Manufacturing consent The new Arbitration Bill may leave the smaller contractor liable for costs exceeding any claim, making it unable to participate, writes David Nevin On 19 June 2008, the Department of Justice, Equality and Law Reform published the Arbitration Bill 2008. This Bill will repeal the three Acts in force at the moment governing the area; the Arbitration Act 1954, the Arbitration Act 1980, and the Arbitration (International Commercial) Act 1998 while preserving Ireland's obligations under the New York Convention, the Geneva Protocol and the Geneva Convention. One of the principle purposes of this legislation is to give the force of law to the UNCITRAL Model Law in respect of both domestic and international arbitration. At present, UNCITRAL only applies to international commercial arbitration, an area of arbitration which would rarely affect the construction industry. The purpose of this article is to briefly examine the operability and inoperability of section 20(1) of the Bill which references costs in arbitration agreements and more particularly to highlight the possible abuse of this section in circumstances where the stronger contracting party to a contract could put in a term stipulating that each party would bear their own costs, which could exceed their claim and in doing so effectively negating the utility of the arbitral process to the weaker party. An example of such inequality of bargaining power is between employers and contractors in tendering situations.

Section 20(1) provides: “The parties to an arbitration agreement may make such provision as to the costs of the arbitration as they see fit”. In essence this allows the parties to agree on the allocation of costs whether before or after the dispute has arisen. This is new in so far as it relates to domestic arbitration. Section 30(1) of the 1954 Act currently deals with such agreements as to costs and it is suggested that Section 30 remains more suitable to domestic Arbitration. Section 30 provides that any agreement that a party pay their own costs of the reference or award or any part thereof shall be void, that any such agreement is invalid and inoperable unless it is achieved after the dispute has crystallised. Section 30 is intended to avoid the situation in which a party is effectively prevented from commencing proceedings as, whatever the outcome, he will be liable for his own costs. However, a post-dispute agreement to that effect under the 1954 Act is permissible, on the basis that once a dispute has arisen the parties are perfectly capable of taking into account their own interests in determining the terms of a submission to arbitration. The majority of construction arbitrations involve claims of e150,000 or less. Notwithstanding the sums involved, these arbitrations are typically quite complex in nature involving variations, delays and/or disruption, EOT claims and the associated time delay analysis etc. Indeed such arbitrations may take in excess of two years to resolve and would certainly involve a legal team, various experts including time delay experts, arbitrators’ fees and a whole host of associated costs leading to costs which in some cases may actually exceed the claim costs. If the contractor had agreed to a provision in his contract which provided that each party bear their own costs then this would lead to the highly unsatisfactory situation where a contractor, who may have a genuine strong claim against the employer is left with a net loss following a successful arbitration. It may also actively encourage the employer to delay proceedings and indeed escalate costs. The reality of commercial life is that the stronger party will exploit their stronger position by dealing with costs in advance, particularly in circumstances where the stronger party knows that the value of the contract (and as a consequence the dispute) is relatively small and that the absence of a costs award in the contractors favour will probably provide a large disincentive to taking part in what may well be an economically futile arbitration. To compound matters it has also been suggested in many circles that we will see an amendment in the second edition to the new public sector contracts to provide that the parties will pay their own costs. The Department of Finance has made it clear that the new public sector contracts are not to be amended. Contractors have a simple choice, they can either tender on the basis of these contracts or not. In the present construction market, that choice becomes even simpler, remain in business or stay in a business risking insolvency. The arguments proffered in favour of Section 20(1) is that arbitration is about consent. The arbitration agreement is the agreement of the parties. If parties decide that a certain section should not have effect, that agreement should be sacrosanct. A further argument that has been put forward in its favour came from proponents of international arbitration who have stated that an agreement that each party bear their own costs is common internationally and that the omission of such an option in Ireland would be detrimental to Ireland’s position as a destination for international arbitration. It is submitted, however, that a compromise would be to simply adopt different approaches to domestic and international arbitrations. It is not suggested that issues regarding inequality of bargaining power should be dealt with in legislation but when such inequality leads to such a clear opportunity for duress and abuse of process that issues of public policy are raised then it is submitted that this section of the Bill should be rethought before it is passed into law. n David Nevin is an associate in Construction Group at Matheson Ormsby Prentice This article appears in the April edition of the Irish Construction Industry Magazine.