NZS3910 Review - 5 of 5 Dispute Resolution and Termination

Five of Five – Dispute resolution

The early identification of areas of disagreement is a key to dispute avoidance in major projects.  The alternative is a formal, multi-layered dispute resolution procedure triggered by notice of dispute, with various time-limited combinations of Engineer’s review, mediation, expert determination, adjudication and arbitration, coupled with a reluctance to sour relationships and future workflows.  For most contractors, the triggering the disputes procedure in clause 13 of NZS3910 is the death-knell for future work from that client.

A formal dispute resolution procedure, combined with adjudication culminating in arbitration is the only sensible disputes procedure.  But to work:

(1)    before the parties get to that point, there needs to be a rational, reasonable and fair discussion of the disagreement as soon as the issue is identified, with a commitment to find a solution on a principled basis.  This is typically best achieved through an evaluative process, rather tan the more traditional facilitative approach; and

(2)    if agreement cannot be reached, then the discrete issues in dispute can be referred to adjudication, and arbitration, if the adjudicator’s determination does not work, on a sensible basis.

Both adjudication and arbitration provide considerable flexibility, and it is that flexibility that enables the parties to make the most of the process.  For example:

(a)    the selection of the adjudicator/arbitrator is one of the most important decisions the parties make – a telephone call between counsel, or preferably a face to face meeting, with a commitment to appoint the best neutral for the dispute, is the best approach to these processes;

(b)    a notice of adjudication or notice of arbitration is not, as one party described it recently “a declaration of war” – it is an opportunity to refer an identified matter of disagreement to an agreed independent expert for determination;

(c)    such processes are not an opportunity for throwing every grievance and potential claim against a wall in the hope that something might stick; and

(d)    each process can be tailored for efficiency – disclosure, experts, cross-examination, hearings, time limited determinations/awards all provide the flexibility for prompt and efficient dispute resolution, provided the parties accept the process and the result.

Short of a disputes resolution process, termination may be the only option left.  Clause 14 provides separate procedures for owner and contractor termination, which largely are too complex – for example, termination by the contractor for non-payment appears to require prior suspension by the Engineer, the owner’s agent (despite the wording of the clause, this is not the case - see the Court of Appeal decision in Custom St Hotel v Plus Construction).

Section 34 of the Contracts and Commercial Law Act 2017 recognises ability of the parties to define essential terms and the remedies for breach.  A more even-handed, and certainly clearer approach than the current provisions of clause 14, would be to provide for material breaches, by either party, entitling termination on notice with cure periods for lesser breaches.  On termination, the existing provisions relating to termination by the owner should be clarified, providing for accounting for cost overruns and savings following completion of the work.

NZS3910 is similarly surprisingly out of step with international contracts by not including a cap on liability.

As currently drafted, the security (mainly bonds), disputes and termination provisions in NZS3910 lack clarity and commercial sensibility, and are out of step with international best practice and our current legislation.  Now is a timely opportunity for an in depth review.