Construction Arbitration - Past and Present


Construction Arbitration - Past and Present	March 2006

This article appeared in Construction Law in August 2006 and was written by Gordon Bell, Partner, Pinsent Masons. In this article, Gordon Bell of Pinsent Masons examines arbitration as a form of dispute resolution in the construction industry and considers whether it is now a thing of the past. KEY POINTS In England, arbitration was once an alternative to litigation Over time it has been said that arbitration is simply litigation in another guise Domestic arbitration has become less common in the construction industry following the erosion of many of its advantages But international arbitration appears to be the dispute resolution mechanism of choice Arbitration is a method of private, binding and enforceable dispute resolution. It is not new but it was once considered part of a growing league of alternative dispute resolution procedures, competing with conciliation, mediation and expert determination as an alternative to more costly and often lengthy litigation. Arbitration grew up as a method to resolve trade, commercial or industry disputes where those within the industry would agree privately to appoint a respected member of that industry to resolve their disputes. The arbitrator was almost always an individual with a wealth of experience in the relevant industry or somebody with a background relevant to the technical issues in dispute. Very few arbitrators were lawyers. Having adopted arbitration as the means to resolve disputes, the parties would generally abide by the decision of the arbitrator and the courts were little involved in monitoring or supervising the process. Over time, arbitration has moved closer to litigation and has become less of an alternative to it. In the construction industry, in particular, some would remark that arbitration has simply become litigation in another guise, albeit without the quality of decisions and the precedents the judiciary might otherwise have provided. In short, arbitration is no longer what it set out to be. In terms of speed and cost, it is true to say that, historically, arbitration was quicker and less expensive than litigation. Indeed, that may still be true but only if the parties are prepared to co-operate once the dispute has arisen. In practice, such co-operation is unusual. What often happens is that parties to arbitration in this country (and, unfortunately, their representatives and Tribunal) often adopt a traditional litigation approach to arbitration requiring detailed pleadings, wholesale disclosure, followed by long and detailed witness statements and lengthy expert reports. This was not the original manner in which arbitration was conducted nor for what it was designed. What has also been lost over time is the desire to appoint good technical arbitrators to decide appropriate technical disputes. What parties have moved towards is the appointment of lawyers or professional arbitrators who often have the appropriate experience or expertise to decide the relevant dispute to which they have been referred. Confidentiality was also an important reason to arbitrate. As a matter of English law, there remains an implied duty of confidentiality in arbitration, such duty being said to be: "…a necessary incident of the essentially private nature of arbitration" However, in practice, there are now so many exceptions to the general rule (for example, court order, leave of the court, appeals, public interest, necessity and enforcement), that arbitration is very often not confidential at all. There are two further problems with the peculiar nature of construction disputes: joinder of parties in arbitration (or the lack of it) and the consolidation of arbitration proceedings. The problems are these. Arbitration, by its nature, is consensual. The agreement to arbitrate is generally included within the terms of the main (or substantive) agreement. Unless, when drafting the arbitration agreement, the parties have given proper consideration to joining third parties (and those third parties have given their consent), third parties may not be joined into any arbitration proceedings. Thus, in a situation where the employer has agreed to arbitrate its disputes with the contractor, unless the employer and contractor have also included provisions allowing sub-contractors or the professional team to be joined, it may not be possible to include them (or join them) into the arbitration. The problem of joinder is deepened by the issue of consolidation. Whereas joinder means joining an additional party to proceedings (through some form of third party notice), consolidation is the joining together of different proceedings so they may be heard together by the same judge or arbitrator. Provided two sets of court proceedings are closely connected, the English courts have the power to consolidate them. However, in arbitration, two sets of proceedings may only be consolidated if all parties agree and if the arbitrator appointed in one set of proceedings is the same in the other. As with joinder, unless the parties have considered the issues carefully when drafting their arbitration agreement, consolidation of proceedings is rare. Obvious problems arise in arbitration where there are no joinder provisions and no consolidation provision in the arbitration agreement. Separate proceedings may have to be commenced, different arbitrators are likely to be appointed and separate findings of fact or law will inevitably result. With the perceived advantages of technical wisdom, speed, cost and confidentiality having been eroded, and with the continuing problems of joinder and consolidation, it is perhaps not surprising that, domestically, the construction industry has moved away from arbitration. That decline has started to be reflected in the standard form construction contracts. It is noticeable that, in the JCT 05 suite of contracts the default provision for dispute resolution is now litigation and not arbitration. Interestingly in the accompanying notes, the comment is made: "Growing experience of adjudication on the part of its members has somewhat altered the JCT view of arbitration from that at the time of the JCT Advice contained in the (1988) Guidance Note to Amendment 18. That of course is evidenced by the absence from the Major Project Construction Contract of any reference to arbitration and, in SBC 2005, by the change in the default position with respect to Article 8, i.e. legal proceedings apply unless arbitration is specifically chosen…" Whilst the JCT recognise later in the notes that there may still be cases where arbitration is the appropriate forum for final resolution, there is no longer a presumption to that effect. The NEC has, however, taken a different approach and continues to favour arbitration over litigation. The 2005 Guidance Notes for the NEC Engineering and Construction Contract state: "An important feature of the ECC is that the Employer is given a choice of tribunal and hence is required in the Contract Data to insert his choice, e.g. arbitration, expert determination, a dispute resolution panel or the courts. However, if arbitration is available under the law of the contract (Clause 12.2) it is strongly recommended that arbitration is chosen as the tribunal. The rationale for arbitration remains important particularly for disputes upon technical matters for which an arbitrator experienced in the technical context of the dispute is preferable to the courts." Time will tell whether the changes made to JCT will ensure a further decline in domestic construction arbitrations. The position in relation to international construction projects is very different. Over recent years there has been a steady increase in the use of international arbitration. It is worth exploring briefly why, in the international context, arbitration is becoming the method of choice for resolving disputes for the construction industry. There are essentially two reasons: neutrality and enforcement. International projects provide unique difficulties. There are "foreign" regulatory and employment issues to face. Procurement of plant and materials is different. Taxes and customs may reduce margins. Then, of course, there is the prospect of serious disputes arising on the project and the worrying thought that those disputes will be governed by a foreign law and will be determined through litigation in a foreign court. There is an natural fear of any court, more so, a foreign court. That is not to say that foreign courts are routinely biased in favour of the local party but, when a risk analysis is being undertaken, most contractors would not wish to take the risk that a foreign court will decide whether it should be paid for work undertaken in a foreign country. The presence of an international arbitration tribunal is often vital. As well as neutrality, there is enforcement. Arbitral awards may be enforced by virtue of the 1958 New York Convention. Well over 100 nations have signed up to the Convention which allows any arbitral award rendered in a New York Convention State to be enforced in any other New York Convention State. There are only limited grounds for resisting enforcement. In contrast to arbitral awards, judgments of the national courts are not easily enforceable internationally. The combined impact of neutrality and enforcement of arbitral awards should ensure, in the international context, that arbitration will remain the dispute resolution method of choice for the majority of international projects. So what now for arbitration in the construction industry? As highlighted, recent experience demonstrates that in the domestic context, arbitration is no longer the dispute resolution mechanism of choice. Adjudication appears to lead the charge. Ironically, for many, adjudication is simply that which arbitration should have been since it is industry focused, it is pragmatic, it has strict time limits (arguably too strict), it is (relatively) inexpensive and, importantly, it keeps projects moving. As well as adjudication, the Technology and Construction Court is also fighting back following many changes last year. Proceedings before that court are once again moving quickly and the expertise the judges offer make it an attractive alternative to arbitration. If domestic arbitration is to be favoured by clients again, plainly its format has to be re-thought. It has to be quicker, it has to be less expensive and it has to suit the needs of the construction industry. If it continues to represent private litigation, it is difficult to see how it will survive. In the wake of statutory (28 day) adjudication, a standardised fast-track arbitration procedure in which an arbitrator has to render an award within 100 days of receiving a claim was launched last year by the Society of Construction Arbitrators. It is thought that 100 days represents a reasonable period for dispute resolution when contrasted with the 28 days set aside for statutory adjudications. Although adjudication has demonstrated that serious disputes can be resolved in days rather than years, a common criticism of adjudication is that adjudication adopts a “one size fits all” approach. The perceived advantages of the 100-day procedure are to be seen in the flexibility of the procedure and the finality of the result. Because of the longer time limits, this procedure is also supposed to be more suitable for larger, more complex disputes. It remains too early to say whether the 100 day arbitration will prove successful. Of course, it still faces the inherent difficulties of joinder and consolidation of proceedings but it imposes time limits and it works to reduce costs. Clearly, in the right cases, it is a sensible option for the parties. To date, experience suggests it is little used. Time will tell whether it injects new life into domestic arbitration for construction disputes in this country. See Ali Shipyard v Shipyard Tragir [1998] 2 All ER 136; see also Dolling Baker v Merrett [1990] 1 WLR 1205 and Department of Economics, Policy & Development of the City of Moscow v Bankers Trust Co. and Anor. (1995) 183 CLR. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June, 1958) 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