Developments at either end of Dispute Resolution
This month has seen two developments in dispute resolution which may impact on how certain construction disputes start and finish. Firstly, the Joint Contracts Tribunal ('JCT') has announced that it will shortly publish its Dispute Adjudication Board documents for use with its JCT 2016 Design and Build Contract ('DB') and JCT Major Project Construction Contract ('MP') at main contract level.
Secondly, the European Commission has at this time rejected the United Kingdom's application to join the Lugano Convention, which governs which court has jurisdiction in cross-border disputes, and streamlines the enforcement of judgments in the jurisdictions of its member states.
Either, or both, developments may complicate the start and finish of disputes arising in certain projects, especially those with a cross-border element. It does not require a great leap of the imagination to foresee, for example, that projects involving off-site modular construction techniques where one or more components are manufactured overseas could be affected.
The JCT Dispute Adjudication Board documents
Dispute Review Boards originated in the United States, where the first recorded use was on the Boundary Dam and Powerhouse project in Washington State which lasted from 1960 to 1967, at a cost of $98 million, and was completed without resort to any construction litigation. The aim of such boards is to avoid disputes by identifying and resolving potential problems during the course of the project before they escalate into full blown disputes. They are usually established at the beginning of the project and their members make themselves acquainted with the contract, the project and the personalities involved. Their remit includes informal risk-management assistance, making recommendations for the resolution of disputes which the parties are free to accept or reject and, where they are constituted as a Dispute Adjudication Board ('DAB'), to issue binding decisions too. A DAB typically comprises one or three persons, with each of the parties nominating an individual, who in turn agree on the identity of a chairman.
The advent in the UK of statutory adjudication under the Housing Grants Construction and Regeneration Act 1996, which was influential internationally, was a major boost to the main engineering contract suites introducing DAB documentation (FIDIC in 1999 and ICE in 2005). They have not been widely adopted in the UK precisely because of the success of statutory adjudication. However, in selecting the DB and MP forms, the JCT has identified those of its contracts which are more likely to be used on larger, longer-term projects, which can justify the expense of constituting a DAB to resolve disputes contemporaneously in order to keep the project on track. This outlay is, so the theory goes, likely to be far less than the cost of taking a dispute to a trial in litigation or a final hearing in arbitration.
The JCT does not publish its DAB documents until 4 May 2021 but we are told that they are based on the Chartered Institute of Arbitrators' Dispute Board rules with amendments for DAB status to allow for the issue of binding decisions in a manner consistent with adjudication in the UK. It will be interesting to see how this is achieved, given that most DABs provide for an 84 day quasi-arbitral process. This results in a decision which is final and binding unless a notice of dissatisfaction is served within, say, 28 days (whereupon, like an adjudicator's decision, they become interim binding pending the resolution of the dispute via arbitration, litigation or settlement). The popularity of the statutory adjudication amongst users of the JCT suite, coupled with the current thin profit margins in construction projects, means that it is questionable whether the DAB documentation will gain traction in their target market.
The Lugano Convention and the enforcement of judgments
The Lugano Convention 2007 is an international treaty negotiated by the European Union ('EU') on behalf of its member states (and by Denmark separately) with Iceland, Norway and Switzerland, all members of the European Free Trade Area ('EFTA'). It contains rules that govern which nation's courts have jurisdiction to deal with cases with a foreign element, such as a foreign-based party or events which took place in another jurisdiction. It upholds any choice of jurisdiction the parties have made in their contracts, while providing that where no such choice has been made, the defendant should generally be sued in the member state in which they are domiciled. This helps prevent multiple court cases taking place on the same subject-matter in different countries and reduces the costs for the parties involved. It also seeks to ensure that judgments made in such disputes are recognised across borders, so that the defendant cannot evade enforcement just because it is in a different jurisdiction to the claimant. Rules governing these situations (known as 'private international law') can have a significant impact on the costs, conduct (including taking evidence and disclosure of documents) and even the ultimate outcome of the proceedings including the claimant's ability to realise the value of a judgment.
Having left the EU, it was necessary for the United Kingdom to join the Lugano Convention as a non-EU contracting state if it was to preserve these advantages, and so the UK applied to join in April 2020 before the end of the Brexit transition period. The rejection of the UK's application by the Commission this month is not final; the European Council may yet permit the UK to accede if a qualified majority of EU member states agree. The EFTA member states have already agreed to the UK's accession.
Thankfully, the applicable law for the contract chosen by the parties based in different jurisdictions will still be respected because, unlike the Lugano Convention, the Rome I Convention on choice of law in contract survives Brexit (as does the Rome II Convention, the equivalent for non-contractual obligations i.e. negligence and other tort-based claims).
What does this mean you or your business?
Proceedings commenced after the end of the Brexit transition period on 1 January 2021 will not have the benefit of the Lugano provisions. So if, for example, a party to a contract with an English jurisdiction clause finds that the other party has, in breach of that clause, issued proceedings in an EU member state, it could only stop those proceedings by persuading the court that they were commenced in breach of that state's domestic law and that it should therefore decline jurisdiction. There is therefore now an increased risk of costly parallel proceedings and disputes about which country's courts have jurisdiction to hear a case.
It also means that different recognition and enforcement regimes will apply when seeking to enforce a judgment of the courts of England and Wales overseas or a judgment of a foreign court in England and Wales. Where no treaty exists, recognition of a judgment and enforcement of it in a foreign jurisdiction will again depend on satisfying that state's domestic law; some will be more benevolent to claimants based here in England and Wales than others. Navigating the resulting patchwork of enforcement arrangements will require specialist advice on a case by case basis, and will increase the cost of enforcement overseas.
The UK's continuing membership of The Hague Convention on Choice of Court Agreements (2005) ('Hague Convention') helps, because it says that contracting states (EU member states plus the UK, Mexico, Singapore and Montenegro) must uphold any choice of court agreement which confers jurisdiction on the courts of a single contracting state exclusively, and must recognise and enforce any resulting judgment. However, not every jurisdiction clause confers exclusive jurisdiction on the courts of one state, so the above concerns will persist. Widespread mutual recognition and enforcement of judgments on a similar basis to the Lugano Convention will not occur until the Hague Judgments Convention (2019) comes into force, which is unlikely to happen before 2022 due to the time it will take for member states to ratify it. Moreover, it will not have retrospective effect.
What do you need to be doing now?
If your projects involve a cross-border element, then carefully consider where your claims are likely to arise, and where the other contracting parties' assets are situated. This is also relevant if your company was to be the defendant in proceedings, because if you successfully defend yourself you would want to realise any costs award in your company's favour. Until the UK re-enters the Lugano Convention or an equivalent, the litigation process is likely to become more complicated as different local regimes will apply. You should consider seeking advice about how the other parties' local law may affect the enforcement of a judgment in the country where their assets are located.
You should consider whether any standard dispute resolution clause you typically rely on is still suitable for future contracts involving other parties based in the EU, and what changes could be made. A contractual service clause, which will determine the method and place for the service of proceedings, is likely to be beneficial. A clause which provides that the service of proceedings at, say, the UK branch of a foreign company is permissible will obviate the need to serve proceedings out of the English jurisdiction so you will not need permission from our courts to serve proceedings overseas. Having assessed where the majority of the other parties' assets are situated and the local law in that country, you should consider which jurisdiction is most appropriate to determine your disputes. If there is a possibility that an English court judgment is going to be harder to enforce now, you should consider if an exclusive English jurisdiction clause is necessarily still appropriate. It may be, if the Hague Convention can be utilised, but if not, then a non-exclusive jurisdiction clause which gives you the option of bringing proceedings in England or to sue the other party in another state instead may be appropriate. It may even be appropriate in some circumstances to agree with the other contracting parties to confer exclusive jurisdiction on another EU member state's courts, or even to forego the right to litigate and specify arbitration at an agreed forum. The parties' choice of law which governs the contract itself is unaffected by Brexit, so specifying English law remains a feasible option and will be of some comfort.