Planning for arbitration

15 April 2008

Dispute resolution provisions are often negotiated in a hurry when bidding for work, in order to get the contract signed-off and the project underway. This may be understandable – no one wants to worry about disputes before the project has even started. However, projects do not always go according to plan and the procedure for resolving disputes can quickly become the focal point of the contract.

In international construction projects there is no compulsory adjudication and the choice is usually litigation in the local courts or international arbitration. Some of the advantages of arbitration over litigation are that the parties have the choice as to who decides the dispute. They can also choose the procedural rules applicable, and arbitration has the advantage that it is a private process, so there is less scope for unfavourable publicity.

Perhaps most importantly, arbitral awards are binding and easily enforced. Such certainty is only afforded if the arbitration agreement is well thought out and clearly drafted. There are some key issues to consider when negotiating your arbitration agreement.

Is It Optional?

If arbitration is only expressed to be optional, it may not be an effective arbitration agreement. Careful drafting is required to make arbitration mandatory, otherwise the local court may still have jurisdiction.

Which Country?

The place or seat of arbitration is an essential part of international arbitration and should be specified in the arbitration agreement. Parties from different countries will commonly want a neutral, but mutually acceptable, place of arbitration to ensure a level playing field when it comes to procedural issues or the occasional local court intervention.

If no seat is specified in the arbitration agreement, then it will usually fall to the tribunal to decide its seat once it is appointed. If that happens, you cannot be sure that the tribunal will share your sentiments as to which place is most appropriate.

Which Rules?

As with the place of arbitration, the parties are free to agree the rules that will govern the arbitration process.

Most of the Standard Form of Contracts provide that where arbitration is the chosen method of dispute resolution, the arbitration will be conducted in accordance with certain rules. For example, the International Federation of Consulting Engineers (FIDIC) Silver Book specifies that the arbitration will be conducted in accordance with the Rules of Arbitration of the International Chamber of Commerce (ICC Rules).

There are a wide variety of Rules to choose from, although the ICC Rules, the Arbitration Rules of the London Court of International Arbitration (LCIA Rules) and the Arbitration Rules of the United Nations Commission of International Trade Law (UNCITRAL Rules) are established and relatively widely known.

The selection of certain Rules, such as the ICC Rules will mean that the arbitration will be “administered”. That means the relevant institution will assist in the appointment of arbitrators, collect the arbitrators' fees and generally monitor the progress of the arbitration.

The advantage of an administered arbitration is that there is some external control over the process and over the tribunal. This must be balanced with the increased cost of having an institution provide that service. UNCITRAL arbitrations on the other hand are not administered by an institution and are therefore often less expensive.

The Tribunal

Unlike domestic courts, arbitration gives the parties the opportunity to choose who will decide their dispute. In construction projects, this is a particularly important factor when dealing with complex delay and disruption claims or technical engineering disputes.

The parties are also free to specify the number of arbitrators they wish to deal with any dispute. The choice will often be between a one- or three-member tribunal. The main distinguishing factors here are cost and time – the difference between paying for three arbitrators as opposed to one, and the logistical difficulties of getting three arbitrators in the same place at the same time for hearings.

While more costly and time-consuming, a three-member tribunal does give the parties the opportunity to select their own arbitrator with a third arbitrator selected by the party-appointed arbitrators as chairman.

The difficulty with specifying the number of arbitrators at the outset is that you cannot foresee the types of dispute that may fall to be determined by arbitration later. This is why parties very often leave the number of arbitrators to be determined by the Rules they have chosen.

Conclusions

Arbitration provides the opportunity to agree in advance how, where and by whom disputes will be resolved. However, careful consideration must be given to these issues when negotiating arbitration agreement to ensure that you are getting what you want.

While the dispute resolution provisions may be left to the last minute, it is critical to get them right. Otherwise disputes arising out of, or in connection with a carefully negotiated contract may not be resolved in the manner and by those you would wish.

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