Arbitration is an internationally recognised, confidential and binding process used to resolve disputes between two or more parties. As expressed by Supreme Court Justice Lord Neuberger: “There appear to me to be a number of reasons why people prefer arbitration … two of them are privacy and expert tribunal”.
Because arbitration is widely used in some sectors due to these benefits, this article explores why it is not more widely used in land and property matters, and asks the question – Are we missing an opportunity by not using arbitration more extensively?
Why arbitrate rather than litigate?
The English legal system enjoys a sound reputation for its independent judiciary and undoubtedly this jurisdiction is a major player in global dispute resolution.
The courts have an ongoing central role to play, and not every dispute is suitable for arbitration. Part of the role of legal practitioners is to seek the most suitable resolution process for any given dispute.
In recent years, English courts have been subject to high workloads, in parallel with budget cuts, which have generally increased the time that it takes for a judgment to be given. Court rules and procedures are often complex and can result in a prolonged process and high costs.
Arguably, arbitration can bring about an expedited and confidential decision, made by an expert in their field and at a lower cost than court proceedings.
The use of arbitration in other practice areas
Arbitration is already widely used and recognised in construction disputes and international commercial disputes.
The option of selecting arbitrators most suited to complex disputes, based on their background and/or expertise is a strong draw. However, this is not the only factor as demonstrated, for example, by the regular use of arbitration in construction disputes and notwithstanding the specialisation of the judges in the Technology and Construction Court in England & Wales.
Given the increasingly international nature of the property market, arbitration appears to provide parties in different jurisdictions with the potential for a neutral venue and a process that all parties understand from the outset. This should have appeal where, for example, a buyer and seller are based in different jurisdictions and might be concluding a contract for property in yet another jurisdiction.
So, are there legal technicalities that prevent wider adoption of arbitration? At first glance, it would appear not.
What could arbitration be used for in the land and property disputes sphere?
In many key EMEA jurisdictions, there is no legal barrier for parties to refer most common property related disputes to arbitration. Although this is the case theoretically, arbitration is still not widely used for land and property disputes.
Arbitration is well suited for dealing with contractual disputes. It can bind parties who have contracted with each other and are parties to the dispute (and the arbitration agreement). Where an award is not binding on certain groups, however, such as a public land registry, a court can in many jurisdictions render the enforceability of that award against those groups in support of the arbitral award.
- Arbitration in land and property disputes can be effectively used in almost all areas but might be particularly effective in:
- Disputes over break rights/options in a lease, or termination rights in a contract;
- Breaches of covenant/obligation as to assignment of a lease and applications for consent or dealings (often arising in landlord and tenant relationships);
- Breaches of repair and reinstatement obligations;
- Interpretation and construction of contracts (e.g. sale contracts, leases and finance agreements);
- Valuation and overage disputes.
In England, examples include taking break disputes, breaches of covenant as to assignment, and interpretation and construction of contracts:
Break disputes: We routinely see break disputes as to whether a tenant has met the pre-conditions of the break, if vacant possession has been given, and which parts of the rents must be paid for the break to operate. This is the paradigm example of a dispute where the parties need certainty, and need it quickly. These are not complicated matters that need long trials with countless satellite court applications. The parties need fast, effective resolution with a specialist dispute resolver. A long complex dispute process can leave the parties uncertain about the status of the lease contract, which is unsatisfactory.
Breaches of covenant relating to assignment and applications for consent: An arbitrator in their award can expeditiously deal with questions such as: Is the proposed incoming assignee reasonably capable of meeting the lease covenants? Is the package of security offered by the assignee reasonable in the market? Is it justifiable for the landlord to insist on a rent deposit? Has there been an unreasonable delay in the landlord dealing with an application for consent?
Interpretation and construction of contracts: Disputes regularly arise between parties over questions of interpretation and compliance with terms and conditions of contracts. Where the parties differ in their opinions, an arbitrator (with substantial expertise and experience in the property sector) can identify the points in dispute and provide an award in an expedited timeframe in comparison with litigation.
What are the advantages of arbitration for property disputes?
Many arbitral institutions now have procedures available to allow summary determinations and provide emergency relief and sanctions. In many jurisdictions, the powers of arbitrators are increasing. For example, the Arbitration Bill (in England) seeks to modify the Arbitration Act 1996 in a number of ways, which makes arbitration an even more suitable and attractive alternative to litigation. The Bill proposes that an arbitrator should have the power of summary dismissal and that arbitrators have court powers in support of arbitration proceedings, which include orders relating to the sale of goods, interim injunctions and the appointment of a receiver.
The rules of an arbitration are determined principally by the arbitration agreement, which is agreed between the parties. Unlike in litigation, arbitration has an increased flexibility in proceedings and procedure needed to dispose of the matter (e.g. including more targeted or limited disclosure). Where it is run well, arbitration can, in many scenarios, result in an award far faster and at a lower cost than a court judgment.
An arbitration award can even have a wider enforcement reach than a court judgment. Under the New York Convention, an arbitration award is, generally, globally recognised and mutually enforceable amongst the 172 contracting states including Spain, Germany and Saudi Arabia.
The ability to appeal an arbitration award is also far more limited than with a court judgment. The narrower scope for appeal therefore provides the parties with a greater level of finality to a dispute.
The parties are also able to specify the composition of an arbitral tribunal. In many property-related claims, a sole arbitrator may well be more suitable than a panel, further streamlining the process and lowering costs. For example, in a lease agreement, the parties could provide for a lawyer-arbitrator to deal with a break option notice dispute (i.e. whether a break notice had been validly served or the option exercised) or provide for a surveyor-arbitrator to deal with a dispute over completion of, for example, fit-out works.
Confidentiality
An arbitration award is generally confidential and details of the award might only enter into the public domain as a consequence of, for example, an appeal being made to a court in relation to the award. Arbitration can be viewed by some as a potential barrier to the development of case-law and precedent.
In our view, that does not have to be the case. Legislation was passed in the UK in 2022, which introduced an arbitration scheme for landlords and tenants for commercial rent arrears during the COVID-19 pandemic. Awards over rent arrears were published, excluding any confidential or commercially sensitive information (unless the party waived the exemption and agreed to its publication).
We view this approach as the best of both worlds. It – develops case law and ensures confidentiality where required. Our view is that this approach could be expanded.
Conclusion
The absence of arbitration in property disputes is not the result of fundamental legal or jurisdictional issues.
Hence, when sale contracts or lease drafts are being prepared, the question should be asked – Is there a good reason why an arbitration clause is not being added to deal with specified disputes? Only if parties push against the status quo will we begin to see arbitration more widely adopted in property disputes, and experience the resulting benefits of these arbitrations.
Arbitration may not be the norm when it comes to property disputes in our region. However, based on an application of the merits of arbitration to the typical disputes that arise in this sector, we must ask ourselves:
Shouldn’t it be?
