Guest editor Martin Burns, Head of ADR Research and Development at RICS, sees a renewed appetite for arbitration, as a middle ground between long drawn out litigation and high speed adjudication. An improved version of what went before won’t be enough to cope with modern demands so new ground must be broken, he argues.
In the early 1990s arbitration was the principal alternative to the UK courts for resolving construction and engineering disputes. By the Millennium it had fallen into decline. This article explores why arbitration fell out of favour, and why there appears now to be a renewed appetite for it.
Parties to disputes chose arbitration over litigation for a number of reasons. Where litigation was slow and costly, arbitration was widely considered to be economical and concise. Arbitration offered confidentiality. It gave parties the capacity to choose their arbitrator and agree terms of reference, including the arbitrator’s remuneration.
Within the industry there was a large pool of experienced arbitrators. Many of these were technical experts drawn from surveying and engineering professionals. Some were practicing lawyers.
Arbitration presented an opportunity for disputes to be examined in depth, whilst allowing parties to determine the agenda and timetable for procedures. The decisions of arbitrators were binding, and the process reliably put an end to disputes, with little or no involvement of the courts.
But as the 1990s drew to a close, arbitration had fallen into steep decline. The Royal Institution of Chartered Surveyors appointed around 500 construction arbitrators in 1992. Less than 10 years later it was appointing fewer than 30 annually. Arbitration appeared to have lost its way.
Why did arbitration loose its way?
The process had become incredibly complicated and impractical. Pleadings were extraordinarily detailed. Extensive and indiscriminate disclosure was often followed by verbose witness statements and impenetrable expert reports. The timetable stretched to years, and the result was that arbitration became too slow and expensive to be feasible. Parties often had to wait years for decisions, and costs outweighed the value of many disputes.
Prevarication by parties and their representatives caused delay and expense, though blame also lay with arbitrators. Many were alleged to have poorly managed procedures and timetables, and allowed arbitration to shift out of their control and become long drawn-out affairs. The quality of decisions was patchy. Parties who were unable to agree the identity of their arbitrators, and were required to apply to arbitral institutions, were often uncertain whether they would get someone who was first-rate, or inadequate. They felt arbitration had become a lottery.
The Arbitration Act 1996, which came into force in 1998 and was promoted as an instrument to make arbitration more efficient, seemed to have failed to stem the tide of criticism. It was evident that the industry believed there was so much wrong with arbitration that it would welcome any new method for resolving disputes.
These issues were central to the debate during the 1990s on whether adjudication was the appropriate option for the construction and engineering industry. Adjudication promised speedier results and greater cost efficiency. By the early 2000s, adjudication was delivering on those promises and it took over as the pre-eminent method for resolving construction and engineering disputes. In 1998, the year adjudication became enshrined in law under the Construction Act 1996, RICS appointed 23 adjudicators; in 2000, this had risen to over 1,000 per year. During the same period, the number of arbitrators appointed by RICS dropped from several hundred each year to fewer than 30.
The swing back in favour of arbitration
Now the pendulum has seemingly started to swing back in favour of arbitration. An RICS survey of lawyers and claims consultants in 2014 revealed that the construction and engineering sector is once again attracted to arbitration.
Parties seem to perceive arbitration as a viable middle ground between high-speed adjudication and drawn-out litigation. The renewed appetite for arbitration appears to be driven by demands from organisations and businesses for better control of their disputes. It is clear, however, that the same arbitration process, which had become so out of favour in the industry during the 1990s, will not be acceptable in 2016. The industry is demanding a new approach to how the entire process, from appointment of the arbitrator to the issuing of the award on costs, is conducted.
A new approach
Parties want to be able to provide greater input into who will decide their disputes and they want more time and space to convince decision-makers of their case than the 28-day adjudication process allows. Parties want more detailed examination of issues and require decisions that are superior to adjudications in terms of overall depth and reasoning. They also want greater clarity and control over how long the process takes and how much it costs.
The RICS survey revealed that parties who may consider using arbitration now demand highly experienced arbitrators, who will manage timetables and costs with exceptional proficiency. Arbitrators must be immensely credible experts in construction and engineering, and they must provide outcomes that are fair, sound and fully reasoned. Where institutional appointments are concerned, parties would like to be more involved in deciding the professional background of their arbitrators, and who their arbitrators will be.
A new approach to arbitration in the UK is long overdue, but meeting the modern-day demands of parties is not without its challenges. The highly specialised make-up of construction and engineering disputes, and the requirements for commercially-focused outcomes, means parties are increasingly eager to refer to decision-makers who have unquestionable subject-matter knowledge and practical expertise obtained over many years. These experts need also to be highly qualified and experienced in arbitration law and practice.
What parties want in 2016 and beyond is not just an arbitration system that improves on the pre-1990s version. The restoration of arbitration for the 21st Century is a matter of doing things materially differently, and creating an arbitration procedure and a pool of quality arbitrators that actually breaks new ground. The process of arbitration will need to evolve and arbitrators must adopt new approaches that meet the expectations of a more demanding client base.
The development of arbitration should focus on what the parties are liable to require in the future. The probability is that they will continue to want their disputes resolved as quickly and cheaply as possible by high quality industry professionals. What is likely to be different is the process itself. It will need to be more structured and committed to ensuring commercially sensible outcomes are reached speedily and economically.
Looking forward
Going forward, arbitration can once again offer a practical alternative to the High Court for dealing with large value and complex disputes. Arbitrators could commit to working with the parties to achieve an award within 12 months. Their fees could be capped or, if not, arbitrators should be required to provide an estimate of fees at the outset and update this estimate throughout the course of the arbitration.
Where the value of a dispute is relatively low arbitration could offer a genuine alternative to both the county court and adjudication. Arbitrators could work with the parties to enable the award to be published within six months. The fees for arbitrators could be set at a fixed hourly rate, up to a maximum number of hours. The parties’ recoverable costs might also be capped at a percentage of the value of the claim, plus the value of any counterclaim.
These and other options are currently being explored by RICS and other arbitral institutions, who have an interest in ‘future proofing’ arbitration as a feasible alternative to the courts and adjudication.
It is evident there is a renewed appetite for arbitration. It remains to be seen whether the construction and engineering sector will embrace it fully, and use arbitration routinely once more.