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Dispute resolution - when to litigate and when to arbitrate

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legal matters

Most standard forms of building contract include an agreement to resolve any subsequent disputes by arbitration. Why this should be the case has, apparently, something to do with the voting rights within the Joint Contracts Tribunal (JCT ), which is responsible for drafting the standard forms, and a long-held belief by the contracting lobby that arbitration offers quick and cheap dispute resolution.

For decades, this belief has represented something of a triumph of optimism over experience.

Ironically, a shift of power within the JCT, which permitted contracting parties, for the first time, to opt for litigation as the preferred dispute resolution forum, coincided with the passing of the 1996 Arbitration Act, which has enabled a new breed of arbitrator, at last to live up to the industry's expectations. Nevertheless, arbitration is still the default option for most building contracts.

Before the 1996 Act, the existence of an arbitration clause did not preclude court proceedings. It simply gave the defendant the option of staying with litigation if they liked, or applying to the court to stay the proceedings for arbitration if they did not.

The remedy was discretionary, and many a young barrister was kept employed by attempts to persuade the judge that although arbitration was generally a very good idea, there were even better reasons why this particular case ought to stay with the courts, or visa versa.

The Arbitration Act changed all that. It took away the discretion of the court and provided that if you had an arbitration clause, you were bound to stick with it, unless the arbitration agreement was 'null and void, inoperative, or incapable of being performed'. Now, if you have second thoughts about arbitration after signing up to it, you have to show not simply that litigation has the edge, but that the arbitration option is a non-starter.

The recent Court of Appeal case of John Downing v Al Tameer Establishment (2002) shed some light on how this might be done. The claimant was the inventor of a process, called 'Black D', for separating crude oil from water, but lacked the funds needed for its exploitation, marketing and manufacture. The claimant was put in touch with the defendant, a Saudi Arabian company, and it entered into a written agreement jointly to exploit 'Black D' for commercial gain. The agreement included an arbitration clause which required the parties to try to settle their disputes amicably, failing which, to submit them to arbitration by three arbitrators.

It seems that, shortly after signing up to the agreement, the defendant lost faith with 'Black D', withdrew its funding and refused to communicate with the claimant. It even went so far as to deny the existence of the agreement. The claimant sought to operate the arbitration clause and invited the defendants to cooperate in the appointment of three arbitrators. All attempts fell on stony ground. Ultimately, the claimant issued court proceedings and embarked upon a three-year marathon to serve the writ and translations in Saudi Arabia. The defendant's response to the court proceedings was to apply instead for arbitration.

The Court of Appeal described the matter as a straightforward case of a claimant which, having being rebuffed in its efforts to implement the arbitration agreement by a defendant which denied its existence, resorted to proceedings only to have the defendant perform a volte face and rely upon the very agreement that had been hitherto denied.

The court observed that the existence of an arbitration agreement does not prevent either party from starting court proceedings. But if court proceedings are started in breach of the arbitration agreement simply, as it were, to test the water, it falls to the court to intervene.

The arbitration agreement operates independently of the primary contract and the ordinary rules of contract law apply to it as much as to the main contract. In this case, the defendant had breached the arbitration agreement and were now prevented from relying on it. Instead, the claimant was entitled to accept the position by commencing proceedings.

This useful case offers some assistance to those who seek to avoid their arbitration agreement by showing that it has come to an untimely end, thereby opening the door to the court.

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