The Arbitration Bill

As insurers and practitioners know, there are several forums for dispute resolution available to those bringing and defending claims of professional negligence. These include court proceedings, arbitration, mediation, adjudication and expert determination. Each forum brings its own advantages and disadvantages. In some circumstances, the defendant professional may have the right to participate in the determination of the forum for resolving the claim, such as whether and when to mediate, mediation being a voluntary process.

Often, however, the question of which forum will be used to determine the dispute will be out of the defendant’s hands. For example, if the claimant wants to bring an adjudication and the circumstances around the claim provide jurisdiction for this, there is little that a defendant professional and their professional indemnity insurers can do to prevent an adjudication being commenced.

When it comes to final determination of a dispute (an adjudication award being only temporarily binding), the choice of the forum for construction claims is sometimes between the commencement of court proceedings and the commencement of an arbitration under the Arbitration Act 1996. In order for arbitration to take place, there must be an agreement to arbitrate between the claimant and proposed defendant, which usually would be found as a clause in the building contract or professional appointment. In such cases, if the claimant wishes to proceed in that forum, there is little the defendant can do, other than to ask the claimant to waive the arbitration clause and, instead, to proceed in court. Would professionals and their insurers want to make that request?

Arbitration as a means of dispute resolution is long established and the Law Commission for England and Wales have suggested that there are at least 5,000 domestic and international arbitrations each year in England and Wales, producing £2.5 billion for the economy in arbitration and legal fees. Arguably, the number of arbitrations taking place is surprisingly high, given its relatively low profile, although the number of arbitrations is still dwarfed by the use of court proceedings, statistics suggesting that in 2023 the civil courts handled 1.7 million claims, excluding family cases.

As the statistics suggest, in recent years, arbitration has not been particularly popular for domestic (non-international) claims and there have been a number of criticisms of the process and legal framework. For that reason, Parliament is currently trying to make arbitration more attractive and an Arbitration Bill has just passed its second reading in the House of Lords. The aims are to enable more efficient dispute resolution, to attract international legal business and promote UK economic growth. Key aspects of the Bill include codifying the duty on arbitrators to disclose circumstances that might give rise to doubts about impartiality, clarifying the law on arbitration agreements to avoid unnecessary satellite litigation, empowering arbitrators to make awards on a summary basis on issues that have no prospects of success (and so be aligned with a court’s interim powers), revising the framework for jurisdictional challenge and strengthening an arbitrator’s immunity from liability.

These changes reflect the fact that the appetite for including arbitration clauses in construction contracts and construction-related professional appointments has declined over recent years. There are certainly advantages to arbitration over court proceedings, particularly for professionals. Arbitration provides both privacy and confidentiality, which may be very important when dealing with allegations of professional negligence which impact on the reputation of an individual business or policy coverage disputes involving insurers and their policyholders. This also may be appropriate for sensitive projects. Arbitration has some flexibility of procedure and there is the opportunity to provide for the choice of arbitrator in terms of his or her professional background, such as being an architect, engineer or lawyer. Arbitration continues to be popular in engineering contracts where one party (usually the contractor) is an international (non-UK) entity. This is because Arbitration creates a neutral forum, awards are easier to enforce than court judgments and parties can choose who decides their dispute.

However, it is often the case that parties to contracts delete arbitration clauses in standard form appointments when contract drafting or opt to waive an arbitration clause that has been included in the contract when a claim arises and instead opt to use the courts to determine the dispute. There are likely to be several reasons for this, one of which is cost. A benefit of arbitration is that no issue fee is payable to commence proceedings, unlike the court system which has a maximum issue fee of £10,000 for higher value claims. However, that is outweighed by the fact that in arbitration, the parties must pay the arbitrator’s fees, which are usually calculated on an hourly basis and which will add up to a six figure sum in any substantial dispute. There is, of course, no equivalent requirement for the parties in court proceedings to pay the cost of the time of the judge. Payments to the arbitrator for his or her time therefore may appear to be an unnecessary but significant expense. Further, while arbitration has more flexibility of procedure, the courts have had an increased focus in recent years on cost control and driving through costs efficiencies, with an increased use of technology, such as the introduction of e-filing, e-bundles, virtual hearings and through the introduction of portals.

Another difficulty in a construction context is that of multi-party proceedings. Construction claims frequently involve at least three parties. However, an arbitrator derives his jurisdiction from the arbitration agreement, which is usually one of a number of clauses in a written contract between two parties. There may be a situation where there are other parties who should be involved in a dispute, such as co-defendants or third parties who do not have similar arbitration clauses in their appointments and so cannot be required to arbitrate. This can also be an issue where there are policy coverage disputes spanning several policy years where different insurers may have different dispute resolution provisions within their policies. Even where there are such clauses, it will be necessary to seek the appointment of the same arbitrator if possible (which may not be straightforward if a conflict exists) and for two or three sets of arbitration proceedings to be consolidated or running parallel in order to ensure consistency of outcome. More usually, there will be a mix where some contracts have arbitration clauses and some do not. Those parties who do not have such a clause in their contract can’t be made to arbitrate. So, with certain claims being dealt with by an arbitrator and other claims on the same project between different parties proceeding before a judge, there would be a risk of inconsistent and contradictory final outcomes.

Other factors to consider are that there are more limited circumstances in which an arbitrator’s award (which will be final and binding on the parties and enforceable) can be appealed when compared with the court system and that the quality of the arbitrator may be more variable and unpredictable, compared with judges.

In summary, where privacy is imperative, arbitration will be preferred and where the dispute involves more than two parties, litigation offers that greater flexibility. From a cost-perspective, this may depend on the arbitration provisions but the costs of arbitration are likely to continue be unattractive, especially if there are parallel arbitrations.

We will watch with interest whether the Arbitration Bill results in more wide use of arbitration as a dispute resolution forum, although we suspect that substantial further benefits would be needed for domestic clients to change their views about the disadvantages outweighing the benefits.