| Arbitration
- PainSmith Solicitors Legal Update by
Dr David Smith of Pain Smith Solicitors* PainSmith
Solicitors Legal Advisor  1st
April 2008
Many property professionals will be familiar with arbitration clauses. In the
past these used to be relatively popular but, with the advent of Tenancy
Deposit Protection and the end of the TDSRA scheme their usage has tended
to fall away. This is unfortunate, as when dealing with higher value claims a
well crafted arbitration clause can actually produce a quicker, cheaper and more
effective form of settlement for both sides. Arbitration
is governed under the Arbitration Act 1996 which was designed to set out a quick,
effective, but thorough form of arbitration to be used in the United Kingdom.
The Act has been so effective in so doing that its forms have been adopted by
other countries and it is the de facto standard for international arbitration. There
is no purpose in arbitrating for sums under £5,000. In point of fact the Arbitration
Act makes it an unfair term under the Unfair Terms and Consumer Contract Regulations
for any clause to be included in a contract which demands arbitration for sums
of less than £5,000. In practice, the existence of the small claims track in the
County Court system and its relatively low cost makes it wholly unnecessary. Where
arbitration clauses truly come into their own however is for claims in excess
of £15,000. These claims would normally fall into the multi track within the county
court.
Since the recent alteration of the court fee structure these claims are now relatively
expensive and the court fees alone will amount to in excess of £1500 for a claim
that goes all the way to a final hearing, with the consequent legal fees to be
added on top. It is also worth remembering that a case in the small claims track
will usually take in excess of 6 months to reach a final decision so it is not
particularly speedy. By contrast, an arbitrator will usually cost somewhere in
the order of £1,000 and he will often render a decision within a month or two
and he can therefore provide an economic and timely solution. It
is important not to confuse arbitration as provided for in arbitration clauses
with adjudication as is commonly used by Tenancy
Deposit Protection schemes. Adjudication is designed to be a quick and cheap
interim settlement of a problem. It is not designed to give a thorough, or necessarily
final, decision. In fact adjudication is not final and binding unless the parties
specifically agreed that it should be which is why all Tenancy Deposit Protection
schemes require that the parties agree that the adjudication should be final and
binding before they can resort to it. Arbitration, by contrast, is designed to
be final and binding and the courts will recognise it as so. Indeed the courts
will not overturn an arbitration award unless it has been so poorly conducted
that there has been significant prejudice to one or other of the parties, and
the Arbitration Act sets out the mechanism by which this should occur. The
biggest downside with arbitration awards is that they are not currently directly
enforceable and if one or other party absolutely refuses to abide by the award
then it is necessary to resort to the High Court. However, even then this is usually
better than following through the multi track of the County Courts as any costs
associated with resorting to High Court enforcement will be met by the party refusing
to abide by the arbitration award. In addition arbitration awards are internationally
recognised and can often be easier to enforce in foreign jurisdictions than Court
judgments. The
biggest downside with arbitration awards is that they are not currently directly
enforceable and if one or other party absolutely refuses to abide by the award
then it is necessary to resort to the High Court. However, even then this is usually
better than following through the multi track of the County Courts as any costs
associated with resorting to High Court enforcement will be met by the party refusing
to abide by the arbitration award. In addition arbitration awards are internationally
recognised and can often be easier to enforce in foreign jurisdictions than Court
judgments. So
what does an Arbitration Clause need to set out. Most importantly it needs to
set out what sorts of dispute should be rendered to an Arbitrator, and what should
not. In particular for our purposes it should certainly set out that only disputes
in excess of £15,000 should be rendered to an Arbitrator as it will not be economic
to do so for lesser value disputes. There should also be an effort to set out
the method by which the arbitration will be commenced. For example, who is to
be notified of the dispute, in what detail they need to notified of it, and how
they should be notified. It is also important to set out how the Arbitrator will
be appointed. This can be done in a number of ways. Either the parties can agree
a list of Arbitrators or one Arbitrator in advance who will be appointed to arbitrate
any dispute. Clearly, a list of Arbitrators is preferable in the event that a
single named Arbitrator has retired or is unavailable for some other reason. Alternatively,
the parties might hope to agree an Arbitrator at the time of a dispute however
it would be unwise to rely on an agreement being reached and some other provision
should be included. Usually this will involve asking an appropriate body to select
an Arbitrator from a panel.
The two most commonly used bodies in these circumstances are the Royal Institute
of Chartered Surveyors and the Chartered Institute of Arbitrators. The President
of one of these bodies would be asked to select an Arbitrator from his panel and
the parties will then consent to that Arbitrator being appointed to determine
the dispute. It is important to realise that if this method is going to be chosen
that the President will charge a fee, typically in the order of £300, for making
that selection and that it is therefore best wherever possible to agree an Arbitrator
in advance. Other issues which parties may wish to agree in advance are timescales
by which the arbitration should be conducted, for example on submission of documents
and rendering a decision and also aspects of how the arbitration is to be conducted
for example is it to be conducted solely on paper or is the Arbitrator to hold
a hearing for which both parties can submit full evidence. It
is worth remembering that an arbitration agreement can equally require that other
means of dispute resolution are to be used before arbitration. So, for example,
an arbitration agreement could require that the parties seek adjudication - a
cheap interim remedy of a dispute - first with the option of taking the result
of the adjudication onto arbitration if either party was dissatisfied with it.
Alternatively the parties might wish to seek mediation of their agreement and
attempt to settle their dispute more amicably before resorting to a more formal
arbitration process. Once
an Arbitrator has been appointed he has full authority to decide how he will conduct
the arbitration unless the arbitration agreement already sets out how he is to
operate. The Arbitrator is also empowered under the Arbitration Act to decide
as to whether he has been properly appointed and whether the arbitration has been
properly commenced. In these respects his powers are very similar to those of
the Court. Finally, the Arbitrator will have power to make a decision on the merits
of the parties' cases and also, assuming the arbitration agreement allows them
to do so, to decide who should pay the cost of the arbitration. The
use of arbitration does not necessarily avoid the use of lawyers altogether. It
would usually be advisable to instruct solicitors and possibly barristers to represent
parties and assist them in drawing up arbitration papers and representing them
at any arbitration hearing if one should be used. It may of course also be necessary
to instruct lawyers in respect of enforcement of arbitration. However, the need
to utilise lawyers should not be seen as a disadvantage of arbitration as they
would certainly be required in respect of any multi-track claim and time which
is spent preparing for arbitration should be far less than that required to pursue
any case through the courts. In
all, while arbitration is certainly not cheap, for higher value claims it is a
far superior alternative to the use of the court system and will often provide
an answer much more quickly. A sample agreement which can be incorporated into
a tenancy agreement to allow for arbitration on the terms set out in this article
is included below although it should be recognised that this is for illustrative
purposes only and anyone wishing to place an arbitration clause of this sort into
an agreement is strongly advised to seek legal advice. Sample
arbitration agreement: - The
parties agree that any dispute arising out of or in connection with the tenancy
created by this agreement save for disputes relating to its existence, validity,
or termination where the sum in dispute exceeds £15,000 (fifteen thousand pounds
sterling) shall be submitted to arbitration by a single arbitrator to be agreed
between the parties.
- Should
the parties be unable to agree an arbitrator within 28 days of wither party requesting
arbitration then either party may apply to the President for the time being of
the Royal Institute of Chartered Surveyors/Chartered Institute of Arbitrators
to ask them to appoint a suitable arbitrator.
- The
seat of the arbitration shall be London, United Kingdom and the law of the arbitration
shall be that of England and Wales.
- The
Arbitration Act 1996 will apply to the arbitration.
- The
notification of arbitration will be deemed delivered on the second working day
after posting to the landlord if it is sent by first class post to the landlord
(or to one of the landlords if there are more than one) or his agent at the address
given for landlord or agent in the tenancy agreement or such address as has been
notified to the tenant during the term of the tenancy if different.
- The
notification of arbitration will be deemed delivered on the second working day
after posting to the tenant if it is sent by first class post to the tenant (or
to one of the tenants if there are more than one) at the property address or such
other address as the tenant(s) may have provided or if it is sent care of the
tenant's agent if one has been appointed.
- The
arbitrator will have full authority to determine how the costs of the arbitration
shall be apportioned including all legal costs and expenses, any expert fees and
witness expenses, the arbitrator's fees, and any costs or fees associated with
the appointment of the arbitrator.
*Dr
David Smith is a trainee solicitor with PainSmith Solicitors, a niche practice
specialising in residential landlord and tenant law. PainSmith
Solicitors Legal Advisors are provided for information only and are not legal
advice. If you do have a legal problem, you should talk to a lawyer or adviser
before making a decision about what to do. You
may wish to use the CLS/CDS Directory (www.justask.org.uk/public/en/directory)
to locate an adviser. The information provided here is written for people resident
in, or affected by, the laws of England and Wales only. You
should note that date given in the update and be aware that the information given
may become inaccurate due to changes in the law or its implementation. See
also: ________________________________ *See
also Section 13 Notices and Is the deal closed? The use of the 'Subject
to Contract' formula- For
full article Click
Here ________________________________ *See
also Safety Glass and Defective Premises Act - The Information on
a Court of Appeal decision (7th February 2007) regarding the Defective Premises
Act 1972 For full article Click
Here ________________________________ *See
also Implementation of the Regulatory Reform (Fire Safety) England & wales)
Order 2005 Click
Here ________________________________ *See
also Understanding
Business Tenancies June 2007 Click
Here ________________________________ *See
also Duty of Landlords To Mitigate Loss Click
Here _________________________ *See
also Energy Performance Certificates in Let Property
- 29
January 2008 Click
Here ________________________________ *See
also Commercial Rent Arrears Recovery
1 April 2008 Click
Here *
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