International Arbitration Series – Part 1: Key Concepts

Anatomy of an International Construction/Energy Arbitration – Key Concepts

International arbitration is a preferred method for resolving complex, high-value, cross-border disputes due to its neutrality, flexibility, privacy and enforceability. That, together with its widespread acceptance and generally supportive legal framework, makes it an attractive alternative to national court litigation for international businesses.

However, deciding whether international arbitration is the right forum for resolving disputes on your construction or energy project depends on several factors.

Kevin Joyce and Alex Slade take a closer look.

International arbitration – an overview

An international arbitration typically includes several key components and phases:

(a) The arbitration agreement

Arbitration is a dispute resolution mechanism based on the consent of the parties and this consent is usually expressed in the form of a dispute resolution clause (or ‘arbitration agreement’) in the underlying construction or energy contract.
Effectively, the parties agree that any disputes falling within the scope of the arbitration agreement will not be resolved by state courts, but by private individuals (usually a single person or tribunal of three people) acting as arbitrators.

There are several key components to the arbitration agreement:

• Scope: the disputes that are subject to arbitration
• Arbitral rules: the rules governing the arbitration, such as the International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), Dubai International Arbitration Centre (DIAC) and United Nations Commission on International Trade Law (UNCITRAL)
• Seat of arbitration: the legal jurisdiction of the arbitration (which may be different to the substantive law governing the dispute)
• Language: the language in which the arbitration will be conducted and
• Number and appointment of arbitrators: the constitution or the arbitral tribunal and the method for their appointment

(b) International trade and investment disputes

Sometimes the right to arbitrate arises not through a commercial agreement but through bilateral investment treaties and free trade agreements between nation states.

These treaties / agreements are intended to promote and reciprocally protect investment by nationals of one state in the other state, and a key part of that is that they grant investors a right to arbitrate certain claims relating to investments directly against the host state. The rights and protections provided by such treaties over investments typically include:

• Compensation for expropriation of property or assets
• The right to fair and equitable treatment
• Protection against arbitrary or discriminatory treatment
• The right to full protection and security
• The right to treatment no less favourable than that accorded to nationals of the contracting state in which the investment is made or a third state, or to their investments
• A right for disputes to be resolved through arbitration, typically under the rules of the International Centre for Settlement of Investment Disputes (“ICSID”) Convention or the UNCITRAL Arbitration Rules.

Although investment treaty arbitration differs significantly from international commercial arbitration (e.g. the applicable law is public international law, including the provisions of the relevant treaty or trade agreement), there are several similarities in some of the procedural mechanisms that are usually involved.

(c) The arbitral process

The arbitration process has the same outcome as litigation in national courts – a binding decision by an independent decision-maker. However, the process is flexible and can be adapted to suit the needs of individual cases. That said, there are many steps that are common to most international arbitrations.

An arbitration usually starts with a request for or notice of arbitration being served by one party on the other party, setting out the existence, nature and scope of the dispute, the relief sought and the claimant’s views or proposals as to the appointment of arbitrator(s), the language, seat (or place) of the arbitration and the law applicable to the substance of the dispute.

The respondent usually submits a response to the request for arbitration which – depending on the arbitral rules – will generally set out the names of the parties and their lawyers and provide brief responses to the contents of the request for arbitration. The response might also include any challenges to the jurisdiction of the arbitral tribunal and / or set out a brief description of the nature and scope of any counterclaims against the claimant.

The appointment of the arbitrator(s) is often one of the most important steps. Appointments will be made in accordance with the arbitration agreement, the rules of the arbitration or, if necessary, the law of the seat of the arbitration.

Typically, disputes are referred to either one or three arbitrators. In the former case, and in the absence of agreement between the parties, the arbitrator is usually appointed by the relevant arbitral institution. In the latter case, often each party nominates one arbitrator and the arbitral institution, or the two party-nominated arbitrators, nominate the third arbitrator who then acts as chairperson for the tribunal.

Once the tribunal has been formed, one of the first things it must do is provide a procedural timetable and framework for the case. Although this varies depending on the particular arbitration rules that apply, the parties’ wishes and the tribunal’s preferences, the procedure adopted typically involves:

• The parties exchanging written statements of their case setting out the legal, factual and technical bases of their claims
• The disclosure or discovery of documents and evidence relevant to the issues in dispute (though on a more limited basis than is seen in common law national courts)
• The exchange of witness statements and / or expert reports (say, on delay, quantum, pricing, valuation or technical matters), either with statements of case (in a “memorial” style process) or at a later stage (in a “pleading” style process)
• An oral hearing (usually held in the seat chosen, but it can be held in a different venue or online) and, sometimes, written post-hearing submissions
• The final award, where the tribunal sets out its decisions, its reasons for those decisions and any other additional matters required by the relevant procedural rules or arbitration law. Often there can be more than one final award (called partial final awards) that deal with different issues (e.g. an award on jurisdiction, followed by an award on the merits)

Key concepts

There are several key concepts that impact the suitability of international arbitration as a means of resolving construction or energy disputes.

(a) Enforceability

International arbitration leads to an award by the arbitrator(s) which is similar to a court judgment in that it is final and binding on the parties. However, unlike a court judgment, there is usually no right to appeal (though this right is commonly retained in certain sectors of arbitration) and the award can only be set aside on limited grounds.

One major advantage of arbitration as compared to court litigation is the international enforceability of arbitral awards under various international agreements including, most importantly, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

With over 160 signatory countries to the Convention, successful parties have a far greater ability to enforce arbitral awards in appropriate jurisdictions (e.g. wherever the counter-party’s assets are located), than they would in trying to enforce a decision of national courts.

(b) Neutrality

Arbitration can offer parties some comfort that a dispute will be resolved in a neutral forum, not only in terms of where, how and in what language the dispute will be resolved but crucially in the impartiality of the arbitral tribunal.
Further, although the courts at the seat of the arbitration have a role to play in supporting the arbitration, the tribunal’s ability to determine the procedure and merits of the dispute means it is much less likely that the particular views, approach, political motivations or policies of national courts will influence the ultimate outcome.

(c) Privacy and confidentiality

In contrast to court documents and hearings, the arbitration process is private and, in many jurisdictions and unless the parties agree otherwise, confidential. This means arbitration is often preferred by individuals, companies and states that do not want to air their dirty linen in public, want to protect proprietary information or want to protect their reputations / avoid the risk of adverse publicity.

(d) Autonomy and flexibility

Parties to international arbitration have far greater choice in determining not only where and how their dispute is to be resolved, but by whom and under what process. This choice of decision-maker(s) is particularly important if, as is often the case in the construction or energy sectors, the dispute is of a technical nature or requires specific expertise or experience. The ability to tailor a process to the particular dispute, rather than following rigid court procedures, is also important in sectors like construction or energy where very different types of disputes arise and can then be addressed individually.

In short, the greater autonomy and flexibility of international arbitration allows the parties to tailor the process to their individual commercial and practical needs.

Potential downsides of international arbitration

Despite the many advantages of international arbitration as a means of resolving international construction and energy disputes, there are some disadvantages that parties should consider.

First, unlike court proceedings, as noted above most arbitral laws do not allow for the tribunal’s decision to be challenged or appealed except in very limited circumstances. For many commercial parties, this finality is a positive and is desirable. Of course, in reality this can be seen as a major drawback if the decision ends up being unfavourable, or if the tribunal simply makes a legal error or misinterprets the evidence presented. In some jurisdictions, though, a right to appeal can be maintained if it is specified in the arbitration agreement.

Second, arbitration is sometimes less suited to multi-party disputes – something which is common on international construction projects, where a single dispute might involve an owner, main contractor, subcontractors, suppliers and consultants. Multi-party disputes can be handled effectively if the arbitration agreement has been drafted properly, but often not enough thought has been given to this issue at the time of contracting. Further, if different contracts contain different dispute resolution mechanisms, the prospects of inconsistent results increase significantly.

Third, it is often said that international arbitration is quicker and cheaper than litigation, but this is not always the case. Much depends on the court system it is being compared to, but the reality is that a complex and high-value dispute will often take a long time to resolve and will be expensive, whichever process is used. Sometimes, international arbitration can be significantly more protracted and expensive than court proceedings, particularly in certain jurisdictions, though the parties do have the flexibility to ensure otherwise – if they are able to reach agreement on that.

Conclusion – is international arbitration right for your project?

International arbitration remains a popular choice for resolving disputes on international construction and energy projects, and for good reason.

However, it is essential to consider the specific circumstances of your project – its size, its technical complexity, the nature and number of parties involved and the location of other parties’ assets – as well as some of the potential downsides, to make an informed choice.

Posted by: Kevin Joyce and Alexander Slade