Arbitration - pain or panacea?
Ron Cheriyan of Waltham Forest Council reviews the main benefits and drawbacks of arbitration for local authority disputes in the light of recent developments.
Arbitration has some key advantages over litigation and is often embodied into the dispute resolution provisions in commercial agreements, including construction contracts and partnership agreements. However, arbitration is not always appropriate in every situation and may in fact generate its own difficulties.
Speed
Arbitration is established on the premise that it is a quick and economical means of dispute resolution. Arbitrations should be fair and they should be carried out without unnecessary delay or expense1. The arbitrator is required to act fairly and impartially and must adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay and expense2.
Similarly, the parties have a mutual duty to do all things necessary for the proper and expeditious conduct of the arbitration3.
Arbitrators are accustomed to issuing directions via email, following the exchange of correspondence. This availability of arbitrators on email is a distinct advantage over court proceedings which require formal applications to be meted out.
Additionally, it may take time for a new judge unfamiliar with the case to become proficient on the history. As a result, court applications are usually furnished with a comprehensive background to the dispute. In contrast, arbitrators quickly become familiar with the case once the arbitration has commenced.
Costs
Arbitration does not come within the scope of the Jackson reforms. This is particularly attractive as it means the parties are spared the joy of preparing costs budgets!
Nonetheless, the costs of arbitration are generally quite high. The procedure often mirrors court litigation with its emphasis on statements of case, disclosure of documents, expert meetings and exchange of witness statements.
There is also the matter of the arbitrator’s fees and expenses. This is usually charged in one of two ways – an hourly rate or a percentage of the amount in dispute. The parties are usually required to pay the fees for the time the arbitral tribunal is engaged. This differs from litigation where the judge’s costs are largely funded by the tax payer.
Parties to an arbitration will customarily start on the basis that the arbitrator’s fees should be divided equally between them, while retaining responsibility for their own legal costs. The arbitrator will determine at the conclusion of the proceedings who ultimately should pay his fees and legal costs. Difficulties may arise if a defendant refuses to pay - arbitrators often refuse to release awards until their fees have been paid. If it is apparent a party is going to lose, they may have little motivation to pay their portion of the arbitrator’s fees. The winning party may find itself in the unhappy position of paying the arbitrator’s fees so as to gain access to his award.
Confidentiality
As a general rule, parties are constrained by confidentiality (although details of the dispute may become public if a party seeks to challenge an arbitrator’s award). This is a significant benefit of arbitration that allows parties to a dispute to maintain privacy. This can be particularly useful in the case of commercially sensitive disputes and compares favourably to litigation where judgments are routinely reported and publicly accessible.
However, confidentiality is not unqualified. Parties should review the contract’s arbitration provisions to determine the appropriate limits, along with the rules of the relevant arbitral body. For instance, rule 30.1 of the London Court of Arbitration (“LCIA”) states:
“(unless expressly agreed otherwise in writing), the parties undertake as a general principle to keep confidential all awards in the arbitration, together with all materials in the arbitration created for the purpose of the arbitration and all other documents produced by another party in the proceedings not otherwise in the public domain, save and to the extent that disclosure may be required of a party by legal duty, to protect or pursue a legal right, or to enforce or challenge an award in legal proceedings before a state court or other legal authority”.
The principle of confidentiality is also recognised by the common law. Confidentiality may be lifted where there is express or implied consent, where there is an order or leave of the Court, where it is reasonably necessary for the protection of the legitimate interests of an arbitrating party, where the interests of justice require disclosure and where the public interest requires disclosure4.
Jurisdiction
There is a general presumption that, where parties have made an agreement for a particular form of dispute resolution that agreement will be binding on both parties and they should be held to it5. Jurisdiction to an arbitrator is provided by agreement between the parties – usually in the jurisdiction clause within the contract.
The construction of an arbitration clause should commence on the supposition that the parties, as prudent business persons, were likely to have intended that any dispute arising out of the relationship should be resolved by the arbitration tribunal.
The provisions set out in the Arbitration Act 1996 will apply in cases where is any disagreement regarding the extent of an arbitrator’s jurisdiction.
The arbitration clause will need to be carefully drafted to ensure that the parties know which disputes are to be referred to arbitration. A party that raises jurisdiction arguments with the arbitrator may apply to challenge an award.
A party may refuse to participate in an arbitration on one of the following three grounds – (i) there is no valid arbitration agreement, (ii) the tribunal is not properly constituted or (iii) the matter has not been submitted to arbitration in accordance with the arbitration agreement6.
Third parties
Section 43(1) of the Arbitration Act states:
“A party to arbitral proceedings may use the same court procedures as are available in relation to legal proceedings to secure the attendance before the tribunal of a witness in order to give oral testimony or to produce documents or other material evidence.”
Section 43(2) goes on to state that a party may only use these powers with permission of the court or agreement of the other party.
Section 43(3) limits the powers in this section to where the witness is in the UK and the arbitration is England and Wales or Northern Ireland. If the witness is abroad, then a party must use section 44 (described below).
Section 43(4) states that a witness will not be required to produce evidence which it could not be compelled to produce in legal proceedings.
Challenges and Appeals
The fundamental principle of the Act is that courts should not pry into arbitral decisions except for manifest errors. The arbitrator’s award may be challenged in one of two ways:
● Power to remove an arbitrator based on “serious irregularity”;
● Appeal on a point of law.
Power to remove an arbitrator
Section 24 of the Act sets out the grounds under which a party may apply to court for the removal of the arbitrator7. The arbitrator may be removed if (a) there are justifiable doubts as to his impartiality, (b) he does not possess the qualifications required by the arbitration agreement, (c) he is physically or mentally incapable of conducting the proceedings (or there are justifiable doubts as to his capacity to do so), or (d) he has refused or failed properly to conduct the proceedings or use all reasonable despatch in conducting the proceedings. It is extremely rare for an arbitrator to be removed by the court under section 24.
Serious irregularity
Under section 68 of the Act, a party may apply to court challenging an award in the proceedings on the grounds of serious irregularity affecting the tribunal, the award or the proceedings8. Section 68 (2) goes on to provide a list of nine categories of “serious irregularity”.
In Lesotho Development v Imregilo SpA9, the House of Lords made a number of observations in respect of section 68 challenges. Firstly, intervention under section 68 is only permissible after an award has been made. Secondly, it is a high threshold to meet10.
Thirdly, it must be established that the irregularity has caused or will cause substantial injustice to the applicant. Fourthly, the irregularity must fall within the closed list of categories contained in paragraphs (a) to (i) of section 68 (2).
Appeal on a point of law
Under section 69 of the Act, a party to arbitral proceedings may challenge an arbitrator’s award by way of appeal on a point of law11. Permission is required from the court and there is limited scope for challenge. Under sections 69 (3)(c) and (d), the decision of the tribunal has to be obviously wrong or of general importance and open to serious doubt. Additionally, it must be just and equitable in all the circumstances for the court to determine the question.
Construction disputes
In November 2015, the Royal Institution of Chartered Surveyors (RICS) launched a new arbitration service specifically for construction and engineering disputes. The RICS service aims to allow for a more comprehensive deliberation for complicated disputes compared to the statutory adjudication process, which can often be slapdash in approach. Resorting to litigation is only for the bold, requiring careful navigation of the post-Jackson landscape along with ever increasing court fees. The RICS arbitration service offers two schemes as follows:
Fast Track Arbitration Service
The Fast Track Arbitration Service is designed to resolve disputes where the value is £100,000 or less. An initial fee of £350.00 is payable to cover RICS’ administration costs for processing an application for appointment. Arbitrators appointed under the Fast Track scheme are subject to capped fees and the parties’ recoverable costs are also fixed.
The Fast Track Arbitration Service is a practicable surrogate for disputes that do not come within the compass of adjudication. Adjudication may not be suitable for complex cases that require detailed analysis of the evidence. The Fast Track Service offers an alternative to the “rough justice” of adjudication and concludes in a final and binding decision.
Select Arbitration Service
The Select Arbitration Service is intended to resolve disputes where the value exceeds £100,000. Unlike the Fast Track Arbitration Service, an administration fee is not required and awards must be published within 12 months. Arbitrators appointed by the Select Arbitration Service are not subject to capped fees. However, they are required to provide an estimate of their fees at the outset which must be updated throughout the duration of the arbitration.
The Select Arbitration Service is designed to provide a viable alternative to the Technology and Construction Court, extending benefits in terms of timespans and costs. Issuing a claim in the Technology and Construction Court (TCC)) is not inexpensive. Unlike TCC proceedings, the Select Arbitration Service will be able to complete the procedure within 12 months and the process is confidential.
It remains to be seen whether these schemes will prove to be successful. Some commentators have likened it to the 100 Arbitration Procedure by the Society of Construction Arbitrators, which was not widely adopted - this was mainly due to timing as the scheme followed hot on the heels of adjudication in 1998 and many years before the introduction of the Jackson reforms.
In both schemes, arbitrators will be selected from a range of appropriate professions including architects, lawyers, engineers and surveyors. Appointments will be made according to RICS Criteria for Inclusion on RICS Panels of Construction and Engineering Arbitrators. Appointees will be routinely assessed to ensure that they are able to manage the arbitration process.
In October 2015, the judiciary introduced the Shorter and Flexible Trial Procedure Pilot Schemes which were designed to streamline litigation procedures.
Some commentators have argued that the Pilot Schemes corrode the advantages of the RICS services. However the Shorter and Flexible Trial Procedure Pilot Schemes only operate in the courts in the Rolls Building (Commercial Court, Technology and Construction Court, Mercantile Court and the courts of the Chancery Division) until 30 September 201812.
Since its introduction in May 1998, adjudication has become the darling of the construction industry, promising a faster and cheaper alternative to both litigation and arbitration.
Adjudication is undoubtedly effective when the issues in dispute are simple and can be resolved quickly. However, it does present certain challenges and is not suited to dealing with high value, complex disputes which require forensic examination of the issues, such as Byzantine final accounts. The twenty eight day procedure13 does not give parties sufficient time to set out their case properly and the rapid nature of the process can often lead to “rough justice”.
Generally, the adjudicator has no power to award costs unless this is expressly provided for in the contract or the parties agree, although the decision in Lulu has potentially opened the door to claims for costs. The inability to recover costs is a significant disadvantage – referrals to adjudication should only be made in the most unambiguous cases. Also, the adjudicator’s decision is only temporarily binding pending judicial determination or arbitration.
Conclusion
Despite certain shortcomings, arbitration remains an effective and useful form of commercial dispute resolution. It is seeing a gradual resurgence in the construction arena where the drawbacks of adjudication are all too apparent to parties dealing with complex disputes. If properly used, it can be a practical alternative to litigation, allowing parties to resolve disputes quickly and efficiently.
Ron Cheriyan is a litigation and public law lawyer at the London Borough of Waltham Forest
1 Section 1 Arbitration Act 1996
2 Section 33 Arbitration Act 1996
3 Section 40 Arbitration Act 1996
4 Emmott v Michael Wilson and Partners Ltd [2008] 2 ALL ER (Comm) 193
5 Channel Tunnel Group Limited v Balfour Beatty Construction [1993] 1 ALL ER 664
6 Section 72 Arbitration Act 1996
7 Section 24 Arbitration Act 1996
8 Section 68 Arbitration Act 1996
9 Lesotho Development v Imregilo SpA [2006] 1 AC 221
10 See also Compton Beauchamp Estates Limited v Spence [2013] EWHC 1101 (Ch)
11 Section 69 Arbitration Act
12 Paragraph 1.2 of Practice Direction 51N of Civil Procedure Rules 1998
13 section 108 of Housing Grants, Construction and Regeneration Act 1996
14 Lulu Construction Ltd v Mullaley & Co Ltd [2016] EWHC 1852 (TCC)
This article was first published in the July edition of Local Government Lawyer Insight, which can be accessed at http://www.localgovernmentlawyer.co.uk/insight Insight is published four times a year and is circulated free-of-charge to all Local Government Lawyer newsletter subscribers (click here to subscribe) in electronic format. A single hard copy is also circulated to all local authority legal departments in England and Wales. Additional printed copies are available for just £49.95 for four issues. Multiple copies are also available at £149.95 for five or £249.95 for 10. Payment can be made by purchase order/invoice or by credit/debit card. To order, please call 0207 239 4917 or email This email address is being protected from spambots. You need JavaScript enabled to view it.. |
