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Explanatory Notes
Arbitration Agreement
B104 ARBITRATION AGREEMENT
EXPLANATORY NOTES INTRODUCTION This Agreement is designed for a situation where a dispute involving three parties - employer, main contractor and one of the subcontractors - has arisen and the parties want to have a formal arrangement for the dispute(s) to be dealt with by a single arbitrator. Even if the main contract and subcontract contain arbitration clauses, there is often no linkage between the two contracts. Thus, if disputes arise, even if they are common to both contracts, there will be two separate arbitrations, one under the main contract, and one under the subcontract. Even if the construction contracts do make a link, this Agreement does more than bring the three parties before a common arbitrator. It also sets out the procedure in a lot more detail than would normally appear in the construction contracts as well as dealing with the sharing of common costs etc. Although the terminology refers to a construction project, this form can be used, with some amendments, for any 3 party dispute where there are contractual connections - e.g. client, consultant, sub-consultant. (For general notes on arbitration, see our Free Information on the website') SUBMISSION TO AND PURPOSE OF ARBITRATION - CLAUSE 1 This clause establishes the basis of the agreement and the objective -namely to resolve certain disputes which have been identified. Brief details of those disputes and of the contracts which are the subject of the Agreement are to be set out in the Schedule. Care must be taken to be precise as to the disputes to be made subject to the arbitration. APPOINTMENT OF ARBITRATOR - CLAUSE 2 This Agreement provides for a single arbitrator: if more than one is required - sometimes a panel of 3 arbitrators is preferred - the clause would need to be amended. The clause also specifies the type of qualifications which the arbitrator should possess. This is a matter for consideration whenever arbitration is being contemplated. The fact that a dispute may arise out of a civil engineering contract does not necessarily mean that a civil engineer should act as arbitrator. For example, if the dispute centres on money claims a quantity surveyor or accountant could be more appropriate. Alternatively, if there are important issues regarding the proper interpretation of the construction contracts, a lawyer might be more appropriate. This Agreement allows a two stage appointment process. First, each of the parties puts forward up to 3 names. If no agreement is reached within a fixed time limit, the appointment will be made by some independent third party. There are numerous organisations willing to nominate or appoint arbitrators from lists which they maintain. In addition to the professional institutions - RICS, RIBA etc. - there are various specialist arbitration institutions - ICC (International Chamber of Commerce), Institute of Arbitrators, London Court of International Arbitration etc Before selecting such an institution, it would be appropriate to ascertain the basis upon which a nomination will be made. Whether the arbitrator is selected from among the names circulated among the parties or appointed by an independent institution, he must, of course, be entirely impartial and independent of the parties to the dispute.
This clause also deals with the possibility of the arbitrator resigning or dying. In this connection, especially in high value arbitrations which are likely to take some time to resolve, it is not unknown for the parties to insure the life of the arbitrator. PLACE OF ARBITRATION - CLAUSE 3 Especially in a cross-border or international arbitration, the place of arbitration needs careful consideration. A 'neutral' territory is often selected i.e. a country with which none of the parties is connected, or in which none of them have their head office. There are also legal considerations. Without going into detail, it is easier to enforce an arbitration award in an international arbitration if that award is made in a country which is a signatory to the New York Convention on the Enforcement of International Arbitral Awards. LAW AND LANGUAGE OF ARBITRATION - CLAUSES 4 AND 5 These provisions are only relevant to an international arbitration when they can be important. With regard to the substantive law, this may already be set out in the contracts, but if it is not it is advisable to establish it by agreement. The substantive law is the law which will be applied when interpreting the contract(s) during the arbitration. Fortunately perhaps for English practitioners, English law is frequently applicable in international transactions, just as English is a language frequently used in drafting international agreements. PROCEDURE AND PLEADINGS - CLAUSE 6 This clause outlines the procedure for the arbitration. However, the clause leaves a lot to the arbitrator, since he needs to have control over the process, deciding the time limits, requests from the parties etc. Clause 6.5 allows for the Agreement to contain certain specific matters on which the Arbitrator is required to pronounce: if so, details should appear in Part B of the Schedule. Clause 6.6. permits the arbitration to be dealt with without the necessity for oral presentations to the arbitrator. However, not least because parties like to have their 'day in court' if any of the parties requests that there should be oral presentations, then a hearing must take place. Clause 6.7 deals with disclosure of documents. Under English law all documents which are relevant, even if only peripherally relevant, have to be 'disclosed' -i.e. produced to the other parties. Disclosure can be very time consuming and expensive, and this clause makes it clear that the parties want to limit the exercise, although there can be risks in such
an approach. COSTS - CLAUSE 7 Arbitration can be expensive and this clause establishes how the various common expenses will be shared among the parties. The main costs are the arbitrator's fees and the cost of hiring premises at which the arbitration will take place. One disadvantage of arbitration when compared to litigation is the fact that, in arbitration, the parties must pay for services of the arbitrator and the courtroom. If there is a partial settlement before the arbitration has run its full course, Clause 7.5 allows for the cost sharing ratios to be adjusted. This would be appropriate where, for example, the main contractor settles his difference with the subcontractor but carries on the arbitration with the employer. OTHER MATTERS - CLAUSES 8 -11 These clauses tidy up a few legal points. Clause 8 emphasises the binding nature of the process and expressly prevents any party from starting some other legal proceedings relating to the issues in dispute. It also commits them to honouring the award. If anyone fails to do so, not only would he be in breach of this agreement, but the arbitration
award will itself be enforced by the courts. Clause 9 makes it clear that the arbitration clauses in the relevant construction contracts will be superseded, and Clause 10 deals with the possibility of a partial settlement with some disputes remaining unresolved. Finally, Clause 11 gives the arbitrator the right to settle disputes arising out of interpretation of the Arbitration Agreement itself.
The Construction Act applies to contracts for "construction operations" within the UK. Broadly speaking, this covers all contracts involving building operations, whether new buildings or maintenance or repairs of old buildings, within the UK. The main exception is construction work for residential occupiers.
The Act contains certain mandatory provisions relating to payment and adjudication as a means of resolving disputes.
PAYMENT
Sections 109 to 113 of the Act deal with payment.
1. Payment
Where a contract duration is likely to be 45 days or more, a construction contract must provide an adequate mechanism for determining what payments become due under the contract, when they become due and contain provision for final date for payment of each sum becoming due. The following wording in a payment clause may be appropriate to deal with this provision:
"Within 5 days after the end of each month, the Contractor will submit an application to the Employer for payment in respect of work carried out during that month. Within a further 5 days the Employer will issue to the Contractor a certificate showing the amount due and the final date for payment which will be 20 days from the date of the Contractor's application."
2. Withholding of payment
Section 111 makes it illegal for a party (usually the Employer) to withhold any amount from a payment which has become due unless within a specified period before the final date for payment, that party has given an effective notice of its intention to withhold payment. That notice must specify the amount to be withheld and the grounds for withholding each such amount.
Suggested wording is as follows:
"If the Employer wishes to withhold any payment which has become due under the Contract, he shall, not less than [5] days before the final date for payment of that amount, give notice to that effect to the Contractor specifying in the notice each amount to be withheld and the reasons."
3. Pay when paid
Section 113 of the Act makes it illegal for a Contract to contain a "pay when paid" clause - i.e. a provision which makes payment under the Contract conditional upon the payer receiving payment from a third party. In other words, a Main Contractor cannot make payment to a Subcontractor conditional upon payment being received from the Employer under the Main Contract.
4. Suspension
The right to suspend performance of a Contract is given under Section 112 to a party who has not received payment in full of the amount which has become due by the final date for payment and no notice of withholding has been given. In those circumstances, the payee must give 7 days notice of its intention to suspend performance, and if payment is made within that period, the right to suspend ceases. There is no need to give this right of suspension expressly in the Contract as it is covered by the wording of the legislation. Some commentators have argued that an Employer would be entitled by contract to exclude the right of a Contractor under Section 112 to give notice of suspension. Not everyone agrees with this argument.
ADJUDICATION
Section 108 of the Construction Act contains provisions which give any party to a Construction Contract the right to refer a dispute arising under the Contract to adjudication. The section states that a party can give notice at any time of his intention to refer a dispute to adjudication and the timetable must be designed to secure the adjudicator's appointment and the referral of the dispute to him within 7 days of the notice, with the adjudicator's decision within 28 days from referral. This 28 day period may be extended by 14 days with the consent of the referring party or for any other period by agreement between the parties.
The adjudicator must act impartially and be able to take the initiative in ascertaining the facts and the law.
The adjudicator's decision will be binding (and must be implemented) until a dispute is finally determined by legal proceedings, arbitration or agreement. If the Contract states, the adjudicator's decision can be final and binding.
It is not possible to contract out of these provisions and if the Contract is silent on adjudication, there is a statutory scheme - the Scheme for Construction Contracts, which will apply.
Thus, even if the Contract is silent, a party to a Contract to which the Act applies can require that a dispute is referred to adjudication.
There are a number of organisations which will appoint an adjudicator and which have adjudication rules which are compliant with the Construction Act. These include most of the main professional bodies - RIBA (Royal Institute of British Architects), RICS (Royal Institution of Chartered Surveyors), ICE (Institution of Civil Engineers) etc.
A suggested clause, under which reference is made to one of those organisations, is as follows:
"Either party may refer a dispute arising out of this Agreement to adjudication by giving notice to the other party. The adjudicator, if not appointed by agreement between the parties, shall be appointed by the President of the [Institution of Civil Engineers] on the application of either party. The adjudicator shall act impartially and be free to take the initiative in ascertaining the facts and the law. The adjudicator shall be required to reach a decision within 28 days of referral or such longer period as the parties may agree.
[The adjudicator's decision shall be binding on and implemented by the parties and unless either party gives notice to the other within [60 days] from the date of the decision, it will be final and binding on the parties and will not be subject to any further legal proceedings."]
It should be noted that the Construction Act is so written that if a Construction Contract does not comply with the Act, the Contract will, in effect, be supplemented by the (statutory) Scheme for Construction Contracts. This sets out details of provisions with respect to payment by instalments and adjudication which will take effect in those circumstances.
This is one of many engineering contracts.
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