So why arbitrate? Part 1

Far too often, arbitration agreements comprised in construction contracts are ill-considered, boiler plate provisions that are not afforded a well deserved priority

One supposes this is because of the conception that matters are unlikely to go wrong, however it is when they so do, that badly drafted arbitration agreements create inconveniences that the whole raison d’etre of international arbitration intends to avoid.

In the international arena, the luxury of, off the shelf standard form contract solutions are evasive and often, the task of drafting arbitration agreements falls to whomever is preparing tender documents, quantity surveyors in a majority of cases.

This article examines why transnational companies prefer (after of course, amicable and conciliatory measures have failed) arbitration, as a preferred alternative to litigation, as a means of final settlement of disputes.

Further consideration and understanding of that preference will encourage properly drafted arbitration agreements, that achieve what is intended to be achieved, simply, a workable agreement to arbitrate disputes.

Given the serious implications of international arbitration and what it is intended to achieve, sponsors of international projects may be less than forgiving of negligently drafted arbitration agreements.

Flexibility of procedures
A prevailing theme of popular institutional arbitration rules are the words, or variants of “unless the parties otherwise agree” and this theme is central to the party autonomous nature of modern arbitration.

Arbitration agreements are intended to reflect, whether drafted before or after a dispute arises, the wishes of the parties in dispute as to how, when and where the dispute can be resolved.

An extension of that autonomy is the agreement of the parties to authorise others to decide matters upon which the parties are unable to achieve unanimity. Most international arbitration rules and a majority of arbitration laws also provide, subject to party autonomy, for the arbitral tribunal to determine appropriate procedures.

The agreement to arbitrate, provided such agreement is unequivocally stated, to a significant extent excludes the involvement of most developed nation’s national courts in the determination of the merits or otherwise of dispute.

National courts may still however intervene in the event some aspect of the arbitration agreement is silent or unclear the extent of such intervention is jurisdiction dependent.

In an arbitral context, matters such as venue, (that determines the procedural law to be applied) language to apply, discretionary powers afforded to arbitrators, number of arbitrators, choice of procedures (ICC Rules of Arbitration for example), and other relevant (to the parties) procedural issues can be decided upon by the parties in dispute or failing agreement then by the arbitral tribunal.

Contrast that with the rigid and formal procedures of a national courts authority, tied by, (for example only), procedural rules, rules of precedent or rules of discovery of evidence.

Choices of venue, language, procedural law or what type of expert resolves the dispute are not available to litigants in national courts as all of these matters are decided upon by judicial authority.

Trans-national companies therefore, when considering dispute resolution by arbitration are consequently able to and often do strategise an approach to the risks of disputes arising.

Well drafted arbitration clauses, whilst never providing any certainly of outcome, can provide a strategic advantage or even serve as a mechanism to avoid disputes, when technical drafting fails such a strategy negligence claims may result.

Venue of arbitration
The Parties’ choice of the place or juridical seat of arbitration is central to an arbitration agreement, as it sets the stage for the degree of support or intervention by national courts, provides neutrality and impacts on the degree of enforceability of any award.

The ability to choose the place of arbitration presents a significant advantage over litigation in national courts in that it avoid the pitfalls of litigating in unfamiliar or corrupt or incompetent legal systems, whilst also setting the stage for the procedural law that will govern the arbitration.

The choice of venue may also provide a neutral (as between the parties) location, such neutrality can render an arbitral award more acceptable to a losing party.

Speed
Differing perceptions persist as to the speed at which a matter referred to arbitration can be resolved. In Indonesia for example, the Rules and Procedures of the Indonesian National Board of Arbitration (BANI) encourage speed by requiring, subject to party autonomy, for disputes to be resolved in 180 days.

The ICC Rules of arbitration require, again subject to party autonomy, that disputes be resolved within six months of the agreement of an initial terms of reference.

In some jurisdictions even getting to litigate in national court can take years, and this process is hindered further by appeal processes, at times contrived to prevent conclusions.

Where arbitral proceedings simulate courts proceeding, often the case in common law jurisdictions adopting adversarial as opposed to inquisitorial type hearings, then proceedings can sometimes be lengthy.

Any advantage of speed of arbitration will defeated if a badly drafted arbitration agreement does not properly exclude the involvement of national courts. This may lead to resolution of a dispute (or even worse) parts of it by litigation and arbitration, thus defeating the rationale of arbitration.

Such an issue arose in the Australian case of Seeley International Pty Ltd v Electra Air Conditioning BV (2007) an Australian federal case.

Whilst not an international arbitration, the outcome, relevant to this subject, was that notwithstanding an otherwise eloquent drafting of an arbitration clause, the use of the words which provided that nothing in the clause “prevents a party seeking injunctive or declaratory relief in the case of a material breach or threatened breach of this Agreement” were sufficient for the supervisory court to conclude that it was the parties’ clear intent to preserve the ability to pursue certain rights, in a forum other than arbitration even though this was something the parties clearly did not intend to happen.

Whilst this decision may be seem to be going against the trend of a robust approach to support of arbitration clauses avoiding fine linguistic distinctions, it should serve as a lesson to take utmost care when drafting an arbitration clause that properly reflects the parties’ consent to arbitrate any and all disputes arising out of or in connection with a subject contract.
 
Click here to read Part 2 of this article

Michael Fesler FRICS is contract advisor at PT Thiess Contractors Indonesia

Further information
www.rics.org/drs