As far as the trading community is concerned, the settlement of disputes or contractual claims has traditionally been effected through the courts. Shipping has been the exception, where for more than 100 years disputes have been decided by the process of arbitration. Over the last two decades, however, commercial men in other fields of activity have become aware of the uses of arbitration, and as a result arbitration clauses have been inserted in a wider and wider range of contracts.
Most companies in this country rent or lease their accommodation and under present-day conditions the rent which is paid will be reviewed, or raised, every so many years. If the landlord and tenant do not agree on what the new rent shall be then provisions in the lease usually specify that an arbitrator or an expert shall decide the new rent.
Another instance where arbitration can arise is when the tenant has taken new premises. Changes may be required and a building contractor needed to carry out the works. In most building and civil engineering contracts there is a clause which states that, in the event of a dispute between the contracting parties, an arbitrator shall be appointed to settle the matter.
A further example occurs when a company places a general contract for the supply of goods or services with another company. If the contract is not completed satisfactorily then instead of suing the defaulting party both may agree to settle the matter by arbitration.
Indeed, parties can in the original form of contract specifically postpone resort to the courts by the insertion of what is known as a Scott v Avery clause. This ensures that, subject to certain exceptions such as fraud, parties to the contract must use the arbitral process before any application to the court is permitted.
Why use arbitration at all?
There are various reasons why contracting parties might prefer to use arbitration in preference to an action in the courts. These reasons will not always be relevant to every case, but generally one or more will be present.
First, the process can be speedy. Although governments are making efforts to create more courts and to make the judicial process more efficient, High Court claims can take years to be decided, whereas arbitration can take place within weeks or even less. Where arbitrators are named in the original form of contract instances are on record of a binding decision being given in days or even hours. This speed can be essential where disputes, as they so often do, arise during the contract period.
Second, the costs of arbitration are usually much less than those of going to law. The only extra cost is that of the arbitrator whose costs must be met by the parties, whereas a judge is not paid directly by the parties but by the state. It is cheaper because legal representation is not obligatory. Where a company makes a claim or defends one in the courts, it must be represented by a solicitor. Solicitors will frequently brief counsel and costs will soon rise, whereas in an arbitration the parties can appear in person or can employ expert lay advocates. In arbitration relevant to construction matters lay advocates will often be surveyors or civil engineers — although, to be fair, there are a few barristers who are also qualified as civil engineers, architects or surveyors!
An additional saving arises indirectly from the aspect of speed, in that in the case of a financial settlement the parties will receive their moneys more quickly than would be normal in a court hearing.
The hearings are informal, which helps to reduce the stress placed upon the participants and strict rules of evidence may be dispensed with if the parties wish. And another benefit is confidentiality, which can be very important to the participants. The press and the general public cannot be admitted unless both parties specifically agree.
It is often said that arbitrators do not have the authority or powers of a judge, and therefore the court process must be used. This is no longer so. If the Arbitration Acts and the parties themselves have not given complete authority to the arbitrator at the outset, then the 1979 Arbitration Act enables the courts to give an arbitrator 99% of their own powers. To the writer’s knowledge this application has never been refused by the courts, who are delighted to delegate their powers where permitted — it enables the judges to devote their attention to those matters to which arbitration will not apply.
Who are arbitrators?
Arbitrators are men and women who are already experts in their own field and generally also members of the Chartered Institute of Arbitrators. The institute has 38 panels of expertise, both legal and technical, from which arbitrators can be appointed. In order to be placed on a panel a member of the Institute of Arbitrators must become a Fellow, which involves a rigorous course of training followed by testing written examinations. Members of the institute, who are composed of subscribers, Associates and Fellows, exceed 6,500 in number throughout the world.
Settlement by arbitration is increasing, and as a result the secretariat of the Chartered Institute is becoming increasingly more involved in giving advice both to professional bodies and individual companies concerning methods of appointing arbitrators as is the arbitration section of the RICS.
Recent examples to illustrate the practical uses of arbitration
A contractor was awarded a contract which was to be completed within 40 weeks. The contract contained a severe but fair penalty clause. A schedule was issued which set out the dates by which the engineer should supply various sets of drawings, and on one of these dates the engineer failed to supply the necessary drawings.
The contractor applied to the architect for a certificate that an extension of time should be granted, an arrangement permitted by the contract for this sort of reason. The architect failed to provide the certificate and the contractor, as a result, wished to terminate the contract as he was entitled to do.
At the time of signing the contract both parties had agreed that an arbitrator should be appointed in the event of a dispute arising during the contract. The parties also decided to agree on a named arbitrator and subsequently obtained the arbitrator’s agreement to act.
The dispute occurred at 3.15 pm on a Friday afternoon. The contractor decided to try to achieve a settlement before actually terminating the contract and telephoned the office of the arbitrator who unfortunately was not available. However, communication by telephone was made that evening and the arbitrator agreed to meet the parties on site on the following Sunday morning. The employer agreed, and also requested the architect and engineer to be present.
The meeting went ahead, and was finished by 2.30 pm. At 7.20 pm on that same day the arbitrator notified the parties of his decision by telephone — later to be confirmed in writing. The decision was that the extension of time should be granted. On the following Monday the contractor was able to continue with the contract without any delay or financial disruption, except to the employer.
In this case the imminent legal costs of the legal claims and counter-claims as well as the uncertainty of success for either side were removed and good relations were restored between the parties. The employer was forced to extend the period of the contract, but subsequently negotiated with the contractor to provide an additional financial bonus to return to the original date, which was in fact achieved.
Another good reason for the use of arbitration, as we have already noted, is secrecy or confidentiality. A contractor had an employee who was a team leader for a design-and-build project: he appeared to have wide experience and his references were excellent.
On a particular project some reinforced concrete beams were to be constructed at first-floor level. Some eight weeks after striking the formwork to the beams two out of four beams collapsed, the team leader having incorrectly designed them. The financial consequences for the contractor can be imagined. Fortunately the employer implemented the arbitration clause and the costly dispute was settled quickly without any widespread detrimental publicity to the contractor. And during the course of the arbitration hearing it was discovered that the team leader had obtained forged references!
If this matter had gone to the courts it is possible that the resulting publicity could have prevented the contractor obtaining further design-and-build contracts.
The above case histories are only two examples where arbitration can provide the kind of service unavailable elsewhere.
