Traditionally the perception has been that arbitration is the informal, quick and cost-effective alternative to litigation, however, it is not uncommon to hear of domestic arbitrations becoming so expensive and slow that parties are placed in a position where settlement is more cost-effective than seeing the process to its end. How then are we to distinguish arbitration as a genuine and effective alternative to the court process? Further, what mechanisms do the courts have in place to manage the unique features of construction litigation so that an expeditious and less expensive disposal of proceedings might be achieved?
Arbitration or litigation?
The perceived advantages of arbitration over litigation are speed, cost-efficiency, flexibility as regards the application of rules of evidence and other formalities, the enforceability of an arbitral award and, often of great importance in a commercial context, the absolute privacy of the forum.
While there are potential benefits to arbitration, its success is largely dependant upon the parties' willingness to be proactive and accommodate the process.
For example, where a dispute involves complex legal questions before an arbitrator who is perhaps a technical expert, engineer, architect or quantity surveyor, it is not uncommon to reach the end of the process, only to find that one party will challenge the decision of that arbitrator on the basis of a perceived error of law, breach of procedural fairness or denial of natural justice. For that reason, where there are substantial and complex legal issues, litigation is often (particularly in retrospect) thought to be the better way of resolving such dispute.
Further, arbitration is most effective when arbitrators are empowered to keep the proceedings simple and efficient or the parties adopt procedural rules that allow the proceedings to be run efficiently. When parties insist on extensive pleadings, discovery and lengthy hearings, particularly in a domestic arbitration, there is little difference between the cost of arbitration and litigation.
Conversely, problems may arise when the formal and strict processes of the courts endeavour to accommodate a construction dispute involving unique, technical issues and documentation without mechanisms in place to properly manage a dispute of that nature. This is complicated further when the litigation involves an international contract, in which case arbitration will almost always be preferable for its simplicity, efficiency and enforceability of outcome.
Of course, whether parties undergo litigation or arbitration is a matter usually governed by their contract. A careful consideration of the competing benefits of each forum is required at a very early stage of any project to avoid the risks associated with either.
Reforms to litigation
The courts have long endeavoured to take steps to ensure appropriate mechanisms are in place to manage the unique features of construction litigation.
The introduction of a Building Case List in Victoria in 1972 was designed to encourage faster and less expensive disposal of proceedings with one of the clear advantages being that judges were able to monitor progress of the proceedings. The Supreme Court of NSW has for the past 20 years managed a similar list (now called the Technology and Construction List) and, for a significant period of time, Queensland had a building list (effectively superseded by the current Supervised Case List).
On Friday, 19 June 2009 the Victorian Supreme Court launched the Technology Engineering and Construction ("TEC") List which incorporates "building cases" from the previous Building List, as well as disputes over the operation of particular technologies. The new procedures established by the TEC List have been introduced with a view to reducing litigation costs by allowing the early and flexible adoption of such procedures as the appointment of external assessors, limited time trials and early resource conferences where the parties consider the resolution of particular legal questions.
One of the clear advantages of such a system is that it facilitates the referral of technical questions to a suitably qualified expert while reserving resolution of legal questions to a judge. However, the litigation of technical issues cannot be endless. The process must have the effect of saving the judge time, avoiding misinterpretation or mistakes on technical issues and ensuring the judge continues to apply his/her own mind to the report.
However, while this "reference out" system resolved, to a certain extent, the difficulties in ensuring that a judge is equipped with the right tools for resolving technical disputes, the system does not address the issue that parties are often more interested in enforcing their legal entitlements than resolving disputes.
To that end, the NSW Supreme Court has since 2005 been introducing further reforms associated with case management and cost minimisation. Through various amendments to the NSW Civil Procedure Act and Uniform Civil Procedure Rules, the following measures are now available to the courts:
the power to cap the costs recoverable as between the parties to the proceedings, or the costs that may be charged as between solicitor and client;
the power to order "stopwatch" trials; and
the power to limit expert evidence provision for stopwatch hearings and expert conclaves.
As mentioned in our March edition, the 2007 Annual Review published by the NSW Supreme Court reported a 10 percent growth in caseload and a median finalisation time of 8.1 months (compared to 21.9 months in 2003). These data suggest that the recent reforms have restored some confidence in the litigation process.
Also in NSW, in December 2008 a Practice Direction was issued to set out the case management procedures for the "just, quick and cheap" disposal of proceedings which notably:
at the outset of the matter, requires the parties to provide details of the nature of the dispute, the main issues, the questions which should be referred to a referee, and a statement as to whether the parties have, or are willing to attend mediation; and
makes provision for adopting more flexible approaches to discovery.
This confidence in the litigation process may not only act as a catalyst for other states to follow suit but has coincided with, and may influence, the current reform agenda for domestic arbitration.
Domestic arbitration reform
Domestic and international arbitrations in Australia currently operate under separate regimes, with domestic arbitrations governed by the Uniform Commercial Arbitration Acts applicable in each state and international disputes governed by the International Arbitration Act 1974, based on the UNCITRAL Model Law.
The major (although still limited) distinction between these two streams is that, under the domestic legislation, there is greater scope to apply to courts for judicial supervision of an arbitration and the setting aside of arbitral awards. For example, in Oil Basins Ltd v BHP Billiton Ltd  VSCA 255 it was held that inadequate reasons in an award did not meet the judicial standard, constituting a manifest error of law. The practical effect of such intervention has unfortunately been that many arbitrators are simply unwilling to deviate from the traditional "litigation style" process, in the expectation that such an approach will result in a less contentious outcome.
In stark contrast to the domestic position, under the UNCITRAL Model Law, courts may only set aside arbitral awards in a limited number of circumstances, namely, where there was no agreement to arbitrate, where the dispute falls outside scope of the arbitration agreement, where there has been a breach of procedural fairness in the making of the award or where the enforcement of the award is against public policy.
Calls for the reform of domestic arbitration from within the legal profession have been the impetus for discussions regarding adoption of the Model Law. Earlier this year, NSW Chief Justice Jim Spigelman suggested that the Model Law be adopted in order that "out-dated" arbitration in Australia be made effective and to indicate Australia's intention to become "an international arbitration hub".
In response to growing frustration with the effectiveness of the domestic process, Australia's Attorneys-General announced, following a meeting of their Standing Committee on 16-17 April 2009, that new, uniform commercial arbitration legislation would be drafted based on the Model Law and supplemented by any additional provisions necessary or appropriate for the domestic scheme. Their Report stated that the aim of the proposed reforms was to give effect to the overriding purpose of arbitration, being to finally resolve disputes in a "quicker, cheaper and less formal" manner to traditional litigation.
The hope is that these reforms will achieve the right balance between limiting the court's invention both during, and at the conclusion of, the process, while at the same time maintaining the parties' freedoms and flexibility to adopt processes to best manage and resolve their particular dispute. If this balance can be achieved, domestic arbitration will go a long way to meeting its potential as an effective alternative to litigation.
Disillusioned parties increasingly inclined to remove arbitration clauses from standard contracting terms in favour of the court system, which continues to develop new rules and procedures to accommodate construction disputes, may be heartened by the proposed reforms to domestic arbitration in this country.
As litigation and domestic arbitration continue to evolve as mature dispute resolution options in Australia, parties should, when negotiating contracts, remain mindful of the current limitations upon each process as well as the changing legal landscape within which future disputes may be decided.
In our next edition of Project Insights we will be looking at Dispute Review Boards.