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Home > Operations Management Best Practice > Multiparty and Multicontract Arbitration

Operations Management Best Practice

Multiparty and Multicontract Arbitration

by Stavros Brekoulakis

Executive Summary

  • Multiparty arbitration involves several actions between several parties to different contracts.

  • Multicontract arbitration involves several actions arising out of several contracts between the same two parties.

  • In both multiparty and multicontract arbitrations the issue is whether the several actions and several sets of proceedings can and should be consolidated.

  • Consolidation of several sets of arbitration proceedings might be beneficial as it would prevent the risk of having conflicting arbitral awards and it would reduce time and cost.

  • However, consolidation of several sets of arbitration proceedings might violate the consensual nature of arbitration.

  • Thus, multiparty and multicontract arbitrations may only be achieved if all the relevant parties have expressly provided so in their arbitration agreements.

Multiparty Arbitration

Contemporary international transactions are extremely complicated and very often require the participation of several parties in the delivery of a single project. For example, a typical construction project will usually involve—apart from a client and a main contractor—an engineer and/or an architect, several subcontractors, suppliers, financiers, and possibly additional commercial parties. Therefore, a dispute that might arise between the client and the main contractor would most likely affect the legal or financial position of the subcontractor, the engineer, or the supplier, who would thus have an interest in participating in any proceedings between the client and the main contractor. Thus, in litigation proceedings, provision is invariably made for parallel interrelated proceedings between different parties to be consolidated in order to prevent the risk of having conflicting decisions, and to reduce time and cost.

However, in contrast to litigation, arbitration is a dispute resolution mechanism that is based on a contract—i.e. an arbitration agreement. Only those persons who have unequivocally consented to and signed an arbitration agreement can participate in arbitration proceedings and be bound by the resulting arbitral award.

The contractual basis of arbitration is thus a double-edged sword: On the one hand, it makes arbitration a very flexible dispute resolution mechanism, allowing the parties to design the arbitration proceedings in accordance with their commercial needs. This has proved to be a significant advantage of arbitration over litigation, and has contributed to the increasing popularity of the former amongst members of the international commercial community, particularly in the last 30 years. On the other hand, its contractual basis makes arbitration unsuitable to accommodate multiparty projects, and it frequently leads to unfavorable results.

Thus, in the above example of a typical multiparty construction project, the usual practice will be for a client and a main contractor to sign a bilateral arbitration agreement. Consequently, it will not be possible for a subcontractor, an engineer, or a supplier (the “third parties”) to participate in the arbitration proceedings between the client and the main contractor (the “original parties”). These persons will remain third parties to the arbitration proceedings even if they have played an active role in the actual business project and, therefore, have an interest in the outcome of the dispute between the original parties.

The prevailing view is therefore that multiparty proceedings in arbitration are not possible unless all the relevant parties have consented to arbitration.

Multiparty Arbitration and Consent

Parties may provide consent for multiparty arbitration either in one multiparty arbitration agreement or in several identical arbitration agreements that make express references to each other.

Single Multiparty Arbitration Agreement

Multiparty arbitration agreements are typically found in multiparty contractual arrangements, such as join ventures and consortium agreements. Thus, for example, where a dispute arises between two of the parties involved in a consortium, other consortium members may intervene in the arbitration proceedings between the original parties. Similarly, multiparty arbitration proceedings may result from an arbitration agreement inserted in the articles of association of a corporation, so that all the shareholders will be bound by that arbitration agreement.

Several Identical Bilateral Arbitration Agreements

Consent for multiparty proceedings may be ascertained from several contracts with arbitration clauses that first, provide for arbitrations with identical characteristics and second, make express references to each other (so-called “back-to-back” arbitration agreements). For example, a client and a main contractor should agree on an arbitration agreement that would provide for the same arbitration institution, seat of the arbitration, and applicable law as those provided in the arbitration agreement included in the subcontract between the same main contractor and a subcontractor.

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Further reading

Books:

  • Hanotiau, B. Complex Arbitrations: Multiparty, Multicontract, Multi-Issue and Class Actions. The Hague: Kluwer Law International, 2006.
  • Lew, Julian D. M., Loukas A. Mistelis, and Stefan Kröll. Comparative International Commercial Arbitration (Chapter 16). The Hague: Kluwer Law International, 2003.

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