Arbitration has been written off over the last few decades as time consuming, costly and impractical commercially if the wrong arbitrator is appointed. The process competes with adjudication, which has since 1998 grown to be the main ADR process in construction and engineering contracts and it has left arbitration behind. In arbitration, although with a guarantee of only partial recovery, costs can be salvaged unlike adjudication where it is now nil. Adjudication however delivers a legally binding decision in a 28 to 42 days. In practical terms adjudication wins commercially. The issue of costs in these and all dispute resolution processes are of paramount importance commercially, no costs in adjudication and partial disproportionate cost recovery in arbitration is frankly unpalatable. The English legal system treats the subject of costs very badly, the word costs is a dirty word and this is a whole topic of its own.
Arbicon treat the subject of costs very seriously and recognise the need for speed and low cost or cost recovery, which are the main forces to be respected in construction dispute resolution.
An Arbitrator is obliged to conduct proceedings quickly and without unnecessary cost, section 33 of the Arbitration Act 1996 imposes this as a mandatory rule. The Arbitrator also has the power to determine the arbitration procedure, timetable and evidential matters, if not already agreed. In practice many Arbitrators do not care for time, cost or procedure, they let the parties tell them what to do. The longer it goes on the more they are paid. The problem is the Respondent takes control, the matter drags on and by not taking control the Arbitrator will cause major commercial damage. If you need to engage in arbitration it is recommended you agree an arbitrator with a modern approach and model as Arbicon offer and do not use a random nomination panel.
Consider this case study…
The Claimant, let us call him C, owned an acre of land with planning for two large new houses on it. The Respondent, let us call him R was a builder, who could build the houses. C had no money to finance the build so he entered into a development agreement with R who would finance and build the houses and take the sale money. On completion of the build and after the sales were complete the resulting profit would be split 50-50. Simple and straightforward? Not at all! R built and sold the houses and declared a profit of £340,000 and duly paid £170,000 to C. However, the properties were sold for millions, built in basic low-cost materials and the projected profit was supposed to be circa £1.25 million. R had also excluded C from any cost planning or expenditure management as the development proceeded. C commissioned an Expert QS Report which confirmed that the costs had been overstated and the profit was circa £1.20 million and consequently the pay-out was £430,000 short. It was a quantum only case, ideal for adjudication, but here is the warning… the Construction Act does not cover development agreements and the development agreement, which was very poorly drafted by a solicitor did not include an adjudication clause. A simple sentence in the contract, an adjudication clause, would have allowed the dispute to be over in 28 days, it took over two years and C incurred circa £200,000 in legal costs to get to the end after the parties went to and completed an arbitration with a barrister arbitrator who knew little about construction and Quantity Surveying. The Arbitrator charged an eyewatering circa £70,000, most of which R had to pay for losing after a disappointing award of £60,000. The Arbitrator then only awarded circa £100,000 of the £200,000 to C for costs, so although C won he lost out as it cost more than the award. It could have been worse if C had to pay the Arbitrator’s fees too. C also incurred damage from his nerves being shattered over two years and the award wiped out by £100,000 of unrecoverable costs the whole process was disproportionate, badly managed and badly judged by the Arbitrator and failed under section 33 in every respect. This example, may have, had it been in Court, been subject to higher legal costs as the Court procedures drag out the litigation and although the judge is free unrecoverable costs would have been limited to about £50,000. Adjudication has been sold here and it is easy to see why it is popular as the cost would have been £10,000 - £15,000 that was unrecoverable, but a more switched on professional Quantity Surveyor adjudicator would have understood the QS Report and understood the cynical cost tactics of the builder, thus the award may have been more significant.
The arbitration failed as the Arbitrator, a barrister, did not recognise that this was simply a quantum exercise that could be done on a documents only basis. It could have been conducted in an adjudication style and it could have been over in a matter of weeks. Section 34 of the Arbitration Act 1996 allows the Arbitrator the power to determine all evidential and procedural matters. With time and cost in mind under Section 33, an adjudication style timetable of submissions and a meeting would have dispensed with the disputed account. The Arbitrator allowed the Respondent to drag out the timetable and insist on Expert evidence and a number of witnesses, who were irrelevant to the quantum exercise. The Arbitrator is supposed to be the Expert and the Expert that R provided did not even look at the material quantum except to say it was reasonable, which is worthless evidence. A trial had to be held over five days formally with Counsel in attendance. The matter was treated unnecessarily like full blown litigation thus cost and speed went out the window. The award then took around three months to be issued and huge fees paid and costs incurred. The Arbitrator made many senior mistakes, accepted charges that lacked any evidence, had in the trial identified costs and documents that could not be valid then paid them, drew on evidence from witnesses particularly R’s expert that was not put by the witnesses, allowed charges that were clearly incurred in another project. Here is the trick it was obvious the builder was having materials and resources booked/delivered to the site, which were being then transported elsewhere, bricks and tiles enough to build several houses were not used at the site, the list goes on. The Arbitrator did not see this. The Arbitrator’s expertise and impartiality was questionable, no attempt had been made to measure the work or apply any expertise. The arbitration was conducted in an old school fuddy-duddy fashion without any regard to speed or cost, ending in an unacceptable unconscious award and disastrous cost outcome over two years as illustrated above.
Old school arbitration is dead, many Arbitrators consider they have to conduct proceedings like a Court would, mainly because they are probably lawyers who have been brought up on that process. Beware that an Arbitrator must be an expert in the field of the dispute so engaging a solicitor or barrister should include an enquiry into what relevant dual professional qualification in construction expertise is held, without extensive experience and how recent. Appointment should be avoided on a quantum claim without these attributes. A solicitor or barrister arbitrator will also have high rates. The best option is to appoint a Claims Consultant qualified as an Arbitrator, who has the extensive experience, a professional qualification such as Chartered Quantity Surveyor or other chartered specialists promoted by professional institutions such as the RICS.
Don’t be put off arbitration, just get the right Arbitrator and avoid using arbitration rules other than the Arbitration Act 1996. The case study above is to demonstrate in a worse-case scenario what can happen and that Arbicon are very experienced and experts in the arbitration and the dispute resolution process and use that understanding and apply it in their own procedures to achieve speed and low cost for our Clients whilst getting results.
Arbicon offer arbitration either by appointing an Arbitrator or by representing the Client in arbitration proceedings. The model procedure is offered is principally aimed at where an Arbicon Arbitrator is required. The procedures will also be offered to any third-party Arbitrator, where Arbicon are acting as advocates.
Basically, the Arbicon model procedure attempts to execute the arbitration with speed and low cost, everything that the case study above failed to achieve and to compete seriously with the adjudication process treating cost recovery in awards with certainty and respect making the service commercially viable.
Depending on the value and complexity of each case, a practical procedure will be adopted or offered to the parties, which might include:
Don’t be put off by the reputation arbitration has had in the past please ask for more information without obligation about our contemporary approach to this valuable service.
If you have any queries or would like to know more about arbitration or the service provided by Arbicon call 01733 233737 or visit us at www.arbicon.co.uk.