Arbitration, the justice system's flexible friend

The new Act should do much to make resolution of disputes more speedy, says Henry Sherman

Arbitration has been subject to criticism for many years, and the arbitration v litigation debate has rumbled on for at least as long. In 1966, a judge, picking through the wreckage of an arbitration which had gone wrong in the case of Price v Millner recorded that: "Many years ago, a top-hatted old gentleman used to parade outside these Law Courts, carrying a placard which bore the stirring injunction: 'arbitrate - don't litigate!'" The judge - Edmund-Davies J - went on to wonder "whether the ardour of that old gentleman would not have been dampened somewhat had he survived long enough to learn something about the present case."

But unacceptable levels of cost and delay are not unique to arbitration, as Lord Woolf states in his recent report on the shortcomings in the civil justice system.

So is arbitration really worse than litigation? And, given the long-running nature of the debate, can the Arbitration Act, which recently received Royal Assent, and comes into force early next year, make any difference? The answer to both, I think, is a qualified "yes".

In principle, arbitration should have a crucial advantage over High Court litigation - the considerable freedom that it gives the parties to decide themselves how it will be conducted. In short, the parties are able to design their own resolution process. This freedom, if used properly, can achieve a flexibility, informality and speed with which the High Court cannot compete.

Unfortunately, this power is all too rarely exploited to the full. As a result, the arbitration user can end up with what is, in effect, the worst of both worlds - cost and delay, rivalling or even exceeding the cost and delay of litigation, without the availability of a judge to enforce progress and apply effective sanctions to an unco-operative party. There is also justified concern among commercial users generally about the uncertain scope and effect of judicial intervention in the arbitration process.

At the heart of the problem is the approach that has hitherto been taken by the law. Unlike other jurisdictions, English law has tended to treat arbitration as a matter for the parties and, as a result, our arbitration legislation has, until today, said very little about the powers of an arbitrator, and nothing whatsoever about how an arbitration can or should be run.

Legislation has been scattered between a number of different Acts, and is often obscurely drafted. As a result, arbitration law until now, rather than helping the parties to decide how their arbitration should be conducted, has created a journey largely without maps.

A partial solution has come with the introduction of arbitration rules for use with a number of standard construction and other forms. Inevitably, however, these too are incomplete, and what they leave out (often for good policy reasons) is often crucial - what specific powers, for example, should the arbitrator have? And can parties outside the contract be brought into the same arena so that all relevant disputes can be heard together?

The resultant vacuum has led parties and their lawyers to turn for help to the rules of High Court procedure as the obvious - and arguably the only - model available for handling major disputes. This has resulted in a degree of formality and the adoption of, for example, rules of discovery and evidence which have tended to get in the way of cost-effective and rapid progress.

The parties and the arbitrators alike have often been confused about the extent of their powers and their freedom to act, which has been largely based on common-law decisions, and leaving considerable scope for uncertainty. The aim of the new Act is nothing less than a cultural revolution. Its aim is to enfranchise both parties and arbitrators and encourage them to exploit fully the opportunities for flexible and user-friendly dispute resolution which the Act provides. To this end the Act:

sets out clearly for the first time in one place the powers that the parties have to shape the arbitral process to suit their needs, while providing a fall-back regime;

makes it clear for the first time that, where appropriate, the arbitrator can adopt an inquisitorial role, which enables him to act as a sort of proactive examining magistrate, and which is often better suited to an informal process where the arbitrator himself is also a technical expert;

strengthens and clarifies the powers of the arbitrator generally, for example: to order security for costs in place of the Court and to limit the recoverable costs of the arbitration (both new and radical moves); to make orders equivalent to High Court injunctions if the parties agree; and to decide on the scope of his jurisdiction.

The Act also lays down clear responsibilities for the arbitrator and the parties. The arbitrator, for example, must "adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense", while the parties must "do all things necessary for the proper and expeditious conduct of the arbitral proceedings". Lord Savile, the Court of Appeal judge who played a leading part in guiding this project onto the statute book, sees these as among the most important innovations introduced by the Act. In particular, there is also now a clear and comprehensive code governing the removal of an arbitrator.

So, what is the verdict? Some say that the Act is largely cosmetic, invoking concepts as laudable as motherhood and apple pie without doing enough to effect real change. Certainly, it does not tackle some of the most crucial areas - notably, how to achieve an effective multi-party arbitration to get round the problem of separate and often conflicting arbitration clauses. In this case, as in others, the Act contents itself with setting out the parties' powers to tackle this issue, without doing so itself.

Also, the Act has not addressed the continuing level of concern about the quality of arbitrators, and the lottery to which the parties are frequently condemned if they cannot agree to an arbitrator, and have to resort to the nominating body under the contract.

However, its defenders argue that it is unrealistic to expect the legislation to provide for such situations. The Act's approach is clear: it provides, for the first time, a clear and comprehensive code, enabling the parties to make their own decisions on how to proceed. If they choose not to use their freedom to merge related disputes into one arbitration, or not to agree on an arbitrator, then, ultimately, that is a matter for them.

It is difficult issues such as these that expose the paradox of arbitration. On one hand, arbitration is a consensual process, dependent on the agreement of the parties; on the other, one of them is almost certainly involved against his will, and the combatants may well have reached the point where they cannot agree on the time of day, let alone on the choice of an arbitrator.

To reduce the scope for agreement in the interests of greater efficiency would, however, strike at the heart of the enfranchising mission of the Act, whose drafters aim to achieve, by gradual means, the cultural changes which will, in turn, produce the more efficient system that all users and the overwhelming majority of arbitrators would like to see.

Will it work? Reaction so far has been generally positive, but it is early days. Generally, arbitration faces a long fight to restore its battered reputation while, in the construction sector, much may depend on the success of the Government's plans for mandatory adjudication.

The author is a partner with McKenna & Co's construction practice.