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Compound interest adds a commercial edge to arbitration

I visited the RIBA recently for a select gathering of the dispute resolution community. The 66 Portland Place building is a short hop from the Temple, where I work, particularly if you travel, as I usually do, by bicycle. During my visit, I was struck by a couple of things.

Although the entrance hall is dominated by a fond homily to sustainability, straight from the lips of some architectural guru, the RIBA offers no facilities for cyclists to park their bikes. True, the RIBA railings, unlike other railings in the vicinity, do not threaten to do unspeakable things to any cycle that should have the temerity to lock onto them. But this is hardly encouraging, particularly in these fuel-aware times. Where is the sign offering a free postcard, cappuccino or 10 per cent off purchases at the RIBA bookshop for those who do chain their bikes to the railings?

Although my meeting was on the second floor, I was directed to the basement for the ladies loo.

If sustainability is about responding to people's needs, surely there is scope for improvement here.

Despite these inconveniences, I enjoyed debating the workings of arbitration at the RIBA.

Inevitably the question came up as to what arbitration has to offer over litigation. This is one of the great, unanswered questions of our time. In the old days the short answer was, 'nothing'. Arbitration was longer, more expensive and more unpredictable than litigation. It was a constant source of amazement to the lawyers that the industry continued to delude itself that arbitration was quick, cheap and conducted by someone who really knew what they were doing. It seldom acquitted itself favourably on any one of these counts. It was not unusual for those who had had any experience of construction arbitration to beg contract draughtsmen to draft a dispute resolution clause that would ensure that they never had to go through anything like it again. The draughtsmen, for their part, were severely hampered in this task by the Court of Appeal which had said, in a moment of madness, that any dispute involving an architect's certificate would have to be decided by an arbitrator and not the court.

But things are different now. The 1996 Arbitration Act is universally acclaimed for its no-nonsense, clear-thinking approach. A new breed of arbitrator has emerged, keen to work with the parties to help them resolve their differences cheaply and efficiently. Conversely the courts' new civil procedure rules have proved less user-friendly and more unwieldy than perhaps was intended. Heavy-handed judges try to straight-jacket the parties into procedures and timetables which do not suit them. Meanwhile both the JCT and the House of Lords, more or less at the same time, said that parties to building contracts are no longer obliged to take their disputes to arbitration; they can choose.

So why should they choose arbitration? Experience demonstrates that fabby-dabby procedures will avail you not a jot if your tribunal does not use them: you may as well pour a good claret through a tea bag. The parties are, of course, free to choose their arbitrator by agreement. But once they have fallen out they can seldom agree anything and often the choice of tribunal is left to the president of an appointing body such as the RIBA or the Chartered Institute of Arbitrators. And although things have improved markedly over the last few years, there are still a few tea bags about.

There has been one constant feature that recommends arbitration over litigation. Under the 1996 Act, claimants can claim compound interest on sums due. In these days of modern commerce this should not seem exceptional, except that the courts do not have a similar power and can only add simple interest to the principal sum. Furthermore, some commentators suggest that the winning party can recover compound interest not just on the claim but also on the costs of funding the arbitration. These commercial advantages may tip the balance in arbitration's favour.

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