A dispute may be determined by arbitration if the parties agree to submit the dispute to arbitration pursuant to an arbitration agreement[1] In New Zealand, the most popular standard form construction contracts and consultant agreements provide for arbitration as the final forum for resolving disputes.[2] Arbitration is often the last step in a multi-tiered dispute resolution clause. Such a clause can constitute an “arbitration agreement” for the purposes of the Arbitration Act 1996 (Act).
One of the key benefits of arbitration is the parties’ ability to tailor the process that will apply to the resolution of disputes arising on a project. Parties should treat the arbitration clause as a key element of the contract and take care to obtain appropriate legal advice when the contract is being negotiated to ensure the arbitration agreement is binding, ‘fit for purpose’, and that any corresponding arbitration award is enforceable. A well drafted arbitration agreement will contain several key elements that we discuss below.
Separability
The Act provides that an arbitration clause in a contract is an independent agreement that can survive if an arbitral tribunal finds the primary contract null and void.[4] Whether it does survive depends on the circumstances. If the primary contract is terminated in a manner that expressly or impliedly terminates the arbitration agreement, it will likely not be found to have survived.
Parties negotiating an arbitration clause should therefore consider whether to expressly provide that it will survive termination or expiry of the primary contract. This will aid with the enforceability of the arbitration agreement and make it more difficult for a party argue the arbitration agreement was terminated along with the primary contract.
Enforceability and jurisdiction
For an arbitration agreement (including an arbitration clause in a contract) to be enforceable, it must reflect an agreement by the parties to submit certain disputes to arbitration that arise out of a defined legal relationship between the parties.[5] In the construction context, this will invariably be a dispute arising between parties to a construction contract. Importantly, if the arbitration agreement is not valid under New Zealand law, the High Court can set aside an arbitral award resulting from it.[6] This is a significant consequence, particularly for the party seeking to enforce the award.
An arbitration agreement should be sufficiently clear to exclude the courts’ jurisdiction in relation to disputes arising under the contract. This should be done explicitly. It is common for this to be in the form of a partial exclusion that preserves either party’s ability to bring court proceedings to seek interim injunctive or declaratory relief[7] (although the High Court has recently cast doubt on the enforceability of clauses that preserve the court’s jurisdiction to grant interim relief outside of the Act’s interim measures regime).[8] If a party brings court proceedings in relation to a dispute that falls within the arbitration agreement, those proceedings can be stayed (unless the arbitration agreement is found to be “null and void, inoperative, or incapable of being performed”).[9]
Consolidation and joinder
In the construction context, disputes can be complicated – there can be more than two parties in dispute regarding interrelated issues arising from the same project. For example, a dispute between the principal and the designer (under a consultant agreement) and between the principal and the main contractor (under a separate construction contract). Without agreement, it will not be possible to join parties to separate arbitration agreements (i.e. separate arbitration clauses in the individual contracts) to a single arbitration.[10] In such circumstances, it may be necessary to commence two arbitrations then seek consolidation under the Act.[11]
Most arbitration clauses in standard form construction contracts (including NZS 3910:2023, NZS 3910:2013 and NZIA SCC:2018) do not provide for a party to be joined to an arbitration between its counterparty and a third party. To maximise resource efficiency and avoid the future need to seek consolidation of multiple proceedings, parties may wish to provide for joinder and consolidation in their arbitration agreement. Such a provision should clearly set out the requirements that must be met for each. For example, it may stipulate that each party consents to be joined to (or have its proceedings consolidated with) another arbitration if it concerns “the same or substantially similar” issues as their arbitration. Likewise, it is desirable for all contracts on a project to provide for arbitration as the ultimate dispute resolution forum, to maximise efficiencies from joinder and consolidation.
Choice of rules
Parties to an arbitration are free to agree and specify the rules that will provide a framework for the conduct of proceedings and an institution to administer and facilitate the arbitration process. The three major arbitral institutions in New Zealand, set out below, each promulgate their own arbitration rules:
- Arbitrators’ and Mediators’ Institute of New Zealand (AMINZ)
- New Zealand Dispute Resolution Centre (NZDRC)
- New Zealand International Arbitration Centre (NZIAC)
There are also several international arbitral institutions whose rules are often incorporated into construction contracts – for example, the International Chamber of Commerce (ICC) Rules of Arbitration and the London Court of International Arbitration (LCIA) Arbitration Rules.
If the choice of rules is not specified, the arbitration will be “ad hoc” and will proceed in accordance with the Arbitration Act 1996 (unless the parties can reach subsequent agreement). NZS 3910:2023, NZS 3910:2013 and NZIA SCC:2018 do not specify the choice of rules, while the FIDIC 1999 and 2017 suite of contracts specify that the International Chamber of Commerce (ICC) Rules of Arbitration shall apply.
The institutions and their rules vary, including on matters such as fee structure, level of institutional supervision, how the tribunal is appointed, the default number of arbitrators on the tribunal, the procedural timetable, and the degree of scrutiny applied to an award before it is issued. Parties should carefully consider the features of each institution and its rules and seek legal advice on the appropriate choice of institution (if any) when an arbitration agreement is being negotiated.
Award to be final and binding
The Act gives parties limited rights to appeal to the High Court on a question of law arising out of an arbitral award. Questions of law can be appealed if this is provided for in the arbitration agreement, if the parties both consent after the award is made, or with the leave of the High Court.[12] However, the parties can contract out of the right to appeal.[13]
NZS 3910:2023, NZS 3910:2013 and NZIA SCC:2018 provide that an arbitral award shall be “final and binding”.[14] The courts have held that this wording is not sufficient to exclude a party’s right to seek leave to appeal on a question of law.[15] In contrast, if an arbitration agreement expressly provides that the part of the Act relating to appeals on questions of law does not apply, this has been held sufficient to exclude a party’s right to appeal against an award on a question of law.[16] Parties negotiating the arbitration clause or agreement should therefore consider what appeal rights the parties are to have against an award, if any.
NEW ZEALAND, March 4 2024
