Impact of the new ICC Rules on the management of construction arbitration cases
In last year’s Review, we discussed the new ICC Arbitration Rules which came into effect in January of this year. Frederic Gillion now reviews their impact. Most European international contractors will no doubt have noticed a significant increase in the number of arbitrations that they have had to commence or defend over the past 10 years. In fact, over that period, the workload of the Court of the International Chamber of Commerce (ICC) has grown by at least 40%, and between 2007 and 2010 the number of arbitration cases handled by the ICC has grown by 15%. Approximately 1,500 arbitration cases are currently being administered by the ICC. According to the latest statistics from the ICC (2010 Statistical Report), 17% of the 796 new cases filed in 2010 related to construction and engineering disputes, i.e. 135 new cases. Fifty per cent of the parties involved in the cases filed that year were from Europe.
Is this trend symptomatic of a (new) belief that arbitration is an efficient way of resolving disputes for international construction projects? Probably not. This increase in the number of arbitration proceedings is most likely simply the result of an increase in the number of construction disputes, which in turn is a direct consequence of the severe financial difficulties experienced by both contractors and employers in recent years. Parties still rightly attempt to stay away from arbitration proceedings by seeking an amicable resolution of their disputes during the course of their projects. However, the current uncertain times sometimes make a settlement difficult to achieve, especially for public works projects where an additional layer of bureaucracy makes settlement discussions problematic.
It is still with a lot of reluctance (often to avoid limitation issues) that parties eventually start arbitration proceedings following the completion of a project, knowing that it will be a lengthy and costly process. Conscious of those concerns amongst users of international arbitration, the ICC has sought to promote in its new arbitration rules (“the 2012 ICC Rules”) a more cost-effective, expeditious and efficient procedure for the resolution of disputes. The new procedural mechanisms and principles introduced by the 2012 ICC Rules are intended to improve case management, but what will the impact (if any) of these changes be on the conduct of construction arbitration proceedings?
Main concerns for parties involved in construction arbitrations: time and cost
Time and costs are beyond any doubt the two major concerns of parties involved in construction arbitrations. A recent survey conducted by the Chartered Institute of Arbitrators showed that the average costs for a UK claimant are £1.54m (£1,685,000 for claimants in the rest of Europe), with proceedings lasting on average between 17 and 20 months.
This survey was based on 254 arbitrations that took place between 1991 and 2010, of which a quarter related to construction/engineering disputes. Although the survey does not specify the average costs and time for construction arbitration proceedings, my experience is that any construction disputes of real significance commonly take anything between 2 and 4 years from the commencement of the arbitration to the final award, and that assumes that the arbitral tribunal has been diligent enough to render its final award fairly swiftly after the closing of the proceedings. A further year is also usually required to enforce that award.
In these difficult economic times, changes are undoubtedly needed to enable those disputes to be resolved in a much shorter time frame and in doing so to reduce the costs of the arbitration.
Who is to blame for this situation?
In the spirit of openness, I should probably start with the parties’ legal advisors who should accept some responsibility for the management of a case by assessing at an early stage the chance of success of some of their clients’ claims so that no time is wasted arguing weak claims. Legal counsel should also identify from the outset the main issues of a case so that, if possible, a partial award may be made by the arbitral tribunal at an early stage of the proceedings. This can make a significant difference in the conduct of the case by increasing the pressure on one party and the chance of an early settlement as well as limiting the scope of the dispute. Finally, the parties’ legal advisors should also ensure that any work given to experts is properly managed so that their scope of work is clearly defined.
Arbitrators are also partly to blame for the current situation. They can delay arbitrations in two ways: (1) their lack of availability for meetings and hearings, which is made worse in the case of a three-member arbitral tribunal; and (2) when drafting the award. A usual complaint with regard to arbitrators is that they take on too many cases at the same time (in the hope that some of them will settle early), making the management of each case a real challenge. I have been the unfortunate witness of a case where it took 18 months for the sole arbitrator to render his award. I have also been involved in some cases where it was clear that the arbitrators were not fully aware of the key issues of the case at the beginning of the proceedings, when it is often at this stage that they can assist the parties the most in fixing procedures that are swift and appropriate to the case.
Finally, arbitration institutions such as the ICC have a role to play in ensuring that the arbitration process is run in an efficient and cost-effective manner. This can be done through the clarification of the arbitration rules, but also by making sure that arbitrators, who genuinely have enough capacity to take on new cases, are appointed promptly. This is what the ICC has sought to achieve with its new rules of arbitration.
The ICC’s response to these concerns in the 2012 ICC Rules
The 2012 ICC Rules came into force on 1 January 2012 and will apply to all ICC arbitrations that commenced on or after that date, unless the parties have agreed that the previous version (1998) of the Rules will apply. The FIDIC forms of contract anticipate in their arbitration clause that all disputes shall be finally settled under the Rules of Arbitration of the ICC without specifying a particular version of the Rules. Construction disputes that arose under an unamended FIDIC contract will therefore be subject to the 2012 ICC Rules if the arbitration was commenced on or after 1 January 2012.
By and large, the 2012 ICC Rules maintain the main characteristics of ICC arbitration such as the terms of reference, the scrutiny of draft awards by the International Court of Arbitration (the ICC Court), and the involvement of national committees involved in the appointment of arbitrators. It is important to bear in mind that the ICC Court does not resolve disputes, but rather administers the resolution of disputes by arbitral tribunals and oversees the arbitration process. Many of the changes introduced by the 2012 ICC Rules in fact amount to a codification of current practice of the ICC Court and Secretariat. However, they also seek to address some of the concerns mentioned above by bringing in new procedural mechanisms and principles, including case management techniques focused on time and costs. I highlight below some of those changes that may improve the way ICC arbitration cases are managed. They include:
- New provisions regarding the appointment and availability of arbitrators;
- Several updates and additions relating to the conduct of the proceedings to make them more efficient and cost-effective, including provisions on which arbitrators will be able to rely to sanction a party’s delaying tactics when allocating costs between the parties; and
- Indication of the timescale for the issuance of the award.
Appointment and availability of arbitrators
The ICC Court’s power to speed up the appointment of arbitrators in order to address one of the traditional complaints made against the appointment of arbitrators by national committees (in particular the length of time it sometimes takes for those committees to appoint arbitrators and also the limited pool of arbitrators who are, as a result, very busy), the 2012 ICC Rules (Article 13) empowers the ICC Court to appoint arbitrators directly if it does not accept the proposal made by the national committee or no proposal is made within the time limit fixed by the ICC Court. The ICC Court may also appoint arbitrators directly in certain circumstances, including arbitrations involving a State entity.
Requirement for arbitrators to sign a statement of availability
Article 11(2) of the 2012 ICC Rules requires any prospective arbitrator to sign before his appointment a statement confirming his availability for the case. In reality, this requirement simply confirms the ICC’s practice to distribute to prospective arbitrators a form that requires them to disclose information not only about their independence, but also their availability to arbitrate a particular case. This new requirement in itself is therefore unlikely to avoid delays attributable to arbitrators.
The ICC is, however, conscious that this is a serious issue and both the ICC Court and its Secretariat will no doubt continue to place pressure on slow arbitrators when it comes to the drafting of awards, especially now that the 2012 ICC Rules have also introduced a requirement for arbitrators to inform the ICC Secretariat and the parties of the date when they anticipate their draft award being ready (see below).
Conduct of the proceedings under the 2012 ICC Rules
Mandatory case management conference
A case management conference must now form part of the arbitral process under Article 24 of the 2012 ICC Rules in order to consult the parties on the appropriate procedural measures at the outset of the proceedings. Article 24 further calls on the arbitral tribunal to hold subsequent case management conferences “to ensure continued effective case management”, and under Article 24(4) the arbitral tribunal is specifically empowered to request the attendance of a party representative at a case management conference, the intention being to ensure the parties “buy in” to these procedural measures.
Appropriate procedural measures may include one or more of the case management techniques described in new Appendix IV which incorporates the ICC’s publication Techniques for Controlling Time and Costs in Arbitration. None of these case management techniques are terribly new, but this Appendix IV does provide a useful reminder for the arbitral tribunal, and also for the parties and their legal advisors, of the procedural measures that can be used to control time and cost.
They include the following measures:
(a) Bifurcating the proceedings or rendering one of more partial awards on key issues, when doing so may genuinely be expected to result in a more efficient resolution of the case. A usual bifurcation observed in construction cases is between issues of principle and quantum. Although this split is sometimes appropriate, it can however lead in some cases to a significant lengthening of the proceedings and therefore an increase of the overall costs;
(b) Identifying issues that can be resolved by agreement between the parties or their experts, typically issues of quantum in construction cases;
(c) Identifying issues to be decided solely on the basis of documents rather than through oral evidence or legal arguments at a hearing;
(d) Limiting disclosure of documents. This is particularly relevant to construction cases which tend to involve a considerable amount of documents;
(e) Limiting the length and scope of written submission and evidence so as to avoid repetition and maintain a focus on key issues; and
(f) Encouraging the parties to consider settlement.
New duty of the parties and arbitrators to conduct the arbitration in an expeditious and cost-effective manner
Article 22(1) of the 2012 ICC Rules imposes on the arbitral tribunal and the parties a new duty to “make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity and value of the dispute”. The duty on the parties is confirmed by Article 37(5) which specifically authorises the arbitral tribunal to consider in its cost decision the extent to which each party complied with its general duty.
Timescale for the issuance of the award under the 2012 ICC Rules
Finally, as mentioned above, the 2012 ICC Rules seek to address the issue of delays in the drafting of awards. At the close of the proceedings the arbitral tribunal must now inform the ICC Secretariat, as well as the parties, of the date by which the tribunal expects to submit its draft award to the Court for approval.
To reinforce that duty, a new Appendix III to the 2012 ICC Rules (on Costs and Fees) provides that in setting the arbitrators’ fees, the ICC Court will take into account their “diligence and efficiency”, “the time spent”, the “rapidity of the proceedings”, but also “the timeliness of the submission of the draft award”. This may well work as an incentive for arbitrators to render their award within the anticipated timescale.
Conclusion
Although not radical, the procedural mechanisms and principles introduced by the 2012 ICC Rules to improve case management may contribute to giving the parties more faith in the arbitration process by allowing them to have more certainty over the likely time and cost involved in pursuing a claim in arbitration. However, this will be so only if these mechanisms are implemented properly by the arbitrators and the parties, and also providing that the parties do buy in.
In principle, the parties should not have any difficulties in agreeing on a swift procedural timetable given that their common interest should be a speedy and efficient resolution of their dispute. However, the reality is that there will be cases where only one party may have interest in pushing for a resolution of the dispute (typically the claimant), while the other will do everything to delay the proceedings and the outcome of the case, and will ask for more time for more time to present its case. In that situation, the arbitral tribunal’s main objective will be not to give priority to one argument over the other but rather to balance the parties’ interests in the light of the particular dispute that it has to arbitrate.
Providing the opportunities given to the parties are equal, there should, however, be nothing stopping an arbitral tribunal from setting precise and narrow limits on matters such as the length of submissions or whether certain issues should be decided on the basis of documents only. In addition, tribunals can take advantage of the new rules relating to costs to sanction a party’s wasteful tactics such as unmeritorious applications by making a partial award on costs against that party.
It is obviously too early to predict the impact of the 2012 ICC Rules on how arbitral tribunals will conduct arbitration proceedings. However, judging from the cases brought to ICC arbitration this year by clients of this firm, it would seem that arbitrators may well have embraced the ICC’s new emphasis on case management and appear ready to stand up to the parties when determining the procedure of the arbitration by insisting in particular on shorter timetables.