Judging the arbitrators

As a viable forum for the resolution of construction disputes, arbitration remains under siege.

One of the most important perceived advantages of arbitration, namely that the arbitrator alone had powers to open up, revise and review certificates of architects and engineers, was recently removed by the House of Lords in the case of Beaufort Developments -v- Gilbert Ashe (Northern Ireland).

With removal of this uncertainty lawyers are now more likely than ever to advise their clients not to adopt arbitration agreements in their construction contracts.

This is a great pity since, with the advent of the 1996 Arbitration Act, arbitration was given many of the tools it needed to rediscover itself as a quick, cost-effective and commercial process for the resolution of complex technical disputes.

There is still time for the 1996 Act to prove that it can bring about this change in the effectiveness of arbitration, but one key issue stands in the way, namely the competence of arbitrators. It is a widespread view that many arbitrators practising in the construction field lack the judicial and procedural skills necessary to conduct arbitration as envisaged under the 1996 Act.

disputes

The case of Gbangbola and Lewis -v- Smith and Sheriff, illustrates this point. Mr Gbangbola and Miss Lewis entered into a construction contract in the JCT Minor Works form with Smith and Sheriff for the construction of a new house. Disputes arose with regard to uncompleted work, defective works, and whether practical completion had been achieved. These matters were referred to arbitration.

It was agreed between the parties and their representatives that, instead of dealing with all the matters in dispute, the arbitrator should first determine only two preliminary issues and that he should do so on the basis of written submissions and documentation.

The two points addressed were whether instructions issued by the contract administrator requiring certain items of work to be carried out were to be treated as variations or were to be considered as part of the original scope of work, and secondly, whether practical completion had been achieved. In his interim award on these issues, the arbitrator held in favour of the employer. The works in question formed part of the contracted scope of work, and practical completion had not, at the relevant time, been achieved.

The arbitrator then proceeded to consider the remaining matters in issue. These included whether the contractor was entitled to variation orders in respect of certain items together with a list of no less than 68 items of alleged defective work.

In presenting these items to the arbitrator, the representatives for the employer had drawn up a Scott Schedule. In respect of the 68 items of defects, the schedule showed that the employer costed these out to a figure in the order of £24,000. On behalf of the contractor a column in the schedule under the heading "amount offered by claimant", was completed in the amount of approximately £6,000. Reviewing all of this the arbitrator held in his final award that the employer was entitled to approximately £3,000 only in respect of these defective works.

It then fell upon the arbitrator to consider the question of the parties' costs in the arbitration. It is a general rule that "costs follow the event". This means, subject to a discretion which may be exercised by the arbitrator, that a successful party in arbitration is entitled to have its costs paid by the losing party. The arbitrator held that the employer should pay the contractor's costs.

This came as a surprise to the employer and its advisors, who considered that they had succeeded both on the preliminary award and on the second award.

Accordingly, the advisors wrote to the arbitrator suggesting that he had transposed the words "claimant" and "respondent". The arbitrator's indignant reply was that he had done no such thing. He then revealed his reasoning. Since the Scott Schedule had shown that the contractor had "offered" £6,000 in respect of the alleged defects and the arbitrator had awarded only £3,000 in respect of those defects, this surely must mean that the contractor had been successful in the arbitration.

challenged

This matter was challenged in front of His Honour Judge Humphrey Lloyd QC in the Official Referees Court. Firstly he held that the words in the Scott Schedule, although badly drafted, did not amount to an offer from the contractor. The figures entered by the contractor on the Scott Schedule amounted to no more than its valuation of the items in the counter-claim, or an admission that it was not disposed to challenge the figures for these items in whole or in part.

Counsel for Gbangbola and Lewis put the point succinctly. If the £6,000 entered on the Scott Schedule was to be treated as an offer by the contractor capable of affecting the position on costs, then it should also be treated as an admission of liability and thus an arbitrator's award in a lesser amount would be inappropriate. If, on the other hand, the offer was not to be taken as an admission on the part of the contractors, then it had no status whatsoever and should not have been taken into account by the arbitrator.

Judge Lloyd agreed with this contention. He concluded that when it came to his decision on costs the arbitrator had completely misconstrued the column in the Scott Schedule as an offer. Accordingly, the arbitrator had taken into account something which could not properly be considered in the exercise of any discretion as to costs. This would give rise to substantial injustice to the employer in having to pay the contractor its costs and in accordance with Section 68 (2) of the Arbitration Act, judgment was to be given in the employer's favour.