Overview: Construction Arbitration in Europe

In summary

This chapter provides an overview of the main trends in international construction arbitration in Europe, and the various initiatives aimed at addressing the users’ concerns for more efficiency in this field.

A review of the recent trends in construction disputes and construction arbitration shows that the construction industry in Europe is concerned with the proportionality of the dispute resolution process, and wants to ensure that the process and its outcome are in line with their expectations. Based on the various surveys conducted over the past few years, the key to resolving concerns on efficiency may be in the stakeholders’ willingness to adopt methods developed in other legal traditions, especially a cross-pollination between the common law and the civil law approach to construction disputes.

Discussion points

• Trends in construction disputes in the United Kingdom and in continental Europe in 2019
• Perceptions and causes of inefficiencies in construction arbitration
• Assessment of innovations to address inefficiencies: Prague Rules versus IBA Rules
• Adoption of methods from civil law and common law to meet the users’ desire for proportionality and predictability in construction arbitration in Europe
• Benefits of the translation of the Society of Construction Law Delay and Disruption Protocol (2017) into French

Referenced in this article

• Global Construction Disputes Report (2020)
• Queen Mary University of London and Pinsent Masons 2019 International Arbitration Survey: Driving Efficiency in International Construction Disputes
• Prague Rules on Efficient Conduct of International Arbitration
• ICC Commission Report: Construction Industry Arbitrations – Recommended Tools and Techniques for Effective Management (2019 Update)

Introduction

In Europe, construction disputes are apprehended very differently in the United Kingdom and on the continent. The sophistication of project analysis developed in the United Kingdom contrasts with the relatively more simple and fact-intensive approach that prevails in countries following a civil law tradition.

In recent years, a clear trend is, however, emerging to suggest that the adoption and adaptation of solutions developed in different legal systems may be key to answering some of the complaints about inefficiencies that users of international construction arbitration continue to formulate. This chapter aims to shed some light on those trends and initiatives in Europe and to participate to the ongoing discussions on the improvement of international construction arbitration for its users.

Trends in construction disputes in Europe

Market surveys such as the insightful Arcadis Global Construction Disputes Report (2020) (the Arcadis Report) typically make a distinction in their analysis of European construction disputes between the United Kingdom and continental Europe. This distinction between the United Kingdom 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, courts and practitioners have developed a specific body of law dedicated to construction contracts, and stakeholders benefit from an access to a specialised court handling construction disputes, the Technology and Construction Court (TCC). 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, events affecting construction projects are analysed in terms of ‘delays’ and ‘disruptions’, with causation between the events and the increase in time or costs for the contractor being subject to expert analyses presented as evidence to the courts.

No such specialisation exists in most of the 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] than in the demonstration of the impact of certain events on the baseline schedule (programme) and the increase in costs for the (sub)contractor.

As the most common causes of construction disputes, participants to the Arcadis survey listed: errors and omissions in the contract document, an unrealistic contract duration or completion date, and a failure to properly administer the contract.^[2] These findings strongly suggest that the continent would benefit from more sophisticated methods of analysis of causes and consequences of delays, not only as a tool for project management but also to ensure the early resolution of disputes. 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, over the last years, causes of disputes similar to those prevailing on the continent have now been reported in the United Kingdom. Of particular concern is the fact the most common causes of dispute now include: failure by those administrating the contract to make interim awards on extensions of time and compensation, failure by the contractor or subcontractor to understand or comply with its contractual obligations, and poorly drafted and unsubstantiated claims.^[3] The Arcadis Report suggests that proper administration has the single largest impact in avoiding disputes. As this trend seems to be taking hold over the years, it will be necessary to see whether the contract documents are becoming too complex or technical.

Arbitration is now reported as one of the top three most common methods of dispute resolution both in the United Kingdom and continental Europe.^[4] This is particularly noteworthy, as arbitration did not make it to the top three in 2018 and 2019. On the continent, the most common form of early resolution of disputes, according to the Arcadis Report, is by settlement, though after legal proceedings have been commenced.^[5] This trend denotes a clear desire by the parties to avoid full-blown legal proceedings, and to increase parties’ control over the outcome of the dispute.^[6]

Interestingly, the Arcadis Report also includes a benchmark of the stakeholders’ assessment of a successful resolution of construction disputes. In the United Kingdom, ‘over half of respondents stated the cost of resolution compared to value of outcome was the most important factor when considering whether a dispute was successful or not’^[7]. This measure of success emphasises the importance of proportionality. On the continent, the measure of success is reported to be based on the ‘ability to manage client/stakeholder’s initial expectations’,^[8] which also denotes a concern for reasonableness and proportionality.

User experience in construction arbitration

The annual survey by the Queen Mary University London (QMUL) in 2019 focused on international construction disputes (2019 QMUL Survey). The purpose of the 2019 QMUL survey was to understand the causes that lead to the perception that construction arbitrations are taking longer and are more costly than they should, and how these problems can be addressed.^[9]

In line with the findings of the Arcadis Report, the 2019 QMUL Survey also identifies the following three factors as giving rise to international construction disputes: late performance, poor contract management, and poor contract drafting.^[10]

In addition, the 2019 QMUL Survey found that the four main perceived causes of inefficiency of international construction arbitration were party tactics, poor case management by arbitrators, large amount of evidence, and lack of experience of arbitrators or counsel in handling construction disputes.^[11] It is also useful to recall the findings of the 2018 QMUL Survey, which was dedicated to the analysis of the evolution of international arbitration, in which respondents expressed the views that international arbitration was likely to continue to increase in the field of construction and energy disputes^[12] and that ‘wider and faster recourse to interim and conservatory measures’ might constitute a factor leading to the increased use of arbitration for the resolution of construction disputes in the future.^[13] These findings highlighted the desire of the construction industry for fast (even if temporary) decisions that could help users move on with the projects.

Another important and relevant finding of the 2019 QMUL Survey is the threshold at which stakeholders consider international construction arbitration to be a commercially sensible method for dispute resolution. Respondents to the 2019 QMUL Survey considered that the minimum amount in dispute for arbitration to be commercially sensible was between US$1 million and US$10 million. However, when responses are filtered to take into account only the responses provided by in-house counsel, this minimum threshold ranges between US$11 and US$25 million.^[14]

These data strongly suggest that the users’ perception of the inefficiency of construction arbitration stems from a perception of disproportion between the time and costs to resolve the dispute, and the stakes of the dispute. Such findings are consistent with the reported benchmarks in the Arcadis Report for assessing whether a dispute was successfully resolved. Proportionality between the value at stake, and users’ expectations are key to the perception of an efficient resolution of the dispute. The initiatives by the community of construction arbitration practitioners and stakeholders in recent years therefore appear to go in the right direction, and could be fine-tuned based on the results from the various surveys.

‘Prague Rules’ versus IBA Rules

One of the most recent initiatives coming from Europe are the ‘Rules on the Efficient Conduct of Proceedings in International Arbitration (Prague Rules)’^[15]. While the Prague Rules do not claim to be specifically designed for construction arbitration, they have attracted the attention of construction arbitration practitioners who have wondered whether they would be suited to international construction arbitration.

The Prague Rules’ declared aim is to ‘provide a framework or guidance for arbitral tribunals and parties on how to increase efficiency of arbitration by encouraging a more active role for arbitral tribunals in managing proceedings’^[16]. On their face therefore, it would seem that the Prague Rules might be well adapted to tackle the issues identified in the 2019 QMUL Survey as causing inefficiency in international construction arbitration. The adoption of the Prague Rules could, in theory, empower the tribunals to limit ‘party tactics’^[17]; it could remedy and improve ‘the poor case management by arbitrators’ by ensuring greater involvement throughout the process^[18]; and the Prague Rules would limit disclosure and thus also reduce the ‘large amount of evidence’ of which the users complain.^[19]

In practice, however, the Prague Rules are not always a perfect fit for the more complex construction disputes. First of all and perhaps most importantly, the Prague Rules’ empowerment of arbitrators risks accentuating two of the main issues identified by the 2019 QMUL Survey: poor case management by arbitrators, and lack of experience of arbitrators in handling construction disputes.^[20] Providing more flexibility for the parties may actually ensure a more efficient resolution of construction arbitrations where the arbitrators have limited experience in international construction arbitration.

More generally, as Loukas A Mistelis and Alexander Ferguson rightly point out, ‘The first challenge [in the quest for efficiency] is that there is no agreed definition of efficiency in international arbitration.’^[21] A more flexible procedural framework may thus be better suited to deal with the users’ desire for proportionality and their legitimate expectations. The flexibility of the IBA Rules thus appears well adapted to construction arbitration in general. The IBA Rules leave ample room to design the proceedings according to the parties’ particular needs, especially if the parties and the arbitrators ensure beforehand that they have similar understandings and expectations of what constitutes an efficient resolution of the dispute.

It is true that the flexibility provided by the IBA Rules may lead to disproportionate and inefficient procedural manoeuvers by some parties, and thus can cause costs inflation and frustration for the other party. By way of example, the more work is required from counsel and experts to come to an accurate and narrow definition of the relevant issues (through pleadings, document production, joint list of issues, etc.), the easier it may be for arbitrators to decide the dispute, but the more costly the arbitration may become. If one is to rely on the 2019 QMUL Survey and the Arcadis Report, construction arbitration users’ interests are for a proportionate method of dispute resolution (to the value at stake), and for a process and outcome that meets the parties’ expectations. On this basis, what drives efficiency may not be a particular set of strict(er) rules, but a common understanding of what is reasonable and proportionate in each case. The Prague Rules probably have the advantage of giving greater guidance on what the parties can expect, and may be best suited for disputes with a relatively modest value. On the other hand, they may not be suitable and proportionate in each case, and to meet the expectations of each legal tradition. Of particular relevance in this respect are the recommendations of the ICC Commission, which emphasise arbitrators’ and counsel’s experience in the construction sector, and their understanding of cultural differences and expectations.

The ICC Commission Report on Construction Industry Arbitrations 2019

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. The ICC is the preferred arbitral institution for the resolution of construction disputes and, in 2019, construction and engineering disputes represented 24 per cent of new ICC cases (211 cases).^[22] This percentage even increases to 40 if energy disputes are counted together with construction and engineering disputes.^[23] 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.

To tackle issues of inefficiency in international construction arbitrations, in 2001 the ICC Commission published a ‘Final Report on Construction Industry Arbitrations’.^[24] 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. The 2019 ICC Construction Report sets the tone with this preliminary remark:

[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.^[25]

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’).^[26] 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.^[27]

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’.^[28] 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.^[29]

This suggestion is consistent with the findings of the Arcadis Report, where users in the UK and continental Europe have defined a successful dispute resolution process as one that is proportionate and meeting the parties’ expectations. As part of that discussion, the Prague Rules could also be discussed as a more controlled way to conduct the proceedings.

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)’,^[30] 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’.^[31] 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.^[32]

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.’^[33] 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.^[34]

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’,^[35] ‘[f]amiliarity with both the civil and common law legal systems’^[36] is considered as a true ‘advantage’, alongside ‘[f]amiliarity with the industry and cultural nuances’.^[37] 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’.^[38] The 2019 QMUL Survey confirms that parties are sensitive to those criteria when choosing an arbitrator. Experience in construction and technical matters remains the most valued characteristic for an arbitrator, but respondents also mentioned their attention to the ‘diversity of the tribunal’, including in terms of country of origin and legal background (typically civil law or common law).^[39]

All of the above suggests that a greater willingness to adopt the tools developed in other legal traditions may be the answer to devising and conducting proceedings that are proportionate with regards to time and costs, and meet the parties’ expectations, thereby addressing the users’ concerns towards construction arbitration.^[40]

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’ (the SCL Protocol)^[41] of the Society of Construction Law.^[42]

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 for delay analyses.

Until a few years ago, 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,^[43] 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’.^[44] 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.

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&edition_id=1000458.

^[2] Arcadis Global Construction Disputes Report (2020): ‘Collaborating to Achieve Project Excellence’, p. 20, available at https://www.arcadis.com/en/middle-east/our-perspectives/2020/06/arcadis-global-construction-disputes-report-2020/ (Arcadis 2020).

^[3] Arcadis 2020, pp. 16–17.

^[4] Arcadis 2020, p. 21.

^[5] Arcadis 2020, p. 20.

^[6] Arcadis 2020, p. 20.

^[7] Arcadis Report, p. 16.

^[8] Arcadis Report, p. 20.

^[9] Queen Mary University of London and Pinsent Masons 2019 International Arbitration Survey: Driving Efficiency in International Construction Disputes, p. 3, available at https://www.pinsentmasons.com/thinking/special-reports/international-arbitration-survey (QMUL Survey 2019).

^[10] QMUL Survey 2019, p. 7.

^[11] QMUL Survey 2019, pp. 24–25.

^[12] QMUL Survey 2019, p. 29.

^[13] QMUL Survey 2018, p. 30.

^[14] QMUL Survey 2019, p. 15.

^[15] See, for example : http://arbitrationblog.kluwerarbitration.com/2019/07/20/do-the-prague-rules-provide-for-an-efficient-resolution-of-construction-arbitration-disputes/?doing_wp_cron=1594396654.7039940357208251953125.

^[16] Rules on the Efficient Conduct of Proceedings in International Arbitration (the Prague Rules), 2018, available at https://praguerules.com/prague_rules/, Preamble.

^[17] QMUL Survey 2019, pp. 24–25.

^[18] QMUL Survey 2019, pp. 24–25.

^[19] QMUL Survey 2019, pp. 24–25.

^[20] QMUL Survey 2019, pp. 24–25.

^[21] http://arbitrationblog.kluwerarbitration.com/2019/05/31/efficiently-resolving-international-construction-disputes/?doing_wp_cron=1597652802.1280419826507568359375.

^[22] 2019, ICC Statistics, p. 13.

^[23] By contrast, construction disputes only represented 5 per cent of the LCIA caseload for that year (or about 17 cases): LCIA 2019 Annual Casework Report, p. 6. The third main arbitral institution in Europe, the SCC, reported only 15 cases arising from construction agreements, or about 8.5 per cent, out of its 175 new cases. https://sccinstitute.com/statistics/ (2019).

^[24] The 2001 Report is available here: https://library.iccwbo.org/content/dr/COMMISSION_REPORTS/CR_0017.htm.

^[25] ICC Report 2019, p. 2.

^[26] ICC Report 2019, p. 2.

^[27] ICC Report 2019, p. 2.

^[28] ICC Report 2019, p. 15, para. 10.1.

^[29] ICC Report 2019, p. 15, para. 10.1

^[30] ICC Report 2019, p. 11, para. 2.2.

^[31] ICC Report 2019, p. 11, para. 2.2.

^[32] ICC Report 2019, p. 20 , para. 16.3.

^[33] ICC Report 2019, p. 20 , para. 16.3.

^[34] ICC Report 2019, p. 23 , para. 19.2.

^[35] ICC Report 2019, p. 10, para. 2.1.

^[36] ICC Report 2019, p. 10, para. 2.1(b).

^[37] ICC Report 2019, p. 10, para. 2.1(a).

^[38] ICC Report 2019, p. 3.

^[39] QMUL Survey 2019, pp. 12–13.

^[40] 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.’

^[41] 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.

^[42] www.scl.org.uk.

^[43] 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.

^[44] 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.