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Multi-party arbitrations

von Holger Langer, LL.M.

A. General considerations

  • purpose
    • to deal with issues in the same proceedings rather than in separate proceedings saves time and money
    • it avoids the possibility of conflicting decisions on the same issues of law and fact
  • difficulty
    • arbitration has a contractual basis, so that only the common will of the parties can entitle a person to bring a proceeding before an arbitral tribunal
    • the greater the number of such persons, the greater the degree of care which should be taken that none of them is joined in the proceedings against its will
  • situations
    • several parties to one contract
      • e.g. joint venture or consortium
      • problems arise when members decide that they would each like to appoint one arbitrator and claims that it is entitled to (principle of equality in the appointment of arbitrators as a matter of public policy)
      • however, the tribunal may only be made up of three arbitrators
      • ICC Rules Art. 8 (4), LCIA  Art. 8 (1)
        • right to appoint by joint nomination
        • if parties fail to agree on two separate sides and to appoint jointly, the right is taken away and vested in the institution which will then make an appointment for the parties
        • possibly problems with recognition and enforcement in this case
    • several contracts with different parties
      • e.g. construction projects
      • problem that each of the disputes may operate under a separate contracts, which themselves may operate under different laws
      • consent of employer generally hard to obtain, since the joinder of a subcontractor would lengthen and complicate his proceedings against the main contractor
      • likewise, consent of subcontractor sometimes hard to obtain, since he might prefer to await the outcome of the main arbitration to see whether or not there was a case to answer

B. The parties involved in a multi-party dispute

I. The Employer

  • has generally very little interest in a multi-party arbitration
  • he ought to be able to hold the main contractor fully liable and is not concerned with whether the main contractor is able to pass on his claims to a subcontractor
  • accordingly, until recently main contract forms made no provision for multi-party arbitration
  • employer would still be wise to retain a discretion and option to participate
  • modification necessary in the case of nominated subcontractors
    • nominated subcontractors are imposed on a main contractor
    • leads both in law and practice to a reduction of responsibility of a main contractor to the employer for the work and services performed by such subcontractors
    • employer may not be able to hold the main contractor liable for all defaults of a nominated subcontractor
    • creation of a separate contractual route of redress
      • Employers have to have direct agreements with nominated subcontractors
      • normally, the Employer would only have to bring proceedings against the main contractor if the works do not meet his satisfaction
      • now, if the main contractor alleges that it was not his responsibility but the nominated subcontractor’s, the employer would have to bring separate proceedings against the nominated subcontractor for breach of the separate agreement
      • the standard for of such agreement would not only incorporate an arbitration clause but would also make provision for the possible joinder of the two proceedings (“triangular” or “polygonal” proceedings)

II. The Contractor

  • has generally a clear interest in ensuring that only one tribunal is appointed to resolve issues of law which are common to both the Employer and himself and to the subcontractor an himself
  • clear interest that all issues that arise will be resolved in a way that all involved parties will be bound by the result
  • instances in which the contractor will not wish to have such a single tribunal
    • e.g. where a subcontractor’s claim puts him in a bad light and might prejudice his position towards the employer, e.g. where the employer claims that the work was done badly and the fault lies in the contractor not having given the proper instructions to the subcontractor who actually carried out the work
    • he would then envisage a classic “string” arbitration

III. The Subcontractor

  • clear interest to have a single tribunal deciding on the case
  • e.g. where his payment had been dependent upon the contractor having received payment (“pay-when-paid” clauses, now generally outlawed, except in the case of insolvency), he would have a great interest to secure a form of proceedings whereby a contractor would be obliged to pursue a claim against the employer which incorporates the subcontractor’s claim
  • subcontractors may have claims
    • against the main contractor for which the main contractor may be legally liable either with or without recourse to the employer, e.g. for interference with the progress of the subcontractor’s work (for which the contractor could claim that the cause of the interference was a matter for which the employer was liable to him)
    • against the main contractor but where the main contractor has either
      • no liability to the Employer without the subcontractor’s claim, because the main contractor would have no loss other than the amount payable to the subcontractor or
      • a residual liability only because the Contractor’s only loss is a small proportion of the subcontractor’s claim
  • Three classes of potential proceedings
    • straightforward arbitration against the main contractor for matters which the main contractor is solely liable (leaving the main contractor with the possibility to have recourse against the employer)
    • a claim against the main contractor which the latter blocks by invoking a provision requiring that the dispute is to be referred to the main contract arbitrator as it is connected with a dispute in the main contract proceedings
    • a claim directly against the employer but through the contractor whereby the subcontractor is entitled to use the main contractor’s name and run a main contract arbitration against the employer (“name borrowing”)

B. Questions

I. Dispute

  • Lord Denning in Monmouthshire v Costelloe & Kemple: there must be both a claim and a rejection of it in order to constitute a dispute or difference
  • practice would even go further, so that a dispute will not arise until the rejection of the claim is not accepted
  • situation not so clear in multi-party disputes
    • it is questionable if there really is a dispute between the subcontractor and the contractor, if the subcontractor’s claim is not challenged by the main contractor because he believes that the employer is fully liable, since it is part of the contractor’s own claim against the employer
  • desirable to define the dispute in the arbitration agreement to ensure that a subcontractor is not excluded from proceedings between the main contractor and the employer on the grounds that there is no dispute between the subcontractor and the main contractor
    • “question or issue which has to be determined not only between A and B but also between B and C”

II. Link

  • Questions arise as to what kind of relationship or link should exist between the two disputes and how far there should be a common issue of law or fact
    • the key to the link is the contract, not e.g. the works (as the wording used in the FCEC subcontract form)
    • a claim under one contract may not be directly concerned with a claim under another contract, but a reference to the subject matter of two contracts should provide sufficient a link
  • “dispute or difference between B and C is substantially the same as a matter which is a dispute or difference between A and B”
    • on the other it should be made clear that claims which are not relevant to an issue which a defendant has with another party are determined in the originally agreed manner, e.g. disputes between a subcontractor and a main contractor that have no connection to disputes between the main contractor and the employer

III. Action

  • Question as to who has to act and what action has to be taken to connect the proceedings
  • it was held that the contractor has to decide whether there was a dispute which was substantially the same as the main contract dispute, since he was best placed as a party to both contracts (i.e. the main contract and the subcontract) to know whether there were any matters in dispute between himself and the employer and whether such matters were substantially the same as the disputes between him and the subcontractor
  • if at that time
    1. the dispute existed between the contractor and the employer which part of which was substantially the same as the dispute subsequently sought to be submitted to arbitration and
    2. an arbitrator had been or was to be appointed under the main contract, then the subcontract arbitration had to be referred to him
  • the question remains when such dispute in the subcontract exists
    • it was e.g. held that a dispute in the main contract does not exist where the dispute was not yet proceeded under the review procedure (i.e. before the Engineer or the DAB)
    • English courts have held that dispute means one between the contractor and the subcontractor and not one following an Engineer’s decision since otherwise the purpose of avoiding two separate arbitration proceedings in respect of the same subject matter (with possibly inconsistent finding of facts) would be eroded

IV. Timing

  • once the subcontract arbitrator is appointed and has jurisdiction to hear the dispute, the power to divert the subcontractor’s claim to the main contract arbitration ceases
  • likewise, the contractual right to multi-party arbitration would be lost, if the employer’s consent had not been obtained within a reasonable time of the contractor indicating a desire to exercise the proviso
  • the contractor must, therefore, act within a reasonable time to set up and to proceed with the main contract arbitration
  • if the contractor is unable or unwilling to bring about a tripartite arbitration within the time span contemplated by the clause, the subcontractors will be free to proceed with an arbitration

V. Consent of third parties

  • Employer
    • some subcontracts envisage that the employer must consent
    • since it will not be easy to obtain the consent of the employer, the main contract would have to contain a comparable provision compelling the employer to accept a third party to his arbitration with the contractor
    • in the system of nomination, where the employer also settles the terms of the subcontract, the consent may – in limited cases – be deemed, depending on the wording used
    • the consent need not be prior to the subcontractor’s request for arbitration
  • Arbitrator
    • there can be no multi-party arbitration without the consent of the arbitrator
  • accordingly, where the arbitration has already started, two consents will be required (employer & arbitrator)

VI. Tiers

  • Limits on the parties?
    • adoption of the court procedure could lead to an indefinite number of parties being brought before the arbitrator
    • main contractor could bring innumerable subcontractors
    • employer could, likewise, bring innumerable nominated subcontractors or parties with whom he made contracts possibly without the consent of the contractor
    • should there be a limit, say two, three or not more than four?