Although standard forms of contract that provide for adjudication and / or other forms of ADR, are habitually used in construction contracts in the UK, there has been a significant rise in the adoption of arbitration as the forum for dispute resolution in both domestic and international construction contracts.
In its 2023 Casework Report, the LCIA reported that "there had been a notable increase in disputes involving "younger" agreements. Almost half of the agreements out of which disputes arose in LCIA arbitrations commenced in 2023 were concluded within the two years previous to the year of referral."
The ICC has also reported that 28.8% of newly registered cases in 2023 originated from parties in North and West Europe; a total of 687 cases .
In this article, we provide a summary of the key elements to consider when drafting an agreement to arbitrate.
Scope of the Arbitration Agreement
It is important to consider what types of dispute(s) are likely to arise out of the underlying contract and whether that type of dispute can be referred to arbitration.
For example, under:
a) English law: criminal matters, family law matters, and certain insolvency matters are not arbitrable;
b) UAE law: disputes relating to a mandatory rule of public policy, employment and real estate and commercial agency matters, are not arbitrable; and
c) KSA law: personal status, criminal law, and public policy matters are not arbitrable.
While it is possible to 'carve-out' certain types of contractual disputes, this should be avoided wherever possible. Such carve outs often mean unforeseen interpretation issues further down the line and can result in increased time and costs while parties 'argue' over what the carve outs were and were not intended to cover. In other words, keep it simple.
Pre-conditions to Arbitration?
Any agreed pre-requisite steps and timescales, such as a meeting of the parties' senior management, mediation and / or other forms of ADR, must be clearly identified in the arbitration agreement.
This can include the clear definition and / or express confirmation of:
a) Each step that must be completed by the parties;
b) The process involved in each step. For example, in the case of an expert determination, the appointment procedure should be expressly provided along with the procedure that is to be followed by the independent expert and the parties, including any minimum qualifications and / or experience that the expert is required to have in order to properly determine the dispute;
c) Whether a step is a mandatory or voluntary pre-condition to the commencement of arbitration;
d) The trigger for each step;
e) The timeframe(s) for how long each step should be attempted by the parties, the deadline or expiry for each step, including the next step/option for the party following completion and / or expiry; and
f) The fact that each pre-condition can be progressed without the active participation of both parties to avoid deadlocks and to allow the process to continue.
Keeping it clear and simple can effectively avoid a party raising jurisdictional and / or admissibility challenges.
Seat of Arbitration
The seat of the arbitration (or curial law as it is often called), governs the procedural issues of the arbitration. The seat determines the applicable procedural laws, the courts with supervisory jurisdiction and set aside procedures.
The seat of the arbitration may also be different to the venue of the arbitration i.e., where the arbitration hearing physically takes place.
Factors to consider in regard to the seat of the arbitration are:
a) The required and necessary legal infrastructure: does the seat of arbitration have effective and appropriate support for interim relief and the enforcement of the arbitral award? Is the chosen seat a neutral jurisdiction?
b) Effective arbitration law: does the chosen seat have an effective arbitration law which provides a framework for ensuring a fair, efficient, and just resolution of the potential dispute?
c) Quality of the judiciary: does the chosen set provide for limited court intervention and an independent and competent judiciary, with experience and understanding of international arbitration?
d) Signatory to NY Convention and / or other treaties: to enable the enforcement of any arbitral award obtained.
Governing Law
The governing law is important as it applies to the arbitral procedure and process. It determines the validity and the scope of the arbitration agreement and can be different to the governing law of the substantive contract.
Number of Arbitrators: 1 vs 3?
The number of arbitrators is very much determined by the type and value of dispute(s) that might arise out of the contract.
Typically, where the type of dispute is likely to be of a high value and / or concern significant technical issues, it is preferable to appoint a tribunal comprising three arbitrators. A determination from a tribunal of three members affords a degree of protection/neutrality and ensures that each party has input into the appointment of one member of the tribunal. For disputes involving a specific technical issue, and where there is a need of having someone who has a particular set of characteristics or experience, the arbitration agreement should specify any specific qualifying criteria that any appointed arbitrator must meet.
Choice of Institutional Rules
Parties can either adopt the rules of an established arbitral institution such as, ICC, LIAC, SIAC etc, to govern the arbitration procedure in the proceedings, or the parties can adopt an ad-hoc procedure. In the event of the latter, the arbitration agreement should detail the procedure that is to be followed.
A comparison of the different institutional rules can be found here: Shaping your arbitration: How do the institutional arbitration rules compare - Trowers & Hamlins.
Language
A clear decision as to the language is needed as all submissions and evidence in the arbitration proceedings will be presented in the language stipulated in the arbitration agreement.
Typically, the language of the arbitration proceedings is English, on the basis that this is ordinarily the common language used in the extensive project documents. It should be driven by the actual language the parties are using or likely to use in their communications. This avoids the burden and costs of arranging for all documents presented in the arbitration proceedings having to be translated and avoids disputes over the transliteration itself. Keep it simple.
Conclusion
With the rise of the adoption of arbitration agreements in construction contracts and the current status of the Arbitration Bill (which is currently before UK Parliament), careful consideration of a proposed arbitration agreement, and a proper understanding of the proposed terms, is key to not only mitigate the risks associated with a defective arbitration clause, but to ensure that the agreement is fit for purpose.
Too often we see parties tied up in legal proceedings concerning the applicability or interpretation of the arbitration clause, rather than the resolution of the dispute at the crux of the project; wasting not only significant costs but time. Keep it simple and ensure the key elements are present and clear. Please do reach out to the Construction Disputes Team who would be happy to review and / or propose draft arbitration agreements, or answer any queries.
