1. Introduction
Multi-tier dispute resolution clauses have been the norm in international construction projects for many years. The issue for such projects is having a durable, interim decision which enables the work to proceed without the cost, uncertainty or distraction of formal arbitration.
A number of interim procedures have been explored over the years, with the engineer’s formal decisions, mini-trials, conciliation, mediation, adjudication and, more recently, disputes boards being variously the flavour of the day. The high-point was the Hong Kong Airport projects in the early 1990s, with provision for engineer’s determination, contractual adjudication for payment disputes, mediation and arbitration (deferred ‘til after practical completion).
Ultimately, in each case the parties have agreed to arbitration, but have deferred the cost and delay inherent in that process by providing for a liveable, if not permanent, prompt interim resolution of disputes while work progresses.
Arbitration as a final forum has, until recently, been largely supported by the courts. A number of recent cases have muddied those waters.
2. Multi-tier dispute resolution clauses
Most disputes procedures start with a requirement that all disputes must be dealt with in accordance with the procedure agreed in the contract. There is no going straight to court or to arbitration without complying with any preliminary steps, as confirmed by Lord Mustill in Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd:
Having made this choice I believe that … those who make agreements for the resolution of disputes must show good reasons for departing from them … having promised to take their complaints to the experts and if necessary to the arbitrators, that is where the appellants should go.[1]
Not only are agreements to arbitrate to be enforced, but the preliminary steps to be taken to resolve disputes before engaging in arbitration are also mandatory.
In NZS3910:2013, every dispute or difference concerning the contract must first be referred to the engineer,[2] and it is only if a party issues a timely notice disagreeing with the engineer’s decision (or an adjudicator’s determination) that the dispute or difference can be referred to arbitration. While that clause appears mandatory, both adjudication and engineer's determinations are optional; a claimant may take either or both approach.
Similarly, under the FIDIC golden principles all disputes must be referred to a Disputes Avoidance/Adjudication Board as a condition precedent to referral to arbitration,[3] and for its part the New Engineering Contract (NEC4 in its latest edition) has contractual adjudication as a precondition to arbitration.[4] In neither case is there a freestanding right to go directly to arbitration without first engaging in the interim procedure.
The underlying concept is relatively simple, and practical; key decisions which affect the progress and cost of construction works must be made promptly in real time. The work can then proceed without prejudicing the parties’ positions when the substance of the dispute is fully and finally argued. It is only once those procedures, designed to reduce or avoid disputes, so far as practicable, have been exhausted that a dispute can proceed to arbitration.
However, while it is understandable and even preferable to prohibit formal arbitration until those interim procedures have been exhausted and, in some cases, until work has been completed, arbitration is the agreed final forum for dispute resolution.
3. Interim determination
A number of procedures for interim resolution and determination of disputes have developed over the years.
The independent engineer
The formal decision of the engineer has the longest history and is the most enduring. The traditional role of the engineer is, as agent of the owner, to provide initial advice on feasibility, provide designs, prepare contract documentation, assist with tendering and award, administer the contract (including instructing variations, granting extensions of time, certifying payments and certifying completion) and determining disputes. [5]
While this approach reflects the independent professional nature of the role of the engineer, it also overlooks the engineer’s conflicting positions as agent of the owner and its own liability linked to its relationship with its insurers.
On any estimation, this raises an unmanageable conflict of interest made worse by the fact that the engineer’s decision may become final and binding if strict time limits are not adhered to, and that the engineer is not, traditionally, bound by the rules of natural justice.[6] It is no surprise that, at least in the NEC contracts, the role of the engineer is dispensed with in favour of a project manager and supervisor.[7]
Mediation/conciliation
Access to facilitated negotiation between representatives of the parties who have decision making power, and are one step or more removed from day to day project issues, is without doubt helpful and productive.
In practise, however, mediation can be problematic.
There is a persistent belief in the construction industry that the project management team can deal with disputes without the unwanted interference of lawyers and formal procedures; this carries through to reviewing and proactively applying the agreed dispute resolution clauses.
By the time the disputes clauses are reluctantly referred to, attitudes have hardened and the opportunity for a negotiated solution has often long since passed. This is not assisted by the attitudes of many mediators who recommend mediation only once the litigation process, either in arbitration of court, is well progressed. This litigation settlement approach is directly at odds with the need for prompt interim resolution of disagreement, at a time when formal dispute can be averted.
Mediation can also too easily revert to horse-trades where legal positions are abandoned in favour of a cost or interest based negotiation. Where construction is ongoing, such settlements rarely provide a basis for dealing with future, similar, disagreement. In major projects, the issue is less the cost claimed than understanding and accepting the principled legal basis upon which a dispute is settled.
Mandatory mediation, when invoked early in the life of a dispute, can alleviate much of this concern. A contractual obligation to go to mediation removes any concern that initiating mediation may indicate weakness in a party’s position; and, once in the mediation process, even the most obdurate will often engage in the process, no matter how distasteful the compromises required.
Curiously, for a mediator trained in the facilitative approach championed by Fisher and Ury in Getting to Yes,[8] NZS3910:2013 provides for the mediator to issue a decision.[9] From a practical perspective, there can be little difficulty with a mediator providing an opinion or even recommendation once a mediation reaches an impasse. That can provide a useful opportunity for ongoing negotiations and for further discussion at board or senior management level outside of the mediation. But for such a “decision” to become final and binding is problematic.
Expert determination
For similar reasons, the fast track expert determination in NZS3915:2005,[10] also raises concerns. While the expert is to be independent, and a step removed from the project, the expert is then to determine the dispute within 15 working days of referral.
While this may work in the case of a single, sitting disputes board having familiarity with the project, as a dispute process, the expert determination is largely unworkable without the agreement of the parties to expand the procedure.
Disputes boards
In all their different manifestations, disputes boards have at their core a sitting body, informed of the progress of the project, available for prompt and binding, but not final, determinations of disputes. In this respect, disputes boards take over the disputes role of the engineer, removing the very real conflicts of interest inherent in the dual role of the engineer, and they provide an effective opportunity for dispute avoidance.
Regrettably, most disputes boards are perceived as an unnecessary expense and an admission that dispute in inevitable. Even if the contract provides for them, they are frequently not appointed until too late to be of anything but an impediment to going to arbitration.
Adjudication
Statutory adjudication under the Construction Contracts Act 2002 has the benefit that it is available at any time, and can deal with any dispute under a construction contract. The parties cannot contract out of adjudication, and it is prompt and binding, but not final.
In most cases, faced with further costs and delays in arbitration, the determinations of adjudicators are treated as final.
4. Arbitration as a final forum?
Leaving aside the importance in the construction industry of dealing with disputes on an interim basis, with a liveable if not entirely acceptable result, arbitration remains the preferred final forum of determining disputes; it has the procedural flexibility and the benefits of party autonomy in selecting the arbitral tribunal and setting timing and the applicable laws to provide prompt and durable results.
In most instances, by the time the parties have turned to the disputes clauses in their contracts, it is the only realistic procedure left available; and it is what the parties want.
In Aotearoa / New Zealand, an UNCITRAL Model Law jurisdiction, arbitration is well supported, with the Arbitration Act 1996 providing for:
- Arbitration being encouraged and limiting judicial review and court intervention;[11]
- Separability of the arbitration clause from issues of the validity of the overarching contract;[12]
- Staying of court proceedings where there is an agreement to arbitrate;[13] and
- Limiting the grounds of setting aside or refusing to enforce arbitral awards.[14]
In that context, it is fair to say that the Act supports the parties’ preference for arbitration as the final forum.
The courts, however, appear to have been increasingly reluctant to give effect to the parties’ agreement, finding technical reasons to invalidate agreements or to limit the availability of arbitration, at odds with the clear purposes of the Act.
In Carr v Gallaway Cook Allan,[15] the Supreme Court went to great lengths to analyse the concept of severability and ultimately found that, based on editing mark-ups providing for appeals on questions of fact (expressly prohibited in clause 5 of Schedule 2), the agreement to arbitrate itself was invalid.
What the court chose to overlook in that case is that the parties willingly engaged in the arbitration; the right to appeal on questions of fact had no impact on the conduct of the arbitration; and it was only late in the appeals process that it was argued that a right to appeal on questions of fact became fundamental to the agreement to arbitration itself.
A simpler, and more supportive, decision would have been to uphold the award and to strike down the right of appeal.
More recently, in the case of Ngawaka,[16] the High Court held that, notwithstanding the explicit limitations on court intervention referred to above, it had inherent jurisdiction to intervene in arbitrations; and that issues of whakapapa were not arbitrable under section 10 of the Act.
In two recent decisions, the High Court has also held that arbitration is only available during the construction period of the respective projects.
5. The Engineer has left the building
In the 2013 decision of Blain v Evan Jones Construction, the Court of Appeal made the following comment in relation to arbitration under section 13 of NZS3910:2003:
[Counsel for the Respondent] … accepted that Section 13 did not prevent the Council from suing EJCL for breach of contract after the end of the construction period. Section 13 is an exclusive process only during the construction period. That being the case, we do not see that Section 13 assists in the analysis of the present issue …[17]
It is worth noting that this issue was not argued in any detail, and was at best obiter.
There are a number of difficulties with this observation:
- Section 13 makes no such limitation. Clause 13.1.2 provides that all disputes or differences not time barred are to be dealt with in accordance with section 13, which includes provision for arbitration.
- Clause 13.2 provides that all disputes are, in the first instance, to be referred to the engineer; however, much like adjudication, this is at the option of the claiming party. If an engineer's determination is sought, then there is a month within which to refer the dispute on to arbitration; similarly a party has one month to dispute an adjudication determination. Otherwise the decision or determination is final.
- Clause 13.4.1 may pre-condition arbitration by referral and dissatisfaction with an engineer’s formal decision or adjudication, but it has no temporal limitation. There is a clear intention that the final forum for all disputes is to be arbitration, with the parties first going to either the engineer or adjudication.
- The decision fails to recognise that the parties had agreed to arbitration for all disputes, and to limit court intervention as outlined above.
Hellaby Resource Services
A similar approach was adopted in Hellaby Resource Services v Body Corporate 197281[18].
That case concerned an application for summary judgment. Hellaby Resources, through a subsidiary, had been engaged under a NZS3910:2013 based contract to carry out remedial work on the Body Corporate’s property. Hellaby’s claim was for a debt established under section 24 of the Construction Contracts Act 2002 (non-payment of a scheduled amount); the Body Corporate opposed summary judgment on the basis that it had an arguable defence. The central issue was whether or not the court should exercise its discretion not to grant summary judgment for that debt.
Among a number of defences, the Body Corporate raised a counterclaim, against which Hellaby sought a stay on the basis that the contract included an agreement to arbitrate. As the final certificate had been issued, the court found that the engineer’s formal decision was no longer available, and therefore the pre-condition to arbitration could not be met. The clear intention of section 13 of NZS3910:2013 being that:
… the escalating dispute resolution process in the Contract, culminating in arbitration, will be mandatory while the contract is being performed and up until one month after the Final Payment Schedule is issued. After that date, the Principal is free to pursue its claims in the court if it wishes to do so.[19]
The Associate Judge based his reasoning on his interpretation of clause 13.4.1 that, as referral of the dispute to the engineer was a pre-condition, “plainly the parties intended that the arbitration agreement would have a limited lifespan.”
In reaching this conclusion, the Associate Judge was unattracted to the “theoretical” argument that adjudication, another pre-condition to arbitration, was not so time limited. The critical point for the court, distinguishing the earlier decision of Miro Property Holdings Ltd v The Fletcher Construction Co Ltd[20] (for which practical completion had been certified), was that final completion had been certified. Therefore, the engineer could not issue a formal decision and arbitration was no longer available.
On the issue of adjudication, the Associate Judge acknowledged that the agreement to arbitrate could be “re-enlivened” by an adjudication determination, but until that happened “the door to arbitration is closed”. It is important to note that neither party had applied any of the dispute resolution provisions of section 13 in that case, nor had the dispute been referred to adjudication. It was the simple pursuit of a debt established under section 24 of the CCA by way of summary judgment.
Quite why the Associate Judge focussed on an engineer’s decision (which neither party had requested) for time limiting the agreement to arbitrate, when it was always open to the parties to go to adjudication is not clear.
Leaving aside the novel concept that the agreement to arbitrate was time limited, the case fundamentally turned on contract interpretation, for which the Supreme Court decision of Bathurst Resources Ltd v L & M Coal Holdings Ltd[21] is the most recent and leading authority. In that case, the Supreme Court re-affirmed that the starting point is the express wording, which must then be interpreted from the perspective of the parties with the information and intentions at the time of contracting, through the lens of commercial common sense.
Construction contracts, by their very nature, are made up of many parts, many of which are conflicting. NZS3910:2013 is not immune from inconsistency and ambiguity which the courts and arbitrators must resolve.[22] The Associate Judge seems to have made no effort to give commercial sense to NZS3910 in his interpretation of clause 13.4.1; particularly in finding that the door to arbitration was closed simply because one of the pre-conditions, the engineer’s decision, was no longer available, and could be re-opened if a party went to adjudication.
It should be noted that clause 13.2 does provide that all disputes are to be first referred to the engineer, however that provision holds the same status as adjudication under the Construction Contracts Act; in neither case is an aggrieved party obliged to refer a dispute either to the engineer or to adjudication. They are both options available if a party wishes to progress its dispute.
The decision fails to acknowledge that the parties had agreed to arbitrate all disputes as part of section 13, and introduced the novel concept of the disputes clause flip-flopping between arbitration and the court in an unusual way. Following the Associate Judge's reasoning, if the engineer was never formally appointed or resigned before practical completion (neither an unusual event), then the parties have agreed that all disputes go to court.
Hellaby will hopefully be limited to the application for summary judgment (which in itself runs counter to the Court of Appeal decision in Laywood & Rees[23]).
Rooney Earthmoving v Infinity Farms
Sadly, the most recent case of Rooney Earthmoving v Infinity Farms[24] takes the time-limited interpretation of section 13 a step further.[25]
That case concerned a claim for defective work. The parties had contracted under NZS3915:2005, which provided in section 13 for expert determination rather than engineer’s decision. As with NZS3910, in the event that a party was dissatisfied with either the expert’s determination or an adjudicator’s determination, then referral could be made to arbitration.
Unlike the case of Hellaby, in Rooney practical completion had not been certified.
Clause 13.2 of NZS3915 provides that an expert may be appointed before or during the carrying out of the contract works. It follows that such an appointment may not be made after the completion of the works. The court found that the work had been completed in 2018 (though no practical completion certificate had ever been issued and disputes about defects remained alive) and the contractor had vacated the site in 2020. Citing both Blain and Hellaby, Justice Eaton found that the dispute resolution provisions in NZS3915 are similarly “intended to deal with disputes while the contract is underway”.[26]
While noting that the issue of a temporal constraint is not settled, Eaton J went on to hold that the phrase “carrying out Contract Works” in relation to the appointment of an Expert in clause 13.2 implies that the contractor remains on site carrying out work.
There are a number of difficulties with this decision; not least that the parties were left in the same position as in Hellaby – without the ability to refer a dispute to an expert, with the only route to arbitration available through adjudication or by agreement.
Further, the decision implies that the critical point is not certification of practical completion or final completion, but actual physical work on site. This implies that the expert is not available for other obligations under the contract, like the rectification of defects which is by definition part of the work to be carried out under the contract.
Thankfully, the court made no temporal finding in relation to arbitration, though it did close with a recommendation that the parties refer the dispute to arbitration by agreement, failing which recourse could be had to the court.
6. Conclusion
As with the Supreme Court decision in Carr v Gallaway Cook Allen, these cases take a technical, legalistic approach to contract interpretation which is at odds with the clear intentions of the parties. The cases also fail to recognise that the NZS3910 series of contracts do not stand up to rigorous interpretation.
That said, those standard conditions of contract are consistent with other international standards which also provide for steps to be taken before arbitration can be commenced. The intention is for arbitration to be the final forum, but prior to that various preliminary steps must be taken. The natural meaning and intent of the clauses is that, if such preliminary steps cannot be taken, then the parties may proceed directly to arbitration. The idea that arbitration falls away altogether is, at best, novel; and at worst out of step with the purposes outlined in section 3 of the Arbitration Act.
The interpretation under which the parties are taken to agree that arbitration falls away when the engineer has left the building, even though neither party attempted to avail themselves of it, but is available subsequently if a party goes to adjudication makes no commercial sense at all.
It has to be accepted that, following the Supreme Court’s approach in Bathurst, the terms of the agreement must be adhered to. However, it also must be acknowledged that NZS3910 requires a high level of judicial interpretation to give commercial sense to what the parties agreed, or would have agreed had they turned their minds to the issue. It would be most unusual for a contract to provide for disputes to flip-flop from arbitration, to the courts, and back again.
For parties and their legal advisors, the message should be clear – if you’re using one of the NZS3910 series of contracts, amend section 13 to provide for direct access to arbitration. For interim determinations, adjudication is available at any time on the application of any party to a construction contract.
There is no substitute for clear and unambiguous drafting.
[1] [1993] AC 334 at 353
[2] See clause 13.2.1
[3] Golden Principle #5
[4] See Engineering and Construction Contract (ECC)
[5] See Hudson’s Building Contracts (7th Ed) at p. 9
[6] See Sutcliffe v Thackrah [1974] AC 727
[7] See Scheldebouw BV v St James Homes (Grosvenor Dock) Ltd [2006] EWHC 89 (TCC)
[8] Getting to Yes – Negotiating Agreement Without Giving In, Roger Fisher & William Ury (Houghton & Mifflin) 1981
[9] General Conditions of Contract for Building and Civil Engineering Construction (NZS3910:2013), clause 13.3
[10] General Conditions of Contract for Building and Civil Engineering Construction (where no engineer is appointed) NZS3915:2005
[11] section 3 and article 5 of Schedule 1
[12] article 16(1) of Schedule 1
[13] article 8(1) of Schedule 1
[14] articles 34 & 36 of Schedule 1
[15] [2014] NZSC 75
[16] Ngawaka v Ngāti Rehua-Ngātiwai ki Aotea Trust Board [2021] NZHC 291
[17] Blain v Evan Jones Construction Ltd [2013] NZCA 680, per O’Regan P at [61]
[18] [2021] NZHC 554
[19] At [131].
[20] CIV-2010-485-2540, HC Wellington, 31 May 2011
[21] [2021] NZSC 85
[22] For example, see the interpretation of the termination provisions in clause 14.3.3 by the Court of Appeal in Custom Street Hotel v Plus Construction Co Ltd [2017] NZCA 36.
[23] Laywood & Rees v Holmes Construction [2009] NZCA 35
[24] [2022] NZHC 2078
[25] In the interest of fair disclosure, I had been nominated by AMINZ in that case. My nomination was held to be invalid, which is not relevant to this discussion, though perhaps entertaining.
[26] At [80]