HOW DOES ARBITRATION WORK?
Most contracts in the Construction Industry are concluded satisfactorily - the project is completed to the client's requirements and the correct amount of money changes hands.
But not always.
One or both of the parties are not happy. The work is not satisfactory, or there are complaints about the amount due and payable and the parties to the contract are at loggerheads.
A dead-lock ensues and thoughts turn to how to resolve the problem. The party who is claiming something the other party refuses to agree to, and in most cases this is the Contractor, arrives at a point where he says - "I want to go to arbitration".
The problem is - he often does not know how to get there.
The first question he must ask himself is "Have I got an agreement with the other party to refer disputes to arbitration?"
If he has not or cannot obtain this agreement he cannot proceed to arbitration and he has to decide whether to pursue the matter through the Courts.
Arbitration is chosen by the parties as an alternative to litigation. Parties cannot be compelled to take their dispute to arbitration. It is a consensual arrangement adopted willingly by both of the disputants.
The Arbitration Act 1965 defines an arbitration agreement as "a written agreement providing for the reference to arbitration of any existing dispute or any future dispute relating to a matter specified in the agreement, whether an arbitrator is named or designated therein or not."
The agreement has to be a written agreement.
Where the parties to a contract have signed a contract agreement which contains an arbitration clause or where they have, by reference, clearly agreed that these conditions are applicable to them, even though the contract documents are not signed, this requirement is satisfied.
Let us assume that our Contractor in this case has surmounted this first hurdle - he has a contract with the other party which contains an agreement to refer disputes to arbitration.
The second question he must ask himself is, "is the matter suitable for arbitration?"
Wille and Millin in their "Mercantile Law in South Africa" say that "Arbitration is the process by which parties to a dispute are, with the approval and encouragement of the law, enabled to arrange for taking and abiding by the judgement of a selected person or persons instead of carrying the dispute in the ordinary course to the established courts of justice".
The issue must be one of a dispute or difference. Arbitration cannot be employed, for example, where the issue is that one of the parties is failing to comply with a legal or contractual duty, e.g. failing to pay an admitted debt. If a Contractor should seek arbitration as a means of compelling payment on a certificate in a building contract, he will be unsuccessful because there is no dispute as the debt has been admitted and certified by the Employer's agent. Consequently the Arbitrator will have no authority to act. If, however, the Contractor's claim has not been certified but is denied by the Employer or his agent, a dispute exists and it is a proper matter for arbitration.
Having satisfied himself that the matter is definitely a dispute or difference between the parties the Contractor must now consider whether he has followed the correct procedure to bring the matter to arbitration. He must turn to the arbitration clause in his contract and understand and follow it's provisions.
Frequently the arbitration clause will provide that, unless the parties jointly agree on who they wish to appoint as their Arbitrator, the Arbitrator will be appointed by a named organisation, such as the KZNMBA. The Contractor will have to make a written application for this appointment.
Once the Arbitrator has been appointed and he has accepted the appointment, all further arrangements can be left to him.
But the Contractor has never been involved in an arbitration before! He now begins to ask himself - but what are the rules? What will the Arbitrator need? How does the arbitration get started? How do I prepare? What are the costs?
There are really only two fundamental rules that must be observed:
1. Each party must know what the other's case is; there must be no surprises.
2. The Arbitrator may not hear one party without giving the other opportunity to be present and to answer; there must be no private communication.
Even in the most informal arbitrations these rules must be strictly observed. Apart from these rules, the parties and the Arbitrator are free to make whatever rules they think will be the most suitable to resolve the particular dispute.
The Association of Arbitrators has drawn up recommended rules of procedure and published these in a booklet entitled "Rules for the Conduct of Arbitrations".
The Arbitration Agreement in many standard form contracts provides that the arbitration shall be conducted in accordance with these rules.
Probably the Arbitrator's first action will be to convene a preliminary meeting with the parties at which the procedure can be discussed and agreed upon, timetables drawn up and arrangements made for the arbitration hearing.
An Arbitrator can only form an opinion and make his award when he has been given all the facts. Consequently, the preliminary stages, and the hearing itself, will be directed towards establishing what the relevant facts are and their significance in the claims of the respective parties.
Understandably the parties will be anxious to put their arguments to the Arbitrator, and each will want to try to persuade him why he should uphold their particular point of view. Usually the Arbitrator will not wish to hear their arguments until all the facts have been laid before him in writing and he is in a position to form his own opinion and test this against the arguments of the parties.
It will be the duty of the parties to lay all relevant facts before the Arbitrator; unless it has been specifically agreed to the contrary, it will not be his function to make any investigation, or to establish any facts for himself. This is a very important point that all too frequently is not appreciated. The Arbitrator will not seek out the facts himself, nor will he tell the parties what evidence he requires of them to lead. He will leave it to them to provide him with whatever facts each considers necessary to prove his case.
One would have thought that by the time they arrived at the point of arbitration, each party would be thoroughly aware of the other's case, but even in the simplest disputes this is not always so. Very often disputes are based on mutual misunderstanding.
It is therefore necessary that disputes are clearly defined, so that each party knows what matters are in dispute, and where proof is necessary for his case, and which matters are not disputed and therefore need not be proved. This understanding will save considerable time and cost. It will also greatly assist the Arbitrator to appreciate the issues between the parties, and what disputes he must determine.
The traditional procedure is based on similar procedure in courts of law and requires the Contractor, who is now called the Claimant, to produce a written statement in which he sets out his claim, and a summary of the relevant facts that give rise to the claim. A copy of this is submitted to the Arbitrator and to the Defendant, who prepares an answering statement of defence in which he takes each point raised in the statement of claim and states whether he admits or denies it, and indicates briefly what his defence is. Again, a copy of this document is submitted to the Arbitrator and the Claimant, who may, if he wishes, prepare an answering reply in which he takes each point raised by the Defendant in the statement of defence and states whether he admits or denies it.
It will be seen that reading these three documents together will reveal which facts the parties are agreed upon, and will therefore need not to be proved, and which they dispute and will need to prove their version in order to win their case.
These documents should contain the statements of what each considers to be the facts; and the parties are required to attach to their statements copies of any relevant documents, correspondence etc.
It should now be clear to each party what the other's case is, and what it must prove in order to establish it's case.
Proof is provided by evidence, which can be oral or written, or in the form of actual objects. If the evidence is believable, it offers proof of the disputed facts.
It is therefore necessary to assemble as much evidence as possible in support of the disputed facts.
The term "hearing" is used for the procedure when evidence is laid before the Arbitrator to prove the parties' respective cases.
Nearly always the hearing will be the traditional type where the parties and their witnesses appear in person before the Arbitrator to give their evidence. However, the Arbitrator may be able to make a finding merely by studying the documents submitted to him by each party. This is referred to as a "documents-only" hearing.
An oral hearing is an occasion when both parties appear before the Arbitrator in person, together with their witnesses, to give oral evidence in support of their respective cases. Each party must have the opportunity to hear what the other says and to cross-examine him and his witnesses.
Cross-examination is a process of putting questions to the other party or his witnesses to try to show what he has said is unreliable.
The Claimant will normally be called upon to begin. He may start by giving his own evidence in the form of an oral statement to the Arbitrator in which he states in full detail all the relevant circumstances and facts that form the basis of his claim. Thereafter he may call witnesses and put questions to them intended to bring forth answers that will tell the Arbitrator more about the facts on which the claim is based and corroborate evidence that has already been given.
The Defendant will be given the opportunity to cross-examine the Claimant and each witness when he has given his evidence. After each witness has been cross-examined the Claimant will have the opportunity of putting further questions to him, limited to the topics on which he has been cross-examined, the answers to which he hopes will correct any misleading impressions that may have been made.
When the Claimant has led all the evidence which he considers to be necessary, he closes his case, and the Defendant then has the opportunity to lead evidence and be cross-examined in exactly the same manner.
During these proceedings the Arbitrator does not normally question either the parties or their witnesses, although he may put a few questions to clarify points where the evidence has been uncertain or ambiguous. In general, however, he leaves it to the parties to lead whatever evidence they consider necessary to prove their respective cases.
When both parties have led all their evidence, the Claimant will be given the opportunity to argue his case. Where there has been conflicting evidence he will advance argument why the evidence of his own witnesses should be believed rather than that of the Defendant's. He will also try to show how his evidence proves that he is entitled to his claim.
After he has finished, the Defendant will be given a similar opportunity to argue his case, and when he has concluded, the Claimant will be given the chance to reply to the arguments raised by the Defendant.
This will then bring the hearing to an end.
In a documents-only hearing, there will be no formal hearing. Each party will submit to the Arbitrator the documents which he considers prove his case. Each party must, of course, be aware of the documents that the other is submitting and he is entitled to be provided with copies of these.
There may nevertheless be a brief informal hearing to give the Arbitrator the opportunity of putting any questions to either party that he may wish, and for the parties to argue their cases. Alternatively, the parties may choose to submit written argument, and once again each party must be provided with a copy of the other's argument and given the opportunity of replying to it.
The Arbitrator is unlikely to give his decision at the end of the hearing. Usually he will require a number of days at least to consider the issues and make up his mind.
His decision is conveyed in a written document known as an "award", and a copy of this is handed to each of the parties, usually only after the Arbitrator's fees have been paid in full.
The Arbitrator is entitled to a fee for his services and he will advise the parties of his charges at the time of his appointment.
The Arbitrator will also decide on which party should bear the costs of the proceedings. The basic principle in awarding costs is that a party who is substantially successful is entitled to be awarded costs. If the Claimant is awarded substantially more than the Defendant was prepared to pay him, even if the award is much less than the original amount claimed, the Claimant has achieved substantial success because he has recovered substantially more than he would otherwise have obtained, by taking his claim to arbitration.
The Arbitrator will state in his award who is to pay the costs and how the costs are made up. The costs comprise his own fees and any attendant expenses, and any professional fees incurred by the parties in presenting their cases, such as the fees of attorneys and expert witnesses.
The award will normally require one party to pay to the other a certain sum of money. The Arbitrator has no power to compel a defaulting party to pay, but the other party has the right to have the award made an order of court. This is normally a simple, quick procedure.
Arbitrations are intended to bring disputes to an end and for this reason there is no appeal. However, the courts have the power to set aside an award if it can be shown that the Arbitrator acted with gross irregularity or impropriety, such as by accepting a bribe.
Once completed, arbitration proceedings can seldom be re-opened. For this reason parties should be sure that during the hearing they lead all the evidence they wish; they will not get a second chance.
Summary
1) There must be an arbitration agreement between the parties.
2) There must be a dispute or a difference arising out of the contract.
3) The precise procedure set down in the arbitration agreement must be followed.
4) Any written notices must be given within the time specified.
5) Unless it is specifically agreed between both parties and the Arbitrator, the Arbitrator will not make any investigation or seek out facts for himself. The onus is on the parties to lay all the evidence before him.
6) At the hearing each party has the opportunity to submit oral evidence in support of his case and the other party has the opportunity to cross-examine to test the validity of this evidence.
7) The Arbitrator will require his fees to be paid in full before he delivers his award.
8) The party who is substantially successful will be awarded costs.
9) There is no appeal and the award is final and binding on the parties.
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