As recently as the 1980s, all residential building disputes in Victoria had to be resolved through arbitration under the jurisdiction of the Commercial Arbitration Act.
Then, in a complete reversal, the 90s saw arbitration clauses banned – yes banned – in residential disputes throughout New South Wales and Victoria under the Domestic Building Contracts Act, though arbitration remains an option in commercial disputes in these states and arbitration is still allowed in residential as well as commercial disputes in the ACT.
So why has arbitration fallen out of favour? There are a number of reasons. First, with arbitrator fees ranging between $3,000 and $8,000 per day, arbitration is an expensive process compared with courts or tribunals, where litigants are not required to pay for judges or tribunal members (though court filing fees and interlocutory fees are on the rise).
A second area of concern revolves around the remuneration structure of arbitrators (daily rates as opposed to fixed salaries), which some critics say reduces the incentive for them to resolve disputes in a timely manner. As employees of the Crown, by contrast, judges and tribunal members (the latter of which enjoy permanent tenure) have no reason to prolong cases, especially given the document intensive – and, rather dull – nature of these cases.
Furthermore, others argue the arbitration system is exposed to conflicts of interest, especially as arbitrators are neither lawyers nor barristers. In my view, "the jury is out" on this, and I have never personally observed any form of partisanship on the part of an arbitrator – though admittedly some consumers are understandably squeamish when they learn the appointed arbitrator is in fact a retired builder.
That said, arbitration does have one significant limitation. Whereas Courts and Tribunals allow for consolidated multi-party proceedings involving a range of actors, arbitration does not.
Under arbitration, the client can take action only against the contractor and only under the terms of the contract, meaning that separate action would have to be taken against any other parties - such as architects or sub-contractors - to the extent these parties shared partial responsibility for the alleged problems. This can lead to multiple proceedings which are more expensive than would have otherwise have been the case under a consolidated action in a tribunal or court.
The bottom line is that arbitration has a number of problems which have led to its demise. Arbitration is, however, more useful when it comes to international disputes, whereby parties to the dispute are often multi-national joint venture partners who feel more comfortable nominating arbitration hubs and using hand-picked arbitrators. This is especially the case in complex disputes involving large corporations, where the cost of employing arbitrators is not usually significant in the context of the scope of the dispute or the amounts of money involved.