Why arbitration may be suffering a decline

31/07/08

by Ian Haygarth writing for Construction Law Review 2008

WHEN I FIRST SAW the above statement in the subject list for this year’s Construction Law Review, I was struck by two words; ‘why’ appeared to be the commencement of an assertion, whereas ‘may’ introduced an element of doubt. In my mind’s eye, however, I added a question mark to the end, given the reasons briefly discussed below.

There is little doubt that the introduction of the Housing Grants Construction and Regeneration Act 1996 (HGCR) dealt a significant blow to the use of arbitration as a primary means of dispute resolution in the UK domestic construction arena. In addition, the introduction of the compulsory dispute adjudication board DAB) procedures via clause 20 of the 1999 edition of the international FIDIC(i) conditions of contract, and the 1995 adoption by the World Bank of dispute board procedures as a mandatory tier of its dispute resolution procedures for all IBRD(ii) financed projects in excess of $50m(iii), affected the international construction sector.

The above measures, however, were introduced during a period of increased construction activity in a generally positive world economic environment, which of itself normally proves an incentive for solutions to be found to developing commercial dispute situations. At the same time, the whole alternative dispute resolution (ADR) movement was gathering pace, with mediation and other resolution skills developing across the board, each filtering additional problems away from the requirement of final determination via arbitration.

The relatively relaxed, informal approach which had characterised the earlier rise of the arbitration process had also given way to an increased ‘proceduralisation’ which, in turn, had impinged on another previous advantage of the arbitration process relative to other dispute resolution forums, i.e. its faster expedition (and associated lower costs).

Taken altogether it might have boded to some, at the turn of the millennium, towards the impending demise of the previously pre-eminent arbitration process. Interestingly, a survey currently published by the Hong Kong International Arbitration Centre (HKIAC) covering a range of international arbitration institutions(iv) reveals that during the period 1998-2005, the overall numbers of arbitration cases, across all commercial sectors, collectively received by those institutions show an overall increase of approx 30%. Additionally, it also appears that HKIAC itself posted an approximate 25% increase in construction sector arbitrations if the median period of 2004-06 is compared with 1998.

Of greater difficulty, however, is to predict the future in a changing world economic order and, notwithstanding the endless argument that can ensue with any use of statistics across sectors and regions, it would appear that, to paraphrase Monty Python, ‘this parrot is not yet dead’.

Two dynamics in particular should be considered. Firstly, the recent financial sector upheavals and the unprecedented oil price rises. The effects of these on Western economies, in particular, are still unfolding and cannot be predicted with any degree of absolute certainty; however, negative downturns of some degree or other are almost certain. Secondly, sits the progress and effects of China and India in particular onto the world stage, with other major emerging economic players also rising.

Downturns and tightening of any economic climate inevitably leads to an increased propensity for financial disputes to occur. The ability to find common cause in amicable settlement, as successfully pursued to date by the whole ADR movement, will therefore most probably be severely challenged by the reduced room for financial manoeuvre that always follows such an economic downturn, possibly forcing parties to seek maximum ‘one off’ redress rather than settle for lesser amicable settlement.

In the event of this possible negative scenario occurring, then increased resolution by arbitration in the international arena is very possible; particularly given the increased complexities inherent within international transactions generally (and construction projects in particular). This challenge might be particularly visible given that the increased use of dispute boards(v) and other ADR techniques are currently filtering out many cases from final resolution by arbitration.

This would be assisted by another distinct advantage of the inherent benefits of the arbitration process conferred by the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards(vi), brought about by the worldwide acceptance of national courts to the safeguards built in to the process, partly via the proceduralisation processes mentioned above (offsetting some of the previously defined disadvantages thereof).
 
Domestically, the tenth anniversary of the 1996 HGCR act has arrived and, notwithstanding the various difficulties that do exist, the previous mid-term review of the act instigated by Gordon Brown generally came down against any fundamental move to initiate major changes.

The economic storm clouds are nevertheless gathering and, whilst the predominance of the act relative to procedural issues (e.g. notice period violations) is ideally placed, challenges probably lie ahead for maintaining the mandated predominance of the adjudication process, with tight deadlines across the whole range of more complex cases if that room for manoeuvre (mentioned above) is either lessened or at worst removed altogether. Consider also that the original ethos of the lower cost adjudication route is also already under pressure, with adjudication costs often proving higher than originally anticipated.

In conclusion of this brief article, I would still wish to add my earlier mentioned question mark to the title. The whole history of the arbitration process itself has been one of continued adaptation to an ever changing world; leading to its almost universal acceptance in a world which might, as a consequence of economic downturn, turn more introspective (and thereby staying with what is tried and tested).

Am I therefore wrong to consider that the true answer to the question posed by the title can only be fully answered after we have emerged from the expected economic downturns ahead? 

Ian Haygarth FRICS MCIArb DipIntArb, is a Senior Consultant at Schofield Lothian.
e: ianhaygarth@schofieldlothian.com



(i) Conditions of Contract for Construction published by the Federation Internationale des Ingenieurs – Conseils, 1999 Edition
(ii) International Bank for Reconstruction and Development.
(iii) Followed in 1997 by the Asian Development Bank (ADB), and the European Bank for Reconstruction and Development (EBRD), plus World Bank bidding documents – Procurement of Works(May 2005) amongst others.
(iv)Table of Cases Received by American Arbitration Association (AAA), China International Economic and Trade Arbitration Commission (CIETAC), Hong Kong
International Arbitration Centre (HKIAC), International Chamber of Commerce (ICC), Japan Commercial Arbitration Association (JCAA), Korean Commercial
Arbitration Board (KCAB), Kuala Lumpur Regional Centre for Arbitration (KLRCA), London Court of International Arbitration (LCIA), Singapore International
Arbitration Centre (SIAC), Arbitration Institute of the Stockholm Chamber of Commerce, British Columbia International Commercial Arbitration Centre,
International Arbitral Centre of the Austrian Federal Economic Chamber of Vienna.
(v) Care should be taken with the FIDIC terminology of dispute adjudication boards (DAB) and the DB (dispute board general heading) recognised by the 2004 ICC rules allowing either dispute review boards (DRB) or DAB procedures to be followed.
(vi) The New York Convention.