Arbitration in Construction Industry
Introduction
The International Chamber of Commerce (“ICC”) released its first report on construction industry arbitrations in 2001 with the aim to provide effective tools and techniques for these complex disputes. In 2019, to reflect the new ICC Arbitration Rules current as of 1 March 2017, and the new developments in the construction industry[1], the ICC Commission on Arbitration and the ADR revised and published its report entitled Construction Industry Arbitrations: Recommended Tools and Techniques for Effective Management of Arbitrations (“Report”).
The Report intends to provide balanced approaches for both common law and civil law jurisdictions and, therefore, does not list resolutions for universal application.[2] It underlines that the procedures used in construction arbitrations should be fast and cost-effective, and the tribunals should apply the procedural rules that will best serve this purpose.
Standard Form Contracts
There are many standard form contracts published by national or international organizations, such as the International Federation of Consulting Engineers (FIDIC), the Institution of Civil Engineers (ICE), the American Institute of Architects (AIA), the Engineering Advancement Association of Japan (ENAA), the Joint Contracts Tribunal (JCT), and the Institution of Chemical Engineers (IChemE).
These form contracts include mechanisms to avoid disputes prior to arbitration. The FIDIC conditions provide for a Dispute Avoidance and Adjudication Board (“DAAB”), which the parties can agree to, and may jointly request, the DAAB to provide assistance and/or informally discuss and attempt to resolve any issue or disagreement that may have arisen between them. The DAAB may also invite parties to make such a joint request. [3]
Other similar mechanisms are the Dispute Review Boards and the ICC’s Combined Dispute Board.[4] These Dispute Boards can help provide informal assistance to avoid disagreements; they are able to grant interim or conservatory measures and may be less costly and more time effective.
Selection of Arbitrators
The Report lists certain qualifications for selecting arbitrators, and recommends the International Arbitration Practice Guideline on Interviews for Prospective Arbitrators, published by the Chartered Institute of Arbitrators (CIArb) as a useful tool.
These key qualities are:
- Knowledge of the construction industry, construction contracts and their interpretation (i.e. FIDIC);
- Case management skills; and
- Familiarity with cultural aspects.
The arbitrator should be “cross-functional,” as well as a “construction professional,” with the ability to understand the technical and legal issues.[5]
The ICC recommends that the arbitration agreements should provide for “one or more arbitrators” without making a definite selection at the start, and advises drafters to refrain from making explicit listings of qualifications for the arbitrators in the arbitration agreements to avoid unnecessary restrictions. Report further suggests that a sole arbitrator should be used in smaller disputes. This suggestion is in line with its Expedited Procedure Rules and the ICC model arbitration agreement.
Case Management Conference
A case management conference (“CMC”) is conducted to set out the initial procedural matters and the timetable. As a result, the tribunal issues its first procedural order and the timetable following the CMC. Effective case management technics are highly regarded in construction arbitrations, and the CMC “cannot be over-emphasized.”[6] The Report lists the following issues to be discussed during the CMC:
- Written submissions and evidence;
- Expert evidence;
- Bifurcation;
- Need for test and site visits;
- Document management;
- Translation and interpretation; and
- Settlement and sealed offer.
It is important in construction arbitrations, which often involve technical aspects, to identify these issues at a prior stage of the proceedings, and to discuss issues, such as experts and site visits earlier on in order to be time effective.
Procedural Timetable
ICC Rules Article 31(1) provides for a six-month time limit in which the tribunal is to render its final award. This time limit is not always realistic for construction arbitrations. Generally, construction disputes before the ICC resolve within two years.[7] When drafting the Procedural Timetable, tribunals should give balanced decisions by being expeditious and allowing both parties reasonable time to defend their case.
The report suggests that the tribunals should consider:
- Whether Expedited Procedure Rules are applied[8];
- Whether there is a need for a partial award as to jurisdiction;
- Number of written submissions;
- Document production process; and
- The hearing.
Document Management
Tribunals should discuss the procedural rules for documents and document control at an early stage of the proceedings, preferably at the CMC. This document management process and the structure should be included in the first procedural order.
Tribunals, when directing parties, should consider that the documents are electronically attainable with a numbering system. According to the Report, such procedural directions should involve inter-party correspondence (instructions), agreed meeting records, programs, agreed summaries of measurement, agreed summaries of valuation, drawings, and technical documents. These should be in separate indexed files with individual numbering[9].
If the parties require a general production of e-documents, the ICC Report on Managing E-Document Production and the CIArb Protocol for E-disclosure in Arbitration can be useful tools.
Test and Site Visits
In disputes regarding unsuitability or malfunction of a plant, equipment or work, tribunals will analyze what tests have been done, whether the results are agreed upon, and whether there is a need for further tests. Tribunals may also order new and required tests. However, tribunals should seek the parties’ consent, and any tests made without consent, according to the Report, should be non-destructive. Cooperation and consent of the parties are very important in conducting site visits and tests; therefore, it is useful to determine these issues at an early stage, and should be included in the first procedural order.
Site inspections/visits and tests should be jointly held by the independent expert appointed by one of the parties, together with other expert(s). The Report also suggests that a site visit by the tribunal, together with the tests, can be beneficial. What should take place on the site visit should also be agreed to by the parties.
Bifurcation
Bifurcation, or splitting a case, can be a beneficial method in complex construction cases where the parties have a number of claims and counterclaims. Tribunals generally split the case into two tranches, those being “liability” and “quantum.” For construction cases, the Report suggests to split the case into three as “jurisdiction,” “liability,” and “quantum.” The Report further recommends hearing the parties’ arguments on causation and quantification, in order to understand how the claims and/or counterclaims have arisen before splitting the case. The decision to bifurcate should be taken if it does not create a financial burden on the parties and, overall, it is sensible and more efficient.
Experts[10]
Expert reports are frequently used in construction arbitrations, and the tribunals heavily rely on expert reports in their decisions. Tribunals ask the parties to submit a list of agreed issues and facts from which the expert evidence will be taken. In cases where one or more members of the tribunal have specific expertise, the need for expert reports can be lessened. The Report states that it can be more cost-effective if the tribunal appoints its own expert. However, in practice, party-appointed experts are still the standard.
Tribunals should also be careful in assessing whether the expert is truly independent, or merely acts as a consultant for the parties while preparing its submissions, as there is a trend of using technical consultants throughout the proceedings.
Hearing
The Report suggests that the duration and allocation time of the hearing should be decided by the parties, or the tribunal should determine a timetable and adhere to it.
Parallel to general practice, the Report emphasizes that the factual witnesses should be heard prior to the experts.
Settlement - Sealed Offer
Parties can agree to settle at any time, and the tribunal should remind the parties that they allowed to. The tribunal can also invite the parties at the i.e. CMC to agree on a procedure for a sealed offer. Secretariat can also assist the parties to communicate their settlement offers or to transmit settlement offers which are not accepted to the tribunal subject to any confidentiality requirements. The Report strongly points out the importance of sealed offers in construction cases by suggesting that the claims are usually excessive, and the prevailing party can recover all or most of its costs.[11]
Conclusion
In a general sense, construction arbitrations are no different from other commercial arbitration cases; however, in most instances, they are more complex and technical. The Report uses the ICC’s strong experience on construction cases by making recommendations and laying out tools for conducting efficient and cost-effective proceedings. Strong case management skills are stated to be an especially prominent consideration for construction arbitrations.
[1] According to the ICC 2018 statistics, 224 new construction and engineering cases had been filed (i.e. 27% of the caseload in 2018).
[2] Report, p. 1.
[3] Red, Yellow and Silver Books, Sub-Clause 21.1.
[4] Report, par. 1.5.
[5] Report, par. 2.1. (a).
[6] Report, par. 8.1.
[7] ICC Dispute Resolution 2018 Statistics.
[8] Fatih Işık: “ICC Rules on Expedited Procedure”, Erdem&Erdem Newsletter, October 2016.
[9] Report, par. 16.1.
[10] Mehveş Erdem: “Expert Witnesses in International Commercial Arbitration” Erdem&Erdem Newsletter, August 2016.
[11] ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (1 January 2019, paras. 227-230)
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