Robert Gaitskell QC of Keating Chambers examines developments in international construction dispute resolution.
"In today’s challenging financial circumstances lawyers are obliged to identify the most cost-effective way of resolving any particular dispute. This is particularly the case with construction disputes, where a conventional arbitration can easily run for weeks and consume costs well into millions of dollars per party."
International construction dispute resolution is in a rapid state of flux. It is experiencing a workload shift towards South East Asia and the Pacific Rim, as well as towards the Middle East, while at the same time undergoing a re-evaluation brought about by the global credit crunch. In this review we briefly survey what is happening and identify the key drivers and outcomes.
The West to East Shift
We start with the geographical shift. The establishment of arbitral bodies such as the London Court of International Arbitration (LCIA), dating from 1892, and the International Court of Arbitration of the International Chamber of Commerce (ICC) established in Paris in 1923, set the scene for a century of Euro-American control of international dispute resolution. Then in 1979 the People’s Republic of China opened up to the West and by 1990 was expanding its economy at a regular growth rate of 9 per cent per annum. Other key Asian economies, including Hong Kong, Singapore, South Korea and Taiwan, also forged ahead. The result has been a swift response from the traditional bodies, as they have opened offices and established links with the new power-players.
For sheer numbers, the China International Economic and Trade Arbitration Commission (CIETAC) is powering forward. In 2011 it accepted 1,435 foreign and domestic cases, up from 731 in 2001 and only 238 in 1990. Its new arbitration rules took effect from 1 May 2012. Of course, these impressive numbers include many entirely domestic matters, and the international disputes are primarily between a Chinese entity and a foreign company. The truly international heavyweight remains the ICC. Its headquarters is in Paris but it has vibrant offices in key growth areas such as Hong Kong. In 2010 there were 793 requests for international arbitration filed with the ICC, and 795 in 2011, and on average it has registered about 800 cases per year since 2009. The 2010 caseload came from 140 countries. Similarly, the LCIA had 224 new cases in 2011, compared to 158 in 2007, so an impressive advance. It has also opened an office in India, among other places.
As noted above, quite apart from the move east by the big Western bodies, and the flourishing of arbitration in China, the key Asian centres are themselves experiencing significant growth. The Hong Kong International Arbitration Centre (HKIAC) in 2010 handled 291 arbitration matters, of which 175 were international. Malaysia’s Kuala Lumpur Regional Centre for Arbitration has appointed a dynamic new director who is rapidly expanding its influence. The Singapore International Arbitration Centre (SIAC) has just notified a record number of cases for 2012. Last year it handled 235 new cases, an increase of 25 per cent on 2011. Singapore has, of course, recently opened its highly regarded Matrix Chambers Arbitration Centre, with state-of-the-art facilities. The chart below, from the SIAC website, showing the total number of new cases handled by SIAC from 2000 to 2011, illustrates the importance of South East Asia on the dispute resolution map.
The Middle East & Africa
Not only have new links been made to Asia, but new centres have also opened in the Middle East and off the African coast to cater for the dispute work emanating from those growth areas. Mauritius is currently positioning itself as the preferred venue for arbitrations with an African connection. There is also a new arbitration centre linking the LCIA and the Dubai International Financial Centre (DIFC). The DIFC has handled about 100 cases annually since its establishment in 2004. Also in Dubai is the Dubai International Arbitration Centre (DIAC) with a caseload about four times greater. In the same part of the world is the new Qatar Financial Centre Civil and Commercial Court in Doha, headed by Lord Phillips, the former head of the English Supreme Court.
The “Golden Age”
In short, international arbitration is experiencing its “golden age”. This was the view of the then-attorney general (now chief justice) of Singapore, the very highly regarded Sundaresh Menon, when opening the 2012 ICCA Conference. He said that never before have so many controversies been left to the disposal of arbitrators with so little interference in their decisions. As we have seen, Singapore itself exemplifies the trend.
Certainly, the proliferation of international arbitration centres appears to bear out the AG’s words. Aside from the new focus points in Asia, even older centres are being revitalised. New York is about to open an international arbitration centre of its own, backed by 33 specialist law firms. Toronto has already opened its much-acclaimed new centre.
In essence, this rapid expansion in service facilities reflects a perception that, for the foreseeable future, arbitration is a leading growth sector for dispute resolution. This is not surprising, since arbitration has some powerful advantages over court litigation. Firstly, the New York Convention of 1958 enables arbitration awards to be enforced worldwide without undue difficulty. Secondly, parties from different countries can avoid appearing in the courts of either if they opt for arbitration. This is a real attraction where the courts of the nation in which the project is being built have judges that are not well versed in construction and commercial law. In addition, of course, arbitration (unlike litigation) can be entirely confidential if the parties so agree. This can be important for parties who do not wish to scare their shareholders when high-stakes disputes are contested. Sir Peter Cresswell, recently retired from the Commercial Court in London, gave an important speech on the future of arbitration in March 2013, and spoke of a new concern in arbitration for giving users what they want. If that happens, the golden age will continue.
The Credit Crunch Effect
This brings us to the second powerful influence on international arbitration. The credit crunch is putting pressure on clients financially so that they, in turn, require their legal advisers to minimise the costs of dispute resolution. In buoyant economic times a party that believes it has not secured a good deal from a particular contract will often not bother to dispute it, because it will have an expectation that there will be further work from that same employer. Further, in buoyant economic times, those parties who do progress a dispute will not feel particularly constrained financially. The landscape changes dramatically when times are hard. If a contract fails to deliver what one party believes it ought to have delivered, then that party is likely to take the view that there is no more work to come from that source, and that it might as well commence legal proceedings for redress. Having commenced such proceedings, the party will inevitably apply pressure to its lawyers to minimise the expense.
Accordingly, in today’s challenging financial circumstances lawyers are obliged to identify the most cost-effective way of resolving any particular dispute. This is particularly the case with construction disputes, where a conventional arbitration can easily run for weeks and consume costs well into millions of dollars per party.
It is now commonplace in big construction arbitrations for there to be a procedural regime specifying time and cost saving techniques such as the use of a ‘chess clock’, so that each party gets a pre-arranged fair share of the time available and so that the hearing finishes on time. There is also likely to be a transcript, so that witnesses do not have to speak at the pace of the arbitrator’s pen. “Hot-tubbing” or ‘concurrent questioning’ will often be used for experts, so that the tribunal is able to pose questions to both experts in one session. This ensures they both address the real issues and cross-examination time is not wasted.
It is also rapidly becoming the norm that the IBA Rules on the taking of evidence in International arbitration (“the IBA Rules”) are used to govern key aspects such as discovery. The 2012 White & Case/QMC Survey reveals these Rules are used in 60 per cent of arbitrations, usually as “guidance” for the tribunal. Indeed, 85 per cent said they found the IBA Rules useful. They are seen as a workable compromise between the extensive (and costly) discovery procedures familiar to Anglo-American common lawyers, on the one hand, and the very confined disclosure favoured by civil code jurisdictions.
The above techniques undoubtedly save costs, but the most effective cost saver is to avoid arbitration or litigation altogether. This is where mediation comes in.
In a key address in London in February 2013, White & Case’s Ellis Baker, a co-author of a leading text on the International Federation of Consulting Engineers (FIDIC), spoke of how parties nowadays are insisting on infrastructure contracts having mediation as a precursor to arbitration in the dispute resolution clause. Statistically, this technique has an impressive success rate, with about 80 per cent of disputes settling on the day of the mediation or shortly afterwards.
This brings us to the dispute board (DB) procedure, which was introduced widely into international construction contracts by FIDIC in the 1990s. Used properly, such “standing” boards are set up at the outset of a project and remain in place until completion. They visit the site every four months or so and “walk the site”, hold a meeting, hear about (and informally deal with) any concerns from either party, produce a report, and then depart the site. Experience shows this procedure avoids or minimises any real disputes ever crystallising. Unfortunately, since the parties want to avoid the cost of such a “standing” board they attempt to save money by only appointing the DB when the contract requires there to be a formal decision by it. Thus, instead of a regular involvement, the DB is reduced to carrying out a series of “adjudications”, after which the disgruntled party has the opportunity to go to arbitration. This is, in the view of many experienced practitioners, a lost opportunity, since the standing DB would have had a good chance of using its skills to avoid any claims in the first place.
Fulfilling the ancient Chinese curse, we are destined to live in exciting times as the world of international construction dispute resolution changes swiftly about us. Global business has proliferated, particularly in the powerhouse economies of Asia, and we are all adapting to the new world. At the same time the effects of the 2007 banking collapse have driven a review of the time and costs aspects of arbitration, leading to new and more efficient techniques. So, which way now? The answer is leaner, meaner arbitration and mediation – probably in a venue near you.