Why has Arbitration Fallen out of Favour in Australia? 4

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Friday, July 12th, 2013
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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.

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4
  1. Rod

    This is a great question, Although not practising in Australia could it be for the same reason it has fallen out of favour in the UK. The lawyers got hold of it and made it too expensive.
    Or could it be that the parties expect the arbitrator to sort out a blizzard of paper and are surprised when he charges for it.
    In the UK we are on the back foot in terms of arbitration but slowly and surly as new arbitrators come on line people are realising the art is get the right arbitrator (discipline), for the right dispute.

  2. Martin Collingwood

    In the Uk, as in Australia, we also have the advent of adjudication which whilst originally intended to provide an interim decision on disputes in construction matters has often led to a final determination on a practical basis because the adjudicator’s decision is not challenged in other proceedings.

  3. Bill Guthrie

    I believe your logic in costs is exactly right.
    But I also believe the legal fraternity is more than a little responsible.
    There are plenty of well qualified Arbitrators that do not charge the type of fees nominated.
    The appointment of Arbitrators seems to revolve those that have spent their careers with the 6 minute block time sheets and hence those that see and believe Arbitration as a form of ADR that should be fast and economical don’t get to play in the game.
    The use and success of Adjudication in the construction industry despite the noise from the legal fraternity that it lacked justice.
    There is scope for the use of fast track Arbitration but how much support does it get from those that would suffer reduced fees.
    I absolutely understand the need to make money nobody is suggesting that costs should not be recovered.
    The head of a major construction company once said to me, if we shear the sheep we can come back time after time and shear it again, but once we skin it that it is all over.
    Maybe more in the legal fraternity should look to those using ADR as ongoing clients and not see ADR as a private mirror of the courts and actively seek to get an outcome were the costs match the event.
    Disputes are always going to happen in the construction industry, they will come by the very nature of the business, that being the case those involve see them as a cost of doing business and hence commercial pressure says that you take the most economical means of resolving the issues at hand.

  4. Matt Campbell

    The issue regarding joinder of third parties is key, both for plaintiffs and defendants. It is not only a costs consideration as raised in the article, but also a strategic consideration for the parties.