In the first of a new series on dispute resolution methods, we look at how arbitration has failed to achieve the objectives set out for it in the Arbitration Act 1996.
Arbitration is no longer the UK construction industry’s preferred method of dispute resolution. The advantage of arbitration over proceedings in the courts, for an industry that did not want to wash its dirty linen in public, was its privacy. That advantage has evaporated with the statutory right to adjudication, which offers the same privacy as arbitration but in a fraction of the time and at a fraction of the cost. If either party does not like the adjudicator’s decision, it can take the dispute to the courts.

The arbitration industry had one last opportunity to clean up its act. About a year before the statutory right to adjudication was introduced by the Housing Grants (Construction and Regeneration) Act 1996, the Arbitration Act 1996 set out a fundamental reform of arbitration procedure. Although the end result was an excellent piece of legislation, it arrived too late, and arbitration is now saddled with a reputation for delay, expense and poor quality decisions.

What is arbitration?

The Lord Chancellor’s department recently defined arbitration as “a procedure whereby both sides to a dispute agree to let a third party, the arbitrator, decide. In some instances, there may be a panel. The arbitrator may be a lawyer, or may be an expert in the field of the dispute. He will make a decision according to the law.

The arbitrator’s decision, known as an award, is legally binding and can be enforced through the courts.” Arbitration is intended to be a quick, cost-effective and private method of resolving a dispute. The reality, however, is that although it may be private, it is often a long and expensive process.

The aim of the Arbitration Act 1996 was “to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense”. It was also intended that the parties should be as free as possible to agree how to resolve their disputes. Unfortunately, if the parties cannot agree, then the result is usually frustration, delay and expense.

The Arbitration Act 1996 has given arbitrators new and wide-ranging powers. Equally, the court’s power to intervene with the arbitral process has been restricted. In domestic arbitrations, the court cannot intervene except as provided for within Part I of the act. Challenges can no longer be made for misconduct.

The test now is whether there has been a serious irregularity that will cause substantial injustice to a party. In Egmatra vs Marco Trading Corp, the arbitrator refused to permit the party’s expert witness to give evidence. Although such a course of action could be criticised, the court held that it had not caused a substantial injustice. In Gbangbola vs Smith & Sherriff Ltd, the court looked at the monetary value of the claims in deciding whether or not there had been a substantial injustice. The court stated that, although there might be uncertainties and ambiguities in the arbitrator’s reasoning, unless substantial injustice could be established, there was no serious irregularity.

A new power to make provisional orders has been given to arbitrators. However, this power must be expressly conferred on the arbitrator. If there is to be a quick and speedy resolution to the hearing, then this is a power that the parties should give to the arbitrator at the outset. The arbitrator also has the power to order a claimant to provide security for the costs of the arbitration. There is also the power to appoint experts, legal advisers or assessors.

The arbitrator may act inquisitorily and may also make peremptory orders if there has been a breach of an order or direction. There are draconian sanctions that can be imposed if the peremptory order is not complied with. The arbitrator can also cap costs.

What went wrong?

It was hoped that the changes made by the act would make the arbitration process cost-effective and quick. Regrettably, this does not appear to have happened.

There are a number of reasons for this. Lawyers, arbitrators, experts and assessors are all expensive. Parties and their lawyers often fear that in taking short cuts, there is a risk that their case will be prejudiced. Arbitrators are not proactive enough and commonly exhibit an irrational fear of removal for misconduct. They possess the powers to proceed quickly with arbitration; however, they often err on the side of caution if one party argues that to proceed quickly will prejudice its ability to prepare its case in a reasonable way. Where there are complex issues of law, then the courts are always better able to provide clarity and certainty.

Almost inevitably by the time the parties start arbitration proceedings, all dialogue has ceased and there is precious little scope for achieving the consensus in appointment and procedure envisaged by the act. Anything proposed by one side will be instinctively opposed by the other.

It is hardly surprising that one of the parties will seek to frustrate the arbitral process if it is to its advantage to do so.

What is to be done?

Arbitration will survive in international disputes because it is far easier to enforce an arbitrator’s decision than a court’s decision in an international context. If arbitration is to become a real alternative to litigation in the UK, then arbitrators must become more proactive. They must use the powers they possess within the act. Although, ultimately, the parties have the power to agree any procedural matter, it is for the arbitrator to take the lead where agreement has not been reached. The arbitrator must proceed with the arbitration avoiding unnecessary delay and expense. The arbitrator should consider appropriate timetables, the use of a single expert and a cap on costs. If arbitration is to meet the objectives set out in the act, then a change in the way arbitrations are conducted is required. Unfortunately, there is no sign of this happening.

Arbitration — a real alternative?

  • Advantages of privacy, cost and speed of arbitration have been overtaken by adjudication
  • The Arbitration Act 1996 reformed arbitration procedure but came too late to save its reputation
  • By allowing the parties to be as free as possible to resolve a dispute, the act set up the possibility for delay and expense when parties cannot agree
  • Arbitrators have wide-ranging powers but often fail to be proactive or to proceed quickly
  • Arbitrators should consider imposing timetables, the use of a single expert and a cap on costs