Overview: Construction Arbitration in Europe

In summary

This article covers the main trends in international construction arbitration in Europe, and initiatives aimed at addressing users’ concerns for more efficiency in this field. The covid-19 pandemic has illustrated the need for swift dispute resolution mechanisms to avoid escalation of disputes. Recent trends in construction disputes and construction arbitration show that the construction industry in Europe has been concerned with proportionality of the dispute resolution process for some time, and wishes to ensure that the process and its outcome are in line with its expectations. The key to resolving concerns on efficiency may be in stakeholders’ willingness to develop new solutions, and adopt methods developed in other legal traditions, especially a cross-pollination between the common law and civil law approach to construction disputes.

Discussion points

• Trends in construction disputes in the United Kingdom and in continental Europe in 2020
• Arbitration community’s response to the challenge of the pandemic
• Impact of the covid-19 health crisis on the construction industry and dispute resolution
• Possible mechanisms to address users’ need for quick (even if interim) dispute resolution
• Adoption of methods from civil and common law to meet users’ desire for proportionality and predictability in construction arbitration in Europe

Referenced in this article

• Arcadis Global Construction Disputes Report (2021)
• Queen Mary University of London and Pinsent Masons 2019 International Arbitration Survey: Driving Efficiency in International Construction Disputes
• ICC Commission Report: Construction Industry Arbitrations – Recommended Tools and Techniques for Effective Management (2019 Update)

Introduction

The period under review has unavoidably been impacted greatly by the covid-19 pandemic. A series of important questions have arisen for the construction industry and construction disputes specifically. Contractual provisions to address the consequences of the covid-19 health crisis showed their limitations, and laws governing contracts could have a significant impact on the owner or contractor’s entitlement to time and compensation.

Party-to-party negotiation, especially in continental Europe, provided the quickest form of early dispute resolution when the pandemic took hold in March 2020. The lasting impact of covid-19 might put a strain on the parties’ negotiated settlement, or their willingness and ability to negotiate in the future.

The arbitration community has responded well to the challenge posed by the health crisis, demonstrating the full extent of its flexibility and adaptiveness. However, lessons can be learned from the pandemic in order to better address users’ concerns for quick and efficient resolution of construction disputes in the future.

Over the past few years, a clear trend has emerged to suggest that the adoption and adaptation of solutions developed in different legal systems may be key to answering some of the complaints about inefficiencies that users of international construction arbitration continue to formulate. This article aims to shed some light on those trends and initiatives in Europe and to participate to the ongoing discussions on the improvement of international construction arbitration for its users.

Trends in construction disputes in Europe: covid-19 and contractual uncertainty

The pandemic that took hold in Europe in March 2020 has had a considerable impact on the construction sector. Works were put on hold due to forced lockdowns, access to sites was restricted and presence on-site was limited by health considerations or decisions of public authorities, and national and international supply chains were disrupted. These events and measures imposed to try to control the pandemic have caused losses of productivity and delays to construction works.

Amid the uncertainty, owners and contractors turned to the terms of their contracts but probably in few other areas than the impact of the pandemic did the governing law become so relevant.^[1] Concepts so widely used as force majeure may indeed have to be construed very differently depending on the law applicable to the contract. Where contracts are governed by common law systems, such as English law, force majeure is essentially a creature of the contract, and the remedies for force majeure events are to be found in the contract. By contrast, in civil law systems predominant in continental Europe, force majeure is likely to be addressed in the law and may provide, for example, that a party will not be responsible for force majeure events unless otherwise specified in the contract. Other contractual or legal provisions entitling contractors to time or compensation might have also consisted in contractual provisions on changes of law or, in certain civil law systems, the théorie de l’imprévision or the general principle of good faith. Obligations of mitigation and their consequences can also vary depending on the law applicable to the contract.

Market surveys such as the Arcadis Global Construction Disputes Report (2021) (the Arcadis Report) confirm that owners and contractors have encountered difficulty in properly characterising their claims under their contracts or the law. All the causes of disputes listed in the Arcadis Report seem to reflect the various possible bases of claims due to the pandemic. For example, as the most common causes of construction disputes on the continent, participants to the Arcadis survey listed: owner’s failure to properly administer the contract, owner-directed changes and errors or omissions in the contract document.^[2] For the United Kingdom, the most common causes of dispute reported in the survey include: owner, contractor or subcontractor failing to understand or comply with its contractual obligations; errors or omissions in the contract document; and failure to make interim awards on extensions of time and compensation.^[3] Owners, on their part, were also likely to worry about payment obligations and their own cash-flow position in the face of delayed projects.

When confronted with the early impact of the pandemic, when the events were relatively easy to understand but the extent of the consequences was yet unknown, stakeholders in the construction industry in Europe displayed a tendency to urgently renegotiate the contract terms to avoid any uncontrolled drifting of the projects. As the Arcadis Report demonstrates, ‘[t]he need for cash flow preservation in the uncertain context clearly made swift resolution a top priority’ and ‘fast agreements [were] observed in 2020, especially regarding COVID-19 impacts.’^[4] In continental Europe, ‘[a]mid COVID-19, many companies have mobilized contract “SWAT teams” to manage consequences with a common goal of fast settlement and limited impact on construction projects.’^[5] These reactions in the early phase of the pandemic explains why party-to-party negotiations played such an important role in the resolution of construction disputes in 2020.

Lasting impact of covid-19

There are many reasons to be doubtful that all covid-19 related disputes will have been definitively settled by direct negotiation between the parties. First, if the early impacts of the covid-19 – with lockdowns and travel bans – may have been relatively easy to grasp, the lasting impact of the pandemic and the periods between the ‘waves’ may be more difficult to apprehend. Contrary to ‘the “hard” lockdowns which characterised the early stages of the pandemic’, today ‘projects are predominantly being impacted . . . by increased health and safety measures, social distancing and limits on the number of people allowed on site; border restrictions; and the impact on the supply chain’.^[6]

In addition, where early settlements were not strong or comprehensive, subsequent impacts of the pandemic are likely to worsen. As reported in the Arcadis Report, ‘COVID-19 claims that did not settle early are likely to have festered and become entangled with other problems on the project, making them larger and more complex claims, and therefore harder to resolve.’^[7]

In the EU, a sharp increase in claims value was observed in 2020 from US$24.5 million to US$54 million. The changing work conditions imposed by the covid-19 pandemic and the long-lasting effects of the health crisis are likely to put a strain on parties’ abilities and continued willingness to negotiate. As the consequences of covid-19 on projects’ finances accumulate, some contractors may decide to turn to third-party adjudication to resolve their covid-19-related disputes.

If it continues in the future, the soaring prices of raw materials and scarcity of manpower in certain European countries will do nothing to improve the situation in the industry. Additional pressure on contractors’ bottom lines may lead to more (and inflated) claims and a lower margin to negotiate. The need to make up for past delays, the deferred demand due to the pandemic, and the EU’s stimulus package may put further strain on the industry and cause parties to commit to unrealistic deadlines, further fuelling claims. At that stage, parties may need more sophisticated solutions to resolve their disputes.

Response from the arbitration community

In the face of the pandemic, the arbitration community has demonstrated all its flexibility and responded quickly to the travel bans and the imposition of social distancing. Protocols for remote-hearing flourished,^[8] the arbitration community picked up Microsoft Teams and Zoom to interact with clients, experts and tribunals, and best practices were exchanged regularly during remote seminars across the globe. Even though the pandemic caused difficulties and there were limitations to remote working – such as engineering models not running on home computers, or difficulties showing 3D Models through the Microsoft Teams or Zoom platform – the effect of those difficulties on the resolution of disputes was somewhat marginal.

All members of the community endorsed their roles: institutions provided guidance on the effect of covid-19 on arbitration proceedings and, sometimes, adapted their rules; IT service providers enabled access to technological solutions that facilitated the organisation of hearings and cross-examinations of factual and expert witnesses; and lawyers (willingly or not) resolved to plead their case via small screens.

However, despite arbitration’s remarkable ability to adapt to the changes, this dispute resolution mechanism does not feature as one of the three main dispute resolution mechanisms in continental Europe in the Arcadis Report, and it features only in third place in the UK.^[9] In fact, in continental Europe, arbitration as a means to resolve construction disputes was not listed in the top three dispute resolution mechanisms in the Arcadis Reports in 2018 and 2019. There is therefore room for improvement for arbitration practitioners in order to meet users’ needs in Europe. The most common form for early resolution of disputes in Europe over the past few years remains settlement, though often after legal proceedings have been commenced.^[10] This trend denotes a clear desire by the parties to avoid full-blown legal proceedings and increase parties’ control over the outcome of the dispute.^[11]

Construction arbitration in Europe: areas for improvement

Recent surveys before the pandemic had highlighted arbitration users’ desire for quicker – even if temporary or interim – solutions to their construction disputes. The pandemic might have just exacerbated that trend even more.

The statistics published by the International Chamber of Commerce (ICC) are informative regarding the construction industry’s requests towards arbitration. The ICC is the preferred arbitral institution for the resolution of construction disputes. In 2020, construction and engineering disputes represented 20 per cent of ICC cases (194 cases).^[12] This percentage even increases to 38 if energy disputes are counted together with construction and engineering disputes.^[13]

In its 2020 Statistics, the ICC reported that, since 2012, when emergency arbitration rules came into force, the ICC received 154 applications for emergency arbitration. Out of those, half of the applications related to the construction/engineering and energy sectors.^[14] These statistics seem to evidence a clear desire from the arbitration users in the construction industry for a solution that provides quick, even if preliminary, relief and decisions. These emergency proceedings could, for example, help parties obtain a preliminary third-party decision that could help them settle their claims earlier on in their project.

These statistics also echo findings of the Queen Mary University London (QMUL) 2018 Survey, dedicated to the analysis of the evolution of international arbitration, in which respondents expressed the views that international arbitration was likely to continue to increase in the field of construction and energy disputes^[15] and that ‘wider and faster recourse to interim and conservatory measures’ constituted a factor that might lead to the increased use of arbitration for the resolution of construction disputes in the future.^[16] These findings highlighted the desire of the construction industry for fast (even if temporary) decisions that could help users move on with their projects.

The subsequent edition of the QMUL Survey (in 2019) focused on international construction disputes. The purpose of the 2019 QMUL Survey was to understand the causes of the perception that construction arbitrations are taking longer and are more costly than they should, and how these problems can be addressed.^[17] The results of the Survey strongly suggest that users’ perception of the inefficiency of construction arbitration stems from a belief that there exists a disproportion between the time and costs to resolve the dispute, and the stakes of the dispute. For example, the 2019 QMUL Survey provided evidence regarding the threshold at which stakeholders consider international construction arbitration to be a commercially sensible method for dispute resolution. Respondents to the 2019 QMUL Survey considered that the minimum amount in dispute for arbitration to be commercially feasible was between US$1 million and US$10 million. However, when responses are filtered to take into account only the responses provided by in-house counsel, this minimum threshold ranges between US$11 and US$25 million.^[18]

To better address users’ concerns, arbitration practitioners in (continental) Europe may therefore need to develop mechanisms to offer a solution to the time and costs issues of which users complain. Quick and preliminary decisions by ‘emergency’ arbitrators may be one such mechanism. Increasing diversity and opening up to foreign methods might also help to import new solutions.

Diversity is key

In the 2019 QMUL Survey, the four main perceived causes of inefficiency of international construction arbitration that were identified by the users were: party tactics, poor case management by arbitrators, large amount of evidence, and lack of experience of arbitrators or counsel in handling construction disputes.^[19] Two of those issues at least might be addressed by increasing diversity and familiarity with how different systems of law address construction disputes.

Perhaps far more than in any other field and region, construction arbitration is permeated by a clear difference of approaches between the apprehension of construction disputes in the UK and in continental Europe. In the United Kingdom, courts and practitioners have developed a specific body of law dedicated to construction contracts, and stakeholders benefit from access to a specialised court handling construction disputes, the Technology and Construction Court. In addition, in the common law tradition where oral and expert evidence play a major role in the establishment of evidence, specific expert disciplines have developed in order to provide parties and courts with expert analyses tailored to the needs and particularities of the construction industry. In a nutshell, events affecting construction projects are analysed in terms of ‘delays’ and ‘disruptions’, with causation between the events and the increase in time and costs for the contractor being subject to expert analyses presented as evidence to the courts.

No such specialisation exists in most of the legal systems on the continent. In the civil law tradition, construction disputes are typically approached based on the general provisions of the civil codes on contractual liability and certain specific legal provisions for construction contracts. Causation in relation to delays and disruptions, and the evidence thereof, is often a matter for the factual record (not expert evidence) and is subject to the sovereign appreciation of judges. Assistance by court-appointed experts is more often encountered in relation to ‘technical’ issues of facts^[20] than in the demonstration of the impact of certain events on the baseline schedule (programme) and the increase in costs for the (sub)contractor.

In his keynote address at GAR Live Construction Disputes in April 2019, Michael Schneider also focused on the benefit of diversity for construction arbitration. He explained the lack of diversity among members of international arbitral tribunals in construction disputes, generally composed only of lawyers, by the possible difference in training of engineers and architects especially between the UK and continental Europe:

[I]n some countries, like in the United Kingdom, the training of engineers and architects includes contract management which also requires contract drafting and interpretation. The preliminary reference of disputes to the engineer, as just discussed, is part of this training. In domestic arbitration in these countries one finds more frequently engineers and architects as arbitrators. On the European continent these subjects do not seem to form part of the training of engineers and architects, at least in the past. The standard conditions of contract also are different and traditionally contract management and dispute resolution does not seem to have been part of the training of engineers.^[21]

However, Michael Schneider also raised a red flag to what he called the ‘hijacking of experts’ by arbitrators, which he attributed to the importation of practices developed in state courts of common law countries:

In England and some other common law countries, the courts adopted an approach which removes the parties’ experts from the adversarial process. They decree that these experts owe a higher duty to the court than to the client that pays them. This approach may make sense in the courts; but it is spilling over into arbitration. Arbitrators are hijacking the parties’ experts . . .

I find this development problematic from the perspective of the arbitrators . . . There are different views about issues in the law and it is perfectly legitimate for counsel to rely on those legal views that fit its client’s case. Such differences exist just as much in other fields of knowledge and the experts dealing with them in the context of a case should be not treated any differently. Or put differently: just because there is no professional diversity in international arbitration, arbitral tribunals should not limit the application of their mind to legal issues and rely for issues in other fields of knowledge on a duty of impartiality by the experts.^[22]

Arbitral institutions have a clear role to play in shaping international construction arbitration into an effective and efficient method for the resolution of construction disputes. To tackle issues of inefficiency in international construction arbitrations, in 2001 the ICC Commission published a Final Report on Construction Industry Arbitrations.^[23] The Report provided very useful tools and techniques for successfully managing construction arbitrations. The success of the 2001 Report led the ICC Commission’s Steering Committee, in 2016, to start work on an update with specifically narrow objectives: to address, on the one hand, the modifications introduced by the 2017 revision of the ICC Rules of Arbitration and, on the other hand, the developments in the practice of construction arbitrations.

Guidance from the institutions: the 2019 ICC Construction Report

The updated report, ‘Construction Industry Arbitrations – Recommended Tools and Techniques for Effective Management’, was published in 2019 (the 2019 ICC Construction Report). It serves as a complement, for construction arbitration, to the more general report issued by the ICC Commission ‘on Controlling Time and Costs in Arbitration’ first published in 2007 and updated following the amendments to the ICC Rules in 2012.

One of the key features underlining the recommendations in the 2019 ICC Construction Report, mentioned at the outset of the report, is the relevance of the parties’ legal culture when approaching international construction arbitration: ‘The recommendations set out in this report try to accommodate the approaches of different national jurisdictions.’^[24] It is a fact that practices derived from construction disputes before the English courts have more than largely permeated international arbitration. However, some view the sophistication of the analysis developed in England (in terms of methods of delay analysis and prolongation costs), the extensive use of experts, and more generally the way in which proceedings are conducted before the English court, as some of the contributing factors to the increased inefficiency of construction arbitration.

The 2019 ICC Construction Report seeks to draw practitioners’ attention to this delicate issue of legal cultures and practices, and emphasises that the parties and their counsel’s legal backgrounds will influence their perceptions of the methods likely to lead to an efficient and cost-effective conduct of the arbitration proceedings:

Above all, procedures in construction arbitrations must be expeditious and cost-effective. For example, some (especially common law lawyers) contend that traditional common law procedures, if correctly employed, usually result in a high degree of precision in fact finding and, arguably, may enable a tribunal to reach decisions in which it has greater confidence. However, such procedures are costly and time-consuming. Others argue, with justification, that other systems and the practice of civil law proceedings in litigation and arbitration can lead to comparable degrees of precision in fact finding and confidence in the result, and that they can do so at lower cost and in a shorter time.^[25]

Among the various instances where legal cultures (of the parties, but also of the arbitrators) may play a role and where knowledge of the practices and procedures in the other legal culture can become an advantage, four such instances appear to be particularly noteworthy.

First, the 2019 ICC Construction Report notes that ‘[i]n construction arbitration, there is still an appreciable divergence between those used to the common law or “adversarial” approach and those used to other approaches’, including ‘significant differences in law and practice within common law and civil law jurisdictions’.^[26] The main advice that the Report gives is to make sure that the parties’ expectations are clearly understood at the outset of the proceedings: ‘at the first case management conference the tribunal ascertain . . . what the parties’ common expectations are regarding the procedure of the arbitration.’^[27] This suggestion is consistent with the findings of the Arcadis Report, where users in the UK and continental Europe have defined a successful dispute resolution process as one that is proportionate and meeting the parties’ expectations. As part of that discussion, the Prague Rules could also be discussed as a more controlled way to conduct the proceedings.

The second area where parties can learn from other legal cultures is with respect to the number of arbitrators to be appointed. The 2019 ICC Commission Report clearly encourages lawyers from the civil law tradition to consider agreeing on a sole arbitrator for disputes where the amount in dispute is between US$5 million and US$30 million. This advice stems from the finding that the ‘[u]se of a sole arbitrator is understood to be common and to work well in England and certain other common law jurisdictions even for large disputes (US$50 million or more)’,^[28] but that ‘this practice is not generally accepted in civil law countries . . . [where lawyers] may find a sole arbitrator to be acceptable only in cases where the amount in dispute does not exceed US$5 to 10 million’.^[29] The clear practice of the ICC is that it will rarely appoint a sole arbitrator for disputes above US$30 million and likewise appoint a three-member tribunal for disputes under US$5 million. This therefore leaves a window for the parties, when the value of the disputes lies between these two figures, to consider the appointment of a sole arbitrator.

A third aspect of the proceedings that may be influenced by the legal culture of the parties is disclosure. As noted in the Report, ‘[a]rbitrators with a civil law background . . . where court procedures for disclosure as understood in common law countries do not exist . . . may be less inclined to order extensive disclosure than those with a common law background.’^[30] The Report notes that ‘very few are still in favour of the wholesale and indiscriminate production of documents by means of the common law process of discovery’ and that ‘such a process must be justified if it is to be applied to an international arbitration. Otherwise, it has no place in ICC arbitrations.’^[31] In practice, however, one will often realise that even the notion of what comprises a ‘wholesale and indiscriminate production of documents’ is likely to be subject to considerable differences of opinion.

Finally, the fourth procedural issue that the ICC raises as a possible point of divergence is the form and content of submissions. As the ICC Commission puts it:

written submissions should be full and exhaustive, and should be delivered at the earliest possible occasion . . . Much antipathy was shown to the common law practice of not presenting the best case in the best possible way and relying on oral submissions, accompanied by supporting notes. Members of the tribunal or the legal . . . representatives of the parties need to have written submissions in advance in order to read them carefully at their own pace.^[32]

The stance that the ICC Commission appears to adopt in the Report is that acquaintance with the practices of the various legal traditions, with the concepts of construction disputes, and a good understanding of the applicable laws will be key in the efficient management of construction arbitrations.

Drawing on all of the above, one of the key takeaways from the 2019 ICC Construction Report is that, among the five ‘key qualities . . . that parties should consider when selecting arbitrators in the context of a construction arbitration’,^[33] ‘[f]amiliarity with both the civil and common law legal systems’^[34] is considered as a true ‘advantage’, alongside ‘[f]amiliarity with the industry and cultural nuances’.^[35] If the arbitral tribunal is constituted in accordance with those recommendations, and taking into account the widely diverging views on how to conduct expeditious and cost-effective proceedings, the ICC Commission considers that arbitrators will be best placed to determine ‘the procedures appropriate to the dispute in question which will enable them to discharge their duties without unnecessary delay or expense’.^[36] The 2019 QMUL Survey confirms that parties are sensitive to those criteria when choosing an arbitrator. Experience in construction and technical matters remains the most valued characteristic for an arbitrator, but respondents also mentioned their attention to the ‘diversity of the tribunal’, including in terms of country of origin and legal background (typically civil law or common law).^[37]

All of the above suggests that a greater willingness to adopt the tools developed in other legal traditions may be the answer to devising and conducting proceedings that are proportionate with regard to time and costs, and meet the parties’ expectations, thereby addressing users’ concerns towards construction arbitration.^[38]

Notes