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The European Arbitration Review 2020

Overview: Construction Arbitration in Europe

Introduction

In Europe, construction disputes are apprehended very differently in the United Kingdom and on the continent. The sophistication in project management and project analysis developed in the UK contrasts with the relatively simpler and fact-intensive approach that prevails in countries following a civil law tradition. In recent years however, a clear trend has emerged, suggesting that the adoption and adaptation of solutions developed in different legal systems may be key to answering some of the inefficiencies that users of international construction arbitration continue to complain about. This article aims to shed some light on those trends and initiatives in Europe and to participate in the ongoing discussions on the improvement of international construction arbitration for its users.

Recent trends in European construction disputes

Market surveys such as the very insightful Arcadis Global Construction Disputes Report (2019) (Arcadis Report) typically draw a distinction in their analysis of European construction disputes between the United Kingdom and continental Europe. This distinction between the UK and the rest of the continent stems from, among others, the classic divide between the common law and the civil law traditions.

In the United Kingdom, the courts and practitioners have developed a specific body of law dedicated to construction contracts, and parties benefit from an access to the Technology and Construction Court (TCC), a specialised court handling construction disputes. In addition, in the common law tradition where oral and expert evidence play a major role in the establishment of evidence, specific expert disciplines have developed in order to provide parties and courts with expert analyses tailored to the needs and particularities of the construction industry. In a nutshell, causes and consequences of events on construction projects are analysed in terms of 'delays' and 'disruptions', with causation between the events and the increase in time and costs for the contractor being subject to expert analyses presented as evidence to the courts.

No such specialisation exists in most legal systems on the continent. In the civil law tradition, construction disputes are approached based on the general provisions of the civil codes on contractual liability and certain specific legal provisions for construction contracts. Causation in relation to delays and disruptions, and the evidence thereof, is often a matter for the factual record (not expert evidence) and is subject to the sovereign appreciation of judges. Assistance by court-appointed experts is more often encountered in relation to 'technical' issues of facts [1] rather than the demonstration of the impact of certain events on the baseline schedule (programme) and the increase in costs for the contractor.

According to the Arcadis Report, continental Europe continues to hold the unenviable first rank for the time that it takes to resolve construction disputes, in comparison to the rest of the world. [2] This statistic is, however, not evidence that litigation or arbitration is slower in continental Europe than everywhere else, since the Arcadis Report calculates the length of a dispute by taking into account 'the period between when [the dispute] becomes formalised under the contract and the time of settlement or the conclusion of the hearing'. [3] The emphasis is therefore put on the early attention to the dispute and its resolution in the course of the project. Party negotiations, mediation and expert determination are reported as the top three preferred methods of disputes resolution on the continent. [4]

Among the most important factors for early resolution of construction disputes, the Arcadis Report lists in second order the 'accurate and timely schedules and reviews by project staff or third parties'. [5] This appears to find echo in the third main cause of construction disputes listed in the Arcadis Report for continental Europe, namely 'proper contract administration'. [6] These findings suggest that the continent would still benefit from more sophisticated methods of analysis of causes and consequences of delays, both as a tool for project management and early dispute resolution. The trend for the professionalisation of contract management in continental Europe seems to continue to be relevant and actors in the construction industry may benefit from the continued import of best practices and concepts developed in the United Kingdom.

However, and maybe surprisingly, causes of disputes similar to those prevailing on the continent have now been reported in the United Kingdom. Of particular concern is the fact that failure to properly administer the contract, failure to understand the contractual obligations and failure to serve appropriate notices are now reported as the three leading causes of disputes in the UK by the Arcadis Report. [7] One of the proposed explanations for this new trend is the increasing complexity and lengths of construction contracts. [8] Whether the new standard form contracts of Joint Contracts Tribunal (JCT), New Engineering Contracts, FAC-1 and the new International Federation of Consulting Engineers suit of contracts released in 2017 will provide a solution will need to be closely monitored.

The Arcadis Report also evidences that arbitration as a method for resolution of construction disputes in Europe is not as popular as it is, for example, in the Middle East. [10] The perception that arbitration is slow and costly may be one of the factors explaining the lower popularity of arbitration to resolve disputes arising from construction projects in Europe.

User experience in construction arbitration

In 2018, the Queen Mary University London (QMUL) dedicated its annual survey to the analysis of the evolution of international arbitration. Respondents to the survey expressed their views that international arbitration was likely to continue to increase in the field of construction and energy disputes [11] and that 'wider and faster recourse to interim and conservatory measures' and 'more industry/sector-specialised arbitral rules' might constitute a factor leading to the increased use of arbitration for the resolution of construction disputes in the future. [12]

While the survey was not focused on international construction arbitration, the 2018 QMUL survey also reported that, among international arbitration's worst features, 'costs' and 'lack of speed' continue to rank as the four main causes of disaffection by its users. In 2019, the QMUL survey will be specifically dedicated to international construction disputes. [13] The survey will be looking at 'how disputes are resolved before arbitration, what leads to arbitration and how construction disputes are arbitrated'. [14] In particular, the survey will seek to 'identify the causes of inefficiency in resolving international construction disputes, suggest practical steps forward, and challenge perceptions'. [15] The results will no doubt give useful insight into international construction arbitrations and lift a corner of the veil on the question of whether perceptions - including that construction arbitrations are slow and costly - correspond to realities.

Arbitral institutions and construction arbitration in Europe

Arbitral institutions have a relevant role to play in shaping international construction arbitration into an effective and efficient method for the resolution of construction disputes, and Europe can play a leading role. Indeed, Europe is home to three of the five preferred seats of arbitration (Paris, London and Geneva) [16] and to three of the five most renown international arbitral institutions (the International Court of Arbitration of the International Chamber of Commerce (ICC), the London Centre for International Arbitration (LCIA) and the Stockholm Chamber of Commerce (SCC)). [17]

However, and maybe counter-intuitively at first sight, the caseload of arbitral institutions in terms of construction disputes in Europe does not follow the distinction between the UK and the continent. To the contrary. While the ICC/Paris-LCIA/London divide reflects the common law-civil law divide, the statistics of these arbitral institutions show that the ICC (and not the LCIA) is the preferred arbitral institution for the resolution of construction disputes.

In 2018, construction and engineering disputes represented 27 per cent of the new ICC cases (224 cases). [18] This percentage even increases to 40 if energy disputes are counted together with construction and engineering disputes. By contract, construction disputes only represented 10 per cent of the LCIA caseload for that year (or about 31 cases). [19] The third main arbitral institution in Europe, the SCC, reported only 11 cases arising from construction agreements, or about 7 per cent, out of its 152 new cases. [20] These statistics explain why the ICC has historically taken a leading role with regards to recommendations of best practices in the management of construction arbitrations. This is undoubtedly due to the success of the ICC in projecting itself as a true global dispute resolution centre, detached from its base in Paris.

The ICC Commission Report on Construction Industry Arbitrations 2019

To tackle issues of inefficiency in international construction arbitrations, the ICC Commission had published in 2001 a 'Final Report on Construction Industry Arbitrations'. [21] This report provided very useful tools and techniques for successfully managing construction arbitrations. The success of the 2001 Report led the ICC Commission's Steering Committee, in 2016, to start work on an update of the 2001 report with a specifically narrow objective: to address, on the one hand, the modifications introduced by the 2017 revision of the ICC Rules of Arbitration and, on the other hand, the developments in the practice of construction arbitrations.

The updated report, 'Construction Industry Arbitrations - Recommended Tools and Techniques for Effective Management', was published in 2019 (the 2019 ICC Construction Report). It serves as a complement, for construction arbitration, to the more general report issued by the ICC Commission 'on Controlling Time and Costs in Arbitration' first published in 2007 and updated following the amendments to the ICC Rules in 2012. The 2019 ICC Construction Report clearly aims to help new entrants - and especially arbitrators - into the world of international construction arbitration. As a preliminary remark, the 2019 ICC Construction Report sets the tone:

[the report is] intended primarily for arbitrators who do not have much experience in construction arbitrations conducted under the ICC Rules . . . it is important that this report should be seen by them to be reasonably authoritative. [22]

One of the key features underlining the recommendations in the 2019 ICC Construction Report, mentioned at the outset of the report, is the relevance of the parties' legal culture when approaching international construction arbitration ('The recommendations set out in this report try to accommodate the approaches of different national jurisdictions' [23]). It is a fact that practices derived from construction disputes before the English courts have more than largely permeated international arbitration. However, some view the sophistication of the analysis developed in England (in terms of methods of delay analysis and prolongation costs), the extensive use of experts, and more generally the way in which proceedings are conducted before the English court, as some of the contributing factors to the increased inefficiency of construction arbitration.

The 2019 ICC Construction Report seeks to draw the practitioners' attention to this delicate issue of legal cultures and practices, and emphasises that the parties and their counsel's legal backgrounds will influence their perceptions of the methods likely to lead to an efficient and cost-effective conduct of the arbitration proceedings:

Above all, procedures in construction arbitrations must be expeditious and cost-effective. For example, some (especially common law lawyers) contend that traditional common law procedures, if correctly employed, usually result in a high degree of precision in fact finding and, arguably, may enable a tribunal to reach decisions in which it has greater confidence. However, such procedures are costly and time-consuming. Others argue, with justification, that other systems and the practice of civil law proceedings in litigation and arbitration can lead to comparable degrees of precision in fact finding and confidence in the result, and that they can do so at lower cost and in a shorter time. [24]

Among the various instances where legal cultures (of the parties, but also of the arbitrators) may play a role and where knowledge of the practices and procedures in the other legal culture can become an advantage, four such instances appear to be particularly noteworthy.

First, the ICC Construction Report notes that '[i]n construction arbitration, there is still an appreciable divergence between those used to the common law or “adversarial” approach and those used to other approaches', including 'significant differences in law and practice within common law and civil law jurisdictions'. [25] The main advice that the report gives is to make sure that the parties' expectations are clearly understood at the outset of the proceedings:

at the first case management conference the tribunal ascertain . . . what the parties' common expectations are regarding the procedure of the arbitration. [26]

The second area where parties can learn from other legal cultures is with respect to the number of arbitrators to be appointed. The 2019 ICC Commission Report clearly encourages lawyers from the civil law tradition to consider agreeing on a sole arbitrator for disputes where the amount in dispute is between US$5 million and US$30 million. This advice stems from the finding that the '[u]se of a sole arbitrator is understood to be common and to work well in England and certain other common law jurisdictions even for large disputes (US$50 million or more)', [27] but that 'this practice is not generally accepted in civil law countries . . . [where lawyers] may find a sole arbitrator to be acceptable only in cases where the amount in dispute does not exceed US$5 to 10 million'. [28] The clear practice of the ICC is that it will rarely appoint a sole arbitrator for disputes above US$30 million and likewise appoint a three-member tribunal for disputes under US$5 million. This therefore leaves a window for the parties, when the value of the disputes lies between these two figures, to consider the appointment of a sole arbitrator.

A third aspect of the proceedings that may be influenced by the legal culture of the parties is disclosure. As noted in the report:

[a]rbitrators with a civil law background . . . where court procedures for disclosure as understood in common law countries do not exist . . . may be less inclined to order extensive disclosure than those with a common law background. [29]

The report notes that 'very few are still in favour of the wholesale and indiscriminate production of documents by means of the common law process of discovery' and that 'such a process must be justified if it is to be applied to an international arbitration. Otherwise, it has no place in ICC arbitrations.' [30] In practice, however, one will often realise that even the notion of what consists a 'wholesale and indiscriminate production of documents' is likely to be subject to considerable differences of opinion.

Finally, the fourth procedural issue that the ICC raises as a possible point of divergence is the form and content of submissions. As the ICC Commission puts it:

written submissions should be full and exhaustive, and should be delivered at the earliest possible occasion . . . Much antipathy was shown to the common law practice of not presenting the best case in the best possible way and relying on oral submissions, accompanied by supporting notes. Members of the tribunal or the legal . . . representatives of the parties need to have written submissions in advance in order to read them carefully at their own pace. [31]

The stance that the ICC Commission appears to adopt in this report is that acquaintance with the practices of the various legal traditions, with the concepts of construction disputes, and a good understanding of the applicable laws will be key in the efficient management of construction arbitrations. Drawing on all the above, one of the key takeaways from the 2019 ICC Construction Report is that, among the five 'key qualities . . . that parties should consider when selecting arbitrators in the context of a construction arbitration', [32] '[f]amiliarity with both the civil and common law legal systems' [33] is considered as a true 'advantage', alongside '[f]amiliarity with the industry and cultural nuances'. [34] If the arbitral tribunal is constituted in accordance with those recommendations, and taking into account the widely diverging views on how to conduct expeditious and cost-effective proceedings, the ICC Commission considers that arbitrators will be best placed to determine 'the procedures appropriate to the dispute in question which will enable them to discharge their duties without unnecessary delay or expense'. [35]

A greater willingness to adopt the tools developed in other legal traditions may be the answer to devising and conducting proceedings that are proportionate in time and costs, and thereby address the users' concerns towards construction arbitration. [36]

Translation of the Society of Construction Law Delay and Disruption Protocol

One of the most significant recent steps in the attempt to bridge the common law and civil law divide to the resolution of construction disputes is the translation into French, in 2018, of the second edition of the 'Society of Construction Law Delay and Disruption Protocol' (SCL Protocol) [37] of the Society of Construction Law. [38]

Established in England in 1983, the Society of Construction Law issued a first edition of the protocol in 2002. Beyond its role as a guide for addressing issues of delay and disruption, the SCL Protocol has formalised many concepts commonly used in construction disputes in England. While the SCL Protocol has no legal value, it is often referred to in international construction arbitration by lawyers and experts alike as a guide (or authoritative source) when addressing issues such as extensions of time, concurrent delay, mitigation and heads of damages. Among others, the SCL Protocol also provides an evaluation of various types of expert methodology of delay analyses.

Until recently, this protocol was unavailable to non-English speakers. The translation of the protocol into French in September 2018 is a very good initiative in this regard, [39] as it will bring a set of formalised concepts to those involved in construction disputes in the French legal tradition. Translation is, however, only 'the first step in the process of producing a version harmonised with French law'. [40] The adaptation of the SCL Protocol to French law, will likely constitute a game changer in the way construction disputes are addressed and handled on the continent and beyond. One can anticipate that, once adapted to the realities of the Napoleon Civil Code, French-speaking construction lawyers will become increasingly familiar with the SCL Protocol and will have recourse to it not only for assistance with contract management and dispute prevention, or in international arbitration, but also the concepts formulated by the SCL Protocol will find their way into state courts.

The harmonisation of the SCL Protocol with French law will also likely have an impact much beyond continental Europe. Other legal systems of the civil legal tradition, such as Egypt, Lebanon and countries in the Gulf (UAE, Qatar, Kuwait), but also countries in Africa and Latin America, will be able to derive the benefits from such a 'civil law-adapted' SCL Protocol for the resolution and management of construction disputes.

Case law update: the North Midland case of July 2018

In an effort to participate in this growing dialogue between legal cultures for the improvement of international construction arbitrations, it seems appropriate to report about a case in the period under review that international construction arbitration specialists might find of relevance whatever their legal background. The 2018 judgment by the London Court of Appeal in North Midland Building Ltd v Cyden Homes Ltd is worth noting for the concepts it addresses. [41] In this case, the Court of Appeal was faced with the question whether the 'prevention principle' could serve to invalidate a contract clause that negated the contractor's right to an extension of time in case of concurrent delay.

In that case, Cyden Homes, the employer, contracted with North Midland Building under a JCT Design and Build construction contract with various bespoke amendments, including an amendment to the extension of time (EOT) clause. As per the amendment, the employer was to grant an EOT to North Midland, except that for the calculation of the entitlement to EOT 'any delay caused by a relevant event [ie, employer culpable event] which is concurrent with another delay for which the contractor is responsible shall not be taken into account'. [42] For the purpose of the appeal, the court was satisfied to adopt the following definition of concurrent delay: 'a period of project overrun which is caused by two or more effective causes of delay which are of approximately equal causative potency.' [43]

On the basis of the amended EOT clause in the contract, Cyden Homes refused to grant North Midland an extension of time for a period in which, although there was delay due to a relevant (employer) event, another event under the responsibility of North Midland had also caused concurrent delay. Importantly, the result of Cyden Homes' position was that Cyden would be entitled to impose liquidated damages for the period of delays going beyond the new completion date determined based on the limited EOT.

North Midland contested the validity of the amended clause based on the 'prevention principle', according to which 'where one party to a contract is prevented from performing it by the act of the other, he is not liable in law for that default'. [44] The Court of Appeal rejected, in particularly strong terms, that argument. In summary, the court found that the disputed clause was unambiguous (and that therefore no issue of construction could arise) and that the prevention principle was not a matter of legal policy that could serve to invalidate a contract term. Interestingly, for the purpose of the this article, at first instance Fraser J in the Technology and Construction Court characterised North Midland's argument on the permissibility of proposed interpretation of the amended clause as 'more akin to a Civil Code view of contracts, than one under the common law'. [45] Whether the comparison is warranted falls outside the scope of this article, but the remark should give some food for thoughts (and arguments).


Notes

[1] See for example for an overview in France, Germany and Switzerland, the GAR Know-how comparison tool for construction arbitration: https://globalarbitrationreview.com/know-how/results?question_ids=&jurisdiction_ids=1006116,1006121,1006124&edit ion_id=1000458

[2] Arcadis Global construction Disputes Report (2019): "Laying the Foundation for Success", avaiable at https://www.arcadis.com/en/united-states/our-perspectives/2019/global-construction-disputes-report-2019/(Arcadis 2019).

[3] Arcadis 2019, p. 8.

[4] Arcadis 2019, p. 21.

[5] Arcadis 2019, p. 22.

[6] Arcadis 2019, p. 21.

[7] Arcadis 2019, p. 18.

[8] Arcadis 2019, p. 18.

[9] Arcadis 2019, p. 18.

[10] Arcadis 2019, p. 25.

[11] Queen Mary University of London and White & Case 2018 International Arbitration Survey: The Evolution of International Arbitration (QMUL Survey 2018), p. 29, available at http://www.arbitration.qmul.ac.uk/media/arbitration/docs/2018-International- Arbitration-Survey---The-Evolution-of-International-Arbitration-(2).PDF ; (QMUL Survey 2018).

[12] QMUL Survey 2018, p. 30.

[13] http://www.arbitration.qmul.ac.uk/research/2019/.

[14] http://www.arbitration.qmul.ac.uk/research/2019/.

[15] http://www.arbitration.qmul.ac.uk/research/2019/.

[16] The other two being Singapore and Hong Kong (QMUL: "2018 International Arbitration Survey: The Evolution of International Arbitration").

[17] The other two being SIAC and HKIAC (QMUL: "2018 International Arbitration Survey: The Evolution of International Arbitration").

[18] 2018, ICC Statistics, p. 13.

[19] LCIA 2018 Annual Casework Report, p. 5. This is up from 7 per cent in 2017 and down from 15 per cent in 2016.

[20] https://sccinstitute.com/statistics/ (2018).

[21] The 2001 Report is available here: https://library.iccwbo.org/content/dr/COMMISSION_REPORTS/CR_0017.htm.

[22] ICC Report 2019, p. 2.

[23] ICC Report 2019, p. 2.

[24] ICC Report 2019, p. 2.

[25] ICC Report 2019, p. 15, para. 10.1.

[26] ICC Report 2019, p. 15, para. 10.1

[27] ICC Report 2019, p. 11, para. 2.2.

[28] ICC Report 2019, p. 11, para. 2.2.

[29] ICC Report 2019, p. 20 , para. 16.3.

[30] ICC Report 2019, p. 20 , para. 16.3.

[31] ICC Report 2019, p. 23 , para. 19.2.

[32] ICC Report 2019, p. 10, para. 2.1.

[33] ICC Report 2019, p. 10, para. 2.1(b).

[34] ICC Report 2019, p. 10, para. 2.1(a).

[35] ICC Report 2019, p. 3.

[36] The ICC Rules of Arbitration 2017, Appendix IV "Case Management Techniques" emphasise the importance of proportionality: "Appropriate control of time and cost is important in all cases. In cases of low complexity and low value, it is particularly important to ensure that time and costs are proportionate to what is at stake in the dispute."

[37] The SCL Protocol, 2nd, can be downloaded from the following link: https://www.scl.org.uk/sites/default/files/SCL_Delay_Protocol_2nd_ Edition_Final.pdf.

[38] www.scl.org.uk.

[39] The French language version of the SCL Protocol, entitled “Society of Construction Law Protocole Retards et Perturbations” is available here: https://www.sclinternational.org/sites/default/files/Protocol%202nd%20edition%20Feb17%20-%20VF%20-%20Edition%20Finale.pdf.

[40] See the post by Frédérc Gillion, Partner at Pinsent Masons on Out- Law: https://www.pinsentmasons.com/out-law/news/french-version-of-protocol-will-help-with-international-construction-disputes.

[41] North Midland Building Ltd v Cyden Homes Ltd [2018] EWCA Civ 1744.

[42] Ibid, at [6].

[43] Ibid, at [16].

[44] Ibid, at [11], quoting Lord Esher MR in Dodd v Churton [1897] 1 QB 566.

[45] Ibid, at [20], quoting the first instance judge.