Agreements to Arbitrate Disputes in Construction Contracts

Introduction

Regardless of their field of specialisation, most lawyers have some familiarity with the refrain that ‘before you can have an arbitration you must have an agreement to arbitrate’, together with the notion that ‘party autonomy’ and ‘party consent’ are central to the idea of arbitration. However, the contours of an arbitration agreement and the boundaries of a party’s consent to arbitration are not always clear-cut.

This is frequently the case in large-scale construction or infrastructure contracts (particularly, but not exclusively, of the bespoke variety) where the dispute resolution clauses, if not borrowed wholesale from a boilerplate used in the past by transactional lawyers, are often among the last clauses to be considered by the commercial and technical teams leading the negotiations. Such clauses also happen to be among the first stopping points for any lawyer tasked with resolving a subsequent dispute.

The resulting mismatch between the importance given to these ‘midnight clauses’ by transactional lawyers on the one hand and disputes lawyers on the other provides fertile ground for satellite litigation and ancillary disputes on the meaning and effect of the underlying dispute resolution clause.

The risk of such difficulties arising is particularly acute in instances where:

• the dispute resolution clause provides (not always clearly) that, instead of taking their disputes to the national courts of country X, the parties agree to a series of steps culminating in arbitration; or, conversely,
• the parties disagree as to whether such an agreement exists and, if so, on what terms.

This chapter looks at some of the issues that arise in relation to agreements to arbitrate and considers the position adopted by various jurisdictions.

The nature of an arbitration agreement

In an essay written in 1974, Frédéric Eisemann, a leading light of international arbitration not least because of his role as Secretary General of the ICC International Court of Arbitration, articulated four minimum requirements that an arbitration agreement must meet:

(1) The first, which is common to all agreements, is to produce mandatory consequences for the parties;

(2) The second, is to exclude the intervention of state courts in the settlement of the disputes, at least before the issuance of the award;

(3) The third, is to give powers to the arbitrators to resolve the disputes likely to arise between the parties;

(4) The fourth, is to permit the putting in place of a procedure leading under the best conditions of efficiency and rapidity to the rendering of an award that is susceptible of judicial enforcement.^[2]

While these requirements are not, strictly speaking, mandatory legal or statutory requirements, they provide a useful shorthand for the core parameters of an arbitration agreement. An arbitration agreement, quite frequently a midnight clause in a large and complex contract, which fails to achieve any or all of these requirements is considered defective or, in arbitration parlance, ‘pathological’.

In modern practice, almost all arbitration agreements are set out in writing, either by way of an express dispute resolution clause in a contract or by way of some other mechanism that provides a written basis for the agreement. Modern legislation in most arbitration-friendly jurisdictions adopts an expansive approach of what constitutes an agreement in writing. For instance, Sections 5(2) to (6) of the English Arbitration Act 1996, read together, provide that an arbitration agreement is made in writing if any of the following conditions apply:

• it is made in writing (whether or not it is signed by the parties);
• it is made by an exchange of communications in writing;
• it is evidenced in writing (including circumstances where an agreement made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties);
• it is not made in writing but is made by reference to terms that are in writing; or
• the parties exchange written submissions in arbitration or legal proceedings and an arbitration agreement is alleged by one party and not denied by the other party.^[3]

Therefore, if a contractor and an employer agree by an exchange of email correspondence (or even orally) to be bound by a standard form of contract that contains an arbitration agreement then they will have made an agreement in writing for the purposes of the Arbitration Act 1996.

One of the unique features of an arbitration agreement is that it is treated as distinct and separable from the substantive agreement of the parties (even when it is nothing more than a clause in a long and complex contract): unless otherwise agreed by the parties, it is not regarded as invalid, non-existent or ineffective simply because the substantive agreement has been so rendered; the arbitration agreement itself would have to be directly impeached for it to be invalid.^[4] In the words of the English High Court in Westacre Investments Inc v. Jugoimport-SDPR Holdings Co:

These characteristics of an arbitration agreement…are in one sense independent of the underlying or substantive contract [and] have often led to the characterization of an arbitration agreement as a ‘separate contract.’ . . . [An arbitration agreement] is ancillary to the underlying contract for its only function is to provide machinery to resolve disputes as to the primary and secondary obligations arising under that contract.^[5]

Consequently, when considering international contracts, particular care needs to be given to the question of the governing law of the arbitration agreement: the law governing the substantive agreement is not necessarily the law governing the arbitration agreement. For instance, in Reliance Industries v. Union of India,^[6] the Supreme Court of India recognised that three sets of laws may apply to any given arbitration:

• the proper law of the contract;
• the proper law of the arbitration agreement; and
• the proper law of the conduct of the arbitration.

As discussed further below, in most jurisdictions, the question of the scope of the jurisdiction of an arbitral tribunal is left to the tribunal to determine, and courts tend not to intervene in the process. Further, if court proceedings are issued or threatened in breach of an arbitration agreement, courts are often happy to stay such proceedings or grant anti-suit restraining such proceedings – particularly in jurisdictions such as England and Wales, where the court may not refuse such an application unless it is satisfied that the arbitration agreement is void, inoperative or incapable of being performed.^[7]

Seat versus venue versus governing law

An issue that often arises in construction and infrastructure arbitration involving parties from different jurisdictions is a dispute over the meaning and effect of terms such as ‘seat’, ‘venue’ and ‘governing law’.

These disputes can have important practical consequences for the scope, conduct and the ultimate enforcement of the award rendered by a tribunal.

In terms of scope, these questions can have a considerable impact on what issues are considered arbitrable and proper before the tribunal. Some jurisdictions might restrict arbitrability of certain kinds of disputes. In India, for instance, only disputes that can be characterised as disputes over ‘rights in personam’ and not ‘rights in rem’ are generally considered arbitrable;^[8] Pakistan, like many other jurisdictions, restricts questions of public policy from being decided by arbitration but adopts a relatively wide definition of what is considered public policy.^[9]

In terms of conduct, an arbitration seated in an arbitration-friendly jurisdiction will benefit from procedural rules designed to support the process; an arbitration seated in jurisdictions that adopt an interventionist approach may struggle to get off the ground.

Coming to enforcement, an award sought to be enforced in a jurisdiction that is also the seat of the arbitration would be considered a domestic award by the enforcing court and will often be subject to a set of rules different from those applicable to a foreign-seated award being enforced under the New York Convention (provided that both seat of the arbitration and the place of enforcement are signatories to the New York Convention). Different approaches adopted by different jurisdictions can lead to drastically different outcomes at the all-important stage of enforcement.

In international arbitration, three systems of national law are engaged when a dispute arises. They are the law governing the substance of the dispute, the law governing the agreement to arbitrate and the law governing the arbitration process. The law governing the arbitration process (sometimes known as the curial law) is generally the law of the seat of the arbitration. Issues particularly arise when the laws governing the substance of the dispute and the law governing the arbitration process or the laws of the chosen seat for the arbitration differ. These issues were considered by the Supreme Court of the United Kingdom in Enka Insaat ve Sanayi AS v. OOO Insurance Co Chubb.^[10] The Supreme Court decided by a majority that the proper approach to determining the law governing the arbitration was to apply English law as the law of the forum. While English law recognised the possibility that different parts of the contract might be governed by different laws, and in particular an arbitration clause that was separable from the rest of the contract, it was reasonable to assume that parties would intend or expect their contract to be governed by a single system of law. There were strong reasons why an agreement on a choice of law to govern the contract should generally be construed as applying to the arbitration agreement, even where it differed from the place chosen as the seat of the arbitration. That inference could be negated by two factors: (1) any provision of the law of the seat that indicated that the arbitration agreement would be governed by that country’s law; or (2) a serious risk that if governed by the same law as the main contract, the arbitration agreement would be ineffective. A choice of the sear of arbitration could not by itself be regarded as an implied choice of law applicable to the arbitration. This decision means that it is unnecessary to refer to earlier authorities that regarded the choice of seat as critical to the identification for the law of the arbitration agreement. They are no longer good law.

As observed earlier, in most arbitration-friendly jurisdictions, courts do not intervene in a determination of the question of a tribunal’s jurisdiction. The underlying doctrine of kompetenz-kompetenz holds, in simple terms, that every arbitral tribunal has the power to determine its own jurisdiction.^[11] Once it does so, even if it declares the substantive contract as null or void or void ab initio, the finding will not defeat the validity of the arbitration clause itself.

Multi-tier dispute resolution clauses

Dispute resolution clauses often stipulate that in the event a dispute arises, parties have to undertake certain steps such as negotiation and mediation to resolve the dispute amicably before commencing arbitration. Before discussing how domestic courts approach these multi-tiered clauses, it is useful to consider the advantages and the disadvantages of such clauses.

Some advantages of a multi-tiered approach:

• it saves the parties the expense of an arbitration if the dispute is settled with high-level talks or negotiations;
• it acts as a ‘second opportunity’ for both the parties and their advisers to re-evaluate the expense of an arbitration with regard to outcome and the net profit or goodwill of the business;
• it helps to preserve long-term relationships between employers, contractors, engineers and other professionals, and does not jeopardise future business opportunities; and
• it reduces the aggregate number of issues to be resolved in an actual arbitration. Through negotiation or early meditation, frivolous or trivial claims can be settled or written off at the outset.

Some disadvantages of a multi-tiered approach:

• where the dispute has reached a deadlock, or where only a third-party verdict on the merits of the issues will suffice, the exercise of going through the motions of a negotiation or mediation may constitute a wastage of resources;
• in time-sensitive and urgent matters, the opportunity of obtaining interim measures may be lost, resulting in an asset being disposed of or funds being siphoned;
• it increases the risk of the arbitration clause being rendered a pathological clause. In particular, where there are no well-defined stages of negotiation, mediation or high-level talks a multi-tiered clause can lead to ambiguity in determining the beginning and termination of each of these stages; and
• its interplay with the domestic limitation act can lead to a bar in commencing arbitration owing to the time taken in negotiation, mediation and high-level talks.

In instances where different preliminary steps in a multi-tier clause are considered conditions precedent to the commencement of arbitration, difficult issues can arise that are often treated differently by domestic courts in different jurisdictions. As a result, there is no single internationally recognised ‘best practice’ position in this regard. Some examples are considered below.

England and Wales

Courts have tended adopt a liberal stance on the basis that a bare agreement to negotiate is unenforceable as it is a mere agreement to agree.^[12] However, there are two English cases that enforced provisions that mediation or negotiation was a condition precedent to the right to refer to arbitration.^[13] In Ophen, O’Farrell J emphasised the need for the obligation to be clear, for it to be clearly a condition precedent and for the alternative dispute resolution procedure to be clear and certain and contain an appointment procedure that did not require further agreement by the parties. In those circumstances, the court had a discretion to grant a stay. In exercising its discretion, the court will have regard to the public policy interest in upholding the parties’ commercial agreement and furthering the overriding objective in assisting the parties to resolve their disputes.

United States

In the context of an investment treaty arbitration,^[14] the US Supreme Court first considered the nature of multi-tier clauses, drawing a distinction between ‘procedural’ and ‘substantive’ conditions precedent to arbitration. It took the view that if a clause was procedural in nature, then it would be the discretion of the arbitral tribunal to determine the consequences. On the other hand, if it was substantive then a failure to comply would imply a bar on commencing arbitration.^[15]

Switzerland

The Swiss Supreme Court has struck a balance between, on the one hand, holding the parties to their agreement of following through with various steps and, on the other, ensuring that non-compliance with such steps cannot be or abused to derail an arbitration that has already been commenced.^[16]

Singapore

The Singapore Court of Appeal gives that strict compliance with multi-tier clauses is mandatory, holding that ‘substantial’ compliance with them is not enough.^[17]

Incorporation by reference

While an express arbitration agreement would be considered ideal, there are often instances in the construction industry where an arbitration clause is incorporated by reference.

There are a number of degrees of complexity of incorporation. On the simpler end of the spectrum are instances where two parties have contracted on the basis of general standard terms, including an arbitration clause. On the more complex end of the spectrum, one finds instances where two parties deal on a basis of terms agreed by them previously, by two other parties in the same group of companies, or by entities up and down the chain.

Conventionally, incorporation by express or implied reference to arbitration was characterised into relatio perfecta and relatio imperfecta. The former is an express reference that the main contract makes to a separate contract containing an arbitration clause. In the latter, the main contract makes a general reference to a separate document with no specific mention of an arbitration clause therein.

A number of jurisdictions have held that general words of incorporation are capable of incorporating an arbitration agreement even where no specific reference to it has been made. For instance, the English High Court in Habas sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL held that general wording would be sufficient in a context where some of the previous 14 contracts between the parties had contained a clear arbitration agreement whereas the others had just used wording to the effect that ‘all the rest will be same as our previous contracts’.^[18]

The Dubai Court of Cassation has held that a mere general reference to a standard form of contract was insufficient to prove that the parties were explicitly aware of the existence of an arbitration agreement and held that the arbitration agreement was not incorporated.^[19]

On the whole, however, incorporation remains a tricky issue – especially in multiparty or non-signatory instances – and difficulties can arise in jurisdictions that are less familiar with, or permissive of, international arbitration. Given the preponderance of construction projects in such jurisdictions, care needs to be taken to ensure that a valid arbitration clause is expressly included in the parties’ agreement as reliance on incorporation might lead to protracted satellite litigation.

Common mistakes

The discussion above has highlighted some of the general themes to bear in mind when drafting arbitration agreements. Some of the common specific mistake include:

• inchoate agreement to arbitrate indicating the mere intention of the parties to have a binding arbitration: an agreement simply to have the option of referring a dispute to arbitration can lead to uncertainty as to whether the parties intended for arbitration to be mandatory – for example, ‘any dispute of whatever nature . . . may be referred to arbitration’;
• unclear multi-tier clauses: failure to use precise words to define the scope of each tier can lead to disputes as to whether a mandatory milestone has been crossed or what kind of steps are envisaged within that milestone – for example, ‘the parties should mediate/negotiate as long as they believe settlement is possible’ or ‘disputes which may be resolved by conciliation shall be first submitted to conciliation’;
• non-existent institution: reference to the rules of an arbitral institution that does not exist runs the risk of protracted satellite proceedings – for example, ‘the tribunal must be appointed in accordance with the rules of arbitration of the Singapore Chamber of Commerce’; and
• failure to specify the governing rules: reference to a set of institutional rules without specifying which version or edition of them is applicable can lead to disputes over whether the intention was to adopt the rules in force at the time of the contract or at the time of the dispute – for example, simply saying ‘under the rules of Institution X’. This can be significant where the rules have undergone significant change.

The FIDIC arbitration agreement

The FIDIC Suite of Contracts is extensively discussed in other chapters of this work. A few observations on its arbitration element follow.

As readers will be aware, one of the key elements of the FIDIC Suite of Contracts is the dispute adjudication board (DAB) provided for within Clause 20 and the ‘pay now, argue later’ approach underpinning it.

However, jurisdiction-specific complexities can arise after the decision of the DAB: for instance, in jurisdiction X, how is a DAB decision to be enforced; in jurisdiction Y, what weight, if any, can an arbitral tribunal give to the decision of the DAB in making its award, etc.?

Many jurisdictions have limited to no jurisprudence in relation to such questions; in instances where there has been some judicial treatment of the issues, the answers can vary considerably and can have a real impact on the extent to which the underlying ‘pay now, argue later’ principle is respected in principle.

The Singapore case of PT Perusahaan Gas Negara (Persero) v. CRW Joint Operation (Indonesia) serves as a useful example.^[20] Between 2009 and 2015, no fewer than two arbitration proceedings and four court judgments were needed to resolve the question of the interplay between the findings of the DAB and subsequent arbitration proceedings. Ultimately, the Court of Appeal upheld the (second) arbitral tribunal’s interim award, which permitted the enforcement of the DAB’s decision. A different jurisdiction may well have reached a different (and less helpful) decision.

Even though the FIDIC Clause 20 is a cogently drafted, clear and perfectly sensible provision aimed at speedy and cost-effective resolution, the example illustrates the importance of electing the appropriate applicable law and seat – preferably one that, like Singapore, has already clarified its approach on the matter. As such, even when using a well-known and respected standard form of contract, the precise relationship between the arbitration agreement contained within that contract and the law applicable to the arbitration is a crucial consideration. Therefore, it would be prudent to be not too ‘spoilt for choice’ and opt for jurisdictions with a proven track record of upholding adjudication decisions and supporting arbitration.

Notes