What to Consider When Signing Contracts with Arbitration Clauses 3

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Wednesday, August 27th, 2014
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Throughout the world, arbitration is a very common form of dispute resolution, although in the antipodes it is less fashionable than it used to be.

Ordinarily, arbitration can only be invoked when there is an arbitration  clause in a contract that states that any dispute of whatsoever nature to do with the contract must be resolved by arbitration or words to that effect. In the building industry, particularly within the commercial setting, arbitration clauses abound. In fact, they used to be the preferred dispute resolution  for the residential sector in some Australian jurisdictions like Victoria until  they were banned by acts of Parliament such as the Domestic Building Contracts Act 1995.

So what do you bargain for when you sign up such a contract if there is a well crafted and legally tight arbitration clause?
  1. You will only be able to resolve the dispute at arbitration with an arbitrator.
  2. You will not be able to resolve the dispute in any other jurisdiction unless there is an act of Parliament like the above Victorian Act that ousts the arbitration  for a particular jurisdictional terrain.
  3. An arbitrator will be appointed to resolve the dispute. Arbitrators have formal and robust qualifications in arbitration unlike mediators and adjudicators where the qualifications are somewhat underdone and often nonexistent.
  4. The procedure to have the dispute resolved is reminiscent of the courts in that there will ordinarily be a statement of claim, statement of defence, reply to the defence, liberty to apply for further and better particulars.
  5. There will also be an order for discovery where both parties, just like the courts, will be required to file a list of documents that canvasses all of the documents relating to the dispute and the contract.
  6. If the matter isn’t resolved, it will ordinarily go to formal hearing and witness statements will be drawn up and filed prior to the hearing.
  7. When the hearing commences, the procedure will again be very reminiscent of the courts in that barristers will normally be retained, the adversaries will ordinarily be called upon to give evidence along with the experts and relevant witnesses.
  8. The dispute will ordinarily be governed by an act of Parliament germane to arbitration at least in a sovereign setting.
So how does arbitration differ from the courts?Arbitrators, unlike judges, are not tenured full-time employees of the Crown. Arbitrators are sometimes part-time in that they have other vocations such as law, engineering or mediation.

Arbitrators are not remunerated by the State, they are remunerated by the disputants who are required to place moneys on account in trust before the arbitrator is deployed. The parties have to top up the arbitrators’ fees for deployment in advance on a regular basis and these fees can be considerable as arbitrators may charge from $2,000 to $10,000 a day depending upon the size of the dispute.

With arbitration, it is nigh on impossible to join other parties, i.e. other defendants or third parties to the same dispute, the reason being the arbitration procedure ordinarily only entertains disputes between the parties that have signed up the contract. This is a problem, as typical garden variety building disputes involve a number of actors, be they the builder, the architect, the building official or a cast of sub contractors. As such, one cannot consolidate proceedings and this can lead to cumbersome and costly parallel proceedings.

With the courts and many tribunals, however, you can consolidate a dispute so that all parties in the loop come within the jurisdiction of the same dispute.

As regards the time to resolve a dispute, when one compares the courts to an arbitration, in my experience it’s pretty much of a muchness. If anything, arbitration would be a little bit faster in some cases.

Ultimately, if the dispute doesn’t settle, the arbitrator will hand down a written determination which will be binding unless there is a mistake on a point of law which ordinarily can be appealed.

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3
  1. Geoffrey Beresford Hartwell

    There seems to be a respectable school of academic thought in the antipodes that has its face set against arbitration but the fact remains, I suggest, that only arbitration has the New York Convention 1958 (NYC) to back it in an international context.

    A Dispute Resolution Clause can always be devised with adjudication, mediation or amicable negotiation on their own or in combination as temporary options. Such ways of resolution may be conditions precedent to arbitration or the result may become final if agreed or, in the example of adjudication and absent dissatisfaction, after a lapse of time.

    However only an arbitration award will support invocation of the NYC.

    Another solution can be Expertise (also called Expert Determination) – simple and does what it says on the tin but does not attract the NYC!

    Lesser Breeds rush in where others fear to tread. The commentator is no lawyer.

  2. Seun Olokeogun

    Arbitration proceeding is meant to be a faster, simpler and less expensive method of dispute resolution than litigation. However, experience has shown that this is not so. In most cases, it has turned out to be more cumbersome and more expensive than litigation. The remuneration of the Arbitrators and umpire appointed shoots up the cost more than litigation. The fact that you have to go back to the court system to have the arbitral award enforced before you can give effect to it, where one of the parties is recalcitrant, makes the process wasteful and more cumbersome than litigation. There is also the problem of enfocement where it is a foreign award. However, it has the advantege of preserving relationships as it is less rancourous.

  3. Rangarajan

    One item that may be missed in international commercial arbitrations is that the default language is French. So better to state the preferred language for the proceedings.