Construction Disputes – Pros & Cons of Arbitration

What is Arbitration?

Arbitration is a form of private litigation managed under the Arbitration Act 1996. It is the form of dispute resolution prescribed by the New Zealand Standards suite of construction contracts - NZS391X - so it has a long history in construction disputes.

Arbitration generally comprises similar steps to a court proceeding - exchange of pleadings, evidence, and a hearing - though together with the arbitrator the parties have a broad scope to agree a process to be used.

Pros

• Arbitration is voluntary, requiring an agreement between parties.
• Arbitration is private and confidential. This can be a great benefit to commercially sensitive parties and disputes.
• Arbitration covers disputes between commercial contracting parties, but non-contractual causes of action can also be raised in the dispute.
• Arbitration is flexible and accessible. The procedure can be tailored to reflect the requirements of the subject matter, and an arbitrator is generally more accessible than a Court Judge for seeking procedural directions.
• There is a broad scope of relief options available, including declaratory relief where the parties do not require an arbitrator to determine value, only entitlement.
• It is comparatively inexpensive and efficient as against court proceedings, though it tends to take significantly longer than an adjudication. Based on the 2022 Inaugural NZ Arbitration survey, 80% of arbitrations were for values less than NZ$3m, the average time of disposal was 10.85 months, and the average hearing time was 3.32 days.

Cons

• Parties generally agree to arbitration as a method of dispute resolution in their contracts long before a dispute arises. It may not be the best forum, but the preexisting agreement can require parties to use an arbitral tribunal for their dispute.
• Multi-party disputes can be especially complicated. While consolidation of claim is possible, this may be difficult either where some of the parties do not have a contractual relationship (e.g. contractors and designers) or where different arbitrators are agreed on for different-but-related disputes.
• Depending on the parties and counsel, the process can end up mirroring Court processes. This can mean the process is less efficient and more expensive than might otherwise be possible.
• Arbitration has the highest level of direct cost for all dispute resolution options. This is because the parties are responsible for the direct costs of the arbitrator's time, venue hire and any technology costs. I note that this means a higher per-day cost, however if the process is managed efficiently, it may be shorter and less expensive than Court overall.
• Arbitration is confidential. As noted above, this can be commercially beneficial but can cause complexities with multiple related disputes. It also means there is limited arbitration precedent, and arbitration determinations cannot be held to the same degree of public scrutiny as court decisions.
• An arbitration determination is generally final (unless a specific avenue for appeal is recorded by agreement between the parties). Under the standard terms in the Arbitration Act, appeals are limited to matters of law. While finality can be a significant benefit to bring a clear close to a dispute, parties are exposed to the risk that flawed factual findings may be made and a party is left with no avenue for appeal.

My two cents - what could be improved?

The cons for arbitration set out above could be addressed by the following:

• As with adjudications, in my view it would be beneficial for all disputes relating to the same subject matter to be dealt with in a single forum. This would enable more efficient dispute resolution. This issue could be addressed if parties were to include consolidation clauses in their contracts to address when issues arise between non contracting parties (consultant/contractor or principal/subcontractor), or by amendment to the Arbitration Act.
• It would be beneficial for there to be a general expectation or requirement for alternative dispute resolution (e.g. negotiation or mediation), and a requirement for a pre-action protocol. These processes would ensure better engagement between the parties on the matters between them and may help parties to refine the scope of dispute. This would have the benefit of enhancing efficiency and reducing cost.
• The standard term in relation to appeals could be expanded to cover appeals on matters of fact. This would alleviate the risk of flawed factual findings without recourse and may result in more considered and well-articulated determinations.

Concluding Remarks

Arbitration is an important avenue for construction dispute resolution. There are many benefits if the process is used effectively. There are also a number of options to enhance the flexibility of the arbitral process and tailor the process to suit the parties and dispute. These are set out in the AMINZ rules. To be effective, parties must be familiar with them and use them.

If you have any questions about your dispute options and if or how arbitration could be used to resolve any dispute you may have, get in touch with the Dentons Major Projects and Construction team.