ICC guidance notes for the management of construction arbitration

The construction industry has more than its fair share of complex disputes. Many construction contracts, especially in international projects, provide for the ultimate resolution of disputes by arbitration, but international arbitration has come under increasing attack for delay and costs reasons.

The ICC is well known as a forum for international arbitration. It felt that one of the main causes of users' dissatisfaction is that arbitrators seem unsure of what they can do to control the proceedings. It recently commissioned a report on international construction arbitrations by a select panel of international arbitrators led jointly by Dr Nael Bunni and His Honour Judge Humphrey Lloyd QC ("the Report"). They found a surprising lack of knowledge and guidance as to the best practices adopted by construction arbitrators. As a result, the panel has made 56 recommendations for the effective management of arbitrations. It is expected that the Report will be published later this year without substantive amendment. This article highlights and comments upon the main recommendations.

The authors of the Report state that it is intended as a guide for arbitrators who do not have enough experience, rather than a textbook on arbitration practice. There is no doubt that it will be welcomed, as one of the major problems with international arbitrations is a lack of understanding of the arbitration process and there is a real need for practical guidance as to how international arbitrations work.

Key recommendations

Before the terms of reference

One of the most important recommendations relates to the make-up of the tribunal.

The Report recommends that the tribunal should be experienced in seeing how international construction arbitration is carried through from start to finish, although it does not go so far as to require the tribunal to have been previously appointed as arbitrators.

A policy of start to finish proven experience sounds good in theory but in practice it is unlikely to assist the effective management of arbitrations. Experience indicates that a major cause of delay in arbitrations is lack of arbitrator availability. Arbitrators have conflicting diaries and the timetable is often held back by the tribunal's commitments. The current trend to appoint, time and again, the same few arbitrators who have proven experience of international arbitrations exasperates this problem. One solution is to increase the size of the pool from which arbitrators are selected. A policy requiring proven experience is unlikely to do this. Instead, it will continue the current trend of recycling arbitrators who already have proven experience. This will further compound the problem and hinder others from gaining valuable experience.

The Report also addresses the issue of how many arbitrators should be appointed and in an attempt to reduce costs recommends a sole arbitrator where the tender value is not more than US$20 million or where the value of the claim is not large. There are also timetabling advantages to having a sole arbitrator. With only one arbitrator to be accommodated, rather than three, the arbitration is likely to be dealt with more quickly. The authors have guarded against the artificial inflation of claims by recommending that a party who does so should be ordered to pay the additional costs of having three arbitrators rather than a sole arbitrator.

However, there are other issues that are equally as important as speed and costs, such as party confidence in the international arbitration process. This is particularly important where the parties are from very different cultures and jurisdictions. The right of each party to nominate an arbitrator gives credibility to, and engenders confidence in, the arbitration process.

Further, neither the tender price nor the size of the claim should be a hard and fast rule for determining the size of the tribunal. Much depends on the nature of the dispute, which may require the tribunal to comprise several different areas of expertise.

The Report recommends that the tribunal should take a proactive role early on in the proceedings, before the Terms of Reference. The tribunal should obtain a chronology of events from each party, especially if there are claims for delay or disruption, from which it should prepare its own composite chronology. Thereafter, the tribunal should maintain and update the chronology as the case develops, with input from the parties.

The terms of reference

The authors highlight the primary task of the tribunal during the early stages as to extract and clearly define the issues in dispute. They warn the tribunal to avoid defining the issues in broad terms, as this is unlikely to help where clear guidance is needed as to the issues for which proof is required. The Report recommends that the tribunal prepare (with the parties' assistance) a chronology of events in order to clarify the areas of disagreement and to assist in the preparation of the Terms of Reference. The chronology should be maintained and amended as the case develops and revisions should be circulated to the parties.

The authors endorse the current trend for the tribunal to require each party to prepare a list of issues before the tribunal drafts the Terms of Reference. However, experience indicates that the process of agreeing the Terms of Reference is likely to be quicker and more cost effective if the tribunal prepares the first draft for comment by the parties, although this is probably only practical where the tribunal is comprised of a lawyer or lawyers.

Splitting the case

Whether to deal with issues or liability and quantum separately is a difficult question and the Report recommends deferring any decision until the case on causation and quantification is known and it is clear how the costs and losses are alleged to have arisen.

Procedure after terms of reference

Unless the arbitration is "fast track", the Report recommends that submissions (including the evidence each party relies upon) should always be consecutive, not simultaneous, with the claimant presenting its case first so that the defendant can reply to it. The tribunal may then permit the parties to submit further submissions. Once submissions are completed, the tribunal should update the list of issues/ chronology of events and guide the parties as to what is now required. The use of Scott Schedules is recommended for typical claims for changes.

The Report advises the tribunal to pay particular attention to delay and disruption claims and to ensure that the causative events are clearly identified and that events which occurred but which did not delay progress are isolated. In particular, it warns against the use of retrospective Critical Path Network techniques. However, the nature of programming disputes is that, in practice, the parties are likely to carry out a Critical Path Analysis even where no Critical Path Network was used to manage the construction process.

Documents and document control

In an effort to prevent paper-mountains, the Report recommends that documents should be directly relevant to the issues as defined by the tribunal and should be limited to those that are necessary for proof or for the proper understanding of principal documents. The parties should state what each document is intended to prove. The tribunal should fix a cut-off date after which no further documents may be produced, save in exceptional circumstances, and give clear and precise procedural directions for the proper organisation of documents and to prevent duplication.

Experts

Article 20.4 of the ICC Rules provides that the tribunal may appoint its own expert to assess the technical points and to guide the tribunal in its own investigations. However, there seems to be some confusion as to when the tribunal should exercise this right to appoint its own expert. The Report seeks to clarify the position. First, it states that the tribunal should not appoint its own expert where the tribunal itself has been appointed for its own expertise. Second, it recommends that the tribunal should only appoint its own expert where it is essential. Third, it provides the tribunal should discuss the matter of whether to appoint an expert with the parties. Fourth, the tribunal should consult the parties at the first procedural meeting as to whether they intend to tender expert evidence.

The tribunal should also consider the timing of the appointment of its expert. The Report recommends that normally the tribunal should decide whether to appoint its own expert before it issues the provisional timetable under Article 18 of the ICC Rules. However, that is not always possible. For example, the tribunal's own expert may only be required once the points of disagreement between the parties' experts are clearly identified. The Report advises that in such cases the tribunal should warn the parties at an early stage that it may appoint its own expert and should only appoint its expert if it is essential, since the costs of the tribunal's expert have to be borne by the parties.

To ensure that the experts are properly directed, the tribunal should either draw up the terms of instruction of the parties' experts – as the issues are known to it – or, if the terms of instruction are drawn up by the parties, these should be checked by the tribunal. Any report of the tribunal's expert must be transmitted to the parties at the same time that it is sent to the tribunal.

Site visits

The Report advises that site visits are valuable in enabling the tribunal to be better informed and in gathering evidence but acknowledges that site visits can be expensive. It therefore recommends, "all site visits must be justifiable both in terms of their utility and by reference to any saving in cost either in arbitrators' fees or parties' costs". However, experience indicates that site visits are unlikely to sound directly in monetary terms, but they are helpful in developing an understanding of technical disputes. Perhaps because of this, the Report recommends that in advance of the visit the tribunal obtain from the parties a neutral, non-contentious description of the site, working methods and of any processes involved. One way of doing this is for the parties to agree a "route map"which "walks"the tribunal through the site and identifies (without commenting on liability or cause and effect) each of the main claims or allegations along the way.

The Report also recommends that the parties and their advisors should accompany the tribunal during the site visit.

General applications

The Report recommends that applications should be made and decided by correspondence without a hearing.

Conclusion

Although aimed primarily at arbitrators, the Report is of interest to everyone who deals with international disputes. A full transcript of the report appears on the ICC website.

An edited version of this article appears in Construction Europe.

For further information, please contact Helen Kenyon at helen.kenyon@cms-cmck.com or on +44 (0) 20 7367 2412.