Effectiveness of Arbitration as an Alternative Dispute Resolution - Research Paper Example

Effectiveness of Arbitration as an Alternative Dispute Resolution (ADR) within the U.K. Construction Industry Introduction The industrial and labor legislations enacted in the United Kingdom encourage settlement of disputes in the industries through mediation, conciliation and arbitration. The spirit behind the law, rules and regulations is to ensure cordial business relationship in the business and promote peaceful industrial climate within the industry which will be conducive for industrial development in the nation. The legal landscape relating to industrial disputes needs to be peaceful for sustainable economic development of the country. Corporate social responsibility calls for taking care of the interests of the various stakeholders of the business and amicable settlement of the disputes in the industry through ADR by avoiding litigations. According to the research conducted by Conlin et al (2009, p. 362) the causes of conflicts include technical problems commercial problems and interpersonal differences. Construction industry is complex in nature and the contracts between the parties envisage generally provision for arbitration of the disputes likely to arise in the course of business. According to Harmon (2003, p. 187) complex construction projects result into complex disputes inter alia due to poor documentation. The effectiveness of arbitration as an alternative dispute resolution depends upon these provisions clearly spelt out in the contracts and the effective mechanisms for the arbitration available in the country. Apart from the commercial disputes, arbitration in respect of disputes arising out of employment of labour is also very important since this industry is labor intensive and involves employment of workers of the company or contractor, labour contractors and other sub-contractors. Objectives This paper seeks to analyze the effectiveness of arbitration as an alternative dispute resolution (ADR) within the U.K. Construction Industry with reference to the following: Arbitration results into cost savings compared to litigation. Privacy and Confidentiality of the proceedings is ensured in arbitration as ADR. Speedier resolution of the disputes could be achieved in arbitration as ADR. Arbitration techniques could be more effective and appropriate in resolving the construction disputes which are complex in nature. Arbitration as ADR provides a forum for the experts in the construction field for taking decisions in line with the industry norms and established practices which makes the settlement process more effective. Simplicity and flexibility in the arbitration process enhances the working relationship among the parties to the dispute. Evolution of Arbitration in the United Kingdom Noussia (2010, p. 9) stated “Arbitration is the most traditional and well-known form of alternative dispute resolution. It arises mostly, though not exclusively, from pre-dispute contracts in which the parties agree that if a dispute arises, it will be resolved by arbitration.” Proliferation of industries in the aftermath of industrial revolution which started in the UK and the rise of Labor Party to prominence led to the passage of Trade Dispute Act in 1906. The intent of the legislations and regulations is to encourage conciliation and arbitration in the proceedings for resolving the trade disputes and avoid legal proceedings in the courts of law. In the Trade Union and Labour Relations (Consolidation) Act, 1992, Mediation, Conciliation and Arbitration have been recognized as important Alternative Dispute Resolution methods. The procedures relating to the commercial arbitrations have been streamlined as a systematic code of law by the Arbitration Act 1889 incorporating the established practices earlier adopted with suitable amendments. Brooker and Lavers (1997, p. 519) stated “disputes are a significant phenomenon within the UK construction industry and that they are a matter of importance to the disputants as well as to the other stakeholders such as developers, owners, non-owning occupiers, contractors, sub-contractors and suppliers and professional consultants”. The English Arbitration Act, 1996 played an important role in consolidating the evolutionary process of arbitration in the commercial context in the backdrop of the growing need for resolution of the disputes efficiently. The spirit behind this act could be inferred from the following general principles enunciated in the act. (a) The object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense; (b) The parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest; (c) In matters governed by this Part the court should not intervene except as provided by this Part. Arbitration as an alternative dispute resolution (ADR) Mistelis and Schmitthoff (2013, p. 30) stated “Centre for Effective Dispute Resolution (CEDR) is the most high profile ADR institution in the UK and one of the leading international bodies in the field of ADR, dispute management and conflict prevention in the world...CEDR Solve arranged 467 in 2002, 642cases in 2003, an overall increase of 35% and 693 cases in 2004”. The steady increase in the number of cases shows that ADR is recognized in the country as effective in settlement of the disputes by the industries and businesses. 81% of the cases in 2004 came to CEDR by mutual agreement of the parties to the dispute and 6% of these disputes are from construction industry. According to Trinidad and Tobago Chamber of Industry and Commerce, “Arbitration is well established within the local construction sector and is a private form of ADR…The passage of the UK’s Arbitration Act, 1996 has gradually decreased the Court’s interference in arbitrations and gives increased powers to arbitrators…” In the other means of alternative dispute resolution such as mediation, the legal binding of the settlement of the disputes in the commercial context is questionable. According to Muller (1984, p.42) “Mediation, based on voluntary submission of disputes to an impartial third party, is a viable alternative to litigation as a means of resolving conflicts in the construction industry. Mediation saves time and is cost-effective when those involved are willing to compromise to arrive at an acceptable solution”. But, the structure of the mechanism in respect of mediation adopted for dispute resolution is less formal. This could make enforceability of the agreements difficult, if the parties are unwilling to comply with the decisions reached. The confidentiality in the proceedings in respect of mediation process is dependent upon the integrity of the mediator. The legal proceedings are very elaborate, time consuming and concerned with precedents in deciding the cases. The arbitration proceedings are private affairs, and the public are barred. Generally, there is no disclosure of the information or communication with regard to arbitration to the third parties or the public is involved on the grounds that the documents related to the dispute are not public records. In the age of globalization and liberalization, competition is intense in real estate and construction industry which call for confidentiality in the business affairs. Apart from the cost involved in legal proceedings, confidentiality, enforceability and time factor, the efficacy of arbitration compared to the legal recourse makes arbitration an effective alternative dispute resolution. Arbitration in construction industry Generally arbitration clauses are included in almost all the construction contracts. Hoellering (1984, p. 34) stated “Resolving construction disputes through means other than litigation is now recognized throughout the construction industry as a more expeditious, less costly, and less time consuming means of settlement.” Arbitration has evolved in the United Kingdom over a period of time and the agencies have been established for catering to the needs of the growing construction industry in resolving the disputes amicably. For example, The Society of Construction Arbitrators aims to promote best practice in Construction Arbitration and other dispute resolution techniques by liaison with Government, the Judiciary, the legal profession and users. (The Society of Construction Arbitrators, n.d.) The 100 day Arbitration Procedure, if adopted by the industry reduces the delays in settlement of the disputes. “Where the parties and the appointed arbitrator agree to adopt this procedure, the arbitrator shall have an overriding duty to make his Award deciding all matters submitted (excluding liability for costs) within 100 days from either; (a) the date on which the statement of defence…or (b) if the statement of defence…from the date on which the arbitrator gives his directions.” (Society of Construction Arbitrators, 2004, p. 1) This provision will be helpful in completing the projects without time delay involving cost overruns. According to Uff (2004) the advantage of the 100-Day Procedure is that it reinstates the principle of party autonomy, which was the keynote of the Arbitration Act 1996.  According to Flood and Caiger (1993, 412) arbitration is not a practice uniform across all fields, and in the field of construction volume and value of disputes are significant both nationally and internationally. Gould et al. (1999, p. 16) stated “Some consider arbitration within the domain of ADR based on the belief that the term encompasses all alternatives to litigation. Others consider ADR an escape from the traditional methods, which in the UK construction industry certainly includes arbitration and litigation, and arguably certification or decision-making by the architect or engineer appointed by the employer.” The management of disputes by the insiders in the industry is expected to be effective in the case of arbitration if the techniques adopted for the purpose of resolution of the disputes are appropriate. Klein (2006, p. 5/16) observed “If one party deliberately sets out to be uncooperative throughout the Arbitration, the Arbitrator has the power to use his discretion by the award of costs to recompense the other party with the additional costs it incurred by the first party’s behavior”. Arbitration Process and Contract between the parties Fen et al (2010, p. 513) stated “Dispute is associated with distinct justiciable issues. Disputes require resolution. This means that they can be managed: the process of dispute resolution lends itself to third party intervention.” In arbitration, the arbitrators are selected by the parties to the dispute and the disputes are referred to them or the panel of arbitrators. The arbitrators are generally the professionals with experience in the construction industry. Arbitration is legally binding, final and not appealable except in the case of misapplication of law or the mistakes with regard to facts. The following are the important points to be considered in this regard. 1. The parties may agree to a set of rules to be applied for arbitration. 2. The contract may opt for non-binding arbitration and stipulate rules with regard to the procedure to be adopted and evidence. 3. The arbitrators selected should have sufficient knowledge and experience in the construction industry, and their integrity is an important factor to be considered. 4. Since there are risks in execution of the complex contracts, a clause limiting the awards or damages could be introduced from the risk management point of view. The contract existing between the parties to the dispute is an important and the basic document and the terms and conditions of which devolve on the parties as rights or liabilities in the case of disputes. Baldwin et al (1999, 651) observed “The construction industry does not have a good record of completing projects on time [1]. With such a poor record it is not surprising that a recent survey [2], found that in UK 52% of all construction projects end with some type of claim”. In the case of construction contracts inter alia, clauses relating to timeline, measurement of work, scope of the contract, jurisdiction or location of the arbitration proceedings, interest, penalties, damages, insurance, responsibilities with regard to compliance with statutory regulations, certificate for completion of work and statutory approvals and clearances should be clearly specified to avoid ambiguity or misinterpretation. Clark (1968, p. 999) stated “In the last analysis, it is impossible to anticipate, and to guard against, every eventuality. Nevertheless, a conscientious attempt to provide protection against those difficulties which are not uncommon makes good sense…” Labour Disputes and Trade Unions in Construction Industry Alternative Dispute Resolution (ADR) refers to settlement of disputes outside the court of law. Construction industry is labour intensive. There are labour contractors and sub-contractors involved in the construction projects employing external workers apart from the workers of the principal company engaged in the construction contracts. There are number of statutory regulations in respect of employment and this involves compliance with various laws relating to the industry. Therefore, the importance of arbitration as an alternative dispute resolution within the construction industry in respect of disputes relating to employment of workers cannot be undermined. Bercusson (2006, p. 2) stated “The United Kingdom’s law regulating workers’ collective industrial action was initially shaped by common law perspectives. Subsequently, it has been moulded by a shifting political composition of Parliament legislating immunities. But it is always subject to judicial creation of new tortuous liabilities outside these immunities.” Right to strike is lawful in the United Kingdom which acts as a powerful weapon in collective bargaining between trade unions and the industrial or undertakings. In respect of right to strike, Millet LJ said in London Underground Ltd v NUR (1996) "a right which was first conferred by Parliament in 1906, which has been enjoyed by trade unions ever since and which is today recognised as encompassing a fundamental human right". Trade Union and Labour Relations Act envisages mediation or conciliation between the workers and employees in resolving the trade disputes. However, if these proceedings are not effective in resolving the trade disputes, proceeding in a broader perspective under arbitration is provided for in the Act. The ACAS Code of Practice encourages Mediation, Conciliation and Arbitration in settlement of the disputes between the workers and the employers before seeking the intervention of court of law. Arbitration in Labour Disputes in the United Kingdom Arbitration is an effective alternative dispute resolution to legal proceedings in respect of labour issues. “The Central Arbitration Committee (CAC) judges applications relating to recognition of trade unions. Its role is to promote fair and efficient arrangements in the workplace, by resolving collective disputes (in England, Scotland and Wales) either by voluntary agreement or, if necessary, through adjudication.” (GOV.UK, n.d.) The decisions of the CAC are binding on the trade unions and employers when they cannot agree on certain issues. The main objectives of the organization are resolving trade disputes, dealing with the complaints related to the rights of the parties to the dispute and providing advisory services for promoting good employment relationships. In Netjets Management Limited v Central Arbitration Committee & Anor (2012) the employer’s claim that the employees were outside the territorial jurisdiction for collective bargaining was dismissed. After reviewing the statutory framework, the factual background and the decision of the CAC, Superstone J held “The contract between the workers in the proposed bargaining unit and the Employer is governed by English law and is subject to the exclusive jurisdiction of the English courts; includes terms relating to pay, hours and holidays; and applies to everyone in the proposed bargaining unit”. The ACAS plays an important role in resolving the trade disputes through arbitration. “Acas is a non-departmental body, governed by an independent Council. This allows us to be independent, impartial and confidential” (ACAS, 2013). Litigation Vs Arbitration as an Alternative Dispute Resolution The arbitrators are predominantly non-lawyers and in the composition of the arbitration panels there are lawyers and non-lawyers. In British Broadcasting Corporation, R (on the application of) v Central Arbitration Committee [2003] it was established that there is no requirement that the chairman of the panel or the other members be legally qualified. Moses J observed “"the proceedings are intended to be informal, non-legalistic and conducive to good industrial relations rather than litigation". The involvement of professionals related to the industry as arbitrators makes arbitration as ADR effective. Also, the process of resolution should not be affected by the motives of the actors in the process, which are external to the resolution of the disputes. Gould et al. (1999, p. 27) stated “If there is arbitration agreement, but the claimant considers that the defendant has no real defence to the claim, then the claimant may consider court action in order to achieve early payment of the sum by way of summary judgment.” As it does not involve full trial, the time and expenses to be incurred in this respect will be limited. Consequent upon streamlining the alternative forms of dispute resolution including arbitration, the procedures evolved enabled the Arbitrator to schedule the process which reduced the time and the costs of arbitration effectively compared to the litigations. Gould (1998, 436) stated “Initially construction contracts included by default, arbitration clauses. More recently, dispute resolution clauses have become sophisticated and include amicable settlement, conciliation, dispute review advisers and dispute resolution panels”. Mattli (2001, p. 919) stated “Two distinguished international arbitrators, Alen Redfern and Martin Hunter, recently observed that the study of the practice of international commercial arbitration is like peering into the dark. Few arbitral awards are published and even fewer procedural decisions of arbitral tribunals come to light.” The main argument in favour of litigation is its transparency. This is important from the perspective of precedence in the resolution of disputes which enlarges the knowledge and the accumulated wisdom in the field for the benefit of the public. Dickinson (n.d., p. 4) states “some say that Arbitration falls within the broad umbrella of ADR. But, in reality, arbitration has more in common with litigation (Court process)”. The Arbitration Act, 1996 has created ground for the general principles and established statutory framework for arbitration in the country. According to Hill (1997, 275) the structure of the 1996 Act is, to a certain extent, based on the Model Law and, as far as possible, the 1996 Act adopts the style and, where appropriate, the text of the Model Law. The construction contracts involve interaction with several contractors and agencies. Pre-action Protocol for Construction and Engineering Disputes (Protocol) aims to ensure that before court proceedings commence the parties have a mutual understanding of the nature of the other side’s case and explore ways that the claim may be resolved. (Hill & Abraham, 2009) “This Pre-Action Protocol applies to all construction and engineering disputes (including professional negligence claims against architects, engineers and quantity surveyors)” (Justice, 2012). There is also perceptible change in the outlook of the courts towards ADR. “In Dyson and Field v Leeds City Council (22 November 1999), the Court of Appeal reminded the parties that they could order indemnity costs and a higher rate of interest on damages if the parties unreasonably rejected the courts suggestion that they should attempt ADR” (Nesic, 2001, P. 3). In Dunnett v Railtrack Plc, the Court of Appeal has refused to award costs to the successful litigant Railtrack on the grounds that it has refused to mediate when it was proposed during the earlier stages of the proceedings. In Cable & Wireless Plc v IBM United Kingdom Ltd there was a clause in the contract for resolving the dispute through ADR. Though exact ADR procedure had not been specified in the contract, it was binding and enforceable. Justice Colman held “For the courts now to decline to enforce contractual references to ADR on the grounds of intrinsic uncertainty would be to fly in the face of public policy as expressed in the Civil Procedure Rules and as reflected in the judgment of the Court of Appeal in Dunnett v Railtrack. Mediation and Arbitration as ADR Mediation and conciliation are more effective compared to arbitration and litigation. Mediation is voluntary in nature as against arbitration which is compulsory. The mediation involves no times stipulation. But, mediation has no power to make any award. Also, the mediators have no power over the third parties. Whereas the arbitration tribunal has some authority over the parties, make orders, set timetable, order disclosure of documents and impose penalties. This authority is necessary for the purpose of proceedings in the proper direction. The proceedings under mediation are private and confidential. Though arbitration is also private, in appeals on point of law the position differs. The mediation process is quicker and less costlier compared to arbitration. The final settlement reached both in the case of arbitration and mediation is enforceable. In Halifax Financial Services Ltd v Balfour Beatty Construction Ltd, it was held that the mediation clause should be a condition precedent with reference to the litigation proceedings in order to be enforceable. Mediation reduces the risk of deterioration in business relationships and enhances the level of understanding among the parties as it aims amicable settlement through mutual agreement. The process of mediation is less formal and is not suitable in complicated disputes. Genn et al (2007, p. 87) found that very few solicitors had any experience of mediation. The participants should be sincere in their intention to settle the dispute amicably and not use this forum to gain information from the other party without providing meaningful information to facilitate the mediation process. Gould (2003) stated “Parties are frequently concerned that they may disclose some important aspect of their argument which will then aid the other side in the event that the mediation is not successful and the matter proceeds to trial.”  The negotiations could be prolonged in the absence of deadline stipulated for completing the process. In the case of mediations, it is very important that the mediator commands the respect of the parties to the dispute since mediation involves decision making authority and the participants should be willing to abide by the decisions arrived at. Therefore, the independence of the mediator and his influence over the participants in resolving the disputes is crucial for the success of mediation. Ndekugri and Russell (2006, p. 380) found that “the Court of Appeal has twice approved a flexible approach based on the principle that a dispute arises only after a party has been given reasonable opportunity to consider the other party’s claim and has rejected it expressly or by implication.” However, lack of enthusiasm on the part of the lawyers in ADR is a cause for concern. According to Zuckerman (1996, P. 4) the lawyers have no incentive to pursue other remedies other than litigation in view of the personal economic benefits attached to the legal remedies. In the complicated construction contracts disclosure of documents would be essential in resolving the disputes which makes arbitration suitable for the resolution of disputes. In Frank Cowl v Plymouth City Council, Lord Woolf has disapproved the failure on the part of the participants to adopt ADR, especially where public money is involved. Since arbitration is also private with timetable and arbitration awards can be enforced as judgment, it is effective as an alternative dispute resolution (ADR) within the U.K. Construction Industry. Chan and Tse (2003, p. 376) stated “The practice of combined mediation and arbitration adopted in many countries such as China has aroused much interest (Chan 1997). Such a line of thinking leads to fusion of amicable and ‘‘judicialized’’ alternative dispute resolution (ADR)”. Conclusion Arbitration as an Alternative Dispute Resolution (ADR) is effective within the U.K. Construction Industry mainly due to the suitability of the process in the business context. Since construction industry is complex in terms of technicalities involved and the diverse stakeholders in the business, the expertise of the professionals such as civil engineers, architects and the others experienced in the business is necessary for resolving the disputes. The factors such as privacy, confidentiality, decision making, awards are very important in resolving the disputes for maintaining the business relationship among the parties to the dispute. Also, due to the administrative pressures in the legal system, arbitration as an ADR is encouraged by the judiciary for effective resolution of the disputes related to the industries and businesses in general. References ACAS, 2013. About Us. [online] Available at: [Accessed 2 March 2013]. Baldwin, A. N., Thorpe, A. and Carter, C., 1999. The use of electronic information exchange on construction, Automation in Construction, 8, 1999, pp. 651–662. Bercusson, B., 2006. European Laws: Help or Hindrance? Institute of Employment Rights, Conference, 10 May 2006, NATFHE, London WC1. [online] Available at: [Accessed 2 March 2013]. British Broadcasting Corporation, R (on the application of) v Central Arbitration Committee [2003] EWHC 1375 (Admin) Brooker, P. and Lavers, A., 1997. 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