Keeping the peace

This article appeared in ICON in March 2007 and was written by Mark Roe and Damian Watkin at Pinsent Masons.  

It is perhaps surprising that the importance of an effective dispute resolution process is not more widely appreciated.  A contract is not much use if it cannot be effectively and efficiently enforced.  Otherwise how does the contractor get paid?

In most jurisdictions effective enforcement is unavailable through the local courts.  Indeed there are very few jurisdictions where a well-advised international contractor would choose local courts over international arbitration.  The English or Australian courts are an exception and are sometimes chosen by international parties to resolve disputes instead of arbitration.  In some parts of North America and Northern Europe, the courts might provide reasonable local dispute resolution services.  However, for the rest, an international contractor should avoid local courts like the plague.

It is therefore surprising how often leading construction lawyers are called to advise on contracts with local court or local arbitration provisions, invariably because of a compromise made on the part of the international contractor. This is highly inadvisable because local arbitrations often share the same pitfalls as local courts and will render any arbitral decisions liable to an appeal at the local courts.

Sophisticated employers have started to recognise that the prospect of a dispute being handled by local courts is a disincentive for international contractors to bid competitively.  It is commonplace to find that major contracts provide for international arbitration even if the project and parties ultimately derive from the same jurisdiction.  Further, many states have recently taken steps to modernise their arbitration laws for the same reason. 

However, progress is patchy.  It used to be commonplace to find that state-owned entities could not validly submit to international arbitration.  Saudi Arabia is one jurisdiction where this is still not possible.  In other jurisdictions, while state entities may submit to international arbitration, the practice is in some quarters regarded as undermining state sovereignty e.g. India. 

Alternative Dispute Resolution - ADR

By ADR we mean a way of resolving disputes by consensual means as opposed to coercion by reference to court or arbitration.  In the UK this usually means mediation.  The Technology and Construction Court (TCC) has in appropriate cases penalised parties refusing to mediate.  In Australia construction disputes are subject to mandatory mediation.

In other jurisdictions the absence of an effective court system has led to the development of Dispute Advisory Boards – DABs as the preferred ADR technique.   The FIDIC 1999 editions provide for DABs and appear to work effectively in many cases.  However it should be borne in mind that DAB decisions are not enforceable as international arbitral awards and so would require, often uninvitingly, local court enforcement.

International Arbitration

The ICC International Court of Arbitration and the London Court of International Arbitration report steady 8-10% per annum growth in cases referred to them.  This growth is led by construction and engineering disputes, no doubt reflecting the matters discussed in the introduction and the rapid growth in international construction business in the last 6 years. 

Against this background, we review some of the regional developments taking place in ADR and International arbitration within the key international frontiers for the construction sector.

Middle East

Anyone who has ever suggested mediation as a means of resolving a dispute in the Middle East will know that it is not a process which has any local appeal.  International arbitration is however making better progress.

The United Arab Emirates (UAE), the UK construction sector's gateway to the Middle East, South Asia and East Africa, is drawing huge foreign and inward private investment in a strategic departure from oil-based economy.  Disputes will inevitably arise from the current glut of international trade, foreign investment and construction activity.  In response, key developments in the arbitration field have occurred.

Last year, the UAE ratified the New York Convention on the Recognition and Enforcement of Arbitral Awards 1958.  Presently the Convention has been signed (although not necessarily ratified) by 142 countries, amongst whom the Convention delivers an established system for the international reciprocal enforcement of foreign tribunal awards.  Save for local law procedure and some specific bilateral treaties, the UAE formerly had no such rules governing enforcement of foreign arbitral awards.  With no other option than to arbitrate disputes in Dubai, foreign investors wishing to conduct business with UAE entities cited this a major flaw.  The ratification of the Convention permits dispute settlement at a neutral overseas venue and ensures that awards made in other Convention states shall be enforceable in the UAE.

This is all very positive. However Dubai, is still plagued with erratic judgments of its courts and successful enforcement of foreign arbitral awards within the region has been sporadic. 

This shift towards an arbitral culture in the Gulf region is accentuated by the very recent unveiling of 2 arbitral centres in Qatar and Saudi Arabia.

Saudi Arabia's accession to the World Trade Organisation has attracted an increase in foreign investment.  The US$400 billion Sharia finance market and disputes under Sharia Law will provide the likely backdrop to the Riyadh arbitral centre's initial focus in the early stages but as a Convention signatory Saudi Arabia is expected to elevate itself into the international arbitral arena.  Qatar meanwhile, itself a Convention signatory, opened its first International Arbitration and Conciliation Centre on 24 January 2007 as part of its Chamber of Commerce and Industry and shall specialise in civil and commercial dispute resolution.  Its arbitral panel already comprises 34 arbitrators and should provide a viable option to referring disputes to the notoriously slow and bureaucratic Qatar courts.

Both centres are certain to mobilise foreign investment so long as each meets the challenge to assemble arbitral panels of true international class.

Indian Sub-Continent

The Indian justice system is presently overwhelmed with cases pending to be heard - approximated at 3.4 million across its 21 High Courts and a further 23 million before its lower courts.  In the face of these burgeoning statistics, accent has been placed upon arbitration to quell the tide. 

Enshrined in India's domestic law is The Arbitration and Conciliation Act 1996, based upon the UNCITRAL Model Law. The Act seeks to reduce the courts interventionist role in the arbitral process and "provide that every arbitral award is enforced in the same manner as if it were a decree of the Court". 

However, the Indian arbitration experience has been a very mixed affair, its courts failing to give effect to the Act's non-interventionist philosophy. Indeed, 2 seminal cases were clear departures from the spirit of the Act, both disclosing judicial distrust in the arbitral process.  It should be noted in particular that any arbitration in India is subject to a mandatory right of appeal to the Courts which the parties cannot exclude.  In a country whose diverse cultural development remains heavily steeped in legend, the groundswell of opinion in the legal fraternity is that it is high time the judiciary cut the Gordian knot on the arbitral process and emancipate it to accomplish the Indian legislature's non-interventionist mandate. 

Like its bordering neighbour, Pakistan too is suffering a considerable backlog in cases pending before its domestic courts. Seeking Contract enforcement at law will typically take anytime between 5 to 10 years of litigation process.  In response to this unsatisfactory situation its Chief Justice, Hussain Siddiqui, advocated 3 years ago greater use of ADR in Pakistan. 

So what has happened since?  Well, considerable efforts have been made in the field of mediation.  For example, in conjunction with the International Finance Corporation (IFC) which is the private sector arm of the World Bank, a delegate of the Sindh Province's most senior High Court Judges together with the Centre for Effective Dispute Resolution undertook a programme of visits and investment in the country last year to raise ADR awareness.  A pilot court-referred mediation centre is now established in Karachi, Pakistan's major commercial hub.  The centre not only provides high-quality mediators but also a training facility for mediators in Karachi and farther afield. 

The long-term prospects of success hinge upon the support of both Pakistan's Federal Government and judiciary.  An encouraging step has been the Ministry of Law's entering into a Memorandum of Understanding with the IFC for the proposed amendment of the Civil Procedure Code making ADR in all civil court cases mandatory.

Asia Pacific

Hong Kong is in the midst of a concerted mediation drive.  Hot on the heels of a similar pilot 'Court Settlement Process' scheme in the English TCC, Hong Kong launched a 2-year pilot scheme for voluntary mediation of Construction and Arbitration High Court List cases.  At any stage of proceedings, the scheme allows any party to issue a 'Mediation Notice' to the other party for agreement to enter mediation.  The scheme is given some teeth by the courts discretion to cost sanction any party unreasonably refusing or failing to attempt mediation.

By stark contrast China has customarily been the vanguard of mediation, routinely employed there more than anywhere else in the world.  Given the Chinese societal and philosophical predilection for peaceful dispute resolution, this is hardly surprising.  Indeed the 'spreading of morality education curbing litigation' is embedded in Confucianism itself. 

What of arbitration?  Despite signing the Convention, China has a chequered history of arbitral enforcement.  But the landscape may be different now.  China's shake-down of its domestic market and the reform of its (former) centrally planned economy has yielded unprecedented foreign investment ensuring this powerhouse presently flexes its muscles as the fourth largest economy in the world. However, with liberalisation, China is committed to becoming the world's largest economy.

In the legal context, this began last year with the liberal revamp of the CIETAC arbitral procedures, China's main international arbitration body.  Resultantly, a neutral seat for determination of disputes can now be selected outside China and the procedural law of another country may apply to CIETAC arbitrations.  China hopes this will enhance its growing reputation within the commercial arena as a leading player in the resolution of Chinese-foreign disputes. 

The early signs are promising.  For investors in China, arbitration is increasingly deemed the preferred method of resolving disputes.  Consistent with other leading institutions CIETAC is experiencing record dispute referrals, handling more than 1,000 cases in 2006. 

Despite its pure common law roots, Singapore plays regular arbitral host to disputes arising within the Chinese, Korean, Vietnamese, Indonesian and Thai civil code jurisdictions.  This has fashioned its arbitration laws amongst the world's most advanced.  Singapore's key statute, the International Arbitration Act, affords its arbitral tribunal to make any order that the Singapore High Court may make - arguably the widest powers of any arbitral tribunal worldwide.

Increasingly international arbitrations in Singapore are conducted under the auspices of the Singapore International Arbitration Centre (SIAC) Rules, whom report sustained 10% per annum growth of dispute referrals.  Vitally, Singapore has a strong tradition of rule of law and robust judicial support of arbitration. Its High Court rulings are consistent in enforcement of foreign arbitral awards, disclosing a patent hesitation to intervene the arbitral process and eschewing any moot foreign developments which menace basic arbitral values in key areas such as confidentiality and autonomy.

Unassailably for so long Asia's principal international arbitration centre, the mature Singapore model remains, for now at least, a country mile ahead of China's budding system.

Conclusions

International arbitration is steadily becoming the standard way to resolve international construction disputes.  But progress is variable and merely inserting a clause providing for arbitration is not a panacea.  Within many jurisdictions, arbitral enforcement ranges between difficult and downright impossible e.g. Russia and India because local courts will not respect arbitral decisions and seek to investigate the bases of their validity.  The well-advised contractor will insist not only on international arbitration but shall ensure that, in the event of an award, it would retain recourse to assets in London, Paris, New York or Berlin.

Always remember that, if a contractor needs to assert a contract claim, the first clause any lawyer will look at is the dispute resolution provision.  If it provides for international arbitration it is probably worth paying the lawyer to read on.  But if the contract provides for local court resolution, the prospects of recovering monies anytime soon are often very remote indeed and, as JM Keynes said, "in the long run we are all dead".

Mark Roe is a partner and Damian Watkin is a barrister in the International Construction & Energy Group at law firm Pinsent Masons

For media enquiries contact :

Lakhbir Rakar
CM PR Advisor
Pinsent Masons
Direct Dial +44 (0)121 260 4005
Fax +44 (0)121 626 1040
E-mail lakhbir.rakar@pinsentmasons.com