On November 27, 2019, the Queen Mary University of London released its highly anticipated international arbitration survey report. It was the institution’s first to focus on disputes related to the construction sector. Titled, “International Arbitration Survey – Driving Efficiency in International Construction Disputes”, it highlights unique themes in construction arbitrations and industry participants’ perspectives on achieving results at lower cost.
The report summarizes observations from the international arbitration community across diverse topics, gathered from 646 completed survey questionnaires and 66 interviews. The insights form two main groups: common construction arbitration characteristics and opportunities for greater efficiency. The respondents were primarily counsel and arbitrators, but also included diverse industry perspectives from experts and in-house counsel. Although responses were not evenly distributed across geographic regions, the report combines survey responses from around the world.
Characteristics of international construction arbitration
According to the report, the four most common disputes resulting in construction arbitrations are delay, poor contract management, poor contract drafting, and contract suspensions or terminations. The report was released pre-COVID-19, yet 44% of survey respondents still cited “unforeseen risks” as one of the most common dispute causes.
Pre-construction issues such as underpricing and inadequate information at tender were identified as the common dispute causes by over 35% of respondents.
More than 20% of respondents identified other common causes of construction disputes: construction defects, disputes among joint venture or consortium members, insolvencies, government interference, or failure to grant permits.
Parties choose arbitration primarily to avoid national or local courts, but also for the ability to select arbitrators and maintain confidentiality. Perhaps reflecting the geographic distribution of the respondents, the most common arbitral seats identified for international construction disputes were London (46%) and Paris (35%), followed by Dubai (26%), and Singapore (22%).
The dominant arbitral institutions employed by survey respondents were the International Chamber of Commerce (ICC) (71%) and the London Court of International Arbitration (ICLA) (32%). Ad hoc arbitration was used to a lesser extent (27%). This may reflect the propensity of standard form international contracts to adopt ICC rules, such as those from the International Federation of Consulting Engineers / Fédération Internationale Des Ingénieurs-Conseils (FIDIC).
The relatively low participation rate from North American, Latin American and Australian participants suggests either a skewed survey base towards European and Middle Eastern international arbitration practitioners, or a propensity towards domestic construction arbitrations in North American, Latin American and Australian jurisdictions.
The group of survey respondents appeared largely to specialize in arbitration: while more than 70% had international arbitration experience in the last five years, less than half that number had litigation experience in the same timeframe.
Survey respondents identified four primary commonalities shared by construction arbitrations: factual and technical complexity, large amounts of evidence, multiple parties, and large amounts in dispute. Those characteristics appear directly related to survey respondents’ answers relating to inefficiency in the construction arbitration context.
Inefficiency Drivers
After exploring what makes construction disputes unique, the survey put inefficiency in the spotlight, asking respondents to identify factors that tend to slow down and inflate cost for construction arbitrations.
The inefficiency drivers identified by over 40% of survey respondents included: party tactics, poor case management by arbitrators, large amounts of evidence, and arbitrators’ or counsel’s lack of construction-specific experience. Over 30% of survey respondents also identified unclear expert evidence as a contributor to inefficiency.
“Party tactics” was not defined in the report; however, it may signal parties’ behaviour and interlocutory maneuvers that do not contribute to an efficient hearing process. During interviews, respondents described “poor case management” as a failure to focus parties on key issues prior to the hearing and lengthy delays in issuing a final award. Juxtaposed with poor case management, “party tactics” may refer to parties’ focus on tangential issues and interlocutory matters that do not lead to a faster final award.
The survey results underscored lack of construction-specific experience as a major risk factor for an inefficient arbitration process. Industry-specific experience assists tribunals to wade through sizeable amounts of evidence, clarify the issues and try cases efficiently.
Opportunities for Greater Efficiency
The report’s survey allowed respondents to choose from lists of options that may improve the efficiency of construction arbitrations from tribunal selection to final award.
Over half of the respondents agreed that tribunal selection was made more efficient by using a list of arbitrators with construction expertise. The second most popular answer was to impose a time limit on the appointment process. Only 20% of survey respondents suggested that greater use of sole arbitrators would increase efficiency. This followed a trend in the report that 60% of respondents valued a balance of legal and technical expertise on tribunals, and 38% of respondents had experienced a non-legal technical expert being appointed to a tribunal.
In interviews, the report also states that there was broad consensus that “engaging experts at an early stage led to a better understanding of the case and clarity of evidence”.
Several themes emerged from respondents when it came to greater efficiency during arbitration hearings. From a procedural perspective, nearly 60% of respondents identified the summary disposal of unmeritorious claims or defences to make arbitrations more efficient if done early in the process. Fifty per cent of survey respondents suggested that arbitrators discourage unmeritorious claims or defences by applying punitive costs if they are carried through to the hearing. This suggests a more Canadian/international approach to costs, rather than an American one, is viewed as an efficiency driver for construction arbitrations.
Although some survey respondents expressed a demand for active arbitrators, strong case management, and disposal of unmeritorious claims, other survey responses suggest that this is not the norm. During interviews, survey respondents perceived that “due process paranoia” prevented arbitrators from making difficult procedural decisions out of a fear of violating parties’ rights to a fair process.
Respondents identified the top characteristics of efficient counsel as individuals who concentrate on winning the case rather than every point (63%) and who distil complex facts and technical issues into “digestible, pithy submissions” (61%). Notably, 70% of in-house counsel identified “full engagement with client teams” as a key characteristic of efficient counsel.
Another primary feature of the report was assessing different tools to increase efficiency of arbitration hearings themselves. The top recommendation was that arbitrators identify the issues to be covered in the arbitration in advance. Thirty-six per cent of survey respondents were also in favour of tribunals asking questions directly to fact and expert witnesses.
The next most common suggestions were for parties to take a more cooperative approach to streamline the hearing: use agreed statements of fact and chronologies (53%), agree to time-capped opening and/or closing submissions (51%), and admit non-contentious issues (42%). A minority of survey respondents suggested doing opening and closing submissions in writing to streamline the hearing. The lack of consensus on this point may point to a concern that written submissions simply front-load the cost of submissions, leading to a similar cost despite a shorter hearing.
Methods
The report’s results ought to be interpreted in the context of its methods:
- Process: The report was based on a first phase of 646 completed questionnaires and a second phase of 66 completed personal interviews. Written comments also appear to have been received and factored into it. The interviews were conducted either face to face or by telephone. The questionnaires and interviews were all in English.
- Timing: The survey opened on May 31, 2019 and responses closed on July 26, 2019. Interviews were conducted nearly simultaneously from June 11, 2019 to July 25, 2019.
- Respondents: The survey respondents were drawn primarily from counsel (>25%), counsel with a partial arbitration practice (>15%), and full time arbitrators (>10%). Minority voices in the survey included expert witnesses, in-house counsel, academics, litigation funders, and employees of arbitration institutions. The respondents’ experience included: “transport (51%), process plants (31%), pipelines (28%), renewable energy (27%), non-renewable energy (25%), and upstream oil and gas (other than pipelines) (24%)”. Any responses from members with no international construction arbitration in the last five years were excluded.
- Geography: Notably, the survey respondents were predominantly from Europe (33%) and the Middle East (26%). Responses were less often from North America (9%) and Latin America (8%). Asia Pacific responses (13%) dwarfed those from Oceania (1%).
- Jurisdiction: The survey responses were evenly split between civil law jurisdictions (42%) and common law jurisdictions (40%), with the balance coming from mixed legal systems.
- Researchers: The research was conducted by two representatives from Queen Mary University of London, both with predominantly common law legal backgrounds. The researchers gathered feedback from a focus group comprised of “senior in-house counsel, private practitioners, arbitrators, technical experts and third party funders” prior to finalizing the questionnaire.
The report does not contain exact percentage numbers for many of its survey responses, as it presents the information in a graph format. Nor does it indicate non response rates for individual questions. There is no indication that the report’s results or methodology were peer-reviewed.
Insights
Arbitration is not viewed as a commercially sensible solution for all construction disputes. Survey respondents most frequently stated that the minimum dispute amount ought to be between $1 million and $10 million USD (42%). In-house counsel responded differently, most frequently stating that the minimum dispute amount to make an arbitration commercially sensible was between $11 million and $25 million USD (43%).
Not only does this suggest an important difference in perspective between counsel and clients, but it also underscores the high perceived cost associated with construction arbitration. The fact that 43% of in-house counsel believe arbitration disputes between $1 million and $10 million USD are not commercially viable suggests significant room for improvement when it comes to cost efficiency.
Interestingly, despite the perceived inefficiency of construction arbitrations, that does not appear to have detracted from its use. When asked whether cost inefficiency had led respondents not to pursue construction arbitration, 67% of respondents stated that was infrequently the case. Less than 20% of respondents chose not to pursue construction arbitration due to inefficiency concerns “half the time”. Another survey result may have explained why. When asked when a high cost arbitration (equal to or greater than $3 million USD) and/or long arbitration (two years or more) was worth it, 40% of respondents replied that that it was the only realistic alternative. Only 17% of survey respondents had experience with statutory adjudication, suggesting that no viable alternative dispute resolution mechanism exists in most jurisdictions if dispute resolution boards, negotiation or mediation cannot resolve a given dispute.
On April 8, 2020, Albert Bates Jr. and R. Zachary Torres-Fowler of Pepper Hamilton LLP reviewed the report and published their analysis in the article “The Intersection of International Arbitration and Construction Disputes: A Review of the 2019 Queen Mary University of London International Arbitration Survey”. Bates and Torres-Fowler criticized the report’s methodology from a North American perspective, describing it as featuring a “U.K./European skew”. New York’s absence from the list of most common arbitration seats was conspicuous, as was the absence of North American voices beyond the 9% identified in the report.
In Bates and Torres-Fowler’s view, the report’s focus on efficiency was a “missed opportunity” to explore the nuanced differences between international construction arbitration disputes versus international commercial arbitrations more generally. Notwithstanding the criticism, Bates and Torres-Fowler celebrated the report as an important resource and highlighted its findings of interest for a North American audience.
Overall, the report is an important resource that highlights perceived inefficiency drivers and efficiency boosters for international construction arbitration disputes. It is, however, based on a survey of perceptions only. More empirical study is needed to evaluate whether those perceptions mirror reality.
In addition, important differences emerged between private practitioners (counsel and arbitrators) and in-house counsel based on perception alone. Further quantitative study is required to assess the cost savings of the different procedures and unique arbitration features raised in the survey. Given the sizeable amounts in dispute in international construction arbitrations, the potential cost savings are enormous.
This article was first published in the Construction Law Letter, and is republished with permission.
Ivan Merrow is an associate at Glaholt Bowles LLP and a member-at-large of the CBA Construction and Infrastructure Law section.