Arbitration in the Construction Industry

Introduction

Arbitration is one of the most popular methods of Alternative Dispute Resolution. It is a private method of dispute resolution whereby parties dispute consent to submit the dispute to a natural party/parties and a binding award is issued which in most cases cannot be appealed¹. Arbitration is similar to litigation in many ways but is distinguished by the fact that while litigation is in the public realm, arbitration is in the private realm. The arbitration process is normally presided over by a sole arbitrator or by a panel of three arbitrators.

In The UAE, most if not all construction contracts, contain an arbitration clause. This is because most parties lack trust in the court system. The recent global financial crisis led to failure of many construction projects and subsequent cancellation of ongoing real-estate projects. There was a massive increase in the number of arbitrated disputes making The Dubai International Arbitration Centre one of the busiest centres in the world.

Arbitration has several advantages over litigation, which include the following:

• It is neutral and is important as an alternative to national courts where people lack faith in the national courts.
• The decision is usually final and binding and appeals are not entertained other than at the enforcement stage where awards can be set aside.
• It is flexible in that parties can determine the procedure and there are no rigid rules on examination of witnesses or production of documents.
• There is a high degree of expertise since parties normally choose a person who is an expert in the field.
• In addition, proceedings are usually confidential as opposed to court proceedings, which are in the public domain and under full-glare media scrutiny.

However, confidentiality depends on the applicable law. For instance, Confidentiality is guaranteed under UK law but UAE law is silent on confidentiality². Arbitral awards also enjoy substantial international recognition under The New York Convention, which has 146 signatories as opposed to national court judgments.

The disadvantages of arbitration are that it is expensive and the cost maybe prohibitive to parties. It is also very lengthy sometimes taking up to two years to resolve a dispute. Sometimes arbitration of construction disputes takes years before a final solution can be reached leading to loss of millions of money especially by the sling party who bears the costs of the arbitration.

The purpose of this paper is to comment on and discuss the necessary amendments to the following arbitration clause, “Any dispute, or whatever nature arising out of or in any way relating to the Agreement or to its construction or fulfillments can be referred to arbitration. Such arbitration shall take place in Dubai or Sana’a, or any other place as the parties may agree, and shall proceed in accordance with the Rules of Arbitration of the LCIA-DIFC in Dubai. Both parties hereby agree that, at least, one arbitrator should be Dr Karim Akram” ³.

Legal Regulation of Arbitration

The UAE is set to enact a new Federal law governing arbitration. Currently The UAE Civil Procedure Code No. 11 of 1992 regulates arbitration. Parties may specify in the contract or by a later agreement that disputes arising from the contract shall be subjected to arbitration. Such an agreement must be in writing. Article 12 of The DFIC Arbitration Law No.1 of 2008, which also affirms that the agreement must be in writing also, reinforces this. Under The DFIC act, an agreement can be incorporated in the contract by reference to a document. The UNICTRAL model law also serves as a guide in Arbitral proceedings.

Types of Arbitration

There are two types of arbitration: Institutional arbitration and ad hoc arbitration. Institutional arbitration is conducted under the directives of an arbitration institute such as the ICSID, the ICC, the DIAC, or the DFIC-LCIA. In Ad hoc arbitration, the parties themselves set out the rules and procedures governing the arbitration process. The administration or supervision of the arbitration process does not vest with an institution⁴. The parties may set their own rules or they may incorporate The UNCITRAL arbitral rules. The arbitration envisioned in the clause above is ad hoc because the parties are setting their own terms and guidelines.

Features of a Valid Arbitration Clause

In The UAE, under Article 203(2) of the civil Procedure code, a valid arbitration agreement has to be in writing. Under Article 58, both parties must sign on the page containing the clause and must be authorized to affect the signature⁵. There must also be a defined contractual relationship between the parties. However under The UNICTRAL rules and The New York Convention, a defined relationship, contractual or not, suffices. The arbitrator or the arbitral tribunal must not act ultra-vires i.e. he or she must only exercise the jurisdiction on matters that are stipulated by the parties or on issues that arise because of operation of the law. The doctrine of kompetenz kompetenz clearly states that an arbitral tribunal derives its authority and jurisdiction from the parties’ instructions. Exceeding jurisdiction can be a ground on which an award delivered by the arbitral tribunal can be set aside.

Under the doctrine of seperability, the validity of an arbitration clause does not depend on the validity of the contract; the clause is regarded as an entirely separate and autonomous contract. Even if the main contract is terminated, the arbitration clause remains valid and the termination itself can be referred to arbitration. However, parties can specifically agree that the existence of the arbitration clause is to be secondary to the main contract, in which case, the validity of the main contract will affect the validity of the arbitration clause.

Parties to arbitration must also have the requisite capacity. Under The New York convention, if a person who lacks capacity enters into an arbitration agreement, the other party can apply to the court to terminate the arbitration proceedings on basis that the arbitration is inoperative, void and the award is incapable of enforcement. The capacity of a corporation or a company is governed by the constitution of the company and the law of the place where it is incorporated.

The Model DFIC-LCIA clause

The model DFIC-LCIA clause is as follows,”“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the DIFC-LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be [one/three].The seat, or legal place, of arbitration shall be [City and/or Country].The language to be used in the arbitral proceedings shall be [ ].The governing law of the contract shall be the substantive law of [ ]”⁶.

Weaknesses/Gaps in the Parties’ Draft Arbitration Clause

The Wording

The wording of an effective arbitration clause must convey the intention of the parties. It must be clear to the parties that arbitration is not just a mere right but it is an enforceable obligation. In the clause under discussion, the parties have phrased the clause to the effect that, any dispute arising out of the agreement or the construction ‘can’ be subjected to arbitration. The use of the word ‘can’ does not convey an obligation; it merely conveys a probability and a party may rely on the loophole to avoid committing to arbitral proceedings. The appropriate word should have been will or should. Using the word, any dispute rather than all disputes limits the scope of arbitration and gives room for state interference. This is because the clause has not been drafted in inclusionary and broad terms.

The seat or legal place of arbitration

It is important to define clearly the seat or the legal because the law of the place governs the arbitral proceedings and governs the choice of the court with the jurisdiction to solve challenges arising out of the arbitration process and enforcement of the award. The choice of the suitable place to conduct the arbitration should take into consideration practical issues such as availability of hearing rooms and the distance to be covered.

By stipulating that arbitration shall take place in Dubai or Sana’a, or any other place as the parties may agree, the parties created a conflict of interest. They should have set out one specific place. Under Dubai Law No. 6 of 1997, if parties enter into an agreement with a Dubai government entity or corporation and choose to pursue arbitration, the arbitration must be in Dubai and subject to Dubai Laws and Regulations.

However, under article 16.2 of The DFIC-LCIA arbitration regulations, “The Arbitral Tribunal may hold hearings, meetings and deliberations at any convenient geographical place in its discretion; and if elsewhere than the seat of the arbitration, the arbitration shall be treated as an arbitration conducted at the seat of the arbitration and any award as an award made at the seat of the arbitration for all purposes”⁷.

Governing Law

An effective arbitration clause should the mention the choice of law (the lex arbitri) that should be applied in dispute resolution between the parties if different laws/ systems of law are applicable to them. The choice of law should be uniform and consistent. In this case, one party is domiciled in Yemen whereas the other party is domiciled in The United Arab Emirates. In the draft clause, the parties failed to indicate whether the lex arbitri should be Dubai law or Sana’a law making a very fundamental mistake that could lead to further litigation.

The Default Clause

A default clause is always inserted into an arbitration agreement in the event that the other party fails to comply with requirements of the arbitration agreement. It is always sensible to include a default clause in case the respondent argues that he or she is not bound by that agreement; or if he or she claims that the agreement was authorized by a separate legal entity; or that the dispute in question is not arbitrable; or that the arbitration is time-barred.

Language

The arbitration clause does not specify the language that is to be used in the arbitral proceedings between the parties. Many contracts in the gulf region are usually made in English and Arabic. Lack of specification of the language may slow down proceedings through translations and may end-up being costly. However under UAE law, “In the absence of an agreement by the parties, the Arbitral Tribunal shall determine the language or languages of the arbitration, due regard being given to all relevant circumstances, including the language of the contract”⁸.

Number of Arbitrators

The draft arbitration clause states, “Both parties hereby agree that, at least, one arbitrator should be Dr Karim Akram” ⁹. Naming a specific person as an arbitrator has the effect of rendering the arbitration defective if the arbitrator dies or if the said Dr. Karim Akram refuses to take up the task of acting as an arbitrator. The clause does not also specify the numbers or the manner of appointment of the rest of the arbitrators.

Per Article 5.4 of The DIFC-LCIA rules, a sole arbitrator shall be appointed unless the parties have agreed otherwise in writing or unless The LCIA court is of the opinion that a three-member tribunal is appropriate. The advantages of a sole arbitrator are that it is easier to schedule appointments, meetings, and hearings; it is cheaper as parties only have to meet the costs of hiring one arbitrator; and quick resolution because there is no need for consultation. It is very advisable for parties to an international commercial arbitration to agree on appointment of one arbitrator in whom they have confidence.

If the parties fail to agree on the number of arbitrators or on the person to be appointed as an arbitrator, it is upon the respective arbitral institute to make the appointment. In Ad Hoc arbitration, the lex arbitri is applicable to determine the court that has competent jurisdiction. This further complicates issues because the clause, does not spell out the lex arbitri. In the UAE, under Article 204 of the civil Pr0cedure Code, courts have power to make unchallengeable default appointments.

Other Weaknesses

The clause does not refer to the arbitrator’s independence and impartiality as required by Article 207(4) of The CPC¹⁰. It does not also address costs; majority/unanimous decisions; translations; evidence; joinder; timetable; and the powers of the tribunal to grant interim or interlocutory measures.

Recommendations

The arbitration clause under discussion is a pathological clause. Pathological clauses have been defined as clauses, which are drafted poorly leading to disputes over their interpretation; or clauses that may lead to failure of the arbitral proceedings or unenforceability of arbitral awards. They include but are not limited to instances where;

• The unequivocal intention of the parties to submit the dispute to arbitration cannot be deduced from the clause;
• where a person named as an arbitrator dies or fails to take up the arbitral appointment;
• Naming a non-existent institution as an arbitrator or naming a n institution which refuses to take up the appointment;
• Giving the arbitrators deadlines that are extremely shorthand; and being too specific on the qualifications of arbitrators. To avoid this scenario that maybe devastating for the construction project, the following measures need to be put in place:

The draft arbitration clause should be amended to be compliant with The DIFC model clause. It should use appropriate wording stipulating that arbitration is an obligation. The parties should also specify the seat of the arbitration; the choice of law (Lex Arbitri) applicable; the language to be used in arbitration; and the number of arbitrators. The parties should avoid specifying Dr.Karim Akram as an arbitrator. They should also specify, whether they require a sole arbitrator or settle on three arbitrators, which is the preferable number of mediators in international commercial agreements.

A three- member panel is recommended because the risk of an error of law is significantly reduced due to the high-level of consultations. In cases of a sole arbitrator, the arbitrator should be a lawyer, while in a panel of three arbitrators; a lawyer should be the chair of the panel assisted by specialists in the construction industry. It is also advisable to appoint an arbitrator with a nationality other than that of the parties.

The parties can also opt for institutional arbitration under DIAC or DIFC. Institutional arbitration is advantageous because: The Costs are predictable; The rules are certain and knowledgeable; They lead to development of case law within the arbitral institution; The rules cater for any challenges that may arise within the arbitration proceedings; and the enforceability is guaranteed without need for further litigation.

The parties should also consider having multi-dier dispute resolution clauses.Multi-dier arbitration clauses are clauses, which provide for dispute resolution through at least two-dispute resolution mechanisms. For instance, conducting arbitration upon failure of mediation or engaging in negotiation before arbitration. The advantage of such a clause is that parties would be in a position to explore diverse dispute resolution mechanisms before commencing on arbitration.¹¹ The disadvantage of a multi-dier clause is that it may delay commencement of arbitration proceedings and the process may end up being ore lengthy.

In construction contracts, it is prudent to include a stipulation in the arbitration clause to the effect that the construction or any other activity connected with it shall continue even if a dispute arises or even if arbitration proceedings are ongoing. This is because the arbitration process is likely to interfere with the construction project resulting in devastating losses for the parties involved. Amounts owed to third parties should not be stopped merely by the fact that arbitration is under-way.

Because performance of a construction contract maybe delegated or sub-delegated to a third party, parties to arbitration should consider inserting a provision for joinder of third parties in the arbitration proceedings.¹²The clause should be included in all contracts related to transactions with third parties so that the arbitral award binds all of them.

Conclusion

In The UAE, there is no specific law on regulation of arbitration. The laws regulating arbitral procedures are found in the country’s civil procedure code. The code creates room for the courts to interfere with the arbitration process breaching on autonomy and confidentiality of the arbitration process. Enforcement of arbitral awards is done by the courts and is executed in the form of a judgment. The global financial melt-down has turned The DIFC into one of the busiest construction arbitration centres.The UAE government therefore has to speed up enactment of the proposed federal draft bill into law. Parties should also seek the legal services of an expert before drafting an arbitration clause.

Reference List

Adnan E, A Faisal, & T Bassam, “Major causes of problems between contractors and subcontractors in the Gaza Strip” Journal of Financial Management of Property and Construction, vol.17, no. 5, 2012, pp. 65-78.

Bodah, M, Labor arbitration in the construction industry: a guide to current practices and issues, Schmidt Labor Research Center: University of Rhode Island, Kingston, 2004.

Bruner, PL, & P O’Connor, Bruner and O’Connor on construction law, West Group: St. Paul, Minnesota, 2002.

Cushman, RF & GC Hedemann, Alternative dispute resolution in the construction industry, Wiley Law Publications, New York, 1991.

DIAC, “Arbitration in the Middle East”, Dubai International Arbitration Centre, vol. 54, no.2, 2004, pp. 25-29.

Gola, PH, CJ Götz, & KM Graf, Institutional arbitration: tasks and powers of different arbitration institutions, University of Zurich, Switzerland, 2009.

Quaray, V, Improving adjudication in the construction industry: a consultation document, Edinburg publishers, Scotland, 2003.

Redfern, H, and C Partasides, International Arbitration, Oxford University Press, London, 2009.

Royal Institution of Chartered Surveyors, Surveyors acting as adjudicators in the construction industry, RICS Business Services, London, 2002.

Zahir, AQ, & LK Mushtaq, “A framework for building competitive sectoral capabilities in developing countries”, Competitiveness Review: An International Business Journal, vol.21, no.4, 2011, pp. 103-109.

Footnotes

1. Cushman, RF & GC Hedemann, Alternative dispute resolution in the construction industry, Wiley Law Publications, New York, 1991.
2. Redfern, H, and C Partasides, International Arbitration, Oxford University Press, London, 2009.
3. DIAC, “Arbitration in the Middle East”, Dubai International Arbitration Centre, vol. 54, no.2, 2004, pp. 25-29.
4. Royal Institution of Chartered Surveyors, Surveyors acting as adjudicators in the construction industry, RICS Business Services, London, 2002.
5. Quaray, V, Improving adjudication in the construction industry: a consultation document, Edinburg publishers, Scotland, 2003.
6. Adnan E, A Faisal, & T Bassam, “Major causes of problems between contractors and subcontractors in the Gaza Strip” Journal of Financial Management of Property and Construction, vol.17, no. 5, 2012, pp. 65-78.
7. Zahir, AQ, & LK Mushtaq, “A framework for building competitive sectoral capabilities in developing countries”, Competitiveness Review: An International Business Journal, vol.21, no.4, 2011, pp. 103-109.
8. DIAC, “Arbitration in the Middle East”, Dubai International Arbitration Centre, vol. 54, no.2, 2004, pp. 25-29.
9. Bodah, M, Labor arbitration in the construction industry: a guide to current practices and issues, Schmidt Labor Research Center: University of Rhode Island, Kingston, 2004.
10. Gola, PH, CJ Götz, & KM Graf, Institutional arbitration: tasks and powers of different arbitration institutions, University of Zurich, Switzerland, 2009.
11. Bodah, M, Labor arbitration in the construction industry: a guide to current practices and issues, Schmidt Labor Research Center: University of Rhode Island, Kingston, 2004.
12. Bruner, PL, & P O’Connor, Bruner and O’Connor on construction law, West Group: St. Paul, Minnesota, 2002.