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  • Drafting of Effective Arbitration Clauses

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    Charles Gavamukulya, MCIArb,AICCP

    Introduction

    A recent judgement delivered on 23 February 2023 in the High Court of Uganda in a case between The Attorney General of the Republic of Uganda (Applicant) v Networth Consult Co. Limited (Respondent) went to the heart of discussing the nature of an arbitration agreement and what constitutes a pathological clause. As a result, this drives a conversation towards the drafting of effective arbitration clauses.

    Dispute resolution clauses are often time referred to as “midnight/ champagne clauses”. This is because once the rest of the contract has been agreed upon, the parties are quick to celebrate and the dispute resolution clause becomes an afterthought, or a matter of “copy and paste” which more often than not results into unclear, incomplete, or contradictory clauses. The parties, often time, agree not to have a dispute resolution clause because there is an anticipation at the start of the performance of the contract that there will not be dispute and if it occurs, there is a general feeling that the parties will always have an amicable settlement. This is always not the case as parties can disagree on legal or technical aspects of the contract and at such a time, the good will and good faith that existed at the agreeing of the contract does not exist anymore. The need for a clear clause to highlight the parties’ consent to settle their dispute under alternative dispute resolution cannot be overly emphasized.

    The Case

    The Respondent filed Civil Suit 541 of 2022 [“main suit”] against the Applicant for breach of a consultancy contract and recovery of sums stated to be payable under that contract. The Applicant brought an application to the court, contending that the dispute between the parties was amenable to arbitration. Accordingly, the Applicant  contended that the Respondent’s suit was barred by law.

    The Applicant asserted that the parties had a binding and enforceable arbitration agreement and that as a result, the Respondent’s suit should be dismissed, and the matter referred to arbitration. The Applicant contended that there was a valid arbitration agreement to submit all disputes arising from the contract  exclusively to arbitration. On the other hand, the Respondent contended that reference to arbitration was optional.

    The Clause in dispute was Clause 45.1 of the Contract between the parties which reads as below.

    “Any dispute between the parties arising under or related to this contract that cannot be settled amicably may be referred by either party to the adjudication/arbitration in accordance with the provisions specified in the SCC.”  SCC in this case is an abbreviation for Special Conditions of Contract.

    The special conditions at Clause 45.1 then proceed to spell out an elaborate set of rules and procedures for arbitration of disputes arising from the agreement.

    The Judgement

    The Judge in this case noted that he was aware of an ADR process called “Adjudication”. Furthermore, he noted that this process was most common in construction contracts but may exist in other contracts. This process  involves the submission of a dispute to an expert who makes a determination often on technical grounds. Adjudication clauses typically have rules indicating how an adjudicator may be appointed and how adjudication may be undertaken. In this case, the contract was not a construction contract and therefore the learned judge concluded that the word “adjudication” was intended to refer to litigation since “The parties could not have intended to have adjudication (as an alternative dispute resolution) as well as an arbitration before an expert arbitrator as this would have achieved the same thing. Still, there is nothing in the agreement that points to an agreement to undergo adjudication as an alternative dispute resolution process.”

    It is from this that he tackled a clause that provides for both litigation and arbitration. In ISC Holding AG v Nobel Biocare Investments N.V 351 Fed. Appx. 480, the US Court of Appeals held that an arbitration clause must exclude the involvement of state 15 courts (save for interim reliefs and/or recognition and execution) and an agreement that did not exclude them was ambiguous and therefore incapable of being enforced. In X Holding AG and Ors v Y Investments NV 4A_279/2010 where a similar clause was involved, a Swiss Court held that an agreement that does not clearly 20 exclude state courts is ambiguous as it does not reveal a clear intention to arbitrate.

    The court also considered whether the use of the phrase “may” was optional. In Meshack Kibunja Kaburi & 3 others v Kirubi Kamau & 5 others; Central Highlands Tea Company Limited (Interested Party) [2021] eKLR the court, considering a clause that provided that a dispute may be referred to arbitration, held that there was a clear intention to refer the matter to arbitration and thus the same had to be undertaken notwithstanding the use of the word “may”.

    Another question was whether in this case, the plaintiff was obliged to submit to the arbitration proceedings initiated by the applicant from this clause. The Judge ruled that from reading the parties’ contract in full, “it appears from the contract that the initiating party is at liberty to decide how to initiate the dispute. Once they had made their election, the other party was obligated to defend or counterclaim in the forum in which the proceedings had been began.”

     He further added that “ in cases of this nature, the initiating party has the election  to determine which mode to commence in, and the other party has to defend in that forum. However, this does not mean that if another dispute arises, it should go to, say, court simply because a previous dispute went to court. The right of election exists in each case.”

    As such, it was not mandatory for the parties to go for arbitration as the clause had been constructed in such a way that the arbitration was another option to litigation in case a dispute arose. The Judge also noted that “This is obviously a little bit disorganized and a clear clause that provided for one 30 mode of dispute resolution would have been a lot more preferable.”

    In that case, the arbitration agreement between the parties was incapable of being performed within the meaning of Section 5(1)(a) of the Arbitration and Conciliation Act as the Respondent had already elected to commence proceedings before the court. As such, the dispute was no longer amenable to arbitration.

    Discussion

    1. What if a deviation from the Judge’s consideration of Adjudication was taken?

    The Judge considered adjudication in this case to mean litigation and as such, it opened up the discussion towards having both arbitration and litigation in a dispute resolution clause. If adjudication was taken for its traditional meaning in construction contracts, however, then my belief is that the judgement would have read differently. Adjudication ,as the learned judge has already alluded ,is an established process along the ADR spectrum normally based on technical aspects like the case in context here. The decision from the adjudicator is a temporary binding decision as it can be overturned by the Arbitrator’s award. The Adjudicator’s decision is made within 28 days. It serves as a quick, flexible, and informal way to solve disputes between parties. In this case, the parties could have elected to either pursue Arbitration or Adjudication as read from the clean text of the clause or could have carried out the Adjudication as a condition precedent to the Arbitration. That approach would have led to a different judgment and different considerations altogether.

    • What are the hallmarks of an effective arbitration clause ?

    Ideally an arbitration agreement will enable the parties to choose the :

    • Composition of the tribunal
    • Language of the arbitration
    • Rules by which the arbitration will be conducted
    • Institution, if any, which will regulate and administer the arbitral process
    • Jurisdiction which will govern the procedural issues in the arbitration
    • Jurisdiction which will govern the merits of the dispute or issues between the parties.

    Like any other contract, not all arbitration agreements are perfectly crafted. There will be defects sometimes whether by human error or because of lack of proper advice. There are certain characteristics which need to be satisfied for there to be an effective arbitration clause and failure to do so results into what is commonly known as a “pathological clause”. A pathological clause is one, which fails to cover the disputes the parties want arbitrated, fails to identify the appropriate “seat” for the arbitration or identifies an inappropriate seat, or fails to identify the correct set of rules or the correct institution to administer those rules. One can argue that for an arbitration clause to be effective, it is necessary that the agreement for the parties to solve disputes by arbitration and not court, should be clear and unequivocal.

    Conclusion

    The existence of a valid agreement to arbitrate has several important consequences for the resolution of a dispute. If there is a valid arbitration agreement, the parties will be compelled to resolve their dispute through the arbitral process thereby keeping the dispute out of the national courts. A party who seeks to initiate a claim in the national courts despite the existence of an arbitration agreement will likely be restrained by the court upon application by the opposing party to stay the court proceeds in favor of arbitration. In this case’s context, the judgement was to the effect that the Applicant filed an application for this restraint. However, the arbitration clause was not effective enough and as such the Applicant’s application was dismissed. This case and the subsequent judgement highlight the importance of drafting of effective dispute resolution clauses.

  • A Critique of the Uganda Seismic Code

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    Charles Gavamukulya, MCIArb,AICCP

    Seismicity of Uganda

    Uganda is situated between seismically active branches of the East African Rift System, The Western Rift (stretching from Aswa Fault Zone in the North to Lake Tanganyika in the South), and the Eastern Rift (stretching from Lake Turkana in the North to Lake Eyasi in the South) according to the Uganda Geological Surveys and Mines Department. To give perspective to the seismicity of Uganda, it should be noted that although the seismic trends in East Africa generally follow the rifts, the Western Rift shows more seismic activity than the Eastern Rift. According to the Uganda National Policy for Disaster Preparedness and Management available seismic information indicates that parts of Western and Central Uganda are prone to seismic activity. Therefore, most parts of the country are exposed to seismic hazards of varying degrees.

    Earthquakes in Uganda

    Damaging earthquakes have occurred in Uganda and they include the Masaka earthquake of 18th March 1945 with a surface wave magnitude of 6.0 in which 5 people were killed, the Tooro Earthquake of 20th March 1966 with a surface wave magnitude of 6.6 in which 160 people were killed, the Kisomoro earthquake of 5 February 1994 with a surface wave magnitude of 6.0 in which 8 people were killed. According to the United States Geological Survey, the most recently felt earthquake event was the earthquake of 4th March 2023 with a magnitude of 4.6 which occurred about 10km from Bundibugyo. With the population growing at an alarming rate, infrastructure has expanded with industrialization and urbanization, more so in Kampala City. It is generally assumed that an earthquake cannot be predicted (although it can be expected) or simulated (although we can approximate it), and that its destructive effects cannot be prevented (although they can be minimized or, at worst, optimized). Earthquakes, therefore, can create disasters of enormous magnitude when they hit such urban areas, schools or hospitals resulting into great physical and economic losses.

    Seismic Code of Uganda

    The seismic code of Uganda, US 319: 2003 was issued by the Uganda National Bureau of Standards in 2003. Three seismic zones were defined. Therefore, most parts of the country are exposed to seismic hazards of varying degrees. Other countries in the East African Rift System have seismic codes too.

    The Kenyan seismic code was issued in 1973 by the Kenyan Ministry of Works and uses the Modified Mercalli intensity (MMI) scale to map the seismic hazard of the country (MWK, 1973). The country was divided into four seismic zones: Zone V, VI, VII and VIII–IX. The building design code of Ethiopia was first introduced in 1978. Its seismic provisions have been revised twice since then. The first revision took place in 1983. The current version, the Ethiopian Building Code Standard EBCS 8: 1995, provides a seismic hazard map based on a 100-year return period.

    The Uganda seismic code is a set of guidelines and regulations designed to ensure the safety of buildings and structures in the country in the event of an earthquake. The code is based on international standards and guidelines, as well as on local knowledge and experience. The Uganda seismic code is a critical tool for design that ensures the safety of buildings and their occupants in the event of an earthquake. It is an important part of the country’s overall disaster risk reduction efforts. By following the code, designers and builders can create structures that are able to withstand the effects of earthquakes and minimize the risk of damage and loss of life. Despite its noble intentions, the code has several loopholes that need to be addressed in order to ensure maximum protection for buildings and their occupants.

    Criticism of the Uganda Seismic Code

    Firstly, the code is only applicable to new buildings and structures, leaving existing ones unguarded against earthquakes. This means that older buildings, which are more vulnerable to seismic activity, are not required to meet the code’s standards. This could be a challenge in a country where many of the iconic buildings were constructed before the advent of modern seismic design considerations. As a result, buildings that were constructed before the implementation of the code, or that were not constructed to the required standards, may not be safe in the event of an earthquake.

    Secondly, the code does not provide clear guidelines on how to retrofit existing buildings to meet the seismic requirements. This has led to many building owners ignoring the code and continuing to use their structures as they were before without retrofitting to include modern seismic design techniques and detailing requirements.

    In addition, the code does not provide clear guidelines on how to conduct seismic assessments of buildings. This has led to the use of outdated assessment methods that do not accurately reflect the seismic risks of a building. As a result, many buildings that are deemed safe by these methods may collapse during earthquakes.

    Another loophole in the Uganda Seismic Code is the lack of trained personnel to enforce it. The code requires that all building designs be reviewed by a qualified engineer, but there is a shortage of such professionals in the country. This has led to the approval of designs that do not meet the seismic requirements, which can lead to the collapse of buildings during earthquakes.

    One of the other loopholes in the Uganda seismic code is the lack of enforcement. While the code sets out clear guidelines for the construction of buildings in areas at risk of earthquakes, there is little enforcement of these guidelines by the relevant authorities. As a result, many buildings in Uganda are not constructed to the required standards, leaving them vulnerable to damage or collapse in the event of an earthquake.

    There is lack of awareness of the seismic code among builders and developers. Many builders and developers are unaware of the specific requirements of the code or are not aware of the importance of adhering to these guidelines. As a result, they may not include seismic design considerations in their building plans, leading to structures that are not adequately prepared for earthquakes. In addition to these issues, the Uganda seismic code also suffers from a lack of clarity and consistency. The code is made up of a complex set of regulations and guidelines, which can be difficult for builders and other stakeholders to understand and interpret. This can lead to confusion and misunderstandings, which can result in buildings being constructed in ways that are not compliant with the code.

    One of the major reasons for these loopholes is the lack of funding for seismic research and building inspections. There are insufficient funds for the implementation and enforcement of its provisions. This has led to a lack of resources for training personnel, conducting assessments, and retrofitting buildings.

    How can these loopholes be addressed?

    To address these loopholes, the Uganda seismic code needs to be strengthened through increased enforcement, awareness-raising campaigns, and regular inspections of existing buildings. This could involve the development of a national database of buildings and their compliance with the code, regular training programs for builders and developers, and the creation of a dedicated team of inspectors to carry out regular checks on buildings. Furthermore, there should be provision of more funding to seismic research in the country so as to aid research and development in the area.

    In addition, the government could consider offering incentives to builders and developers who construct buildings to the required standards, such as reduced fees or faster approval processes. This could encourage compliance with the code and help to reduce the number of buildings that are vulnerable to damage or collapse in the event of an earthquake.

    Furthermore, stricter enforcement measures and penalties for non-compliance should be developed. Clear guidelines on how to retrofit existing buildings and conduct seismic assessments.

    Finally, the Uganda seismic code should be reviewed and revised to make it clearer and more consistent. This could involve simplifying the language and structure of the code, as well as providing more detailed guidance and examples for builders to follow.

    Conclusion

    Overall, the Uganda seismic code is an important tool for ensuring the safety of buildings and their occupants in the event of an earthquake. However, there are several loopholes in the code that need to be addressed in order to maximize its effectiveness. By strengthening the code through increased enforcement, awareness-raising, reviewing, revision and regular inspections, the government can help to ensure that buildings in Uganda are adequately prepared for earthquakes and protect their occupants from harm.

  • Why is there a need for Arbitration in the Construction Industry in Uganda?

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    Charles Gavamukulya, MCIArb,AICCP

    Introduction

    The construction industry is a major contributor to economic growth worldwide. In a Report of Economic Consultants LEK for the UK Contractors Group, it has been estimated that in the United Kingdom, every £1 investment in construction output generates £2.84 in total economic activity. In Uganda, conservative estimates from the Uganda Bureau of Statistics (UBOS 2018) suggest that the construction sector directly contributes to approximately 7 percent of gross domestic product (GDP). This growth in the construction sector is attributed to an accelerated rate of execution of public investment in energy and infrastructure. The upward trend in public investment is consistent with the country’s strategy, as outlined in the National Vision 2040 and the second National Development Plan, to focus on building its capital stock, as a way to address Uganda’s infrastructure deficits and build production facilities to prepare for exploitation of the country’s oil resource(Colonnelli & Ntungire, 2018).

    CG Engineering Consults Staff on-site at the Katosi Drinking Water Treatment plant

    Alternative Dispute Resolution in the Construction Industry

    These complex construction projects are rarely completed without encountering risks that lead to changes to the time and cost required for their execution. Those changes in turn give rise to disputes, the majority of which are submitted to Alternative Dispute Resolution (ADR) mechanisms. Arbitration is one of the mechanisms that are commonly referred to as ADR mechanisms. These mechanisms are set out in Article 33 of the Charter of the United Nations. Arbitration arises when a neutral third party is appointed by the parties or appointing authority to determine the dispute and give a final and binding award. The 2017 International Chamber of Commerce (ICC) Dispute Resolution statistics show that, in 2017, 23% of the ICC’s total caseload was in the engineering and construction sector. This was the largest percentage of any subject matter by a significant margin.

    Why do parties choose ADR?

    The reasons why these parties choose ADR are varied and they include the inefficiencies of national courts as compared to out-of-court dispute resolution. Uganda, for example, lacks construction specialist departments or judges with construction expertise and judgment. Arbitration, on the other hand, allows parties to appoint arbitrators who are experts in the industry. Furthermore, arbitration allows construction parties to choose the dispute resolution procedure in a way that addresses a number of procedural challenges in construction arbitrations. These include the large volume of documentary evidence, the use of experts to determine delay and quantum in claims as well as other technical issues and program analysis. As such, international companies would rather look to arbitration to resolve their disputes, as opposed to subjecting themselves to the idiosyncrasies of local court systems and their inherent risks.

    Furthermore, the use of arbitration provides parties with a large degree of privacy, as most elements of the arbitration process are kept between the parties and are not subject to public scrutiny, unlike litigation. Most arbitration awards are never released to the public, and if they are, it will be with the consent of the parties and in a redacted form. Additionally, the decision of the arbitral tribunal may be reached with less cost and complexity than in litigation. Arbitration also has the advantage of speed as compared to litigation, for example, the backlog level as of 30th June 2021 stood at 51,748 cases in Ugandan courts. It’s important to note that In Uganda, a case is considered to be in backlog when it spends more than two years in the court system. The arbitration may appear to be more expensive than going to court. However, the flexibility of a well-managed arbitration can yield substantial cost savings to the parties, yet court costs are becoming a significant factor in some jurisdictions.

    Cg Engineering Consults Staff at a concrete U-drain construction site.

    A major advantage of arbitration for international business operators is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). The New York Convention gives arbitration awards common currency among all states which have agreed that their courts will treat arbitration awards made in one convention state as if they were local judgments of their own state. The New York Convention is the backbone of international arbitration today. Uganda became a convention state on 12 February 1992.

    Uniqueness of the Construction Industry

    The question that often arises, therefore, is: what is special about construction disputes that require specialist arbitration knowledge?

    Firstly, Construction projects are associated with more risk than other typical commercial transactions both in terms of the risk allocated under them and the complexity of the risk. Their nature and typically long duration lead to risks including fluctuation in the price of materials and in the value of a currency, political risks, and legal risks.

    Secondly, time is often extremely critical in construction projects. The late delivery of a project, for example, a dam, can disrupt the project financing used to fund it.

    Furthermore, there is the involvement of a wide number of parties with different capacities and divergent interests which adds to the complexity of construction disputes, for instance, a limited dispute arising on one subcontract may lead to disputes under other subcontracts and the main construction contract. This may have financial and legal consequences for many of the above parties, triggering disputes under much wider documentation such as shareholder agreements, joint operating agreements, funding documents, and concessions. That often gives rise to issues about multiparty arbitration proceedings and third-party participation in arbitration proceedings.

    Another important feature of construction disputes is the widespread use of standard forms of contract, such as the FIDIC or the ICE conditions of construction contracts. These specialized forms of contract often generate difficult points of law. Efficient dispute resolution often requires familiarity and understanding of the risk allocation arrangements of these standard forms. Arbitration has been included in FIDIC contracts since the publication of the first FIDIC contract in 1957.

    Finally, construction disputes are technically complex, requiring efficient management of challenging evidentiary processes, including document management, expert evidence, program analysis and quantification of damages. Evidentiary challenges in these disputes have given rise to the use of tools, such as Scott schedules, which are unique to construction disputes.

    Conclusion

    One thing that is beyond question; there is a bright future for arbitration and ADR in Uganda and around the world. Since it is a consensual, flexible, cost-effective, private, and fast process, the role of arbitration in an emerging economy like Uganda cannot be gainsaid. The use of arbitration in construction disputes and all other disputes where it is amenable is thus the way of the future. In the past, there has been a capital flight by investors who have relocated from Uganda due to the protracted court battles that are the hallmark of any dispute in Uganda. Apart from running a profitable enterprise, an investor’s only other concern is business certainty and confidentiality, and litigation has promoted none of those.

    However, arbitration is still fairly misunderstood in Uganda, and sometimes it has been made as structurally complex as litigation by those opting for it, thus making it unattractive to others who would want to use it. However, dissemination of information and increased training of professionals in the field of ADR, with arbitration, in particular, will go a long way in popularizing and demystifying it.

    Arbitration is the way for the future, for access to justice, and for the proliferation of the construction industry in Uganda.

    Credits — Gavamukulya Charles, ACIArb — CEO CG Engineering Consults.

    CG Engineering Consults is a company that deals in engineering design, claims consultancy, and dispute resolution.