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Construction arbitration: Geography lessons

by Antony Collins on 26 May 2015

Construction arbitration

With anticipated global population growth of 40% between 2010 and 2030, the world’s interconnected and increasingly urban population is driving unprecedented demand for infrastructure. Delivering the required transport, energy and housing infrastructure in the swiftest and least disruptive manner therefore offers a competitive advantage. Achieving harmony between governments, financiers, developers and subcontractors over the delivery and development of major construction projects requires careful planning and, even then, disputes are inevitable.

Arbitrator Andrew Aglionby says that the main sticking points in construction disputes centre on quality, costs and time, most often when there are changes to contractual terms. Common examples are projects not being completed to the agreed standards, going over-budget or facing very lengthy delays. “These projects involve billions of dollars of investment and one of the biggest challenges is change: a change in the project specifications; a change in the timeframe; a change of mind; or sometimes a change of management,” he states. “When this occurs, and companies suddenly find themselves exposed or facing financial loss, the main question is who should be held responsible?”

The challenges and risks are diverse and substantial. Construction projects will see a multitude of contracts between private and public sector entities, often from different geographies. There have been Middle East investors – usually deploying Islamic finance mechanisms – constructing projects in London, Chinese companies going into Africa and Spanish developers taking on schemes in the US and Latin America. Companies such as Vinci, Flour, Grupo ACS, Hochtief and Skanska, meanwhile, have created global portfolios of projects.

As such, establishing minimally disruptive dispute resolution processes for cross-border projects – including where cases should be heard – are now high on the agenda for all parties. Aglionby, who practised in Hong Kong for 17 years, notes a trend towards resolving infrastructure disputes locally, but exceptions, particularly on smaller projects remain. “Asian-related disputes now gravitate more towards Hong Kong or Singapore, while cases in the Americas may go to New York or Miami,” he says, pointing out that contracts governed by the industry standards of the International Federation of Consulting Engineers (also known as FIDIC) have tended to focus on the UK.

In such situations, having the correct dispute resolution mechanism becomes critical. There are a great many factors companies need to consider when entering arbitration, including what happens before then (Dispute Adjudication Boards for example), the independence and attitude of the judiciary at the seat of the arbitration and the varied influences of the business and legal cultures behind the process. Few companies will agree local court litigation of international agreements and arbitration is often a common solution, although there is still factors that can be overlooked.

“Asian companies, for instance, may wish to hear their cases in Singapore or Hong Kong but one or more of the parties may come from countries with a civil law system,” Aglionby continues. “That may involve them in aspects of the process which may not be familiar, for example disclosure of documents, which might well be a usual feature of arbitration at the chosen seat. That is not necessarily a bad thing, but should not come as a surprise on the day. The situation is made more intricate by the global nature and diversity of the players in the construction industry.”

Aglionby thinks there is a move towards regional seats to gather more of the disputes which have closer geographical connections. There is a big and continuing push in establishing pan-regional arbitration hubs, such as Hong Kong and Singapore in Asia and New York or Miami for the Americas, while places such as Mauritius have been attempting to attract African disputes and Dubai, Qatar and Riyadh are vying to be first choice for Middle East-related disputes.

Aglionby recommends close scrutiny of arbitration clauses in regards to geographical factors, including who will chair an arbitration panel, as that can be influenced by the chosen place for arbitration. He believes that the seat of an arbitration should be considered quite hard during the contracting stages with the geographical aspects – as well as the perceptions or even misconceptions about certain markets – being addressed.

There is a balance to be struck between the cost and time benefits of local proceedings, versus proven seats with “a long history of dealing with relevant subject matter, or where there is good depth in the appropriate pool of lawyers, arbitrators, experts and support services all sufficiently versed in arbitration”. Other factors include the relevant cultural aspects of the businesses involved. “Standard forms of contracts also have a role to play and can be adopted but sometimes could or should adapt to send disputes to the most acceptable places,” says Aglionby.

The issue of where and how a case should be heard tends to be thought through in the very biggest contracts but many of the smaller to medium-sized ones often overlook such nuances, Aglionby believes.

“Many of the contracts will often have an arbitration clause from an earlier contract, cut and pasted, without anticipating all the ramifications of where a case might be held. If an Asian company working on a project in Africa has a standard arbitration clause without project specific amendments, it might, if it thought about it, have preferred a case to be heard in Hong Kong or Singapore - and both parties might have been willing to agree to seat an arbitration in Mauritius,” he summarises.

This post was written by Antony Collins who is a freelance journalist. He can be contacted at ac@acollinsmedia.com

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Topics: International Arbitration, Construction

Antony Collins

Written by Antony Collins