Arbitration is becoming best option for SME construction companies

005_Ross Taylor_137_15thSept10
Ross Taylor

Ross Taylor, founder of resolution specialists Taylor Law, explains why,  when it comes to cost effective ways of solving construction disputes, arbitration is not only a viable option for small and medium sized firms but, in many circumstances, the best option.

INTERNATIONALLY, arbitration is a well-recognised process for solving construction disputes, but until recently it has been the preserve of large companies and usually those operating on an international stage.

The introduction of the Arbitration Scotland Act in 2010 changed all that.

One of the primary drivers for the Act was to benefit the Scottish economy, by encouraging more international disputes to be resolved here. A side effect has been to open up the potential of arbitration to small and medium sized construction companies as an effective tool for dispute resolution.

A first reaction in many construction disputes between businesses is to sue, and often litigation is the only option considered. Research by Glasgow Caledonian University estimates that 80% of construction disputes involve sums of less than £100,000.

In such cases, litigation can be a disproportionately expensive process, and a court may not be the best option for deciding complex technical issues.

From the mid-1990s this led to the growth of adjudication – a form of ‘litigation in private’ where the appointed adjudicator is given the power to rule on disputes. Their decision is binding in that those deemed to be at fault have to pay, but there is still the option to re-run the dispute in court.

While adjudication may be better than litigation for many construction disputes, the process can still seem too labour intensive and expensive, or the parties may feel that the adjudicator, as a technical rather than legal expert, has got the facts and or the law wrong. There can often be a sense of rough justice.

Arbitration could be viewed as an effective alternative to litigation and adjudication. Since the 2010 Act tidied up the processes surrounding this, it has the potential to offer more thorough decisions than adjudication and quicker and more innovative decisions than litigation. Construction disputes will tend to revolve around issues of cost, time and/or quality. Determination of these issues can be subjective and the legal framework difficult to apply.

A key point is therefore to ensure you access legal advice that allows you to weigh up the best dispute resolution options – litigation, adjudication, mediation, arbitration, etc – for your specific situation. If your legal advisors don’t fully understand all the options or have access to specialist advice, your business could be at a disadvantage to a business that does.

Also, ensuring this advice is reflected in any contract agreement you sign up to can be the key which unlocks effective resolution of any dispute that may arise.  You need to know exactly what you are agreeing to. For example, if arbitration is highlighted as an option, under the terms of the 2010 Act, this will take precedence over litigation.

If you are using standard contract terms and conditions based on templates, do they take into account the implications of the 2010 Act? Most of the current standard forms make arbitration the default for dispute resolution between businesses. So you should ensure you select the dispute resolution model that meets your circumstances and that it is reflected in your contract’s terms and conditions.

Adjudication is usually seen as the faster option, albeit more rough and ready, while arbitration is often seen as having the potential for being an open ended, drawn out process. Contrary to this common perception, the 2010 Act means that arbitration can provide a very straightforward, fast-track dispute resolution process with potential cost savings, particularly if both parties are willing to cooperate. In some circumstances, arbitration might be a little slower than adjudication, but will deliver a more robust decision, with more accountability.

An arbitration decision is final and binding and the process allows selection of an arbitrator who is a specialist based on the nature of the dispute.

The appointed arbitrator will set out the procedures and timetable, which the parties then agree to and their rights are protected under law. The views of both parties can be taken into account in agreeing the process and identifying ways to fast-track a resolution.

One of the 2010 Act’s founding principles is that the arbitrator is required to run the process in an economical way for all parties. Flexibility is built in to ensure fairness. Importantly, delays waiting for court time can be avoided and, unlike court proceedings, arbitration is confidential for those involved.

As with any dispute resolution there is no guarantee on the final cost, as this will usually depend on the level of cooperation by both parties. However, under the new Act, arbitration may now be a better option than other procedures.

If you are an SME, don’t discount arbitration.