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To litigate or to arbitrate? Choosing a forum for construction disputes

Construction disputes are inherently complex, document-heavy and time-intensive. They often require the preparation of multifaceted technical fact and expert evidence, accompanied by multiple rounds of lengthy pleadings and submissions. It is therefore no surprise that the nature of construction disputes makes them expensive to run. This is a key factor for all players in an industry where there are high stakes, with many clients facing serious cash-flow pressure in the aftermath of projects that have experienced massive cost and time overruns.

To help manage the inevitable cost, time and business interruption that comes with running or defending a construction case, lawyers should carefully advise their clients at the point of negotiating the dispute resolution provision in a construction contract on whether arbitration, or the Technology and Construction Court (TCC), is the more appropriate forum for the final resolution of their disputes. The unique qualities of both arbitration and the TCC have been the subject of regular discussion and debate by professionals in the construction industry, with the issue appearing back on the agenda recently at a panel discussion at the Inaugural London International Disputes Week. The reality is that the topic is a dynamic one, constantly influenced by client expectations, changes in law, public policy, and initiatives of arbitral institutions, as discussed further below.

Evidence and disclosure

It is common for construction projects to involve hundreds of thousands of documents, many of which are technical drawings, specifications, excels and graphs. Whilst arbitration is known for its more flexible procedural rules, in the absence of strict procedural management by the tribunal, this flexibility can at times backfire. For example, in the context of disclosure, if the tribunal is not appropriately strict in circumstances where parties are from different jurisdictions and legal backgrounds, this can result in parties taking issue with matters of relevance, privilege and confidentiality at every turn. TCC proceedings (until recently) required standard disclosure under Part 31 of the Civil Procedure Rules, which is often broader and more extensive than the disclosure required in arbitration. This can be useful where parties seek a more structured and wide-reaching approach to disclosure, but at the same time can quickly lead to cost and timetable blow-outs and unnecessary complexity. In an effort to better control this risk, the Disclosure Pilot Scheme is currently being trialed in the Business and Property Courts, including the TCC. Only time will tell as to whether the pilot scheme will effectively reduce the costs and complexity of disclosure in TCC proceedings.

Urgent interim relief

Interim relief is a powerful tool available to protect the fundamental rights of parties to a construction contract. For example, following the termination of a construction contract, the employer may require assistance by way of a court granted injunction to compel the contractor to hand over crucial documents and equipment. Similarly, a contractor may wish to seek to prevent the employer from calling down on a performance bond provided as security for due performance of the contract. In Commonwealth jurisdictions such as England and Australia, the courts have an inherent jurisdiction to grant urgent interim relief where appropriate. For disputes governed by arbitration, one of the drawbacks of applying to a court for interim relief is that, in the absence of a suppression order, the coveted confidential nature of the arbitration is to an extent lost. Depending on the companies involved and the sensitivity of the dispute in question, clients may wish to consider an alternative avenue for obtaining urgent interim relief.

Over the past decade, arbitral institutions have been introducing emergency arbitrator procedures into their rules, providing for an emergency arbitrator to decide urgent interim issues prior to the formal constitution of the tribunal (see for example the SCC, SIAC, LCIA and ICC Rules). Whilst emergency arbitral proceedings are perceived as more time efficient than obtaining interim orders from a court, the question of the enforceability of emergency arbitral measures remains uncertain. There can also be less certainty in the ultimate outcome, given that parties have no influence over the emergency arbitrator appointed and his/her background. These factors are worth due consideration by lawyers when advising on the appropriateness of adopting arbitration as the dispute resolution mechanism for a project, because although some clients may prefer the efficiency and confidentiality of emergency arbitrator proceedings, others may prefer the certainty of the courts and may wish to “opt out” of the emergency arbitrator provisions. This issue is particularly pertinent following the decision of Gerald Metals SA v Timis, where the English High Court held that it does not have the power to grant urgent interim relief in circumstances where that relief could have been granted by an emergency arbitrator under the LCIA Rules.

Enforcement

Enforcement is a key consideration in any international dispute. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides for very limited grounds upon which a party can challenge the enforcement of an award. However, just because a country is a signatory to the New York Convention does not necessarily mean that there are good prospects of enforcement in that country. For example, although China has taken some recent steps to improve its system of enforcement of arbitral awards, the process of getting a foreign award in China recognised is still complex and uncertain.

Overall, enforcement prospects are often better for international arbitral awards than for England and Wales judgments, which can only be enforced abroad if an arrangement exists between England and the country where the enforcement is sought (such arrangements include the Brussels Regulation, the EEO Regulation and the Lugano Convention). If no such regime applies, then there is no way of directly enforcing an England and Wales judgment in a foreign jurisdiction.

Distrust of local courts

With respect to international projects, one of the key reasons that parties choose international arbitration is because they do not trust the local courts to be fair and unbiased in their determination of disputes. Given the track record of the English courts, parties should take comfort from the fact that the TCC would fairly decide the dispute regardless of the parties’ origin or nationalities.

Insight

There are qualities of both arbitration and TCC proceedings that make them advisable dispute resolution mechanisms for construction clients.

However, every construction project is different and exists in an ever-changing legal and political landscape; therefore its mechanism of dispute resolution should be considered in that context.

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