Conflict avoidance and dispute resolution
Nicholas Gould is the lead author of a Guidance Note recently published by the RICS entitled Conflict Avoidance and Dispute Resolution in Construction. Of course, many in the construction industry hope that they will never encounter a claim or a dispute. However, claims and disputes are simply symptoms of problems that have manifested themselves in relation to a project. It might be that a request for an extension of time or additional money for variations has not been dealt with, or that the contractor is simply losing money, or that defects have arisen during or after completion of the project.
As Nicholas explains below, attempts to deal with these issues (or rather avoid these issues arising altogether) requires action at a much earlier stage rather than simply waiting and only responding when a dispute arises.
Conflict avoidance requires clear, concise, careful and proper planning, of the strategy for the execution of a project. It is also about adopting a proactive conflict avoidance approach such as risk analysis, clarity in the contract documentation or partnering.
Dispute resolution on the other hand is about recognising when a dispute has arisen and appreciating the escalation of that dispute. Disputes can arise from ambiguity or the unclear definition of risk. An appreciation of the range of techniques that are available to resolve disputes is important, as is a need to recognise when expert or legal advice might be useful.
Conflict avoidance generally
There are a number of simple steps that can be taken in order to attempt to avoid conflict. These include:
- Good management: proactive planning and management of future work, as well as raising early issues of concern can avoid disputes;
- Clear contract documentation: Ambiguities in contract documents can lead to argument, disagreement and dispute. Focusing on the specific details of the particular project (rather than generalisation) is important;
- Partnering and alliancing: Building co-operation between the project participants and fostering team spirit is extremely valuable;
- Good project management: Planning ahead and managing generally and specifically the time, money and risks associated with the project is crucial;
- Good client management: Understanding the client’s objectives and communicating issues and problems early on is fundamental;
- Good constructor management: A regular objective assessment of progress and the costs relating to a project also involves communicating well with the constructor and dealing positively and objectively with problems that arise. Do not ignore problems in the hope that they might go away;
- Good design team management: good information is crucial;
- Record keeping: Disputes can often be resolved by retrospectively considering records that have been kept during the project. However, those records are often not sufficiently detailed.
All these simple principles can help with any project. The more sophisticated the project, the more detailed a particular approach might need to be.
Dispute resolution
There are three main techniques:
- Negotiation: The problem-solving efforts of the parties themselves;
- Mediation or conciliation: A third party intervening in order to assist the parties to resolve their difficulties;
- An adjudicative process: A final outcome is determined by a third party. This of course includes construction adjudication, but litigation and arbitration also lead to binding decisions based on an assessment of the facts and law.
These three core dispute resolution principles can be further sub-divided by particular techniques themselves. For example, expert determination is a contractual process where the parties agree that a third party will make a binding decision. The terms are governed by the contract. The decision of the expert will be final. It is, therefore, an adjudicative process.
The term ADR meaning alternative dispute resolution (although the term appropriate dispute resolution is far better) describes not just mediation. Any alternative to litigation (and arguably arbitration) that leads to a resolution of the dispute is alternative. So this could include rapid construction adjudication, the use of dispute boards and expert determination. Negotiation in itself is not really alternative as this is the widely used bedrock of all settlements. Mediation is alternative in that it helps the parties to reach that settlement more quickly, while expert determination is alternative in that a binding decision is imposed more quickly and more economically than by arbitration or litigation.
Contract documentation
A large number of standard form contracts are published and are widely available. This includes not just the JCT family, but also NEC3 as well as PPC, the old ICE contracts, the international FIDIC contracts and a range of other published forms, sub-contracts, collateral warranties, bonds and guarantees. Disputes can be reduced by checking that the contract documents are in place. This is not just about ensuring that the contracts are signed and dated, although that is extremely important and often overlooked in the construction industry. It is also about ensuring that the correct documents are included within the document. Consideration should be given to:
- The exact description of the contract (which edition, does sectional completion apply, and are there any supplements or amendments etc.);
- Inserting precise and correct details in the appendices, not just the completion date, but also the insurance provisions and other vital data; and
- Including in the contract the full text of any auxiliary documentation, such as guarantees, bonds, collateral warranties, etc.
A full copy of the contract should be kept for record purposes. It is not unusual for a key document to be misplaced during the course of a lengthy project. If a dispute arises in relation to an issue set out in that document, a lot of time and money can be spent trying to locate it.
Multi-stage dispute resolution
The range of techniques that are available, and the commercial drive to find early and sensible resolution has led to the development of dispute escalation clauses. These are simply clauses that provide for several methods of resolving a dispute before finally ending up in litigation or arbitration. For example, the first step might be negotiation between senior executives of both parties. It is important to ensure that there is a clear timetable in respect of this procedure, otherwise it will be unenforceable. A court cannot force parties to settle their dispute, but they can enforce a timetable which requires parties to meet and discuss their differences.
Mediation could then be used as a second step, or occasionally as the first port of call.
More frequently a second step involves a binding decision by a third party. This will usually be a fast procedure such as expert determination. Adjudication under the Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy and Economic Development and Construction Act 2009) must always be available “at any time” in respect of any construction contract covered by that legislation. Parties can therefore adjudicate at any time, but might save time and money by attempting a commercial negotiated or mediation based settlement procedure. Arbitration and litigation are of course always available as a final dispute resolution approach at this stage.
Conclusion
Considering how disputes may arise and then taking proactive steps to avoid them is important for all of those involved in construction projects. Communicating well and looking for objective solutions and avoiding conflict can also help once the project is underway. A commercially based settlement, either in negotiation or by mediation is now frequently used in the construction industry. Use of a mediator or some other ADR process can resolve disputes more quickly, saving time and money. If all of this fails, there is of course the Rolls Royce procedures of arbitration or litigation. While they are applicable occasionally, they are best avoided if possible.
PS: Costs management pilot
You may recall from last year’s Review, that Nicholas Gould is heading a team which is monitoring the effectiveness of the Costs Management Pilot, which started on 1 October 2011. The Pilot was scheduled to end on 30 September 2012 but has now been extended to March 2013. The purpose of the Pilot, as stated by Lord Justice Jackson in the introduction to the questionnaires being distributed by the courts to those participating in the Pilot, is to ascertain: (a) the benefits and disadvantages of costs management; and (b) how the process might be improved for the benefit of court users.
The Pilot will end just before the introduction in April 2013 of new rules on costs management. In line with the Pilot, parties will increasingly be expected to exchange costs budgets and will find that greater reliance is going to be placed on them. “Proportionality” has long been a phrase used by Judges when exercising case management powers, and there seems to be little doubt that this will include questions of cost management. In short, a costs management order will record the extent to which the budgets are agreed between the parties and, where not agreed, record the court’s approval after making appropriate revisions. When a budget has been revised, the court will have to review, make any appropriate revisions and approve that budget.
Going back to the Pilot, an Interim Report was produced in February 2012. The findings should be considered to be preliminary, as the scheme had only been running for four months. However, with these caveats in mind, it seems that solicitors in general had a mixed opinion of the Pilot. Significant concerns were expressed that the Pilot actually resulted in increased costs due to the time taken to comply with it. Having said that, this aspect of the process should become easier to deal with once familiarity with it increases.
Importantly, respondents also highlighted that the Pilot was helpful in bringing early attention to costs and that this allowed their clients to better understand their potential liabilities (including their potential liability to the other party if they did not win). This is something which could also assist with settlement. This increased transparency in relation to costs, can only be of benefit to all parties. In relation to the judges, they generally seem to believe that the Pilot encouraged proportionality of costs to the value of the claim, that the current scheme worked well and so it did not require improvements. When the new rules come into effect, no doubt the courts will seek to control costs even further using their new case management powers.