Dealing with Disagreement
Introduction
Every construction contract, to varying degrees, has high levels of uncertainty - with the best will in the world, the final design, price and completion date are provisional at the time of award. That tends to make disagreement inevitable.
The first Hong Kong Airport project we awarded, back in 1991, was for the Tsing Ma Bridge; a HK$7.2 billion suspension bridge forming the core of the Hong Kong Government's new Chek Lap Kok airport development. That project adopted a traditional employer's design, contractor build approach, with conditions of contract developed specifically and then adapted for all 70 airport core programme projects.
The disputes procedure was staged, starting with an engineer's decision, followed by mediation and arbitration. Payment disputes had the added novel procedure of adjudication. The final forum for disputes was arbitration, with the qualification that, while a notice of arbitration could be issued after mediation or adjudication (as appropriate), no step could be taken in progressing arbitration until either practical completion or termination.
While the disputes process may appear to be complex by today's standards, few disputes got to arbitration and the US$20 billion project, completed in the limited time before hand over of the Territory to the People's Republic of China in 1997, was praised for its lack of corruption and its successful outcome (particularly by Transparency International - note the reference to dispute resolution).
When I later discussed the project with John Bellhouse, the head of the legal team at McKenna & Co (advising the Government on the project) he made two interesting observations - (1) the disputes process was perhaps too complex; and (2) deferring arbitration helped reduce disputes considerably, provided disputes could be dealt with reasonably on an interim basis. Having a project co-ordination office, effectively a local office of Bechtel, to identify and proactively deal with disputes certainly helped, with legal advice as required.
The lesson to be learned was the importance of dispute avoidance and having an effective interim dispute resolution mechanism.
Dispute Avoidance
Much can be done during the tender stage, through peer reviewing the procurement strategy and tender documents, and probity auditing the process itself. Independent review and involvement can do much to improve the process and to assuage the fears of potential contractors.
Details of design, unexpected site conditions and other disruptive events will always arise. It is a truism that on-site relationships are critical to making progress. Trust is critical. But where budgets are strained, margins at risk and commitments to funders and beneficial users are looming, relationships can come under pressure.
Angry lawyers' letters, refusing extensions of time and declining variation claims don't help.
While, typically, the seeds for disagreement are sown during the tender process and at award, much can be done during construction to alleviate the stress of disagreement.
First is transparency. There is no upside in hoping a disruptive event will go away if it is ignored; worse, creative or optimistic reading of the contract to reinforce that it is the other party's problem to deal with.
Second, the early identification of the potential for disagreement. It is entirely possible to disagree on liability, but to still agree on the least disruptive, and most productive, means of dealing with unexpected events.
Finally, a frank discussion of how to avoid, or at least mitigate the effects of, such events.
The most effective tools for such strategies is thorough monitoring and updating of the programme, progress reporting and maintaining the project risk register, coupled with proactive project management.
Interim Determination
Most effective project management is solutions based, within the context of the overall commercial agreement between the parties. Nothing is more likely to result in protracted and expensive dispute than "throwing the contract in the bottom drawer and getting on with the job." That is fertile ground for disputes lawyers.
What is required is the early identification of disagreement before it crystallises into formal dispute, and corralling that disagreement before it infects the rest of the works. This can be achieved by negotiation between project managers, or more senior representatives removed from day to day involvement in the works or, failing that, by interim determination.
Whichever approach is adopted, the key is early identification and limiting disagreement to avoid escalation.
Engineer's formal decision
The engineer (NZS3910:2013 & FIDIC), architect (NZIA SCC1), project manager (NEC3), independent certifier (NZS3910:2023) or other professional appointed by the owner to exercise a discretion, to issue certificates or to make decisions occupies a unique position in constructions contracts. In the words of Lord Reid in Sutcliffe v Thackrah [1974] A.C 727 at 737 (see also Costain v Bechtel [2005] EWHC 1018 and Scheldebouw v St James Homes [2006] EWHC 89, such professionals have two different types of function to perform:
In many matters, he is bound to act on his client's instructions, whether he agrees with them or not; but in any other matters requiring professional skill he must form and act on his own opinion.
This creates an inevitable perceived, if not real, conflict of interest. In the words of Lord Hoffman, in Beaufort Developments v Gilbert-Ash [1998] UKHL 19:
... the [Engineer] is the agent of the employer. He is a professional man but can hardly be called independent. ... There are ... contracts which provided that in case of dispute, the [Engineer] was to be arbitrator.
But the notion of what amounted to a conflict of interest was not then as well understood as it is now.
While there is considerable benefit in having a professional person, familiar with the issues in dispute, provide a prompt, interim decision which enables the work to continue, the engineer's conflict of interest should not be under-estimated. They have the obvious commercial relationship with the owner; they have personal involvement as designer and administrator of the contract works (in which respect, it will inevitably be their own decisions which are in dispute); and they have their obligations to their insurers.
There are better mechanisms for interim determinations, not least adjudication, early neutral evaluation or disputes boards.
Adjudication
Statutory adjudication under the Construction Contracts Act 2002 has been available since 2003. It has the benefit of being prompt (compared to arbitration) and mandatory (in the sense that it is not possible to contract out of the availability of adjudication).
For major projects, where there is a discrete issue in dispute, referring that dispute to adjudication, and isolating the disagreement from the rest of the works, adjudication has been massively successful. Key factors in such adjudications have been (1) carefully defining the dispute, rather than a scattergun approach; (2) selecting by agreement an adjudicator with the experience and skills best suited to the issue to be determined; and (3) focusing the submissions, within an agreed timescale, on relevant evidence, expert opinion and law.
On the downside, too many adjudications appear to have been run on an "ambush" approach, depriving the respondent of the opportunity of being involved in the selection of the adjudicator and time to prepare a proper response. The suitability of adjudicators appointed by authorised nominating authorities has often been questionable, with determinations which fall well short of effectively resolving the dispute at issue.
The result is that adjudication has become to be seen as an expensive lottery (overall fees, excluding the parties' own legal and in-house costs, currently running in excess of 25% of the amount claimed). It does not, of course, have to be this way; the process simply needs to be used more carefully.
Mediation
Mediation can be a useful circuit breaker for disputes, however it is often taught and used as a means of litigation settlement
In the construction industry, most parties need to understand why, in the context of the contract, a settlement is justified. This lends itself better to evaluative mediation, albeit non-binding, engaged not as a precondition to arbitration, but at the earliest opportunity once a potential for dispute is apparent.
There is considerable discussion about the merits, or theoretical problems with, mandatory mediation as a precondition to arbitration. This was the approach taken in the Hong Kong airport projects, and there was clearly benefit in engaging in mediation because it was required in the contract, rather than showing some loss of face or weakness by proposing mediation.
Whatever approach is adopted, it should be recognised that mediation is a voluntary process and can be engaged at any time.
Disputes Boards
Disputes boards of various flavours have been in use for major projects for some time, whether Disputes Review Boards, Disputes Avoidance Boards or Disputes Adjudication Boards. The concept is to have a sitting board, informed of the project from the outset, available throughout to provide interim determinations.
Many projects have provided for such boards, without ever having them constituted. The reticence is mainly over costs. Few owners or contractors accept that disputes are likely, at the start of a project, and seek to avoid what is seen as an unnecessary cost; once disputes do eventuate, it is too late to establish a board and then capture the benefits it might have offered.
An alternative, originally proposed by the Central for Effective Dispute Resolution (CEDR) in the UK, is to appoint a "project mediator" who would call the initial risk meeting following award; be copied into monthly reports and formal contract communications; attend project control meetings; and would have the power to call meetings where the potential for dispute is identified and to mediate such disputes.
However the role is described, there is a place for an independent person, removed from the project, to provide peer reviewing, probity auditing and dispute avoidance advice.
Early Neutral Evaluation
One such approach is to engage an independent expert, whether legal or technical, to evaluate disputes before they escalate and to provide a non-binding opinion of what the outcome might be if the matter were referred to arbitration. This is an increasingly common approach.
The procedure typically involves having summaries of position from the parties, with relevant supporting evidence if necessary, followed by a conference at which both parties are present and the issues discussed. The independent neutral then provides an informal, oral opinion followed by a non-binding report.
The benefit of this approach is that it then gives the parties a basis upon which to carry out further negotiation, whether assisted by a mediator or negotiation facilitator as required.
Arbitration
The final forum for dispute resolution in the construction industry has been arbitration for many years. That position changed slightly in the early 21st century when it was felt that arbitration had come to be as expensive as litigation in court without the benefit of published decisions. Many standard forms (notably the JCT and NEC forms) have removed arbitration as the default tribunal, leaving it to the parties to specify either arbitration or litigation in court as the final forum.
Arbitration continues to have the benefits of (1) the ability to select the tribunal; (2) confidentiality; (3) all the powers of the court; and (4) the ability to adopt a procedure appropriate to the dispute.
In this respect, the more formal court rules do not apply, provided those few mandatory rules (natural justice, opportunity to be heard, etc) are complied with. This allows for emergency arbitration (particularly for interim measures and preliminary orders); expedited arbitration (with brief hearings or on the papers); and evidentiary rules which have the benefit of reducing procedural costs.
Arbitration under the Arbitration Act 1996 also allows for the removal of rights of appeal on questions of law which can frustrate the efficacy of arbitration overall. In a case some years ago, similar to many others since, the parties referred three matters to adjudication, then had an arbitration (including a week long hearing), followed appeals to the High Court and to the Court of Appeal. Years later, after considerable cost to the parties, the claimant finally conceded and paid the amount claimed, having lost in every forum.
In the words of the late Sir Robert Chambers KC, if you're going to arbitration, go to arbitration and make the most of it. Don't include rights of appeal.
Conclusion
Disagreement is almost inevitable in construction projects, not least because so many critical issues are not determined, or understood, at the time the contract is awarded.
Those disagreements do not need to evolve into formal, distracting and expensive disputes, provided the parties engage in an early, sensible discussion about how to resolve the issue.
Sometimes, the differences are too fundamental, and too important to the successful completion of the works, to be negotiated. In that case, an interim determination of the disagreement, whether through adjudication or some other independent person can be critical to maintaining progress on site.
Once the parties have reached a point where a more formal process is required, arbitration is the obvious forum for such disputes to be finally determined. In such cases (and in the case of adjudication), the most important decision to be made is the selection of the arbitrator (or adjudicator). That is a decision which should be most closely guarded, and dealt with by agreement between the parties, rather than surrendered to a nominating authority.
Once arbitration is likely or required, providing for preconditions to arbitration (whether by referral to the Engineer or Independent Certifier, to mediation, to chief executives or disputes boards) simply provides yet another avenue for challenging the process and increasing cost and delay.
In any project, if the parties wish to go to arbitration, they should be entitled to do so at any time, without impediment.