WHAT'S WRONG WITH ARBITRATION?

1 July 2004

by Professor John Uff QC, Emeritus Professor of Construction LAW

The question "What's wrong with Arbitration" was at the forefront of the debate on whether statutory Adjudication was the right course for the Construction Industry in 1995/6.  Evidently much was then wrong with Arbitration and the argument that it was or would soon be put right by the Arbitration Act 1996 was plainly lost.  But events have moved on.  After a long period of deliberation, Adjudication sprang to life in 1999 and there is now 5 years of impressive track record from which some very interesting lessons are to be learnt.  The opening question is therefore now to be addressed in the light of experience up to 2004 of what Adjudication can and cannot do, as well as in the light of contemporary needs of the Construction Industry.

In addition, the UK Construction Industry and the Legal Industry attached to it should not need to be reminded that they do not operate in a vacuum or in a protected trade area.  Quite the reverse.  The UK Construction Industry operates on a world-wide basis, and even more so does the UK Legal Industry.  Thus, the Construction Industry also operates outside the jurisdiction, where International Arbitration remains a safe haven from foreign National Courts, as a result of battles fought and won fifty years ago.  The UK Legal Profession enjoys a relatively dominant position in international trade disputes including International Construction Arbitration, often involving entirely non-UK parties.  To maintain both positions we must not turn our back on Arbitration, and it must be remembered that an increasingly high proportion of UK trade is now with the EU and this can only accelerate with the increasing size of the Union.  Here also International Arbitration remains the only alternative to litigation in National Courts.  There is presently no sign of Adjudication being adopted by the European Union, whether for Construction or anything else.

So the question "What's wrong with Arbitration" ought not to be approached from the standpoint that Adjudication is such an obvious success that Arbitration must plead and establish its case from scratch.  Rather, it should be approached on the basis that there are now two viable means of consensual dispute resolution available in the Construction Industry whose relative merits should be appraised in as objective a manner as possible.  One of the features of Adjudication is that it has generated a number of vested interests whose opinions on the matter are anything but objective.  Perhaps we all suffer from this.  Specifically, there are many enthusiastic Adjudicators who are delighted with the fee-earning opportunities that Adjudication presents, that probably would not have been available to them otherwise.  And to lawyers, 28-day Adjudication means not only fee-earning opportunities but an attractively quick turnover rate.  One thing that Adjudication has not necessarily achieved is cheapness, nor is it necessarily cost-effective compared to other means of dispute resolution.

So what lessons can Arbitration now learn from the experience of Adjudication?  During its 5-year lifespan, Adjudication is to be credited with a number of notable achievements.  It has established or re-established that serious disputes can be resolved in days rather than years.  The ability to do so was seemingly lost to English Arbitration during the last half century although surviving in other jurisdictions.  Secondly, Adjudication has re-established the credentials of the "trade" or professional Arbitrator or Adjudicator.  This is a tradition largely confined to Common Law countries and one which was fast declining during the 1980s and 1990s as Arbitration procedure became more technical and the proceedings were taken over by Lawyers.  Parties reasonably concluded that only a Lawyer Arbitrator could control the proceedings.  This was a great loss not only to tradition but to the ability to make proper use of the Tribunal's own expertise.

The lessons to be learned are, therefore, that Arbitration can be conducted speedily, provided the parties agree to a suitable truncated timetable; and that trade or professional Arbitrators can operate effectively, making full use of their expertise.  Let us not forget that the power of the Adjudicator to use his or her initiative to ascertain the facts and the Law was one of several provisions lifted from the Arbitration Act 1996 and inserted into the Scheme for Adjudication.

Other lessons to be learned, in the light of the recent run of enforcement decisions handed down by the Courts, are that Arbitration can avoid some of the pitfalls of Adjudication which are now apparent.  These include:

  • Avoidance of "ambush" opportunities for Claimants;
  • Avoidance of arguments based on Natural Justice / Human Rights;
  • Flexibility, including powers available to the Court to extend time;
  • Clear and well-established procedures for enforcement and challenge;
  • Finality of decision coupled with power to contract into or out of right of appeal on law;
  • Well-established and uncontroversial body of case law on conduct of Arbitration.

The conclusion drawn by the Society of Construction Arbitrators was that the perceived "wrongs" of Arbitration have been overstated and there is much that can now be seen to be "right" with Arbitration.  Their conclusion was pre-empted by a lecture (delivered several times) by my distinguished colleague Paul Darling QC who called for a new 100-day Arbitration procedure.  While the number 100 does not hold the significance for Arbitrators that it holds for cricketers, it nevertheless represents a reasonable period for "short" Arbitration, bearing in mind the 28 or 42 day limit for most Adjudications and the requirement under the ICC Rules for Awards to be delivered within six months (183 days) of the signing of the Terms of Reference.  The Society of Construction Arbitrators therefore concluded that the time was ripe for the production of such a procedure which is now offered for general consumption.  The following notes describe the approach to the new Rules.

To devise a series of steps adding up to 100 days is not itself the problem.  What is required is a proper apportionment of the available time and this will be seen in the series of "not more than" directions contained in Rule 4.  It may be noted that these include an oral hearing of not more than 10 working days and appropriate periods for all other steps necessary.  Rule 6 then sets out a number of express powers which the Arbitrator may adopt which have been refined from various Rules and Procedures available elsewhere which are generally known to be workable and beneficial.  Among these may be mentioned the calling of witnesses to give evidence together ("back-to-back") which is now commonly adopted between experts of like discipline, and can be equally effective as between opposed witnesses of fact.

A major departure from Adjudication is that the 100-Day Arbitration timescale does not commence until both parties (not simply the Referring party) have served a pleading.  Where the Respondent to the Arbitration serves a Counterclaim, the 100-day period is further suspended until a defence to the Counterclaim is delivered.  The purpose of adopting this approach is to reinstate the principle of equality of the parties. The right to initiate proceedings with little or no warning is one of the less attractive features of Adjudication.  As HH Judge Wilcox accepted in London & Amsterdam [2004] BLR 179 "mere ambush, however unattractive, does not necessarily amount to procedural unfairness".  It is plainly permitted if not encouraged by the legislation.  To extend the period of 28 days to 100 days would do nothing to avoid the same possibility.  Indeed the likelihood that 100-Day Arbitration would be used more regularly for substantial cases would make it more likely that Respondents would be effectively ambushed.  The solution adopted is to give both parties the same opportunity to present their case initially and to apply the time limit to the subsequent proceedings.  This brings the procedure more in line with the ICC Rules, where the Terms of Reference will usually be preceded by a relatively full exchange of pleadings from the parties.

That Arbitration proceedings in relatively complex cases can be conducted within the periods set out in the 100-Day Procedure cannot be doubted.  The UK now has a group of experienced practitioners serving the Construction Industry who have acquired the requisite skills in dealing with truncated procedures.  Their skills will often be better used in cases which are suitable for final determination within an overall period of about 4-5 months.  Like Adjudication, it is inappropriate and unnecessary to set any limits on the type of dispute that may be referred.  It must be adopted by agreement of both parties, who are themselves the best judges as to when it should be adopted.

The 100-Day Arbitration Procedure is seen primarily as an alternative to Adjudication, although there is no reason why it should not be adopted after Adjudication proceedings or even reverted to during the course of Adjudication, where the parties so agree, with the Adjudicator being re-appointed as Arbitrator.  Primarily, however, the Procedure is an alternative single-stage process necessarily involving a waiver by the parties of their right to Adjudicate.  Such a waiver will not be binding (except in the case of Contractual Adjudication) but, having agreed to Arbitrate within a limited period of time, it is difficult to see why either party should want to revert to Adjudication.

The drafting exercise considered a number of alternative approaches including the use of Section 39 (Power to make provisional award) of the Arbitration Act 1996.  This would give the Arbitrator the power to give a provisional award in case where 100 days was regarded as insufficient for a final decision.  A provisional award can include an order for the payment of money or any other relief and would be binding subject to a final decision.  It was eventually decided not to include such a power for a number of reasons.  First it introduced avoidable complication to an otherwise simple procedure.  Secondly, the parties are free to contract in to (or out of) Section 39.  Thirdly, the ability to give a provisional award capable of being reopened (whether by the same or a different Tribunal) would put the Arbitrator into a virtually identical position to an Adjudicator, but with some additional advantages.  Such a procedure would not necessarily require 100 days and should in any event be seen as a separate alternative procedure suitable for some but not necessarily all types of case.  The Society will continue to review the need for a separate "provisional arbitration" procedure.

The Society of Construction Arbitrators have considered it necessary only to provide a simple form of agreement to Arbitration under the 100-Day Procedure incorporating a waiver of Adjudication, and covering different circumstances in which the parties might wish to adopt the procedure as follows:
   (i) Any dispute arising in the future
   (ii) A particular dispute which has arisen
   (iii) A cross-claim arising out of (ii)
   (iv) A dispute already referred to Adjudication
   (v) A cross-claim arising out of (iv)
Other circumstances may be covered by ad hoc agreement.

Thus the ways in which the 100-Day Arbitration Procedure may be used are the following:

  1. The parties may adopt alternative (i) which will operate as a severable Arbitration Agreement in relation to an identified contract in respect of future disputes.  The 100-Day Procedure cuts in either at the date of service of the Statement of Defence (or Defence to Counterclaim) or when the Arbitrator gives the 100-day directions.  Prior to that point the Arbitrator will have all the powers deriving from the Arbitration Act 1996 to direct appropriate dates for service of the pleadings antecedent to the 100-Day Procedure.
  2. The Procedure may be adopted ad hoc for an existing identified dispute as alternative (ii) and optionally for any cross-claim (iii) arising out of that dispute.  This may cover the situation in which there is no pre-existing Arbitration Agreement or Arbitrator, or a situation in which there is an existing Arbitrator and in which some or all the pleadings have already been served.  The 100-Day Procedure again cuts in either when the pleadings are complete or when the Arbitrator gives his directions.
  3. The Procedure may be adopted for a dispute already set out in a Notice of Adjudication where the parties wish to adopt short-form Arbitration instead.  The reference covers the original Adjudication dispute as alternative (iv) and optionally a cross-claim (v) arising out of that dispute.  The parties will normally want to re-appoint the Adjudicator as an Arbitrator and the procedure will cut in in the same manner as above.

A final advantage of the 100-Day Procedure is that it reinstates the principle of party autonomy, which was the keynote of the Arbitration Act 1996.  Instead of non-waivable statutory rights, the parties are free to amend and adapt the 100-Day procedure in any way they wish.  Thus, in appropriate cases it may become the "28-day Arbitration Procedure" or equally the "200-day Arbitration Procedure".

The Society of Construction Arbitrators will keep the procedure under regular review and will welcome feedback from users.