It’s time for arbitration to make a comeback. Construction and engineering projects often involve many relationships and contracts, all of which contain the potential for disputes. Resolving disputes can be costly and inordinately slow. Disputes damage commercial relationships and cause harm to reputations.
Litigation has historically provided the authoritative forum for investigating the often complex and multi-issue disputes in construction and engineering. In fact, the resolution of disputes in construction and engineering has advanced building contract law to such high levels of sophistication that they have their own specialist court, the Technology and Construction Court (TCC)
The TCC decides disputes according to the law and decisions are binding and enforceable. Claimants and respondents generally understand the potential consequences of litigation, including the potential liability for costs. However, despite continuous reforms over the past 20 years or so, litigation remains a lengthy and costly exercise. The emphasis of litigation is on a thorough examination of the issues in order to arrive at the correct answer. Reaching a quick and commercial resolution is less of a priority. Litigation is not confidential. Hearings are open to the public and the media. This can be a hindrance to parties who would rather avoid an open examination of their commercial activities, or the gaining of an undesirable reputation.
The process of arbitration is similar to litigation. An independent tribunal makes a decision, which is an evaluative opinion based on the persuasiveness of evidence submitted by the parties. The Arbitration Act 1996 makes an arbitrator’s decision, called an “award”, enforceable in the same manner as a judgment or order of the court. Parties are bound by an arbitrator’s award and cannot refer the same dispute to the courts. The Arbitration Act also imposes an obligation on parties and their arbitrator to obtain a “fair resolution of disputes“, “without unnecessary delay or expense”.
Arbitration clauses are common in many standard forms of building contract in the UK and, until the advent of adjudication in 1998 it was widely used to resolve construction and engineering disputes. Arbitration is meant to be quicker, cheaper and more informal than litigation, but by the late 1990s it had become seen as a long drawn out and expensive process.
Regardless of the statutory obligations under the Arbitration Act to avoid delay, parties, and perhaps also those who acted as arbitrators, would sometimes contrive to make the process expensive and lengthy. It came to be that arbitrating disputes was taking just as long as court proceedings. Where speed and containment of expenditure was a priority, arbitration, like litigation, was not seen as an efficient way to resolve construction disputes.
In May 1998 adjudication came along and promised a simpler way to resolve disputes that was also quicker, cheaper and less formal than litigation and arbitration.
S.108 of the Housing Grants Construction and Regeneration Act 1996 introduced a 28-day procedure for resolving disputes on construction contracts, and it led to far fewer disputes ending up in the courts or arbitration.
Adjudication was received with great enthusiasm by disputants and eventually by their professional advisers too. In the last 2 years of the 20th Century it grew in popularity and by the early 2000s it had become the most widely used dispute resolution procedure for the UK construction and engineering sectors Over the years, judicial intervention has answered moot questions around how adjudication operates in practice. This has been helpful in that we now know what happens if a decision is not issued by an adjudicator within the 28-day timescale, and we know the extent to which adjudicators’ can (or in reality cannot) determine issues concerning their jurisdiction. In other aspects though, the law has developed to make adjudication more complicated. Just to give one example, a TCC decision in November 2014 (Eurocom v Siemens) established that a party needs to be very careful in what they put in their application when applying for an adjudicator to be nominated, or they might find themselves in court answering allegations of fraudulent misrepresentation.
Adjudication has been particularly useful when issues in dispute are relatively straightforward and can be dealt with in short order. However, where the value of disputes is high, and issues are complex, the speed that makes adjudication attractive can lead to rough justice. Perhaps even injustice. Big value, complex disputes need greater deliberation and they do not lend themselves to a rapid process like adjudication. A process that is limited to 28-days simply does not allow enough time for parties to make out their case and deal with that of their opponents.
It is often said that “what goes around comes around” and it seems there is increasing interest in an arbitration comeback. The results of a recent online survey conducted by RICS suggests that whilst costs, and the length of time it takes to get a resolution, remain key issues for parties when deciding on a method to get their disputes resolved, there is nevertheless growing demand for more comprehensive deliberation of issues.
The highly technical nature of complex construction and engineering disputes, and demands for commercially focused outcomes, rather than legal positioning, means parties are increasingly keen to refer to decision-makers who have genuine technical expertise and subject matter knowledge. There is evidence parties are once again seeing arbitration, by arbitrators who are highly experienced construction and/or engineering professionals, as the best way to resolve disputes.
But if arbitration is going to make a comeback it will need to be structured in a way that addresses the concerns of previous years. Arbitrators must use the powers given to them under the Arbitration Act to robustly manage costs. The process needs to be (and be seen to be) faster and cheaper than the courts. At the same time arbitration must prove itself better than adjudication by allowing a detailed examination of the issues, and routinely resulting in arbitration awards that are commercially sensible and better value than judgments from the courts.
Arbitrators and the bodies that appoint them will need to provide high quality “customer services” which target parties’ expectations in terms of quality, standards and overall client experience. In the 1990s, arbitration of a dispute could easily stretch out over 2 to 3 years. Often, by the time a decision was made by an arbitrator, the parties had forgotten what the dispute was about in the first place. It would appear reasonable then that arbitrators and service providers who appoint them should provide a commitment to concluding arbitrations within a set maximum period of time, say 12 months, and at a proportionate cost.
Underpinning a new arbitration regime for construction and engineering there must be excellent arbitrators who are wholly independent. They must be completely up to date with the relevant law and practice, and able to discharge the role of arbitrator sensibly and without delay.
It is time for arbitration to make a comeback in construction and engineering. The development of a new approach to arbitration in the UK will not only provide domestic parties with a fresh and viable alternative to the courts and adjudication, it would establish the UK as a world player in international arbitration, alongside the likes of world regional arbitration centres such as Singapore and Hong Kong. ?
Martin Burns Head of ADR Research and Development
Royal Institution of Chartered Surveyors
15 December 2014
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