Improving the efficiency of construction arbitration proceedings in Eastern Europe

Dr. Ioana Knoll-Tudor
Jeantet, Paris
​​​​​​​iknoll-tudor@jeantet.org

The fourth edition of the Jeantet 'Arbitrating in CEE and CIS' roundtable was held during the Paris Arbitration Week on Tuesday 21 September 2021. This year’s panel examined pre-arbitration tools available for resolving disputes in the construction sector as a means to enhance efficiency in the resolution of disputes in this sector. The panel was composed of Ms Hjordis Birna Hjartardottir (Counsel at the International Court of Arbitration of the ICC), Pr Doug Jones AO (Independent Arbitrator, Atkin Chambers), Mr Michael Mcillwrath (MDisputes), Mrs Aisha Nadar (Panel of Conciliators, ICSID, Advokatfirman Runeland AB) and Ms Malgorzata Surdek-Janicka (CMS, Vice-President International Court of Arbitration of the ICC). The panel was moderated by Dr. Ioana Knoll-Tudor (Jeantet, Partner).

Defining construction arbitration disputes

Mr. Mcillwrath started by defining a construction arbitration dispute with reference  to the  ICC Commission Report 2019 'Recommended Tools and Techniques for Effective Management' of Construction Industry Arbitrations. While the report lays out the characteristics of construction disputes (e.g., the high level of specialised expertise, points of procedure relating to schedule analysis, delays or liquidated damages) it does not describe the types of contracts which give rise to such disputes. From his experience, other types of contracts apart from infrastructure projects (such as software delivery projects, services contracts for operation and maintenance or equipment delivery contracts) may be plagued by the same leitmotivs, such as the impact of delay on contractual performance. As such, one needs to think of construction disputes in a broader sense and approach them from a jurisdictional perspective: the same construction dispute will be subject to different operative principles of law, and to different expectations from the parties, depending on whether they are decided in a common or civil law context.

Construction disputes are different from say, M&A disputes, in that they entail the creation and delivery of a final product that does not exist (infrastructures) and can span over a considerable timeframe. As Pr. Jones explained, construction naturally involves a high level of coordination with attached risk associated with performance and payment. Many issues thus emerge during the course of a construction project, requiring swift resolution for the project to be completed within budget constraints and match delivery expectations. For this reason, project managers must find means to solve their commercial differences, particularly as regards payment and performance obligations. Therefore, construction arbitration is only the tip of an iceberg composed of numerous conflicting views which have been resolved by the parties in the interest of project delivery before they escalated into a full-blown arbitration. The means used by parties to iron out these differences entail contractually designed procedures that – apart from negotiation – may involve a neutral third party to the construction process. Such procedures are called pre-arbitration procedures or alternative dispute resolution (ADR) tools. 

Pre-arbitration methods available to the parties

Mrs Nadar went on to describe the pre-arbitration tools available to the parties between the inception until the completion and delivery of a construction project. They may be situated on a spectrum defined by two metrics: (1) party control during the process, and (2) enforcement of their outcome.

Changes relating to ADR methods in The 2017 FIDIC Suite

Mrs Nadar further pointed out that the 2017 FIDIC Suite brought about two new developments with respect to pre-arbitration procedures:

1. First, the 2017 FIDIC Suite separates claims from disputes – highlighting in Clause 20 that the claims mechanism is a contract management mechanism which focuses on requesting entitlement to equitable adjustment in case certain risks eventuate, whereas Clause 21 is now reserved solely to dispute avoidance and resolution. In particular, Clause 21.3 creates the opportunity to deescalate disputes by entitling the parties to jointly approach the DAAB for an opinion. 
2. Second, Clause 21.7 makes it clear that DAAB decisions are binding once issued and can be enforced in arbitration even if they have not become final because of the issuance of a Notice of Dissatisfaction. 

Cultural and regional perceptions of ADR methods and DABs: Eastern Europe in a comparative context

It has been remarked that the ADR provisions found in FIDIC standard forms are not always implemented in the standard forms of contract in certain Eastern European jurisdictions.

Ms Surdek-Janicka confirmed that by taking the example of Poland. She explained that after a series of legislative amendments which first removed and then reincorporated DABs in 2017, the Polish authorities eventually issued new Special Conditions of Contract in 2020 for construction of roads and motorways. These new standard forms replaced arbitration with state court litigation as a default mechanism of dispute resolution, while leaving the possibility for the parties to file a request for arbitration with the Arbitration Court attached to the Office of General Counsel. Similarly, Romania also implemented its own standard forms of contract applicable to public contracts in excess of USD 5 million, which notably removed DAB provisions altogether and included an arbitration clause in favour solely of the Court of Arbitration of the Romanian Chamber of Commerce. 

Elaborating on the reasons for such aversion to DABs, Pr. Jones remarked that the phenomenon is not unique to Eastern Europe but can be seen in the MENA region as well as in South America. The first reason is the reluctance from purchasers of construction services to be reasonable and sensible in solving problems inevitably emerging. A second reason to such reluctance is the fear of government officials of exposing themselves to potential accusations of corruption. Seeking to avoid personal responsibility, public officials tend to favour a poor judgment over a settlement, since this will ensure they are not subject to subsequent investigations. In this context, the importance of a public sector environment where state employees are encouraged to take decisions and responsibility is greatly needed. 

Pr Jones cited Australia as an example of such state administration, where there is a positive requirement on government officials to demonstrate that they solved the problems in order to make the projects succeed. Conversely, if they are not prepared to take responsibility for such an outcome, they may be criticised in Parliament for failure to adequately manage the project. This comparison shows that there is a public sector issue which transcends the cultural dimension and which needs to be solved since ADR tools may often be preferable to an arbitration proceeding.  

Use of pre-arbitration methods: in-house and ICC perspectives

Mr Mcilwrath acknowledged that, in the private sector, he has not seen international oil companies frequently proposing DABs in their contracts as a pre-arbitration tool. To him, this may have to do with the industry’s peculiarities (industry culture), rather than being a culturally motivated choice.

Ms Hjartardottir endorsed this view, pointing out that the ICC Court sees two types of construction contracts giving rise to disputes in Eastern Europe, each with their specificities in terms of ADR tools employed: 

1. standardised contracts, which may be further subcategorised into (i) FIDIC-type contracts and (ii) other types of standardised contracts, in particular contracts drafted in the context of projects financed by international financial organisations. She explained that, in such standardised contracts, there will often be a multi-tiered dispute resolution clause providing for at least two or more steps before arbitration, such as consultations followed by adjudication. As for the FIDIC-type contracts, she noted that DAB provisions are generally not excluded, which may be because most of the disputes are still based on the 1999 FIDIC Suite, or because there are financial institutions involved which impose DABs as a precondition for financing; and
2. standalone contracts, which are drafted by the parties (who enjoy full autonomy and control over the drafting terms) for the purpose of a particular project. Ms Hjartardottir observed that when parties retain control over the drafting, they tend to opt for a simplified dispute resolution procedure involving at most a two-tiered system, with either negotiation or mediation provisions followed immediately by arbitration (as opposed to the multi-tiered provisions in the standardised contracts). 

Based on the ICC Court’s caseload, Ms. Hjartardottir concluded that, aside from the region or culture per se, the type of contract, project and financing will also influence the type of ADR techniques which are ultimately implemented in a given contract.

Effectiveness of ADR tools in practice

The panel went on to discuss the efficiency of such ADR clauses in practice, in situations where one of the parties does not embrace them wholeheartedly, but sees it imposed on it by the financing institutions, or reluctantly acquiesce to their incorporation at the initiative of in-house counsel.

Mrs. Nadar emphasized that there is no one-size-fits-all solution with respect to the ADR techniques which should be inserted in a construction contract. Instead, the effectiveness of any ADR tools depends on the particular project and the parties involved: much depends on whether there are a prime contractor and a subcontractor, whether there is an element of  international institutional financing involved, or whether the parties are equals (such as in a Joint Venture type of contract), and whether the parties have a longstanding business relationship or not.

Ms. Surdek-Janicka added that albeit some parties initially see the ADR stages simply as stepping stones ('a necessary evil') in anticipation of the impending arbitration, such ADR sceptics can be motivated to get engaged in meaningful and good faith ADR process, especially when financial institutions are involved. One often imposed financing condition included in contracts with lenders is linked to an 'event of a dispute' clause, pursuant to which the filing of a request for arbitration is a risk event triggering the right of the lender to suspend the draw-down of the loan. As a result, the employer will be highly motivated to avoid such situation and will engage in the ADR methods meaningfully to settle claims without resorting to arbitration; such contractual clauses therefore illustrate the transformative power of contractual mechanisms to convert non-believers into faithful ADR adepts, and enhance efficiency. 

From the in-house counsel perspective, Mr. Mcilwrath expressed a particular fondness for mediation as a contractual ADR mechanism that he would recommend parties to include in their contracts. From his own experience, even if parties displayed an initial reluctance to negotiate or mediate, once they engaged in the mediation process, positive outcomes arise. Parties should consider choosing a mediator familiar with construction disputes and with the skills to structure the process to enhance the likelihood of reaching agreement. He said that these insights can be applied in negotiations not facilitated by a mediator. He gave the example of having once retained a well-known construction mediator, the late David Richbell, to advise his company on a large construction dispute that was on the verge of initiating arbitration. With the benefit of Mr. Richbell’s experience assisting parties in similar disputes, his company was able to guide the process to a successful negotiated outcome without initiating mediation or arbitration. In addition, the parties’ relationship was preserved and they continue to collaborate on the same project to this day.

Efficiency of DABs

Christopher Seppälä (White & Case) (who was in the audience) pointed out that a current criticism of DABs is that they may too often degenerate into becoming almost arbitrations – because, among other things, parties may have difficulties resisting proposals of the DAB to extend its deadlines (as they do not want to alienate the DAB). 

Pr. Jones concurred with the view that having a DAB consisting of three lawyers usually tends to transform the process into a “mini arbitration”, which result time being wasted. Mrs. Nadar also emphasized that the risk of the adjudication process turning into a virtual boutique arbitration is particularly high in the case of ad-hoc dispute boards (as opposed to standing boards, constituted from the inception of the project), a phenomenon particularly observed with the silver and yellow FIDIC standard forms. 

Whether the DAB is constituted at the outset of the contractual relationship or on an ad-hoc basis once a dispute arises, has practical consequences on the efficiency of the ADR process. From the perspective of the ICC Court, Ms. Hjartardottir confirmed this phenomenon by pointing out that in those cases where DABs were constituted at the outset, disputes were more likely to have been significantly narrowed down in terms of outstanding issues by the time they reached the arbitration phase. Conversely, where DABs are constituted later on, or only when a dispute has already arisen, parties seem to be more reluctant in accepting DAB decisions and the issues in dispute are more likely to remain the same throughout the two processes. The practical conclusion is thus inescapable: the earlier the DAB constituted, the more it achieves its purpose, which is ultimately dispute avoidance. 

Use of ADR tools in light of Covid-19 

A final theme discussed by the panel concerned the use of ADR tools since the onset of the pandemic. Mrs Nadar depicted two post-pandemic stages: the first, triggered by the novelty of the situation, saw parties develop an appetite for mediation and negotiation as tools to make it through the unchartered waters of the pandemic. One year and a half later, the picture looks different with parties displaying a decreased appetite for resolving their differences through amicable solutions and an increased number of contract terminations and arbitration claims. 

Pr Jones also mentioned that one positive aspect generated by the pandemic and the virtual technology is the increased capacity of board members sitting on DABs to more closely monitor the project and contribute virtually to the successful resolution of disputes, a fact not previously possible without virtual technology.

Ms Hjartardottir noted that from the ICC Court’s perspective, there has not been a huge shift in the manner in which parties approach disputes. However, it is important to keep in mind that the ICC Court sees disputes that have reached the arbitration phase. In other words, if parties incorporated new ADRs tools into their contracts during COVID, it is possible that their disputes have been resolved (or will be resolved in the future) before reaching the arbitration phase. Ms. Hjartardottir further noted that the ICC ADR Centre had  a record number of mediations in 2020, with mediation sessions taking place virtually, and reported a stronger commitment and engagement by the parties in the process.

Recommendations 

To conclude, the panel gave some recommendations for a more efficient use of pre-arbitration and arbitration tools in international construction disputes: 

1. Draft first and mediate later: Mr. Mcilwrath advised drafting contracts to include mandatory pre-arbitration dispute resolution mechanisms; whether both parties are in favor to them or not is less important, what matters is to make them mandatory. Practice shows that parties which would have never considered going to mediation, often obtain positive results.  And even when they do not, the modest amount of time and money is not wasted, but useful in starting an arbitration better prepared.   More crucial questions in terms of a positive outcome are how the mediation is set up, who advises and who the mediator is. 
2. Mrs. Nadar emphasized the importance for lawyers to educate the project participants about the content of the contract and how to use the mechanisms provided in it in order to achieve positive results.
3. From the perspective of the arbitral procedure, Ms. Surdek-Janicka recommended appointing proactive arbitrators who engage with the parties early in the process and also in the period leading to the evidentiary hearing. Proactive tribunals can enhance the efficiency of the procedure by holding deliberations before the second round of written submissions and prior to the evidentiary hearing with an aim to give the parties directions, which can help the parties to focus their efforts on the key disputed issues and not get side tracked.
4. Ms. Hjartardottir stressed the importance of knowing the ADR tools that are drafted into the contracts and using them in the manner they were intended. An ADR tool that is intended to avoid or de-escalate a dispute only works to that effect if used in a timely manner (ideally, before there is a full-blown high-intensity dispute).