What is arbitration?

Arbitration is an alternative form of dispute resolution where parties can agree to finally resolve their disputes outside the traditional court system (i.e. litigation). Disputes are resolved by a neutral arbitrator, or a panel of arbitrators (i.e. a tribunal), appointed by the parties that makes a final, binding and enforceable decision to resolve the matters in dispute.

There are similarities between the arbitral process and litigation, including: 

• both litigation and arbitration are designed to finally resolve legal disputes between the parties through a third party decision maker;
• disputes are resolved through the application of relevant legal principles; and
• the parties can call expert witnesses to provide commentary on complex technical factual matters before a judge or an arbitrator.

While similarities exist, arbitration is a more flexible process which enables the parties to adapt the procedure and process to suit the circumstances of their dispute. In this regard, arbitration is particularly well suited to complex construction disputes. Key features of arbitration include:

• the parties can appoint an arbitrator(s) of choice (including, with the necessary technical experience);
• it is a confidential process;
• awards can typically be obtained faster than an equivalent High Court proceeding; and
• finality of awards (awards are not subject to review on the merits and avoids prolonged court appeal procedures) – and awards can be enforced extra-jurisdictionally under the New York Convention.

In this article, we expand on the key features of arbitration and explain why arbitration is particularly well suited to the resolution of disputes arising in connection with construction projects.

Key features of arbitration  

Flexible procedure and speed

Arbitration offers a flexible approach to dispute resolution. The parties have the ability to choose institutional rules of arbitration which suit their needs. Alternatively, they can agree their own process, including whether to hold an oral hearing or to ask the arbitrator to make a decision on the papers, how to carry out disclosure of documents, and whether or not the Evidence Act applies. In the context of arbitrations involving construction projects, the ability to agree to carry out a visit to the disputed construction site is particularly useful. This is in contrast to litigation, which requires strict adherence to procedural rules. 

If the parties are under pressure to obtain a fast decision, arbitration is often a suitable choice. For example, under the International Chamber of Commerce (ICC) arbitration rules the final award is to be rendered within six months from the last signature of the terms of reference. In New Zealand, the Arbitration Act 1996 (Arbitration Act) does not impose strict timeframes for the delivery of awards. Overall, in most cases, arbitration results in a final determination more swiftly than litigation.

Choosing arbitrators with appropriate expertise 

In arbitration, parties can choose which arbitrator or arbitrators will determine their disputes. This allows the parties to select arbitrators with necessary industry and technical expertise. The selection process will often be a strategic one – as the parties will attempt to appoint arbitrators who are more likely to understand the basis of their case. Where the parties fail to agree on a procedure for appointment, institutional rules or the Arbitration Act will generally provide default mechanisms. 

In our experience, dispute resolution processes are far more robust when decision makers have a sound understanding of the technical matters that are the subject of the dispute (i.e. often pertaining to complex time and cost matters in construction disputes). It is common practice for the parties to choose arbitrators from a pool of King’s Counsel or former judges, although it is possible to appoint engineers with relevant experience (for example, where a dispute concerns specific technical issues). 

Confidentiality 

Unlike court proceedings which attract publicity and are on the record for anyone to view, arbitration is typically confidential. It allows the parties to resolve a dispute without the fear of publicity or external scrutiny. The New Zealand construction industry is relatively small, and businesses can rise and fall based on their reputation. Arbitration is particularly attractive where the nature of disputes involves sensitive commercial information or serious allegations that are harmful to the business if publicised. Achieving a favourable outcome in a dispute is important, but this should not come at the expense of damaging commercial reputations.  

Cross-border disputes 

There is an increasing proliferation of international main contractors in the New Zealand market for large scale projects (including EPC projects). When disputes arise, the head contractor may be unwilling to pursue litigation in the New Zealand courts because of a perception of a potential risk of judicial bias, and the perception that the principal may enjoy a “home ground” advantage given its familiarity with the domestic legal system.

In arbitration, the parties can eliminate the perceived “home ground” advantage issues. They can agree on the applicable law of the arbitration (and can elect to apply widely known institutional arbitration rules such as the LCIA, SIAC, or ICC), the language, and procedures. The parties can also set up a panel of independent arbitrators who have no national ties to either party. This way, the dispute resolution process is tailored to address the parties’ concerns in relation to neutrality. Further, any arbitral awards can be enforced extra-jurisdictionally (including through the New York Convention). This means that the awards obtained in New Zealand can be enforced in a foreign jurisdiction. 

Arbitration for construction disputes 

When disputes arise on construction projects, they are often complex and require a great deal of technical expertise to resolve. Arbitration allows the parties to appoint a tribunal that can understand the matters in dispute and to tailor the procedure to best ensure a robust and fair resolution of their dispute. 

It is becoming increasingly common for construction contracts to include an arbitration agreement establishing that disputes are to be finally resolved by binding arbitration. NZS 3910, the most common construction contract used in New Zealand, includes a dispute resolution clause which requires parties to proceed to arbitration. It is clear that arbitration is widely recognised as the dispute resolution mechanism of choice for parties in the New Zealand construction industry.  

For tailored guidance and support in both domestic and international arbitration, contact our dedicated team of construction law experts who have significant experience advising clients under the New Zealand Arbitration Act 1996 (and related jurisdictional issues) and a wide range of institutional arbitration rules, such as ICC, LCIA, DIAC, AMINZ, SIAC, the UNCITRAL Rules, and others.

If you would like to discuss any of the themes highlighted in our arbitration series, please get in touch with one of our experts.

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