Practical Law

Last week saw the launch of RICS’ new construction and engineering arbitration service. Now, before I go any further, I should declare an interest. I chaired the working party responsible for developing the service, so I acknowledge that I may be somewhat biased.

Why bother?

A question I have been asked on a number of occasions is why is RICS attempting to revitalise domestic construction and engineering arbitration in the UK?

The main reason is because the working group believes that arbitration can offer a viable alternative to both adjudication and litigation. We are not saying that these processes are ineffective. Everyone would agree that adjudication has been a resounding success since its introduction in 1998, and the TCC is now a standard-bearer when it comes to modern litigation procedures and the quality of the judgments it produces. However, arbitration can still offer advantages, both as an alternative to adjudication and as an alternative to litigation.

Advantages to adjudication include:

• More thorough examination of the evidence. Adjudication can and is used for large and complex disputes but, on occasion, the timescales can be too restrictive.
• Less scope and incentive for parties to raise spurious jurisdictional challenges. Unless the parties have agreed otherwise, an arbitrator has jurisdiction to decide his own jurisdiction.
• Finality. Unlike an adjudicator’s decision, an arbitrator’s award is final and binding (subject to certain, limited rights of appeal).
• Cost recovery. There is no doubt that a prohibition on cost recovery in adjudication has been one of the reasons for its success, as the small sub-contractor knows that it can pursue the main contractor without the risk of having to pay the main contractor’s costs. However, there are occasions when the parties want to be able to recover their costs.

Advantages to litigation include:

• Privacy. While not expressly set out in the Arbitration Act 1996, English law recognises that arbitration proceedings are private and confidential, and the same obviously cannot be said for litigation. Confidentiality is very important to some parties. Indeed, I can’t help wondering whether Mr Mackay (of Walter Lilly & Company Ltd v Giles Patrick Cyril Mackay and another fame) wishes he had included an arbitration agreement in his contract.
• A wider choice of tribunal. Arbitration allows the parties to select their own arbitrator/s to suit the issues in dispute. That might be a lawyer or retired judge, but it could equally be an engineer, surveyor or architect.
• More flexibility on management and procedure. The Arbitration Act 1996 and many sets of arbitration rules provide the parties (and the arbitrator) with a great deal of flexibility.
• No mandatory pre-action procedure. There are no pre-action protocols to be followed when it comes to arbitration. All that is required is a dispute.
• Costs. Unlike litigation, there is no requirement for detailed cost budgets to be submitted and agreed. Furthermore, the cost of starting an arbitration is considerably less than the cost of issuing court proceedings. For example, the cost of starting a £100,000 claim in court is now £5,000, whereas the cost of appointing an arbitrator will usually be less than £500 (and might even be free).
• Internationally common. An increasing number of international contractors are plying their trade in the UK. Many of them are used to (and prefer) arbitration.

Customer charter

In developing the new services RICS went out to the market, sending questionnaires to a variety of representatives and potential users, and went on to interview some of those who responded. This has resulted in RICS setting out its commitments to customers in a charter that includes requirements for it to engage with both parties concerning the experience and qualifications of the selected arbitrator and whether there is agreement concerning matters of independence and impartiality. RICS is also committed to appointing arbitrators within two weeks of receiving an application.

The customer charter also extends to members of the arbitrator panels, and includes commitments relating to the management of costs and the conduct of the arbitration. One of the most innovative commitments is for arbitrators to provide an early indication of their fees, and provide updated estimates throughout the arbitration. Lawyers and experts are regularly required to do this, so why not arbitrators?

While some cynics have pointed out that the charter is unenforceable, it makes sense from a commercial perspective as parties are hardly likely to use the RICS arbitration service again if the RICS or the appointed arbitrator is unable to meet these commitments.

Fast track or select arbitration service?

RICS is offering a fast track arbitration service and a select arbitration service, depending on the value of the parties’ dispute.

The fast track arbitration service is:

• For claims where the value is £100,000 or less.
• An alternative to County Court litigation and adjudication. A large number of relatively low value construction cases, which would be far better suited to arbitration, end up in the County Court. I am not suggesting that County Court judges don’t have the skills and experience to deal with such cases, but rather that they don’t have the capacity or resources to, say, decide the value of multiple disputed variations. While adjudication is obviously suitable for low value disputes, on occasion parties want a final and binding decision, and to recover their costs.
• Underpinned by a set of rules providing a clear timetable and procedure, all designed to ensure that the parties achieve a fair, impartial, final and binding award on the substantive dispute within six months of the arbitrator being appointed. In 2016 this will be supplemented by a guide to assist those with no, or limited, knowledge of arbitration.
• Capping costs, with an arbitrator’s hourly rate limited to £175 per hour (plus VAT) and a maximum of 60 hours they can charge for (subject to a counterclaim).
• Capping the parties’ recoverable costs at £5,000 (plus VAT) or 20% of the value of the claim and any counterclaim, whichever is higher. This, combined with the maximum fees for the arbitrator, will enable parties to determine their maximum exposure relatively early in the proceedings.

The select arbitration service is:

• For claims where the value exceeds £100,000.
• An alternative to High Court and adjudication. As I explain above, arbitration can offer a real and viable alternative to litigation and adjudication
• Intended to conclude an arbitration within 12 months. Panel arbitrators are committed to this through the customer charter and they will have to work with the parties to achieve it.
• Without rules (RICS felt there were sufficient arbitral rules already available).
• Intended to be more cost effective than arbitration services provided by the international arbitration bodies. The market research revealed that there was limited interest in a fully administered service (such as those offered by some of the international arbitration bodies). Rather, this is something that can be managed by the parties’ representatives and arbitrators.

Arbitrator panels

Arbitrator panels accompany both the fast track arbitration service and the select arbitration service. Individuals have been selected from a variety of professions (solicitors, barristers, retired judges, surveyors, architects and engineers).

The criteria (qualifications and experience) for getting appointed to the panels has been purposively pitched high, but that has to be the case if RICS want to hold itself out as only appointing the highest quality arbitrators.

Conclusion

Only time will tell if the numbers of domestic construction and engineering arbitrations increase, and if these two arbitration services are a success. However, if the anecdotal evidence is correct and parties are increasingly including arbitration agreements in their contracts, I have a sneaking suspicion that we might well see the arbitration phoenix rising from the ashes.