International arbitration in the construction industry: why is it important now?

 

Michael Turrini, Partner (Construction) at White & Case

Legal issues are commonplace in this industry: construction does not always go to plan and costs can quickly escalate. Reflecting this, the global consulting engineer Arcadis recently published research to show that the value of the average construction dispute rose by almost 60% last year, with failure to properly administer the contract and misunderstandings over contractual obligations amongst the top five causes cited.

When it becomes apparent that such issues cannot be resolved between the parties involved, formal dispute resolution proceedings often beckon. Recent years have seen a huge increase in the use of international arbitration instead. Why is this the case?

Construction disputes sit at the apex of complex, highly technical and constantly evolving disciplines; construction and engineering and the law. Only a few jurisdictions have specialised construction courts (the Technology and Construction Court in England is a notable exception). Consequently, parties that choose to resolve their disputes through the courts risk having their case being heard by a judge who may have limited experience in dealing with construction contracts, construction industry terms and the technical aspects of a construction project. In international arbitration, where parties have the option of selecting arbitrators with specialist technical knowledge and industry expertise, selecting an arbitrator that has significant experience with construction disputes gives rise to a greater likelihood of achieving a decision that takes account of all relevant issues.

A sea change is evident from primarily court-based litigation to utilising arbitration as the preferred method of dispute resolution. The 2015 International Arbitration Survey, conducted by Queen Mary University of London (QMUL) in partnership with White & Case, illustrates that international arbitration is, conclusively, the preferred form of dispute resolution for cross-border disputes. In particular, the research found that 90% of the respondents favoured international arbitration over other forms of dispute resolution, a 17% increase from QMUL’s first international arbitration survey in 2006.

Factors behind this shift include the greater enforceability of arbitral awards, the flexibility of the arbitral process and the ability to avoid specific legal systems. As the research shows, however, the most attractive feature for parties in the construction industry is the ability to have disputes resolved by individuals with construction industry expertise.

International arbitration also provides parties with the option of choosing the jurisdiction in which disputes will be resolved. The location of an arbitration can be anywhere in the world, irrespective of whether it has any connection to the parties or the project. A neutral venue can be chosen, thereby avoiding any perceived ‘home advantage’.

London and Paris have long been the most traditionally preferred venues. However, the study showed that Hong Kong and Singapore have gained significant momentum, arguably reflecting the growing importance of Asia for inbound and outbound investment in large infrastructure and construction projects. Such projects, being sizeable, expensive and complicated, invariably result in disputes. As such, more Asian parties are becoming involved in large construction disputes and arbitral forums in the region have invested considerable effort to attract these sorts of disputes.

The 2015 International Arbitration Survey demonstrates that although London and Paris continue to be the two most used locations and preferred seats, Singapore is now considered the most improved seat over the past five years followed closely by Hong Kong.

The cost of large scale construction projects is now rising into the billions and at the same time so does the value of the disputes that arise out of them. The decision as to how to resolve them is therefore of critical importance. The latest International Arbitration Survey shows that international arbitration has now become the norm.

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