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Media Coverage

Arbitration Clauses - What could possibly go wrong?

25 March 2011
Construction News

This article first appeared in a slightly different form in Construction News, 25 March 2011.

Arbitration clauses could be described as Cinderella clauses. Very often they don't go anywhere; they sit at the end of the contract, in danger of being given little attention in contract negotiations, perhaps because the parties are weary from negotiating the more immediate, if not glamorous, clauses dealing with the works. But if things go wrong, having an appropriate, effective and enforceable arbitration clause can be critical, as cases in the English courts have shown.

In principle it's simple.To arbitrate disputes, the parties need an arbitration agreement, in a few sentences, recording that all disputes are subject to arbitration and setting out clearly the key principles agreed.  And, obvious though it may seem, both parties need to have agreed arbitration as the dispute resolution machinery. In Walter Llewellyn & Sons Ltd v. Excel Brickwork Ltd, for instance, the Technology and Construction Court recently found that the parties had failed to incorporate an arbitration agreement in their sub-contract as there was no express agreement that arbitration was intended.

Arbitration may be part of a dispute resolution package, blended with alternative dispute resolution and litigation, but the parties' intentions need to be clear, avoiding inconsistencies and future arguments. In Holloway v. Chancery Mead Ltd, for example, the parties had to ask the High Court to decide if their contract required claims to be referred to a construction dispute resolution service before they could be referred to arbitration.

Other key issues follow. What procedural law and rules apply? One or three arbitrators and who appoints them? If the arbitration is international which institution will administer it? Where is the seat of the arbitration? What will the different options cost, since arbitrators and arbitration venues and administering institutions have to be paid for?  Even the appointment of an arbitrator has its dangers. The UK Supreme Court has yet to decide in Jivraj v. Hashwani if an arbitration clause requiring the arbitrators to be members of the Ismaili community is unlawful.

And then there's enforcement which is another key ingredient in the arbitration options. Without it, arbitration can be pointless, especially so in international contracts, where arbitration is the neutral choice, so as to avoid issues with choices of foreign local courts. For UK contractors, subcontractors and consultants working outside the UK, the arbitration option must be capable of effective enforcement.

The 1958 New York Convention is the enforcement route in almost 150 countries and in this country the 1996 Arbitration Act makes enforcement of a Convention award mandatory, subject to limited exceptions with a high threshold for denying enforcement. But even then things can go wrong, as in Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, where the Supreme Court here in the UK refused to enforce an ICC arbitration award, deciding, contrary to the finding of the arbitral tribunal, that the Government was not a party to the arbitration agreement.

So, take great care with your arbitration clause. One day it could all be terribly important.

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