143: Arbitration, litigation and multi-party disputes: don’t just tick the box

A version of this article previously appeared in the ICE publication, Management, Procurement and Law in December 2016.

First, a bit of ‘ancient history’. The ‘Latham’ years between 1996 and 1999 were particularly momentous for construction. They saw the passing of the Housing Grants Construction and Regeneration Act in 1996 (brought into force in 1998). This radically changed the payments regime and brought in adjudication for everyone working on the majority of UK based construction projects. The Contracts (Rights of Third Parties) Act 1999 was passed, with the aim of replacing the use of collateral warranties (take up of this is still proceeding at a snail’s pace). There was another significant change in 1996 less widely remarked. Perhaps not surprising, as it was because of something which didn’t happen. However, this non-event significantly impacted the use of arbitration in construction disputes, and the effects are still felt today.

Under section 9 of the Arbitration Act 1996 (the Act), where there is a valid arbitration agreement (in for example a JCT contract), if a related dispute is brought before the courts, it must be stayed to arbitration and cannot be litigated. The Act was a consolidation Act, meant as a bringing together of different existing statutory provisions and case law, whilst ‘restating and improving’ upon the old law.

The new Act contained provisions (sections 85-85) giving the courts power to refuse to stay disputes to arbitration where the dispute was multi partite. This just restated the existing law. The courts already had this discretion so that disputes involving, for example, a contractor, engineer and sub-contractor, all being held responsible by a client for the same defect or default, could be ‘joined’ as defendants to a single claim in litigation. This avoids a claim on the same facts against different parties being separately arbitrated and / or litigated before different tribunals, with the risk of inconsistent decisions. There was no similar discretion under the Act in relation to international arbitration agreements.

By sections 85 to 87, it was originally intended that the Act would retain this discretion for UK arbitration agreements. However, these sections were never brought into force and remain there, un-repealed and in limbo. Courts therefore no longer have discretion to refuse a stay of legal proceedings and must refer the putative multi-party dispute to arbitration. This unexpectedly rendered arbitration less fit for purpose for disputes on UK construction projects. Some contract writing bodies took the problem on board. The JCT, for example, responded by making litigation the default form of dispute resolution in its 1998 editions (and the last amendment to the preceding form) of its contracts onwards, with an optional Article 9, Arbitration, as an alternative.

This is not to say that arbitration is always unsuitable for construction disputes. If it sometimes cannot respond effectively to multi party disputes, neither can adjudication, which remains a two party procedure. In fact arbitration agreements can be made to respond more effectively to multi party disputes by the inclusion of specific joinder provisions. The JCT’s own solution was to incorporate an option to use an ‘off the shelf’ set of joinder provisions produced by the Society of Construction Arbitrators, the ‘CIMAR’ rules. However, this will still not help if this approach has not been followed through from the construction contract into the appointments of the professionals or other parties.

In the international arena and in relation to projects (often very large projects), where the project team have agreed that the contracts will be under English Law and disputes resolved under English arbitration rules, arbitration will still play a part. These projects are more likely to be involve parties who have given a great deal of thought to issues of governing law, jurisdiction and dispute resolution, often involving detailed bespoke procedures and multi layered ‘escalation’ for disputes of different kinds. Similarly on major UK infrastructure projects, the client and his team are likely to have given careful consideration to issues of dispute and made provision for, for example, dispute escalation and review boards. NEC3 has optional provisions for litigation or arbitration and an escalation formula for disputes to move from adjudication to whichever of these tribunals is chosen.

Outside this sphere, it is fair to say that this change in law under the Act (if you can call it a ‘change’ – it was more a failure to keep the law as it was) wasn’t widely noted or talked about, except in legal / arbitral / claims consultant circles. For a lot of developers, the JCT was resolving a problem they didn’t even know they had, at least until they were in dispute. Awareness of this particular issue amongst professionals may also have diminished. Many disputes which might otherwise have found themselves in arbitration/ litigation are now resolved by adjudication and do not proceed further, so it just never comes up.

Many commentators on the JCT dispute provisions now assume that the preference for litigation is on the basis of the overall merits (cost, complexity) of the different methods and seem to have forgotten that it has anything to do with sections 85-87 of the Arbitration Act and multi-party disputes. Some supporters of the Act have pointed out that under Section 35 there was always provision for arbitrations on the same subject matter to be consolidated. However, this rather assumes that the other contracts in the suite for the same project – including the professional appointments – also contain arbitration agreements, or that if they don’t, the other parties will participate voluntarily in a joined up arbitration. Defendants facing potential claims are not necessarily going to want to make life easier for a claimant, particularly if it is more expensive for them.

Some will say that the parties have agreed to arbitrate and should be ‘held to their bargain’. In reality – certainly this is our experience of advising developer clients – the person ‘ticking the box’ in the standard forms of contract will be an architect, engineer or quantity surveyor, and they may apply Article 9 of JCT in the particulars from force of habit. Unless they are aware of the employer’s own particular preference in this regard, they may like to picture the scene at some future date when they have to explain to the employer that they cannot go to court over some fairly modest sum of money. Orthe fact that the employer may now be facing multiple proceedings on the same issue before different tribunals. They may well imagine that a certain amount of colourful language will be used.

We would advise our UK construction clients and consultants to think long and hard before ‘ticking the box’ for arbitration on their contracts, unless they fully understand what they are getting themselves into.