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von Holger Langer, LL.M.

Arbitration in Construction Disputes – practical considerations

A. Pre-arbitral dispute resolution

  • Engineer used to fulfil a role as quasi-arbitrator or dispute adjudicator, even in cases that required decisions about his own work
  • however, since doubts arose as to the impartiality that an Engineer can possibly provide in these circumstances, recently published standard conditions of contract allow for the appointment of Dispute Adjudication Boards (DAB), cf. FIDIC Conditions, clause 20, or Dispute Review Boards (DRB), cf. World-Bank Standard Bidding Documents, section 13
  • Three principle trends
    • the cost of having a DAB acting during the performance of a contract is much cheaper than having an arbitration
    • the DAB has a filtering function, so that disputes that escape the DAB are likely to be intractable and too complex to be resolved satisfactorily by a DAB or raise important questions of principle that have to be resolved by arbitral award
    • however, the preliminary dealing of a DAB with the dispute will have facilitated a refinement of the dispute by the process before the DAB so that the points at issue will be clearer than they have been

B. Selection and appointment of the arbitral tribunal

  • maybe most important point in international arbitration, since the quality of the arbitral tribunal will not only directly affect the outcome of the parties’ claims, but might also affect the enforceability of the award
  • appointment either by agreement of the parties or by a professional or arbitral institution
    • in principle, the parties are free to choose their own arbitrators
    • the freedom of choice might, however, be restricted by stipulations of the arbitration agreement itself, e.g. because the agreement calls for a special qualification, or the number of arbitrators has been settled in advance
    • choice might also be left to an appointing authority, e.g. the president of the arbitral institution under whose auspices the arbitration is to be conducted
    • the authority might in this case know more about particular arbitrators, but it will have to be kept in mind that they will definitely know less about the dispute between the parties
  • Sole arbitrator / Three arbitrators
    • ICC, LCIA and AAA favour appointment of sole arbitrator (Art. 8 (2) ICC, Art. 5.4 LCIA, Art. 5 AAA)
      • especially recommendable for smaller arbitrations
      • cheaper, faster, e.g. when a site has to be visited, dates have to be agreed etc.
      • disadvantage: if parties cannot agree on sole arbitrator, he will be imposed on them
    • UNCITRAL favours three-arbitrator tribunal (Art. 5)
      • each party will usually have the right to appoint one arbitrator, who then agree on the appointment of a third arbitrator as chairman
      • especially recommendable in international arbitration, since parties will be more confident when their particularities, such as language, tradition and culture will somehow be reflected in the tribunal
      • leaves some flexibility, e.g. especially in construction it might be helpful to have both, arbitrators with a mainly legal background and arbitrators with a primarily technical background
  • Qualities required in particular
    • in short, arbitrator should know what are the right tools in a construction arbitration and how and when to use them
    • General qualities and abilities of arbitrators
      • age – age does not really matter, as long as he is experienced and competent (which can however be problematic with a very young arbitrator)
      • open minded – especially in an international arbitration one needs to have an arbitrator who is psychologically comfortable with people from other countries and cultures
      • languages – the arbitrator should be familiar with the language(s) of the dispute, to be better able to understand the background of the dispute
      • practical – he should not be overly technical and waste time in raising legal niceties unless they are really significant to the process
      • independent and impartial
        • all major arbitration rules call for independence and impartiality (cf. Art. 7 (1) ICC, Art. 9 UNCITRAL, Art. 7 (1) AAA, Art. 10.3 LCIA)
        • “independence” in Art. 7 (1) ICC also comprises impartiality
        • impartiality concerns the problem of bias and is thus a more abstract concept than independence in that it involves primarily a state of mind which presents special difficulties of measurement
        • independence is measured e.g. in having a relationship or special financial connection to one of the parties
        • independence is a term not interchangeable with impartiality
          • it is possible that an arbitrator is perfectly well independent of a party but is not impartial, because he is biased towards the nationality of the other party etc.
          • on the other hand, an arbitrator could well be not independent of a party and yet be capable of giving an impartial view on the merits of the case
          • especially in a tribunal consisting of three arbitrators an arbitrator would fulfil his duty in making sure that the party who nominated him can present its case in a proper way, so that the other arbitrators and the other party are fully aware of the point of view, but nevertheless form his own, impartial decision as he thinks is right relying on the facts presented
        • ICC requires the arbitrators to sign a declaration of independence (Art. 7 (2) ICC), to make sure that any fact which might question the independence of the arbitrator is disclosed
      • leadership – the chairman of the tribunal should take a leading role in the arbitration
    • particularities of construction disputes that have to be kept in mind when selecting an arbitrator
      • more complex disputes than other trade disputes
      • can involve difficult technical questions and difficult and novel questions of law, e.g. relating to specialised forms of contract not known to people outside the construction industry
      • frequently require the examination of many more documents than in other disputes
    • special qualities in construction arbitrations
      • arbitrator should be familiar with construction contracts, with how construction disputes evolve and with how they are best resolved
      • where the issues are technical, the tribunal should be able to understand them, i.e. the arbitrator should have the intellectual curiosity and ability to get to grips with the technical issues
      • regarding the complexity of the dispute, the arbitrator should be capable of taking a proactive role in the proceedings, i.e. he should have the ability to manage the arbitration in an expeditious and cost-effective manner, e.g. by setting up an effective management framework
      • familiarity with computers and basic word processing skills
      • most construction arbitrations were resolved by agreement rather than award, but since the disputes will in future already be refined by the DAB-procedure the writing of awards will become increasingly important, so that at least the chairman should provide some experience in writing an award that will be recognisable and enforceable
        • one of the great advantages of the ICC system is the need to obtain approval of the ICC Court as to the form of the award, so that greatest effort will be undertaken to ensure the international enforceability of the award

C. Initial steps prior to the preparation of the Terms of Reference

  • once the file is transmitted (Art. 13 ICC), the tribunal must examine the statement of case and defence to see
    • whether they make sense
    • whether they need to be clarified so that the Terms of Reference can be properly drawn up
  • since construction disputes are generally about the performance of long-term contracts, it is highly desirable to obtain a chronology of the events (especially in cases of delay and disruption)
    • submission of a chronology of each party
    • subsequent composite chronology by the tribunal
    • crosschecking any discrepancies
    • he tribunal should further maintain and amend the chronology as the case develops
    • result should be a database that should e.g. readily identify the date when an instruction was sought, the date by which it was required, the date it was given and so on
  • tribunal should seek to clarify any statements that are incomprehensible, which appear frequently because of translations, imperfect knowledge of the contract etc.
  • common tools for clarification and assistance include also the creation of organisational charts, layouts, glossaries etc.
  • amplification of the parties’ statements may be needed, where e.g. a party has not anticipated a point that has been taken by the other party or which the tribunal sees as likely to arise
    • where it is unclear whether notice of intention of claim has been given when it was required by the contract
    • where a claim or a defence is or may be barred in law, e.g. by prescription or limitation
    • where it is not clear whether a claim has been referred to or decided by the Engineer / DAB or whether notice of dissatisfaction was given
    • where the amount of the claim is unclear
  • However, tribunal not obliged to seek clarification

D. The Terms of Reference

  • one of the main characteristics of ICC Arbitration
  • purpose
    • designed to focus the arbitral proceedings on the essential issues at the earliest possible date
    • enable the tribunal to become familiar with the parties’ claims, to clarify at an early stage any misunderstandings and to emphasise any preliminary issues
    • serve as a guideline for determining what procedures have to be adopted (to ensure a cost-effective conduct of the proceedings, cf. Art. 20 (1)) and what directions have to be issued to the parties (e.g. on which points evidence is needed etc.)
    • in this context, the Terms of Reference also facilitate the establishment of a preliminary framework and provisional time-table (Art. 18 (4) ICC)
    • establish the limits in which new claims are admissible (Art. 19)
    • serve as a checklist for the tribunal to make sure that all relevant points are being covered by the oral and written submissions
    • allow the tribunal and the ICC Court (in regard of the necessary scrutiny of the award) to determine whether the tribunal has fulfilled, exceeded or fallen short of its mission
    • on the part of the parties’, they assist in reassessing the respective claims in view of the essential issues and, thus, facilitate early settlements of the dispute
  • first draft should be produced by the tribunal to make sure that the tribunal gets to grips with the case
  • However, since the initial submissions are likely to be incomplete or incomprehensive it is advisable to ask the parties for their own list of likely issues and for suggestions of other matters that should usefully be included in the Terms of Reference, such as procedural rules
  • Art. 18 (1) ICC requires especially
    • Summary of the parties’ respective claims and of the relief sought (Art. 18 (1) (c))
      • should not be in too broad terms, so as to prevent the parties from forwarding new claims or shifting from one claim to another without the authorisation of the tribunal
      • should, however, not be too precise either, so as not to tie a party to a particular legal basis of its claim, since the true legal basis of the claim might not be apparent at this early stage
      • tribunal should require the parties to state the amount claimed
    • Issues to be determined (Art. 18 (1) (d))
      • although recently put into the discretion of the tribunal, a list of the likely issues should be required in all but the simplest cases
      • list is vital to decide on the future course of the proceedings
      • aim must be to extract the essential issues and set out a clear and detailed summary of the issues (which could e.g. promote a settlement)
      • since construction disputes tend to be rather complex, a too detailed list could prove to be not very useful, so that it would be recommendable to include a broad summary (where necessary) and to refine it during the procedural meeting right after the signing of the Terms of Reference
        • otherwise the tribunal might restrict itself in the conduct of the proceedings and the flexibility of its assessment of the case
    • Procedural rules (Art. 18 (1) (g))
      • unless the parties have already agreed before on the applicability of specific rules (e.g. IBA Rules of Evidence) or the exclusion of certain powers of the tribunal, the procedure applied to the proceedings should be left to the tribunal as it thinks fit, so as not to restrain the tribunal too much in ensuring a cost-effective and timely manner of procedure
    • Provisional timetable (Art. 18 (4))
      • useful tool for enhancing the efficiency and speed of the arbitration
      • on the other hand, it has to be realised that at the early stage of the Terms of Reference, it is in most cases quite impossible to foresee the need for and the scope of further evidentiary proceedings

E. Procedural Meeting

  • Accordingly, the setting up of a provisional time-table may severed from the drawing up of the Terms of Reference (“cf. Art. 18 (4), “as soon as possible thereafter”) – see infra
  • the Terms of Reference should however be signed before a procedural meeting takes place
  • importance of the initial procedural meeting cannot be overestimated in international arbitration proceedings
  • initial procedural meeting is vital to the creation of a sound working relationship between the parties and the tribunal
  • Hearing date
    • when the Terms of Reference are circulated the tribunal should inform the parties of a likely hearing date
    • procedural directions should be agreed, so that the hearing that will emerge will be acceptable to the parties
    • if a hearing date cannot be agreed, then it will be decided by the tribunal and should be the earliest possible date for the parties
    • benchmark should be the six month time limit contemplated in Art. 24 (1) ICC, especially where the dispute has already been processed by contractual dispute resolution machinery (e.g. DAB)
  • Procedures
    • the nature of international commercial arbitration brings together a multitude of people from different cultural and business and legal backgrounds
    • the way of approaching and dealing with problems that arise in an arbitration will not very likely be on a basis that is so similar that the parties would be able to agree on a common formula, so that especially the divergence between common law backgrounds and civil law backgrounds of the parties will be apparent
    • the parties should leave it to the tribunal to adopt a procedure
    • whatever approach the tribunal adopts, it should be and be seen to be cost-effective
  • if the issues have not been determined yet, the tribunal should make sure that the list will set up at this point
    • either proceeding directly to proof, i.e. requiring the parties to present their submissions accompanied by evidence (documents, witness statements) and then drawing up a list of issues as they appear
    • or to first draw up a list of issues to which then the parties’ submissions and evidence should be directed
  • Schedules
    • useful working document which records briefly the essential elements of each party’s case and, thus, defines and establishes the position of each party and the real nature of each party’s case (where lies the true gap between the parties’ positions?)
    • identifies points that are not in dispute and points that have to be decided
    • thus, schedules reveal also the points which need investigation and evidence
    • success is dependent on each party dealing properly with the principal allegations of the other party, i.e. a respondent would be required to state specifically
      • which of the claimant’s allegations are admitted
      • which of the claimant’s allegations are denied
      • which allegations cannot be admitted or denied but which the claimant is required to prove
    • constructive approach – if a defendant denies an allegation he has to state the reasons for doing so and has to state the different version of events
  • Specific requirements for exemplary claims
    • Claim for numerous changes or variations
      • case and defence do not indicate where all the differences lie
      • claimant should be required to state
        • how each change evolved
        • which extent of work it involved and which delay it caused
        • why it is the liability of the defendant
        • and how the amount claimed for each item and the delay is arrived at
      • defendant should be required to state
        • in relation to each item of the claimant’s case, whether it is admitted or denied
        • if it is denied, reasons have to be given and any different version of events will have to be stated
    • Claims for defective work
      • similar technique
      • claimant required to state
        • each item that is complained of together with the precise legal basis for the complaint (e.g. non-compliance with a contractual provision)
        • the work required to remedy the effect (and whether it has or has not been done already)
        • the cost of such remedy (or estimated cost)
      • defendant
        • to answer to each item as set out above
    • Claim about the unsuitability or mal-functioning of a plant
      • tribunal will need to ascertain what tests have already been carried out and whether the results are agreed
      • it may be necessary to direct that new tests should be undertaken in conditions which are either agreed to be or which are possibly representative of the conditions of use
      • direction should take the form of an order under Art. 23 (1) ICC (Conservatory and Interim Measures)
      • tests which are considered necessary by the tribunal, but which are not accepted by the party that owns the property will have to be conducted as part of the tribunal’s obligation to ascertain facts by all appropriate means (Art. 20 (1) ICC) or by a tribunal appointed expert (Art. 20 (4) ICC)
      • similar considerations apply to the inspection of the site
    • Claims for delay and disruption
      • most important that the causative events are clearly identified and that events which occurred but which did not delay the progress are eliminated, so that the irrelevant events are detected as early as possible and do not lead to time, cost and effort spent
      • facilitated by the setting up of a chronology (see supra)
      • claimant
        • if the claimant based its case on its own programme, he should be required to justify that his programme would have been achieved but for the events complained of
      • defendant
        • should be required to explain why the claimant’s analysis is incorrect
    • Quantification of the claim
      • claimant
        • claimant ought to be required to produce the primary documents verifying the amounts claimed, cross-referenced to the statement of case
      • defendant
        • will have no excuse for not stating the reasons why liability does not exist, or if liability exists, why the amounts are nevertheless not due (e.g. they were not caused by the events, they were not reasonably incurred etc.)
      • these matters should not be left to experts since they define the agenda and the terms of reference for the experts
  • with measures and steps taken like this it should be possible for the tribunal to provide the framework for the directions that the tribunal will give
  • the directions given to the parties should have the aim of reducing the areas of inquiry to those that really matter
  • Provisional timetable (Art. 18 (4) ICC)
    • in practice it is easier to discuss procedure without knowing how much time will be allowed for each step
    • the provisional timetable should, thus, be set up once the steps required for the procedure will have been settled
    • the timetable should be strict, so the tribunal should not give directions unless it is satisfied that they are practicable in terms of time
    • the timetable should allow enough time for the tribunal to read all the material before entering into a hearing
    • the timetable must also allow enough space between the single steps, e.g. after the exchange of evidence, to enable the parties to evaluate the other party’s evidence, to discuss the evidence and to consider the possibility of settlement
      • the timetable should therefore explicitly allow for pre-hearing discussions

F. Evidence

  • conceptual differences between common law and civil law countries
    • common law
      • adversarial system
      • evidence is not produced to support a claim, but determines the claim (at least in part)
      • pre-trial discovery procedure – the initial filing of the claim is a mere formality which triggers a pre-trial discovery procedure at the end of which the full details of the claim are presented to the judge in the trial
    • civil law
      • inquisitorial system
      • evidence is produced to support the claim
      • initial filing determines the limits of the judge’s jurisdiction in which he is obliged to investigate the parties’ claims

I. Disclosure of documents

  • best evidence that can be presented in relation to facts are documents which came into existence at the time of the events giving rise to the dispute
  • Documents include information stored electronically
  • Production of documents
    • common law
      • sometimes “automatic discovery” procedure in litigation, under which the parties are obliged to disclose the existence of all relevant documents, whether they are favourable or unfavourable for a party
      • extends even to confidential memoranda
    • civil law
      • practice adopted by most of the arbitral tribunals, even in common law countries
      • position is broadly that the arbitral tribunal has discretion to conduct the proceedings in such a manner as it considers necessary
      • direct orders against a party for the production of documents is rare
      • non-compliance with a reasonable request by the other party for the production of documents would however be sanctioned by the tribunal by making clear to the refusing party that the non-production of the documents will lead to an adverse inference drawn by the tribunal unless reasonable excuse is given
      • ICC Rules require the parties to support their initial statements by the documentary evidence they rely on
  • Practical problems of dealing with documents
    • excessive documentation in construction disputes
    • measures taken by the tribunal to limit the mass of documents
      • tribunal should make clear at the outset
        • that the documents should be directly relevant to the issues as defines
        • that the documents should be confined to those which a party considers necessary to prove its case
      • tribunal should direct the parties to state at the time of production what each document is intended to prove
      • tribunal should generally direct the parties to organise the documents (to avoid duplication) and to enable them to be accessed easily
        • procedural direction should be clear and precise since this useful practice is not yet widely recognised
        • if the document is long or may be used for several purposes, the relevant parts should be highlighted
        • where possible, documents, such as pleadings, submissions, witness statements and reports from experts, should be compiled in electronic form on a CD-ROM
        • otherwise the documents should be contained in separate indexed files with the pages numbered individually, so that additions can be made simply
  • tribunal may call for further documents at any time in order to fulfil its duty to ascertain the facts
  • tribunal should fix a cut-off date after which no further documents may be produced by any party, unless requested by the tribunal
  • documents in the possession of third parties can usually not be requested
  • however, the tribunal may call such persons as witnesses and ask them to bring all  material relevant to their questioning

II. Witnesses and Experts

  • the reception of oral evidence may be governed by the law governing the proceedings

Witnesses

  • evidence that is not contained in documents and which is necessary to prove or disprove a point in issue must be presented by means of written witness statements
  • Witness statement must be written in the witness’s own words, signed by such witness and furnished to the tribunal and the other party (in a translated version where appropriate)
    • it is desirable to have the whole of a witness’s evidence in written form to help the other party to reconsider its position in the light of such evidence
    • supplementary or additional statements necessitated by the intended evidence of the other party should be exchanged within a short period of time of the principal statements
    • all witness statements should be exchanged in good time before the preparation of any pre-hearing submissions
  • Questioning of witnesses should only be allowed if required by a party or the tribunal
    • the tribunal may in this case require a party to state
      • why a witness is required
      • and upon what matters questioning is to be directed to make sure that the questions are necessary and relevant
    • the tribunal should also impose reasonable limits on the time available to a party for questioning witnesses
  • useful form of procedure along these lines in the IBA Rules of Evidence 1999
  • evidentiary weight of witnesses is usually determined by the tribunal, which has a discretion in this respect and tends to give less weight to it than to documentary evidence

Experts

  • Some issues of fact can only be determined by the arbitral tribunal becoming involved in the evaluation of elements that are essentially matters of opinion
    • In construction e.g.: documents and witness reports may enable the tribunal to determine what actually happened, but expert opinion may be needed to determine if what actually happened was the result of a design error or a defective construction or to investigate the quantification of a claim
  • Two methods of presentation:
    1. experts appointed by the arbitral tribunal
    • power to appoint experts
      • express term in the arbitration agreement
      • incorporation of international or institutional arbitration rules by the arbitration agreement (e.g. Art. 27 UNCITRAL Arbitration Rules; Art. 20 (4) ICC Rules; Art. 21 LCIA Arbitration Rules)
      • in the absence of express terms, implied power?
      • General principle that someone to whom a duty has been delegated (Ùarbitral tribunal to decide the case) can delegate that duty to somebody else
      • Implied power as far as the tribunal is taking merely advice and is not delegating its duty to the expert
      • As a corollary, the tribunal must give the parties the opportunity to comment on any such expertise
    1. Appointment of expert in coordination with the parties, i.e. opportunity to agree upon an expert between the parties, if not possible, then provision of a list of tribunal chosen individuals or institutions, if still unable to agree, choice by tribunal

    experts appointed by the parties

    • common method in arbitration agreements
    • Difficulties for tribunal in evaluating two opposed professional opinions on technical matters
    • Expert evidence normally furnished in the form of written reports, as written statements of witnesses of fact well in advance of the hearings
    • IBA Rules of Evidence: provide that party-appointed experts shall appear for testimony at a hearing unless the parties agree otherwise and the tribunal accepts this agreement
    • practical considerations
      • tribunal may decide to appoint its own expert according to Art. 20 (4) ICC
      • where one or more members of the tribunal have been nominated to give expertise, there is of course no further need to appoint a separate expert
      • tribunal should consult the parties as to whether they intend to tender evidence from experts, since the tribunal’s own expert may only be required once it is clear that there are matters upon which the parties’ experts disagree
      • since the cost of appointing an own expert would have to be borne by the parties the tribunal should incur these expenses only if it is essential
      • As to the time when such an expert should be appointed there are two possible solutions
        • before the setting up of a provisional timetable, since the expert’s work would affect such timetable
        • practically however after the setting up of the provisional timetable
          • to obtain a report of the tribunal’s expert first may prove cost-effective, since it would probably obviate the need for further evidence from the parties’ experts
          • it may also identify points upon which evidence or reports from witnesses and experts may still be required
      • if the parties wish to present evidence from their own experts the tribunal should control the ambit of the evidence to see that it is confined to the issues and does not deal with matters that are or are capable of being proved in other ways
        • by either drawing up the expert’s terms of reference itself
        • or by requiring the parties to agree a statement of the issues and the facts upon which expert evidence is required
      • the experts should discuss their views with each other preferably before preparing their reports, e.g. at a meeting, since experts should agree about most things
      • the tribunal should probably chair such a discussion and should make sure that an agreement reached between the experts on the issues id binding on the parties
      • in any event, the reports should strictly be confined to the issues that are not agreed and should be exchanged between the parties

G. Hearing

  • tribunal should as early as possible decide in which order the main issues should be heard and whether certain issues should be decided in a partial award before (e.g. on the jurisdiction of the tribunal itself)
  • the tribunal should express its view if it thinks that a witness or an expert does not need to attend a hearing to be questioned
  • it should also require the parties to state whether any witness or expert put forward by the other party is not required and to inform, in contrast, why a witness is required and the topics to which the questioning (either by a party or by the tribunal) will be directed
  • all submissions prior to the hearing should be in writing, full but concise and should be delivered at the earliest possible occasion
    • it enables the tribunal to read the statements in advance at their own pace
    • reduces the time spent at the hearing
  • either only a nominal time should be allowed for opening statements or there should be no opening statements (however many parties wish to have their case presented)
  • the tribunal should require the parties to agree upon the allocation of the time available for the hearing to make sure that the parties will be kept to their timetable
  • otherwise the tribunal should itself decide and adhere to a strict timetable
  • each party must be treated fairly, which does, however, not necessarily mean equally in terms of time
  • the parties should be required in advance to agree which documents will be needed at the hearing (pre-hearing submissions, witness statements, expert reports etc.), which should be cross-referenced to the documents
  • factual witnesses should be heard before experts, since the questioning of a factual witness may lead an expert to a better understanding and to the modification or withdrawal of an opinion
  • it may also be desirable that the tribunal appointed expert may be heard first, although this may lead to the impression that the tribunal has already taken a view that will have to be displaced by the following witnesses and experts
  • where the parties present experts or witnesses on the same topic, they should be questioned together to clear up any misunderstandings (if such misunderstandings could not be resolved by a meeting prior to the hearing, see supra)
  • the tribunal must ensure that the decisions it takes are its own and not those of any expert
  • time at the hearing should not be used for closing submissions, which should be presented in writing within a short period of time after the hearing
  •   no further submissions will be considered after that period
  • after the closing of the proceedings, pursuant to Art. 22 ICC, no new facts or opinions will be admitted thereafter

H. Award