When do you insert an international arbitration clause into a construction contract?

When considering the procurement of international construction and engineering projects at contract drafting stage, the option of including an international arbitration clause as part of the dispute resolution provisions, should be considered.

The right to arbitrate a dispute does not exist absent a contractual agreement to do so (at least not in England and Wales), unlike say the right to litigate which exists as a matter of statute here, and so it needs to put into a contract for it to apply.

International Arbitration is not a modern construct. It can be traced back millennia in various forms. The projects where it is routinely applied reflect the areas around the globe where huge construction and engineering projects have been and continue to be the norm, typically in Asia and Africa. Dubai, Saudi Arabia and Hong Kong for example.

The FIDIC suite of contracts are more often than not those that are used in these instances. The popularity of international arbitration shows no sign of waning save for during obvious periods of relative inactivity, such as world pandemics.

The reasons for having an international arbitration clause

If an international arbitration clause is not inserted, the contract will be governed by the local/national jurisdictional and dispute resolution provisions that apply to the project in question.

It may be though that those provisions arising out of country X’s legal system, are not desirable to the parties (and interested third parties such as funders) and so an alternative is preferable. To that end the most commonly cited reasons for having an international arbitration clause in a contract relating to an international project, are these:

1) its perceived neutrality;

2) the wide enforceability of awards around the world;

3) flexibility of process;

4) expertise of arbitrators; and

5) confidentiality.

In terms of perceived neutrality, that is both as to the forum and the arbitrator(s), which is as much about the appearance of neutrality, as actual neutrality. The more politicised and fractured the international community is at any given time, the more necessary such neutrality becomes.

Neither party should have the benefit of their home court and familiarity with its systems and customs, its ways of doing things. Likewise neither party should be able to benefit from any conscious or unconscious lack of impartiality, independence and/or neutrality, in the person/people determining the outcome of any dispute.

The benefits of international arbitration

Turning to the benefits of international arbitration in terms of the enforcement of its awards, the point here is that 170+ states around the world, currently being signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).

They thereby agree to recognize and enforce international arbitration agreements and awards, subject to limited caveats. That global reach and application is a huge advantage, when the Judgments of domestic courts by contrast have no such reach and often find themselves not applied outside the home jurisdiction.

As for flexibility, arbitration permits the arbitrator far greater freedom to tailor the process and the timescale of a dispute than litigation does a judge, to thereby best suit the circumstances of the dispute in question and the parties.

As no two disputes / parties are the same, a fixed way of doing things would not permit the parties to make time and cost savings and identify where efficiencies exist. Limiting the length of legal submissions is a good example of exercising flexibility. Civil litigation rules in England in recent decades, ie the Civil Procedure Rules, have sought to mimic this aspiration from arbitration. Moreover in recent years arbitration users have started in fact to report greater rigidity coming into arbitration. Therefore flexibility is perhaps less of a distinguishing feature now than once it was.

In terms of the possibility of finding greater expertise in an Arbitrator than in a judge, in terms of the subject matter of the dispute in question, that is clearly likely given the ability to select the arbitrator(s) from a large pool of highly qualified candidates, as opposed to being given whoever is available by the Court from a small pool of available judges.

By expertise I mean technical, scientific and professional. I know for example of a recent adjudication enforcement case heard by a judge in England, who had little or no construction law knowledge and who had to be guided by counsel through the basics of adjudication procedure. Moreover domestic judges are often overstretched given their limited number, especially in specialist lists, and so less able to be sufficiently available in the eyes of the parties. This is not a problem that parties looking for arbitrators should find.

Last in our list of the key advantages of international arbitration, is confidentiality. While it is important to note that confidentiality is not inherent in arbitration (and so care is needed on this front to check it is there), it is usually an express feature, at worst an implied term in an arbitration. So for parties not wanting to air their laundry in public for whatever reason, arbitration usually provides protection against publicity.

The rules and laws applicable to international arbitration

Finally a few words on the rules and laws applicable to international arbitration, and their tendency to standardisation. The seat stated in an arbitration clause, means the national legal framework that applies, eg English law under the Arbitration Act 1996. Singapore and London are leading seat selections today. The mandatory (as opposed to non-mandatory) provisions of that national arbitration law, will apply to the contract even if the arbitration agreement therein provides any examples to the contrary. Non-mandatory provisions apply only in the absence of any contrary provisions in the arbitration agreement.

The procedural rules are today usually contained in those of whatever international body or institution is stipulated in the contract. Eg the International Court of Arbitration (operated by the International Chamber of Commerce, ICC) and the London Court of International Arbitration (LCIA). These procedural rules today are fairly standardised.

The further standardisation of arbitration has also been achieved via the UNCITRAL Model Law (United Nations Commission On International Trade Law), which has operated since the 1980s as a template for national arbitral laws.

Tim Seal is head of construction at Ridgemont, a boutique law firm specialising in real estate and construction.