By Dr. Chandana Jayalath
The term construction contract involves not only contractors and employers but also consultants from different disciplines, sub contractors, investors, insurers, bankers, and so on. The international nature lies in both the facts that the parties come from different countries and so is the source of supply of works, goods and services. The forms of contract also differ upon for whom the work is being carried out.
Although the principles governing the construction contracts are basically identical in terms of how rights and obligations have been defined, we come across that the international arena is bit of comprehensive. There may be two or more different national systems of law capable of qualifying as the substantive law of the contract. It could be the law of the country where the contract is made or where the project is constructed. It could also be the law of the state where a significant part of the contract works is manufactured, or where the contract is financed or simply the law which the parties regard as well suited to govern the particular contractual relationship.
It is therefore common in the construction industry for individuals, corporations or governmental agencies to join together in a joint venture or consortium. It is also common in non-contractual matters such as product liability, to have multiple potential parties involved in the manufacture, sale and installations of the product, i.e., windows, doors, roofing, siding etc with each of these parties being a potential defendant.
When there is an issue on a construction project, it is not unusual for the employer to take that issue with the work of both the consultant and the employer. An employer may consider that the defects in the project are attributable to two or more factors including poor design, bad workmanship and lack of supervision. The employer can not begin a single arbitration procedure with both the consultants and the contractor without an agreement on all parties, as the arbitration clause of the contracts do not usually provide for tripartite approach. If there is no general agreement the employer will have no recourse other than to sue both the consultant and the contractor. It would be unwise to commence separate arbitrations against the consultant and the contractor as these arbitrations would perhaps involve the same issue of defect. Separate arbitration hearings by different tribunals would open up the possibility of two inconsistent findings on the same issue.
Although arbitration is frequently preferred to litigation (as it is seen as a more private means of resolving disputes and allows the parties to choose arbitrators with the relevant expertise to preside over their dispute), it becomes no longer applicable when the matter is connected with many parties who are not parties to the arbitration. For instance, FIDIC Red book has no mechanism for a third disputant to occupy in the dispute process although it stipulates a gauntlet for the parties to strictly comply with.
Let us consider a case where the employer joined the contractor as a co-defendant. The contractor applied for a stay of proceedings in favor of arbitration, as there was an arbitration clause in the contract between the employer and the contractor. It would therefore be undesirable to have two proceedings before two different tribunals which might reach inconsistent findings. There are cases that courts dismissed applications by the disgruntled parties.
The court may however take the view that, as both disputes are related to the same project, it would be unsatisfactory for the dispute to be arbitrated while the other was litigated because of the possibility of again inconsistent findings and decisions.
Another example is where the contractor submits a claim for loss and expense based on late instructions by the architect. The architect may maintain the position that whilst the instructions could have been issued a little earlier, the contractor’s claim is grossly exaggerated and submitted malafide with a view to recover some of its costs that were incurred on its own inefficiencies. If the employer accepts the claim, it will need to obtain recourse from the architect. If the employer fights the claim, it will need the architect’s assistance to do so but will also need to obtain recompense from the architect if its challenge was to prove unsuccessful.
Examples in international construction are basically group-complaints that the work had not been done properly and contained one or more defects. An employer may find himself in a position of having to choose between the parties responsible: a contractor or a consultant. What it does not wish is to find, having launched an arbitration, that it fails (e.g. the defect is one of design and the contractor is not liable) and it has to start a further arbitration against the consultant designer. Similarly, a prospective defendant may wish to bring in another party so as that the finding is made which correctly apportions responsibility for the damage the subject of the arbitration, e.g. one consultant liable along with another consultant. All this can be done in courts but can it be done in arbitration?
A sub-contractor loses money for having to comply with an instruction which derives from the Employer. It claims against the contractor. The Contractor does not, ideally, want to be risk being liable to the sub-contractor and have to start off all over again pursuing a claim against the Employer. This is particularly the case if the employer’s defence is that completion was delayed because of matters for which the Contractor would say was the responsibility of the sub-contractor. So too with questions of the interpretation of the provisions common to more than one contract or sub-contract.
Questions might therefore arise such as how to extend arbitration for third parties, may an arbitration tribunal hearing a dispute arising from a specific contract decide issues arising from connected agreements entered into by the same parties, how separate arbitration proceedings can be commenced, may these different proceedings be consolidated and under what conditions; if they cannot be consolidated, how and to what extent can one overcome the inconveniences that arise from having several parallel proceedings; may a party to the complex contractual structure intervene voluntarily in the proceedings; when there are several defendants that have divergent interests and do not therefore want to appoint the same arbitrator, how does one go about constituting an arbitration panel, and so on.
This is why the author believes that Multi-party arbitration should have a satisfactory regime in international construction disputes. It will tie all the parties together in a dispute thus avoid them operate in the shadow of contract privity. It won’t be a real ‘alternative’ to litigation if there is no ability to bring in other parties who were related to the dispute or to allow other parties to intervene.