The evolving role of arbitration in construction disputes

To what extent is arbitration being used to resolve construction disputes? Hamish Lal, construction partner at Akin Gump Strauss Hauer & Feld, suggests that while statutory adjudication and the existence of the Technology and Construction Court (TCC) has made arbitration less common on UK projects, the use of arbitration on international projects has increased significantly.

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How common is the use of arbitration in resolving construction disputes?

The tangible impact of statutory adjudication on construction projects in the UK, coupled with the existence of the specialist TCC, means that arbitration is not often used to resolve construction disputes in UK projects. One cannot over-emphasise the profound effect of statutory adjudication on UK projects and the fact that adjudication is often treated by the parties to be the final stage in the dispute resolution process. UK projects concerned with nuclear decommissioning or offshore wind are two notable exceptions and provide examples of where arbitration is preferred and often used. Where adjudication is not mandated by statute one will see arbitration as the preferred final and binding dispute resolution process. Put simply, it is the impact of statutory adjudication that has ‘killed’ domestic arbitration in the UK. In summary, one cannot foresee that position changing.

In contrast, arbitration is very often used to resolve high value disputes in international construction contracts, engineering, procurement and construction (EPC) contracts and drilling contracts. The primary reasons for this are:

  • a tangible and common apprehension about local courts
  • a shared desire to have the dispute resolved on a final and binding basis by an experienced, specialist and partly party-nominated tribunal
  • a perception that tribunals are more likely to make awards based on a consistent and uniform understanding of how major construction contracts operate

To what extent has this changed over the last few years?

The use of arbitration to resolve construction disputes in international projects has increased significantly over the last three years. This is because a number of large, high value and complex infrastructure projects and hotel and tourism projects, procured or commissioned by various Gulf-seated sovereign wealth funds, have now reached the ‘dispute stage’. Complex, high value and largescale construction projects inevitably give rise to a range of complex or technical disputes which are best addressed and resolved only in arbitration. Examples include liability for front-end engineering design (FEED) errors and subsequent design changes.

A key feature of an EPC contract is getting the contractor to buy in and accept responsibility at an early stage of the engineering and construction process. However, all too often the lines of responsibility are not clearly drawn in the contract and disputes arise over responsibility for errors in and changes to the FEED during the contract. In the case of conflicts in engineering design standards, it is not uncommon for an infrastructure contract to specify compliance with more than one engineering design standard or code—for example both the American Petroleum Institute and the British Standard may be specified.

Also, the decrease in the crude oil prices means that ‘claims’ that would ordinarily have been accommodated by contractors and owners are now the subject of requests for arbitration. Since the drop in global oil prices, we have seen a significant increase in parties electing to terminate contracts and a greater desire in owners to seek to recover performance damages. When output falls short of the target performance levels, employers feel compelled to recover their losses.

Is this likely to continue?

There is nothing to indicate that the increase in the use of international construction arbitration is not likely to continue. Further, the increased use and familiarity with arbitration over the last few years has the tangible consequence that international contractors and owners become more comfortable with arbitration and thus more inclined to advocate its benefits which ultimately allows arbitration use to continue to grow. On a commercial analysis, there is no indication that the oil prices will rise so significantly that disputes will be resolved or compromised without the need for arbitration. One must keep in mind that the parties are often keen to receive a reasoned and considered award delivered by a specialist tribunal.

Are construction disputes particularly suited to being resolved by arbitration?

Yes. This is because construction disputes involve complex technical issues, industry terms, construction law principles and voluminous contracts. Internationally, judges in local courts cannot, naturally, be expected to be familiar with such specialised contracts and technical issues and so the increased attraction of international construction arbitration. An additional factor is that the ‘world of arbitrators’ is also familiar with the technical experts and so a level of consistency in expert work products is more likely. Counsel, experts and tribunals all understand and appreciate what is required and so the process is less open to abuse or the creation of delay.

Which arbitration rules are commonly used?

Our arbitrations for Middle East projects use the Dubai International Arbitration Centre (DIAC) rules or the Dubai International Financial Centre-London Court of International Arbitration (DIFC-LCIA) rules. We are now also seeing an increase in the Singapore International Arbitration Centre (SIAC) rules. The International Chamber of Commerce (ICC) rules are also very common, especially in oil and gas construction projects.

Are there any changes that could be made to the arbitration process to make it a more attractive dispute resolution option?

Some clients are concerned with speed, and especially so when an interim application or relief is sought. In that context, the ICC released (in November 2016) its expedited rules, as part of its latest effort to promote greater efficiency in its arbitral proceedings. Those expedited rules will automatically apply to arbitrations in which the amount in dispute is less than $2m and to cases involving higher amounts on an opt-in basis. Under these rules, the ICC court will normally appoint a sole arbitrator even if the parties’ agreement provides otherwise.

The practice note released in March 2017 provides users with detailed guidelines as to how these new expedited rules can be used, it also establishes the new principle that the court may now provide reasons for its decisions once a request is made by any party to the arbitration. Previously, agreement of all the parties was required before such a request would be honored. Expedited rules are likely to be seen in the other commonly used rules.

Interviewed by Nicola Laver. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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Filed Under: Construction

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