DISPUTE RESOLUTION
Wherever there are commercial transactions, there will be disputes. Events sometimes conspire against the parties to a contract and things go wrong, and when this happens, there is a tendency for each to blame the other. Sometimes contractual terms are not 100% clear, leaving room for different interpretation, leading to arguments. Sometimes things go so badly wrong that emotion takes over from reason making the possibility of an amicable settlement extremely remote. In an ideal world, every disagreement would be settled by straightforward negotiation and inevitable compromise. However, because we are simple human beings, we may forget that:
“A lean compromise is better than a fat lawsuit”
George Herbert - poet 1593 - 1633
That being the case, we must consider alternative means available for resolving our disputes
Historical Context
It is not known exactly when formal non-judicial arbitration first began, but we can say with some certainty that arbitration, as a way of resolving disputes predates formal courts. Arbitration was popular both in ancient Greece and ancient Rome. Records from ancient Egypt attest to the use of arbitration, especially with high priests and their interaction with the public. (i)
The concepts of arbitration (thakim) and mediation are well respected in the Middle East, where Islamic law has long recognised their legality as a peaceful means of settling disputes in both civil and public law. Developed by the Prophet Muhammed and regulated by Sharia law as important mechanisms for dispute resolution in Arabia among the various tribes, arbitration was the chief form of justice among individuals in a society where right often depended on might. Both the Qu’ran and the Sunna include arbitration as a recommended means of dispute resolution, and the Prophet Muhammed himself acted as an arbitrator in resolving numerous disputes, having been appointed by the tribal chiefs of Mecca to settle disputes that arose between them over the sacred black stone. (ii)
In English law, the first law on arbitration was the Arbitration Act 1697, but by the time it was passed arbitration was already common. The first recorded judicial decision relating to arbitration in England was in 1610. The noted Elizabethan English legal scholar Sir Edward Coke refers to an earlier decision dating from the reign of Edward IV (which ended in 1483). Early arbitrations at common law suffered from one fatal weakness, which was that either party to the dispute could withdraw the arbitrator's mandate right up until the delivery of the award if things appeared to be going against them (this was rectified in the 1697 Act).
In the first part of the twentieth century, many countries (notably France and the United States) began to pass laws sanctioning and even promoting the use of private adjudication as an alternative to what was perceived to be inefficient court systems.
The growth of international trade however, brought greater sophistication to a process that had previously been largely ad hoc in relation to disputes between merchants resolved under the auspices of the lex mercatoria. As trade grew, so did the practice of arbitration, eventually leading to the creation of a variant now known as international arbitration, as a means for resolving disputes under international commercial contracts. (i)
Sources: (i) Wikipedia; (ii) Dr Javaid Rehman - Islamic State Practices; Hart Publishing, Oxford
A Dispute Adjudication Board (DAB) [or Dispute Review Board], is a project-site dispute adjudication process, typically comprising either one or three independent neutral experts appointed as a standing board by the contracting parties. The principal difference between a DAB and most other Alternative Dispute Resolution methods is that the DAB is appointed right at the start of the project before any disputes have arisen, and, by regular attendance at site meetings, the board members become involved with and knowledgeable about the project as it progresses.
With this background, a DAB can be consulted early in the development of a dispute and may be asked to report and advise upon how the matters in issue should be resolved. The decisions of DAB’s are generally non-binding, and the parties can always resort to arbitration or litigation if one or either of them do not wish to accept the recommendation of the DAB. A major advantage of the DAB process is that it provides a regular forum throughout the life of a project for a group of impartial expert observers to become familiar with its complexities and to identify solutions for any contentious matters which arise, thus helping to avoid costly and time consuming full-blown disputes.
Major-project DAB’s have, in many countries, enjoyed a large measure of success in recent years. This is wholly due to the fact that they have proved to be a highly effective and economical method of early dispute resolution. The only possible drawback of the DAB process is the fact that the DAB member(s) have to be paid throughout the project, and for this reason it can sometimes be seen as an unnecessary or avoidable expense.
The DAB process is now part of the standard terms of various FIDIC contracts, and has furthermore been included by various Middle East government departments and quasi-governmental developers in their own standard conditions of contract as one of the first steps to dispute resolution.
The procedure known as ‘Amicable Settlement’ is frequently stated in contracts in the Arabian Gulf as one of the first stages of dispute resolution.
Amicable Settlement is essentially an extension of ‘Negotiation’ and there is generally no set format for how it is to be achieved, it being left for the parties to decide how to go about it. It might be that the problem can be settled by elevating the dispute to the level of higher management on both sides, where discussions will be less emotional. If this does not produce the desired results, the parties may need the assistance of an independent neutral party. Frequently, such party will be a quantity surveyor or engineer with experience in the particular matters which are in dispute. Depending upon the size and complexity of the issues, the procedure may be relatively simple and straightforward, or it may be complex and demanding - resembling a formal‘Mediation’ .
Attempts to achieve an Amicable Settlement are entirely non-binding. As indicated above, if no satisfactory resolution is found, the next step is most often to refer the matter to arbitration or litigation.
Arbitration is a form of Alternative Dispute Resolution (ADR) conducted outside the courts, by which the parties to a dispute refer it to one person acting as a single arbitrator, or a ‘tribunal’ of three persons (one arbitrator being selected by each side and the third selected by the two appointees), to review the case and come to a decision to which the parties generally agree to be legally bound. In many ways it is equivalent to litigation in the courts, and entirely distinct from other forms of alternative dispute resolution, such as mediation or determination by experts, which are usually non-binding.
Arbitration is most commonly used for the resolution of commercial disputes, particularly in the context of international commercial transactions. The use of arbitration is widespread in the case of construction disputes and is well recognised throughout the Middle East – indeed, many, if not most, major construction contracts in the Arabian Gulf region contain arbitration clauses, thereby obliging the parties to use this method of dispute resolution in preference to litigation.
Arbitration is an appropriate method of dispute resolution where it is considered advantageous if the principal skills of the decision-maker are of a more technical nature than purely legal. For this reason, some experienced construction professionals, particularly quantity surveyors and engineers, having spent many years dealing with contract administration matters on a daily basis, evolve into arbitrators in the latter stages of their careers. Some go on to become qualified members of recognised professional arbitration institutions.
The decision of an arbitrator is generally final and binding upon the parties, and, depending upon the jurisdiction, with only limited grounds for appeal at law. Enforcement of an arbitration award is usually through the courts, with the significant advantage over litigation that such enforcement need not necessarily be in the same country as the arbitration. This is particularly useful in today’s business environment, where, for instance, a client from country A may be developing a project in country B using the services of a contractor from country C. In these circumstances, if the contractor is successful in his action against the client, he is free to pursue the client in country A, B, or C, or indeed any other country where the client has assets. This principle is enshrined in several international conventions, in particular the New York Convention of 1958, which states that the courts in the countries of all of the signatories are bound to enforce any arbitration award arising in or from any member state.
A major advantage of arbitration over litigation is that it is an entirely private system of dispute resolution, the hearings of which cannot be attended by anyone without the consent of the parties, whereas courtrooms are generally open to the public when cases are being heard, and frequently reported in the press. Furthermore, without the consent of the parties, no copies of any document can be inspected by any party. Thus the parties can be assured that their trade and financial secrets will remain private, so long as there is no need to enforce the award in open court.
In order for an arbitration to take place, both parties must have agreed to submit to that process, and it cannot commence until an arbitration agreement is in place. Normally, the agreement to submit to arbitration is made at the same time as the contract between the parties, but this is not necessarily so, and there is nothing to stop the parties from agreeing to arbitrate after the dispute has arisen.
An absolute requirement for any arbitrator is that he should be fair and unbiased, have no conflict of interests with either of the parties, and afford each of the parties the opportunity to state their case and respond to the case of the opposing party.
An arbitrator’s jurisdiction to act in the capacity of an arbitrator can generally be challenged on a number of grounds, including the validity of the arbitration agreement, whether the arbitral tribunal is properly constituted, and whether the dispute in question falls outside the scope of the arbitration agreement. Any such challenges should be made as early as possible in the proceedings and may, if necessary, take place through the courts.
Arbitration can be either more expensive or cheaper than litigation – it all depends upon the issues at stake, the attitudes of the parties, whether or not they are legally represented, and a host of other factors. One of the important considerations is legal representation. Although the parties are not obliged to be so represented they sometimes are, particularly in larger disputes. When this happens, the arbitration hearing can become similar to a court hearing, thereby losing some of the simplicity and resulting economies.
One of the attractions of arbitration is its flexibility in terms of procedure. In most situations, the arbitrator and the parties will meet and agree the most suitable procedure for the case in question. They may, for instance, decide to dispense with a hearing and allow the case to be decided on the basis of documents alone. Alternatively, they may go for a full hearing with legal representation, or indeed anything in between.
Being a private system of dispute resolution, the parties are generally free to choose their own arbitrator(s), or, if they are unable to agree, they may rely on the choice of a neutral independent appointment body (such as the chair of a professional engineering institution), which will normally have been named in the contract. In many jurisdictions, the powers (and immunity from being sued by the parties) of an arbitrator are statutory.
If one of the parties refuses to participate in the proceedings, despite the best efforts of the arbitrator, it is still the arbitrator’s absolute duty to consider all available evidence to the best of his or her ability and reach a fair decision. The concept of ‘judgment in default’ does not exist with arbitral proceedings.
Once an award has been made, if the parties do not comply with it voluntarily, it is up to the winning party to apply for the award to be enforced through the court. When this happens, the court does not (or should not) concern itself with the details of the award, its duty being restricted to the validity of the arbitration agreement and whether the arbitrator was legitimately appointed and had substantive jurisdiction.
A party to arbitral proceedings may apply to the courts challenging the award in the proceedings on the grounds of a serious irregularity on the part of the arbitrator affecting the proceedings or the award, which will result in a substantial injustice being caused to the applicant. There are also some limited circumstances under which a party may appeal through the courts against an award on the grounds of an error on a question of law determined by the arbitrator(s) that has substantially affected the rights of the party.
Mediation is a consensual form of ADR where the parties agree to appoint a mediator to assist with the settlement of the dispute, and they share the cost of the mediator’s fees.
The underlying principle of mediation is that many disputes become difficult to settle because of clashes of personality, with the result that the warring parties adopt entrenched positions, at which point they might become fearful of being shown to be in the wrong and thus losing face. Mediators are generally people from an appropriate technical and professional background, who are neutral to the dispute and have been trained in the techniques and procedures for dealing with such contentious situations.
Mediation is a non-binding procedure whereby the mediator seeks to facilitate a negotiated settlement but leaves the parties in overall control of how their dispute is resolved. The mediator is there to assist them to overcome deadlocked positions and to help them investigate the various settlement alternatives. Naturally, the mediator must be a person who inspires the trust and confidence of both parties.
The mediator’s procedure will be firstly to meet with the parties together and lay down the ground rules to be followed. He or she will then meet with one of the parties in private, in what is known as a caucus, and hear an outline of the dispute and the evidence from that party’s point of view. He will then afford the other side the same opportunity. All of the discussions in mediation with each party are private and confidential and cannot be disclosed to the other party without express permission. Having heard the positions of both sides, the mediator can now assess the strengths and weaknesses of each and get to understand any personal reasons that might have led to the dispute.
The mediator will then attempt to weaken each party’s confidence in the veracity and validity of its own position, by explaining the views of the other side and indicating the strong points of the opposing party’s case. Cost is also an important persuader. The mediator will point out to both sides the scale of legal costs and expenses which might be incurred if they fail to settle, with the losing side facing the risk of paying the entire bill, not to mention the time and resources that their company would have to devote to a full-scale litigation or arbitration.
Due to the fact that both parties will have come to the mediation process voluntarily, having already agreed to co-pay the mediator’s fees, it is reasonable to assume that they will aspire to achieve a settlement. With this background, the mediation procedure of chipping away at the each party’s case can frequently bring a satisfactory result at minimum cost to the parties.
Because of its success rate mediation has, in recent years, become a popular method of resolving construction disputes in the UK and other countries, but as yet it has had only limited use in the Arabian Gulf region. It is, however, believed by some to be only a matter of time before its efficiency and cost-effectiveness are recognised and it becomes an established technique of dispute resolution in the region.
Adjudication is the legal process by which an arbitrator or judge reviews the evidence and arguments set forth by opposing parties (generally in writing), in order to come to a decision that determines the rights and obligations of the parties involved.
In the UK, adjudication for the resolution of construction industry disputes has been provided for by statute since 1996. That is to say, every construction dispute in the UK must now be referred to adjudication in the first instance. It does not rely on the agreement of both parties, as either party can request that a contentious issue be settled by adjudication. Calling for adjudication is like calling for the referee. Another interesting aspect of the UK procedure is that the adjudicator is required to produce a decision within 28 days from the date of appointment, thus providing a rapid and effective solution.
The process is by the presentation of the case supported by evidence, together with counter arguments to an adjudicator who performs an inquisitorial role in reaching a binding, enforceable decision on the parties to the dispute. If the decision is not complied with, it is enforceable in the courts. An important aspect of adjudication is that the adjudicator’s decision can be varied by court proceedings, arbitration, or by agreement between the parties.
Adjudication in the UK has been hugely successful due to its speed and consequently its limitation of costs. It is not, however, commonly known about or accepted in the Arabian Gulf area – yet.
Expert Determination is a method of resolving complex technical disputes by which an expert in the relevant field, acting as independent neutral party, is vested with the power to decide upon the dispute, often without any reference to or input from the parties other than their initial documentary evidence and written submissions.
Expert Determination may be appropriate in cases where the parties themselves either have insufficient technical knowledge to determine on contentious issues, or where they have become entrenched in their positions and are resigned to handing over to an expert neutral third party for determination.
Depending upon the terms of reference of the expert, his or her decision may be final and binding upon the parties, and it may not be subject to legal appeal.
Due to its speed, simplicity, and the lack of involvement of other participants, this is perhaps the most economical method of resolving complex technical disputes. However, an absolute prerequisite of the appointment of an Expert Determiner is that the parties must have complete trust in his or her abilities, integrity and competence, particularly in light of the fact that, once they have made their appointment, the parties will have no input or influence over the Expert Determiner’s decision.
Expert determination is sometimes cited in Middle East construction contracts as the preferred means of dispute resolution before to resorting to arbitration or litigation.
Litigation is the act of resolving disputes through a lawsuit, not requiring permission or cooperation from the defendant. It is managed and conducted by the state through a court system presided over by judges, and it is generally necessary for the parties to be represented by lawyers and advocates. The cost of the judges and courtrooms will generally be either free or at minimal cost to the litigants, but the cost of legal representation will have to be met by them.
Where a defendant refuses or fails to take part in the proceedings it will be assumed to be an admission of liability. In this case, judgment in default will be entered against the defendant, thereby entitling the claimant to the full value of the claim – plus costs.
Because justice must be seen to be done, in many jurisdictions litigation is a public system of justice, where members of the public are free to attend the proceedings. Details of the proceedings are therefore generally available to the public at large.
Judgment by a ‘court of the first instance’ might comprise a number of orders to the losing party, who must either pay damages or provide some other legally enforceable form of relief. Judgments will always be subject to any appeal to higher courts, and may not be enforceable until such time as the available appeals process has been worked through (or the appellant has given up), until which time, the parties will each be funding their own costs.
If the loser fails to abide by the judgment, the winner may return to court to seek additional remedies, which might include the seizure of money, property, or assets by the relevant authorities. In extreme cases, a prison sentence may be imposed.
Judges are generally appointed to a particular case on the basis of availability, so neither the judge nor the litigants will have any influence over which cases will be handled by a particular judge. Whilst highly skilled in matters of law, a judge’s understanding of the technical issues at hand may be limited, and he or she will often have to rely on the opinions and advice of expert witnesses when considering complex technical issues.