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Time is money: cost-related considerations and the importance of being expeditious

Large construction projects are unusual in that there are few other commercial endeavours in which an entity is required to invest so much for so long before being able to generate a single cent of revenue. Between the execution of the contract and the ribbon-cutting of the finished product lies a daunting gauntlet of risks that threaten to undermine the profitability of the entire project.^[1] Any delay by any participant can cause exponential delay to the completion of the overall project and potentially derail it entirely by disrupting the delicate interplay of each party’s cashflow and credit arrangements.^[2]

When a dispute does arise, it is therefore imperative that the process to resolve it bears the following features: swiftness; the ability to grant interim relief so that the status quo can be maintained pending final resolution of the dispute; and suitability for resolving very high-value disputes at a competitive cost.

Swiftness

An unfortunate by-product of the fact that construction disputes typically involve huge technical documentation and extensive expert evidence, is that they can often take a long time to conclude in an award,^[3] regardless of the institutional rules being applied.

Typically, before a construction arbitration can even commence, the claimant must comply with a lengthy multi-tiered pre-dispute protocol, mandated by the complex dispute resolution clauses contained in the industry’s standard-form construction contracts.^[4] These clauses typically require:

1.   the claimant to submit the dispute to a DAAB^[5] for resolution first;

2.   in the event of an adverse decision by the DAAB, to file a notice of dissatisfaction with the decision;

3.   to then enter into discussions with the counterparty to attempt to resolve the dispute amicably; and

4.   if all this fails, then and only then, to commence arbitration.

The objective^[6] of this complicated layered approach to dispute resolution is to allow disputes to be resolved quickly and at a low cost with minimal disruption to the project.^[7] However, the unintended but inevitable consequence of such a sequential process to disputes that are unresolved by it, is ironically, to ultimately delay their resolution, thereby causing disruption and increasing costs. The cumulative timelines for all these steps can potentially prevent a claimant from commencing an arbitration for up to almost five months from the time the whole process is first triggered.^[8]

This criticism should not be taken to suggest that this popular dispute resolution process for construction disputes is not fit for purpose. It may well be that it is the least inefficient approach to resolving construction disputes generally.^[9] The point is that the risk of disputes becoming protracted is particularly high in the construction industry. The effects of that risk will inevitably be most keenly felt by the least resourced players in the industry, the subcontractors and suppliers with the most precarious cashflows and the most vulnerable credit lines. For them, a work interruption caused by an inability to procure a quick remedy is an existential threat and they have the most to gain from any reforms to dispute resolution procedures that facilitate such a remedy.

Fortunately, in recent years many arbitral institutions have introduced expedited procedures with the aim of shortening the time required to produce a final arbitral award. Figure 1 summarises the main features of the expedited procedure of the three institutions’ rules being considered in this article: the International Chamber of Commerce Arbitration Rules 2017 (ICC Rules); the American Arbitration Association Construction Industry Rules 2015 (AAA Construction Rules); and the Singapore International Arbitration Centre Rules 2016 (SIAC Rules).^[10][11]

While the time limits set out by each of these rules are ambitious and helpful to parties that can avail of them, their utility to many disputants in the construction industry may be limited given the frequency and magnitude of those disputes^[12] and the relatively low claim caps applicable to each of these procedures.

The limit of US$100,000 under the AAA Construction Rules’ fast track procedure (Rule F-1) in particular is so low that it is only likely to be of assistance to the smallest of subcontractor disputes. If this limit were increased, it could provide other small disputants facing larger claims with access to a more prompt and cost-effective resolution of its dispute.

These procedures are therefore unlikely to be significant factors in the decision-making of parties in the construction industry when selecting arbitral rules except perhaps when engaging subcontractors or suppliers for small contracts. Subcontractors and suppliers are, on average, more likely than contractors or employers to benefit from the selection of any of these rules for dispute resolution, particularly in the case of the AAA Construction Rules, as they are more likely to have low-value disputes that can benefit from these expedited procedures.

The ability to grant interim relief so that the status quo can be maintained pending final resolution of the dispute

As explained above, the need for quick effective interim relief is particularly acute for contractors with limited capital reserves. A common example of this need would be when a contractor seeks to block the employer from drawing on a performance bond or letter of credit. In the absence of such relief, the contractor would have to wait for a final award to be issued before trying to recoup the loss by enforcing against what could by then well be an insolvent employer. In the meantime, the damage to the contractor’s credit rating may be irreparable.^[13]

All three institutions’ rules empower arbitrators to make orders for interim relief including injunctions and conservatory measures. They all allow the arbitrator to require that the party requesting the relief provide security if the relief is granted. They all permit parties to seek interim relief from a court of competent authority without being in breach of their arbitration agreement.

All three institutions’ rules also provide for the appointment of emergency arbitrators at short notice to consider requests for such interim relief before a tribunal has been appointed. Figure 2 shows the applicable time limits for the three institutions’ respective emergency arbitrator procedures.

Figure 2: applicable time limits for the appointment of emergency arbitrators under the ICC Rules, the AAA Construction Rules, and the SIAC Rules.

The AAA Construction Rules are the only one of the three that impose no deadline on the making of an emergency interim award. In theory, disputants can agree on a deadline for the making of such an award. However, the absence of this mandatory deadline under the AAA Construction Rules significantly undermines their usefulness to contentious disputants with urgent needs as respondents can often be understandably uncooperative in facilitating the prompt making of interim awards against them.

Furthermore, there are difficulties in some jurisdictions with enforcing partial arbitral awards^[14] that may make these emergency procedures less useful than parties would like.^[15] The AAA Construction Rules and SIAC Rules both allow an emergency arbitrator to give interim relief by way of an award or an order. The ICC Rules only allow an order. A mere order of an emergency arbitrator may be even more difficult to enforce in some jurisdictions than an award.^[16]

Accordingly, while access to interim relief is extremely important in construction disputes and widely available across most major institutions,^[17] the usefulness (and therefore importance) of emergency interim relief should not be overstated in assessing the suitability of any institutional arbitral rules for construction disputes.

Suitability for resolving very high-value disputes at a competitive cost

Given the cashflow challenges facing all players in the construction industry and the thin profit margins which are common among contractors in competitive markets,^[18] the cost-competitiveness of various arbitral institutions for resolving high value disputes is a crucial factor when selecting arbitral rules.

Furthermore, the quantum of construction claims can be very large. With huge sums at stake, parties typically feel more comfortable spreading the risk of an unfavourable arbitral outcome by providing for a three-member tribunal in their arbitration agreement rather than a sole arbitrator. Naturally, this increases costs.

Figure 3 sets out the possible costs of arbitration under each institution’s rules.^[19][20]

Figure 3: possible costs of arbitration under the ICC Rules, the AAA Construction Rules, and the SIAC Rules.

For the most cost-conscious parties, the SIAC obviously offers the best value for money and the AAA the most cost uncertainty. Given the market for legal fees in the US, an AAA tribunal’s fees are likely to exceed the fee schedules of the ICC or SIAC. However, if the sum in dispute is very large, then it may be more cost-effective to arbitrate at the AAA, even at a high hourly rate, as arbitration costs are delinked from the value of the dispute. The alternative at SIAC or ICC of paying a percentage of the total sum in dispute may be undesirable in high value arbitrations.

High cost may give large well-resourced employers and contractors an advantage over smaller subcontractors and suppliers that are less likely to be able to withstand a sustained war of attrition.^[21] The requirement to pay advances on costs in order for an arbitration to proceed and the ability of respondents simply to refuse to do so also puts poorly-resourced claimants at a disadvantage. Subcontractors or claimants for whom cost is a significant factor in selecting arbitral rules, and for whom geographic considerations are not, would arguably be well-advised to consider the SIAC and consider avoiding the AAA, except in very high-value disputes.

Discovery

One relatively consistent feature of construction arbitrations is that they tend to involve the disclosure of a large amount of technical documentation.^[22] Disputants in the construction industry therefore, in choosing arbitral rules, ought to consider the extent to which they facilitate efficient and effective document disclosure.

However, there is a diversity of views as to what efficient and effective document disclosure looks like.^[23] US parties often tend to favour very expansive discovery that discloses any document with any relevance at all to the dispute,^[24] which typically tends to include the entire universe of documentation for a given project.^[25] Civil law parties usually favour extremely limited requests for specific necessary documents.^[26] The rest of the common law world falls somewhere between these two extremes,^[27] favouring the disclosure of relevant documents falling within specifically articulated categories.^[28]

In the construction industry, claimant and respondent both often have access to much of the same project documentation, so the bulk of the documentary evidence relied upon typically does not result from requests to produce. For this reason, smaller subcontractors or suppliers with limited resources may prefer a more restrictive and specific disclosure exercise that avoids paying the significant costs necessitated by an exhaustive discovery. Conversely, well-resourced employers or contractors may prefer US-style discovery if they think their opponent lacks sufficient funding to carry out such an onerous and expensive exercise and might consequently accept a sub-optimal settlement offer in order to cut its losses and end the dispute. For such employers, efficiency is not their objective at all – quite the reverse.^[29]

These factors are usually more likely to shape the parameters of discovery in a construction arbitration than the arbitral rules being used. Typically, most institutional rules defer to the parties’ agreement as to the procedure to be adopted for any document production, failing which the tribunal is endowed with broad discretion to set such procedure. Exceptions are the 2012 Swiss Rules of International Arbitration (Articles 18(3) and 19(2)) and the 2010 UNCITRAL Rules (Articles 20(4) and 21(4)), each of which broadly follows the restrictive civil law approach to disclosure, mandating the upfront provision by each party of the documents on which it relies in its memorials with very limited document exchange thereafter.

Conversely, the ICC Rules (Article 22), AAA Construction Rules and SIAC Rules (Rule 19) do not prescribe any specific discovery parameters and provide complete flexibility to the parties in agreeing the scope of discovery, and to the tribunal in deciding this in the absence of such agreement.

Of these rules, the AAA Construction Rules are the only ones that deal explicitly with the issue of discovery in any detail. This specificity is perhaps unsurprising given the specialised nature of these rules and the typical centrality of documentary evidence in construction arbitrations. The rules provide helpful guidance to arbitrators and parties regarding the basis on which the document production exercise should be curated.^[30]

Specifically, the process should advance the efficient and economical resolution of the dispute and promote equality and fairness as between the parties.^[31] Documents on which the parties intend to rely must be disclosed.^[32] Document requests must be reasonable and for documents which are relevant and material to the outcome of disputed issues.^[33] Documents must be in the most convenient and economical form and the arbitrator may determine reasonable search parameters to balance the need for production of relevant and material documents against the cost of locating and producing them.^[34]

This guidance is helpful in setting parties’ expectations of how discovery should be scoped, particularly in the US context, where discovery might otherwise be expansive and onerous. However, when any claim exceeds US$1m, the Procedures for Large, Complex Construction Disputes (LCC Procedures) are triggered and potentially override the Regular Track Rules whenever it can be successfully argued that they are in conflict with each other.^[35] Given that the majority of international construction arbitrations are likely to exceed US$1m,^[36] the LCC Procedures warrant careful consideration by parties considering the selection of the AAA Construction Rules.

With respect to discovery, these procedures require only that:

‘Parties shall cooperate in the exchange of documents, exhibits and information within such party’s control if the arbitrator considers such production to be consistent with the goal of achieving a just, efficient and cost-effective resolution of a large, complex construction case.’^[37]

While the goals of efficiency and cost-effectiveness are laudable, the requirement to ‘cooperate’ appears aspirational and vague. This could be used by a disingenuous party to argue that the significance of the more specific goals set out in the Regular Track Rules, in particular relevance and materiality, is diminished in a Large, Complex Construction Case, where clarity and focus in scoping the parameters of discovery are arguably even more important.

The omission of similarly specific rules pertaining to discovery in the ICC and SIAC Rules is typically addressed by the parties’ voluntary adoption of the IBA Rules,^[38] or more recently and to a lesser extent, the Rules on the Efficient Conduct of Proceedings in International Arbitration 2018 (Prague Rules), which are significantly more detailed than the discovery rules set out in the AAA Construction Rules. It is suggested that the integration of a loose discovery framework within the AAA Construction Rules themselves represent a pragmatic approach to reducing the cost and procedural inefficiency of the expansive US-style discovery that might otherwise prevail in an AAA arbitration. This is because an AAA arbitration is more likely than other arbitrations to involve a US party who may be unwilling to agree to the adoption of the IBA or Prague rules at the expense of departing from the expansive discovery regime of the legal tradition with which it is most familiar.^[39]

The loose discovery framework required by the AAA Construction Rules is better than no framework at all. It is suggested that any party entering into an arbitration agreement with a US counterparty and for whom the cost and procedural efficiency of discovery are dominant concerns should consider adopting the AAA Construction Rules. For parties arbitrating with non-US adverse parties, the governing institutional rules are unlikely to have a significant impact on the scope of the discovery process as sensible general limiting principles for the scope of that exercise usually ought to be possible to agree.

Ultimately, the institutional arbitral rules governing an arbitration are less likely to dominate parties’ discovery experience in most international arbitrations than other factors such as the legal traditions from which the parties come, the rules of evidence adopted by the tribunal and the amount of documentary evidence already available to the parties.

Joinder of third parties and consolidation of multiple arbitrations

In construction disputes, the need to join third parties to an action is not uncommon.^[40] This is by virtue of the fact that cost overruns on a project can arise from a number of causes for which several participants in the project can be jointly responsible. It is therefore sometimes in the best interest of the parties to achieve a universal resolution of the dispute.^[41]

This can sometimes be more difficult to achieve with arbitration than litigation given the issues of privity that can arise with a dispute resolution mechanism that relies for its jurisdiction on the consent of the parties.^[42] The governing law of the agreement can sometimes provide various creative legal doctrines to overcome some of these difficulties, usually by essentially implying the consent of the non-party to be bound.^[43] However, the applicability of such doctrines to a construction contract is doubtful.^[44]

Preferably, this difficulty is anticipated and avoided entirely at the contracting stage^[45] by inserting a cascading obligation in the master agreement to include identical dispute resolution clauses in all subcontracts which explicitly provide for multi-party arbitration.^[46] The question being considered here is, when parties choose to coordinate their dispute resolution arrangements in advance in this manner, which institution’s rules, if any, are best equipped to allow a party to a separate arbitration agreement to be joined to an arbitration arising out of a different but related agreement.

On the question of when an application for joinder may be made, the SIAC Rules provide the most explicit flexibility allowing this before and after a tribunal is constituted (Rules 7.1, 7.8). The ICC Rules allow joinder only before the constitution of a tribunal absent the consent of all parties (Article 7.1). The AAA Construction Rules normally only allow joinder either before the constitution of a tribunal or within 90 days of commencement of the arbitration, whichever is later (Rule R-7(a)).

The SIAC Rules also provide the most procedural stages of scrutiny to the question of joinder. To even be considered, an application for joinder must first show that the party to be joined is prima facie bound by the arbitration agreement (Rule 7.1 a). This may sometimes be difficult where the applicant is relying on some novel legal doctrine to join the third party. If the application meets this prima facie threshold it can then go on to be fully considered by SIAC’s Court of Arbitration (if the application is made prior to the constitution of a tribunal). Its decision can then potentially be reviewed by the tribunal, once constituted (Rule 7.4).

This potentially lengthy procedure of multi-level scrutiny arguably sacrifices expedition in exchange for increased due process. Ultimately, such a sequential procedure is likely to result in delay, and in the author’s experience does so result. For any SIAC arbitration with aggregate claims of less than SGD6m where it is necessary to apply for joinder, the benefits of the application of SIAC’s expedited procedure are likely to be significantly diminished, if not completely lost, as a result of the potential delay caused by waiting for the determination of the preliminary issue of joinder. Given that parties in the construction industry are often motivated to agree to arbitration by considerations of procedural expedience and do so knowing that they are substantially waiving their right to appeal, such a procedure may not align with the parties’ expectations.

The ICC Rules also require a party being joined to be prima facie bound by the arbitration agreement before the application for its joinder can be considered by the International Court of Arbitration (Article 6.4(i)). However, its decision is not reviewable by a tribunal, once constituted, providing some degree of certainty and mitigating the risk of delay somewhat.

The AAA Construction Rules provide for the decision regarding whether a party should be joined to be made by a specially appointed ‘R-7 arbitrator’ whose sole purpose is to decide that single threshold issue and who has no involvement in the rest of the arbitration. These rules also set down a deadline of 14 days for parties to give their responses to the application for joinder, providing some welcome predictability as to the length of the delay to the arbitration likely to be caused by such an application (Rule R-7(c)). However, no guidance is provided as to the basis on which the decision to allow or deny an application for joinder is made, creating some unpredictability as to the likely outcome of such applications.

All three institutions’ rules also provide similar procedures for the consolidation of multiple arbitrations. The SIAC Rules, as with joinder, allow applications for consolidation to be made before and after the constitution of a tribunal. They also provide the widest bases on which to consolidate (Rule 8.1). As with joinder, the decision of SIAC’s Court of Arbitration (if the application is made prior to the constitution of a tribunal) is reviewable by the tribunal, once constituted (Rule 8.4).

The ICC Rules (Article 10) provide similar but slightly narrower bases for consolidating arbitrations^[47] and applications for consolidation can also be made before and after the constitution of a tribunal. They also helpfully and explicitly provide that claims arising out of more than one contract may be commenced as a single arbitration, irrespective of whether the claims are made under a single arbitration agreement (Article 9).^[48]

The AAA Construction Rules provide the same procedure for joinder and consolidation but give no guidance as to the basis on which consolidation may be allowed. This uncertainty should trouble potential disputants in the construction industry.

In summary, the SIAC Rules seem to provide the greatest potential for successful joinder and consolidation, although with the potential for delay in doing so. Ultimately, all three institutions permit joinder and consolidation. However, at the time of drafting the arbitration clause, parties will not know whether it will be in their future interests to advance or avoid joinder or consolidation. Therefore, the ease of doing so may not be a decisive factor. It is sufficient and essential that any rules governing a construction arbitration provide for some mechanism to join third parties and consolidate proceedings. The exact workings of those mechanisms will not greatly concern most parties in the construction industry when a dispute has yet to materialise.

Concluding observations

Clearly the rules of all three institutions adequately facilitate the resolution of construction disputes. Some institutions address certain challenges more comprehensively than others, but ultimately, factors other than the chosen rules are likely to dominate the outcome of the arbitration. The factors explored above are just some of those which ought to be carefully considered by parties in the construction industry when selecting arbitral rules. Their selection when entering into a construction contract is an exercise which is too often made to feel like a hurried and uncomfortable formality, which parties would rather avoid exploring fully. No one wants to discuss divorce before the wedding. In a commercial relationship, failing to do so would be a mistake.^[49]

To the extent that parties take any interest in the selection of arbitral rules, the dominant consideration tends to be cost, and consequently, the potential to obtain a quick remedy. These considerations in particular are likely to weigh most heavily on the subcontractors at the bottom of the construction value chain who typically have limited cash reserves, and whose very existence is contingent upon access to vulnerable credit lines and the maintenance of a delicate interdependent ecosystem of harmoniously coordinated cashflows.^[50] Disruption of this fragile ecosystem presents a constant existential threat and, if it materialises, parties need to be able to rely on a responsive and affordable arbitral regime. Accordingly, parties would be well advised to take a little more time to consider which regime is best suited to their specific needs, before rushing to sign on the dotted line.