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The Guide to Construction Arbitration

Introduction

The construction industry is a major contributor to economic growth worldwide. In the UK alone, it is estimated that every £1 investment in construction output generates £2.84 in total economic activity.[2]

The industry covers a wide range of different types of projects, from the construction of buildings such as offices, factories and warehouses, shopping malls, hotels and homes to major infrastructure projects that involve more complex civil engineering works such as construction of harbours, railroads, mines, highways and bridges. Other construction projects involve specialist engineering works such as shipbuilding and bespoke plants, and machinery such as turbines, generators and aircraft engines, or works that aim to support energy projects such as upstream oil and gas projects or renewables (wind, wave, solar) and nuclear plants.

These complex construction projects are rarely completed without giving rise to disputes, the majority of which (possibly the vast majority) are submitted to alternative dispute resolution (ADR) processes and eventually arbitration. The reasons that construction parties tend to choose ADR and arbitration owe as much to the (perceived or real) inefficiencies of national courts as to the (perceived or real) advantages of out-of-court dispute resolution. For example, with few notable exceptions such as the Technology and Construction Court in the UK, most national courts lack construction specialist departments or judges with construction expertise and experience. Arbitration, on the other hand, allows construction parties to appoint arbitrators with the necessary specialised knowledge and understanding of complex construction projects. Importantly, arbitration allows construction parties to ‘design and build' (to stay in tune with the theme of The Guide to Construction Arbitration) the dispute resolution procedure in a way that addresses a number of procedural challenges in construction arbitrations, including the typically large volume of documentary evidence, the most effective use of (delay and quantum) experts and programme analysis. While the use of some ADR methods such as dispute adjudication boards has spread relatively recently,[3] arbitration has traditionally been included as the default dispute resolution mechanism for disputes arising out of international construction contracts.[4]

A question that often arises is: What is special about international construction disputes that they require specialist arbitration knowledge? In the first place, construction projects are associated with considerably more risks than any other typical commercial transaction. Because of their nature and typically long duration, construction projects are conducive to the realisation of a wide range of risks, including risks related to unexpected ground, underground and climatic conditions, industrial accidents, fluctuation in the price of materials, political risks (such as political riots, governmental interventions and strikes) and legal risks (such as amendments in law or failure to secure legal permits and licences).

Further, time is very often of the essence in construction projects. If an Olympic Games stadium, for example, is not delivered before a certain hard deadline, or if a shopping mall is not ready for the commercially busy Christmas period, the employer may lose the commercial benefit of the project.

Moreover, the vast majority of disputes in construction projects involve questions of delay and causation arguments that are typically complex. Many phases of a construction project can run concurrently, which often makes it difficult to identify the origins and cause of a delay. Legal concepts such as concurrent delay, critical path and global claims are unique in construction disputes.

Equally, the involvement of a wide number of parties with different capacities and divergent interests adds to the complexity of construction disputes. A typical construction project may involve not only an employer and a contractor, but several subcontractors, a project manager, an engineer and architect, specialist professionals such as civil or structural engineers, mechanical engineers, consultants such as acoustic and energy consultants, lenders, insurers and suppliers. A dispute arising out of the main construction contract may have financial and legal implications on many of the above parties - this often gives rise to issues about third-party participation in arbitration proceedings.

Another important feature of construction disputes is the widespread use of standard forms, such as the FIDIC or the ICE conditions of construction contracts. Efficient dispute resolution requires familiarity and understanding of the, often nuanced, risk allocation arrangements in these standard forms. Good knowledge of construction-specific legislation is necessary too. While the resolution of most construction disputes will depend on the factual circumstances and the provisions of the contractual agreement of the parties, legal issues may often arise in relation to statutory (frequently mandatory) warranty and limitation periods for construction claims, statutory direct claims by subcontractors against the employers,[5] statutory prohibition of the pay-when-paid and pay-if-paid provisions[6] and, of course, mandatory legislation on public procurement.[7]

Finally, as already mentioned, construction disputes are technically complex, requiring efficient management of challenging evidentiary processes, including document management, expert evidence, programme analysis and quantification of damages. The evidentiary challenges in construction disputes have given rise to the use of tools, such as Scott Schedules (used to present fact intensive disputes in a more user friendly format) that are unique in construction arbitrations.[8]

It is for all these reasons that alternative dispute resolution and arbitration of construction disputes requires special focus and attention, which is what The Guide to Construction Arbitration aims to provide.

The Guide to Construction Arbitration is designed to appeal to different audiences. In the first place, it aims to offer practical information to practitioners who are inexperienced in international construction contracts and dispute resolution. For example, in-house lawyers who may lack experience in negotiating and drafting construction contracts, and construction professionals who may have experience in managing construction projects but may lack experience in the conduct of construction arbitration will find The Guide to Construction Arbitration useful. Lawyers in private practice who are familiar with arbitration, but lack experience in dispute resolution proceedings in construction arbitration will also benefit. Last but not least, students who study construction arbitration will find it to be a helpful source of information.

While the main focus of The Guide to Construction Arbitration is the resolution, by arbitration, of disputes arising out of construction projects, Part I is devoted to important substantive aspects of international construction contracts. To understand how construction disputes are resolved in international arbitration, one first has to understand how disputes arise out of a typical construction contract in the first place, and what are the substantive rights, obligations and remedies of the parties to a construction contract.

Thus, this book is broadly divided in three parts. Part I includes Chapters 1-7, which examine a wide range of substantive issues in construction contracts, such as The Contract: the Foundation of Construction Projects (Aisha Nader), Parties to a Construction Contract (Scott Stiegler), Bonds and Guarantees (Christopher Harris and Jane Davies Evans), Introduction to the FIDIC Suite of Contracts (Ellis Baker and Anthony Lavers), Allocation of Risk in Construction Contracts (Ellis Baker, Luke Robottom and Anthony Lavers), Contractors' Claims, Remedies and Reliefs (James Bremen and Leith Ben Ammar) and Employers' Claims and Remedies (James Bremen and Mark Grasso).

Part II (Chapters 8-13) then focuses on dispute resolution processes in construction disputes. The aim of this Part is to look into special features of construction arbitration, and the following chapters are included: Suitability of Arbitration Rules for Construction Disputes (David Kiefer and Adrian Cole), Subcontracts and Multiparty Arbitration in Construction Disputes (Stavros Brekoulakis and Ahmed El Far), Interim Relief, including Emergency Arbitration, in Construction Arbitration (Peter Hirst and David Brown), Organisation of the Proceedings in Construction Arbitrations: General Considerations and Special Issues (Tim Chelmick and George Spalton), Documents in Construction Disputes (Bartosz Kruz˙ewski and Robert Moj) and Awards (Roger ter Haar QC, Crispin Winser and Maurice Holmes).

Part III (Chapters 14-18) examines a number of select topics in international construction arbitration. Specifically, the chapters look into Construction Disputes in Investment Treaty Arbitration (Erin Miller Rankin, Sami Tannous and Matei Purice), Construction Arbitrations in the Nuclear Sector (Jane Davies Evans), Construction Disputes in the Energy Sector (Mark Beeley), Construction Arbitration and Concession Contracts (Philip Dunham and José Manuel García Represa) and Construction Arbitration and Turnkey Projects (James Doe, David Nitek and Michael Mendelblat).

Part IV (Chapters 19-21) examines jurisdictions with particular interest and a very active construction industry: Construction Arbitration in Australia (Andrew Stephenson and Lindsay Hogan), Turkey (Serdar Paksoy and Simel Sarıaliog˘lu) and The Nuts and Bolts of Construction Arbitration in the MENA: Principles and Practice (Mohamed S Abdel Wahab).

The structure and organisation of The Guide to Construction Arbitration is broadly based on the LLM course on International Construction Contracts and Arbitration that David and I teach at Queen Mary University of London. The course was first introduced by HH Humphrey Lloyd in 1987 and was taught by him for more than 20 years. Humphrey has been an exceptional source of inspiration for hundreds of students who followed his classes, and I am personally indebted to him for his generous assistance when I took over the course from him some years ago.

We want to thank all the authors for contributing to The Guide to Construction Arbitration. We are extremely fortunate that a group of distinguished practitioners and construction arbitration specialists from a wide range of jurisdictions have agreed to participate in this project. We further want to thank Gemma Chalk, George Ingledew and Iain Wilson for all their hard work in the commission, editing and production of this book. They have made our work easy. Special thanks are due to David Samuels for asking us to conceive, design and edit this book. We thoroughly enjoyed the task, and hope that readers will find the result to be useful and informative.

Notes


[1]    Stavros Brekoulakis is a professor at the Centre for Commercial Law Studies, Queen Mary University of London. David Brynmor Thomas is a barrister at 39 Essex Chambers and visiting professor at Queen Mary University of London.

[2]    Report of Economic Consultants LEK for the UK Contractors Group.

[3]    Dispute adjudication boards were first introduced in FIDIC contracts (in the Orange Book) in 1995 and in ICE contracts as recently as in 2005.

[4]    Arbitration has been included in FIDIC contracts since the publication of the first FIDC contract in 1957.

[5]    For example, in France, Law No. 75-1334 of 31 December 1975 on Subcontracting.

[6]    For example, in the UK with the UK Housing Grants Construction and Regeneration Act 1996.

[7]    For example, EU Directive 2014/24.

[8]    J. Jenkins and K. Rosenberg, ‘Engineering and Construction Arbitration', in Lew et al. (editors) Arbitration in England, Kluwer, 2013.

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