This article is all about Pendulum arbitration in the construction industry.
Pendulum arbitration is not used much in the construction industry but is worth a mention as part of a general discussion of dispute resolution in construction.
We support legal representation in more complex cases but we want to encourage especially smaller companies to feel more confident fighting for their contractual rights.
This is a simple variation or extension of the arbitration process used in the construction industry. It is also known in the United States of America as baseball arbitration or flip-flop arbitration or ‘last best offer’ arbitration.
To be honest, none of these make much sense.
In this process, the two parties essentially submit their best offer to solve the dispute and the Arbitrator picks one.
For example, lets say a builder is not paid £100,000 and takes the dispute to Pendulum arbitration. Lets look at the process involved
There is a physical hearing much like a standard arbitration process.
Each party is given a certain amount of time to present their case. For example, each party may be given two hours to present their argument. This is very different to standard arbitration whereby the presentation of each sides case may take days, weeks or even months to get through. There is no investigation of the facts or any cross-examination of the witnesses.
Then after both sides have presented their case, each side presents their final offer in a sealed envelope. This offer is called a draft award but basically it’s their best offer of settlement.
The Arbitrator then issues their award using one of these final draft awards. They cannot amend the draft award, they have to pick and issue one draft award, warts and all.
Lets use the example above. The builders offer or draft award is to accept £95k payment and the Clients offer or draft award is to pay £5k. The Arbitrator opens the sealed envelopes and then has to decided which offer most closely matches ‘natural justice’ in this case.
Pendulum arbitration is cheaper than traditional arbitration because it is Arbitration stripped out of all its processes.
Again it is faster than traditional arbitration because its not really arbitration.
Although it is stripped down version of Arbitration it is still binding. So its big advantage can be summed up as cheaper and faster than Arbitration but still delivers a binding decision.
A lot of parties would not fancy following this process as it is essentially a gamble. If you have natural justice on your side why would you risk your position when there are lots of alternative processes out there. For example, if you truly believed you were entitled to £100k why would you agree to being paid £50k?
It has none of the detailed presentation, investigation or cross-examination of the facts which is core part of the arbitration process.
If the arbitrator only gets a couple of hours of presentation of both sides arguments how can they really understand what is fair justice?
It favours one party putting in a low offer just to solve the dispute. That’s the whole point of it. It cannot really take into account natural justice or any deep consideration of the issues. Its basically the equivalent of asking the parties to offer a settlement figure and then just accepting the most generous offer.
Lets say a builder is not paid £100,000 and takes the dispute to Pendulum arbitration. The builders offer is to accept £95k and the Clients offer is to pay £5k. Which offer does the arbitrator take. The Arbitrator will need to examine the case in detail to understand what is the fairest offer. What if the fairest settlement is £50k? Issuing an award of either £95k or £5k will be unfair to either party.
If a dispute has several issues and mediation solves six of them, then maybe Pendulum arbitration can be used to resolve the last. Both sides submit their draft award and the Arbitrator signs one of them.
For example lets say that in the party one has offered £100,000 and party two has offered £200,000. This dispute can be brought into a Pendulum arbitration and can be decided on the best offer on the basis the result has to be between £100,000 and £200,000.
Who in their right mind would sign up to solve a dispute like this ?
We just don’t get this form of dispute resolution. The main argument seems to be ‘its cheaper and better than litigation’. Well, everything is better than litigation.
Arbitration may be great for resolving business disputes internationally but it is most likely a dying form of dispute resolution in construction.
Even with this variation of Arbitration, this variation kills arbitration. It basically says lets substitute a blind auction for the entire Arbitration process. Why even call it Arbitration.
Why do we even need an Arbitrator any form of legal representative. Why not just stop a random person on the street, give them the sealed envelope and let them pick the best offer. Is expert determination not a better option without calling it Arbitration?