Practical Law

Most European international contractors will no doubt have noticed a significant increase in the number of arbitrations that they have had to commence or defend over the past ten years. In fact, over that period, the workload of the Court of the International Chamber of Commerce (ICC) has grown by at least 40%.

Increase in number of arbitrations

Between 2007 and 2010, the number of arbitration cases handled by the ICC grew by 15%. Approximately 1,500 arbitration cases are currently being administered by the ICC. According to the latest statistics from the ICC (2010 Statistical Report), 17% of the cases filed in 2010 (796 new cases) related to construction and engineering disputes, which is 135 new cases. 50% of the parties involved in the cases filed that year were from Europe.

Is this trend symptomatic of a (new) belief that arbitration is an efficient way of resolving disputes for international construction projects? Probably not. It is most likely simply the result of an increase in the number of construction disputes, which in turn is a direct consequence of the severe financial difficulties experienced by both contractors and employers in recent years.

Difficulty of settlement

Parties still rightly attempt to stay away from arbitration proceedings by seeking an amicable resolution of their disputes during the course of their projects. However, the current uncertain times sometimes make a settlement difficult to achieve, especially for public works projects where an additional layer of bureaucracy makes settlement discussions problematic.

It is still with a lot of reluctance (often to avoid limitation issues) that parties eventually start arbitration proceedings following the completion of a project, knowing that it will be a lengthy and costly process. Conscious of those concerns amongst users of international arbitration, the ICC has sought to promote in its new arbitration rules (the 2012 ICC Rules) a more cost-effective, expeditious and efficient procedure for the resolution of disputes. Next week, I will look at the effect of those rules in more detail, as they may affect construction disputes.

Main concerns for parties involved in construction arbitrations: time and cost

Time and costs are beyond any doubt the two major concerns of parties involved in construction arbitrations. A recent survey conducted by the Chartered Institute of Arbitrators showed that the average legal costs for a UK claimant are £1.54m (£1.69 million for claimants in the rest of Europe), with proceedings lasting on average between 17 and 20 months.

This survey was based on 254 arbitrations that took place between 1991 and 2010, of which a quarter related to construction or engineering disputes. Although the survey does not specify the average costs and time for construction arbitration proceedings, my experience is that any construction dispute of real significance commonly takes anything between two and four years from the commencement of the arbitration to the final award (assuming that the arbitral tribunal has been diligent enough to render its final award fairly swiftly after the closing of the proceedings). The successful party usually requires a further year to enforce that award.

In these difficult economic times, changes are undoubtedly needed to enable those disputes to be resolved in a much shorter time frame, and in doing so, to reduce the costs of the arbitration.

Who is to blame for this situation?

In the spirit of openness, I should probably start with the parties’ legal advisors. They must accept some responsibility for the management of a case by assessing, at an early stage, the chance of success of some of their clients’ claims, so that no time is wasted arguing weak claims. Legal counsel should also identify from the outset the main issues of a case so that, if possible, a partial award may be made by the arbitral tribunal at an early stage of the proceedings. This can make a significant difference in the conduct of the case by increasing the pressure on one party and the chance of an early settlement, as well as limiting the scope of the dispute. Finally, the parties’ legal advisors should also ensure that any work given to experts is properly managed so that their scope of work is clearly defined.

Arbitrators are also partly to blame for the current situation. They can delay arbitrations in two ways:

• Their lack of availability for meetings and hearings, which is made worse in the case of a three-member arbitral tribunal.
• When drafting the award.

A usual complaint with regard to arbitrators is that they take on too many cases at the same time (in the hope that some of them will settle early), making the management of each case a real challenge. I have been the unfortunate witness of a case where it took 18 months for the sole arbitrator to render his award. I have also been involved in some cases where it was clear that the arbitrators were not fully aware of the key issues of the case at the beginning of the proceedings, when it is often at this stage that they can assist the parties the most in fixing procedures that are swift and appropriate to the case.

Finally, arbitral institutions have a role to play, but more on that next week…