Should you consider Arbitration as the preferred dispute resolution method in construction contracts?

Recent legislative changes and trends in dispute resolution are promoting the re-emergence of Arbitration as the ideal option as a dispute resolution method in construction disputes.

However, as a referral to arbitration depends on an agreement between the parties, it is important to consider this as early as contract time.

What has changed?

Key stake holders in the construction industry will now be familiar with recent changes to the Security for Payment regime in Queensland which has now had a full year of operation since coming into force in December

2014. One of the key amendments was the dual system of standard and complex claims which saw claims over $750,000 being subject to extended time frames of up to around 150 calendar days, compared with the previously rapid process of around 50 calendar days.


Advantages of Arbitration over other methods

All States and Territories have now introduced reformed Commercial Arbitration legislation which are all based on the International Model (the UNCITRAL Model Law). This legislation replaced the old Commercial Arbitration Acts which were generally considered to be embarrassingly out of date.

The significant advantages to arbitration over litigation now include that:

  • There is a mandatory ‘stay’ of court proceedings and referral to arbitration when there is a binding agreement in place between the parties to refer disputes to arbitration.
  • Arbitration proceedings (including statements and evidence) and decisions of the arbitrator/s are confidential.
  • Interim measures made by an arbitrator/s are enforceable by the courts.
  • Appeal rights have been narrowed significantly.


What about Expert determination?

The usual practice in construction contracts is that any expert determination will not be final and binding on the parties. This significantly detracts from ED’s attractiveness as a dispute resolution method in construction and property disputes. In addition, the ED process is not governed by any specific legislation which means that there is a less coherent scheme setting out the rights of appeal.


Isn’t security for payment still the way to go?

Figures for 2015 in security for payment show that after a full year of operation under the new regime:

  • For the financial year ending July 2015 there were 712 adjudications lodged in Queensland claiming $2.1 billion and the largest being $360 million; and
  • For the September quarter of 2015 there were 174 further adjudications, claiming $1.53 billion.

These figures would suggest that there has not been a slowdown of security for payment activity in the construction industry in Queensland.

However, the success rate of claimants has now reduced to 43% based on claimed amount vs adjudicated sum.

We do expect that there will be a slowdown in the flow of complex adjudication applications being referred to adjudication, as claimants begin to experience the frustration associated with the drawn out timeframes and substantial costs of the new procedures, which will be comparable in cost to a short form arbitration.

The frustration will (we expect) be compounded by the lack of finality in the adjudicators’ decisions and recent Supreme Court authority which confirms the ability of a principal to quickly reverse the effect of adjudication decisions by having recourse to security given under the contract.


Incorporating Arbitration into your contracts

The numerous dispute resolution bodies in Australia for both international and domestic arbitration (e.g the Institute of Arbitrators & Mediators Australia (IAMA) and the Australian Centre for International Commercial Arbitration (ACICA)) offer both a standard and fast track or expedited arbitration procedures, the attractiveness of referring disputes to arbitration is now overwhelming.

Parties can now expect to resolve more minor disputes within timeframes of up to approximately 120 to 150 calendar days on the fast track arbitration rules, and with larger and more complex disputes in the vicinity of 365 days.

Clearly these timeframes are good justification for not only the inclusion of Arbitration as the preferred mechanism for dispute resolution in the construction contracts, but parties should also seriously consider aiming to reach a more specific agreement to stipulate a particular Dispute Resolution body to appoint the Arbitrator, and perhaps even to agree in advance to a specific set of rules to be applied.

Please contact us for advice on the incorporation of dispute resolution clauses, tailored to your project.


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