The Use of mediation to settle construction disputesBy Nicholas Gould |
1. Goldberg, S B et al, Dispute
Resolution: Negotiation, Mediation and Other | ||||||
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There are two common threads to mediation. First, the form of the third party intervention. The primary role of this neutral third party is to facilitate other people’s decision making. The process builds on negotiation, and the mediator reviews the situation with the parties. Second, the third party mediator must be independent of the parties in dispute. The essence of mediation is that the mediator is impartial. The trust that develops during the process allows the mediator to perform a bridging role between the parties. There is some debate about how interventionalist or evaluative a mediator should be. There is no internationally agreed law. It is perhaps more useful to make a distinction between a facilitative and evaluative technique. A facilitative mediator merely tries to aid communication between the parties. Such a mediator will call on many techniques, such as reality testing, in order to persuade the parties to critically review the strengths and weaknesses of their position in order to reach a settlement. The Centre for Effective Dispute Resolution (CEDR) advocates the facilitative approach to mediation. At the other end of the scale is the evaluative approach. An evaluative mediator comments on the subject matter and makes recommendations as to the outcome. Some argue that the danger with the evaluative approach is that one party may feel that the mediator is ‘finding’ against them and in those circumstances the mediator will compromise his or her neutrality. In summary, the main elements of mediation are therefore:
1.3 The court’s approach to mediationThe initial development of mediation for the resolution of commercial
disputes and, in particular, construction industry disputes developed
from the industry, its consultants and new organisations such as CEDR.
The growth of ADR and 1.4 The Civil Procedure RulesADR and its principles are now embodied at the heart of the Civil Procedure Rules (‘CPR’). These Rules govern litigation in the courts. The overriding objectives of the CPR is set out at CPR part 1: ‘Rule 1.1 The overriding objective
Rule 1.3 Duty of the parties 1.5 The Pre-action Protocol for Construction and Engineering DisputesThe Pre-action Protocol for Construction and Engineering Disputes applies to all disputes in that category, including professional negligence claims against architects, engineers and quantity surveyors. A claimant must comply with the protocol before commencing proceedings in the court, subject to some exceptions. Paragraph 1.4 relates to compliance and states that: Non-compliance with the Construction and Engineering Pre-action Protocol is considered in the case Paul Thomas Construction Limited v Hyland & Anor (8 March 2000). In that case, the defendants had employed the claimant as a building contractor. A dispute arose over the quantification of the final account. The defendants offered to submit to a form of adjudication, but the claimant refused unless the defendants paid the entire costs of that process.The claimant then issued proceedings in the High Court, and made unsuccessful applications under CPR Part 24 (summary judgment) and Part 25 (interim payments). His Honour Judge Wilcox considered whether the claimant was justified
in issuing proceedings. He came to the conclusion that it was not and that
it had conducted itself in an unreasonable manner and in breach of the
pre-action protocol. The appropriate sanction was for the claimant to pay
the defendants’
For parties that follow the pre-action protocol procedure, s 5 requires the parties to attend a pre-action protocol meeting. At that meeting, the parties are expected to consider whether some form of alternative dispute resolution procedure would be more suitable than litigation. If so, the parties should endeavour to agree which form of alternative dispute resolution to adopt. In this respect, the pre-action protocol is simply emphasising and extending the requirement for the parties to consider alternative dispute resolution in line with the requirements of the Civil Procedure Rules considered above. 1.6 The impact of ADR on litigation1.6.1 Costs There have been several highly significant decisions regarding costs orders against successful litigants on the basis that those litigants failed to seriously consider mediation. The first of these was Susan Dunnett v Railtrack Plc [22 February 2002] in the Court of Appeal. Susan Dunnett’s three horses had been killed when the gate to her paddock, which had been replaced by Railtrack, had been left open, allowing the horses onto the line. The gate was not padlocked, nor was there any mechanism for automatically closing the gate, despite the fact that Susan Dunnett had warned Railtrack that people left the gate open. There was an appeal and cross-appeal from the first instance decision, and in granting permission to appeal the Lord Justice stated that mediation or a similar process would be highly desirable in this particular case because of its inherent flexibility. Regardless of the court’s suggestion, Railtrack refused to engage in mediation. Railtrack effectively won the appeal, but the Court of Appeal found that as Railtrack had refused to mediate, a costs order should not be made against the unsuccessful claimant – paragraph 14 of the costs judgment:
The point was then made that a party who dismissed the opportunity for mediation without proper thought would suffer uncomfortable consequences. The Court of Appeal was in effect following the view of Lord Woolf in Frank Cowl v Plymouth City Council [The Times 8 January 2002]. In that case, Lord Woolf emphasised the need for parties in dispute with public bodies to consider ADR. Lord Woolf said that ‘today sufficient should be known about ADR to make the failure to adopt it, in particular where public money is involved, indefensible’. In that case, the defendant offered to submit the dispute to a complaints procedure chaired by an independent chairman. The claimant refused, and that refusal led to an adverse costs order against the claimant. Given that the CPR requires the parties to consider ADR, and that obligation is extended into the pre-action protocols, there is now clear obligation on the parties to seriously consider some form of mediation or other ADR process. It seems that that obligation will, if ignored, lead to cost consequences, even if the party concerned is successful. However, there may be some circumstances when a failure to mediate is justified. 1.6.2 Refusing to mediate The case of Hurst v Leeming [9 May 2002] gives some guidance as to when a refusal to mediate might be justified. The case concerned the dismissal of an action against a barrister, Leeming. The claimant argued that despite the dismissal of the action he should still receive his costs as Leeming had refused to mediate. Leeming raised five reasons as to why he had refused to mediate:
Lightman, J in the Chancery Division considered each of these grounds
and decided that the first three were insufficient. Therefore, the matter
of legal costs already incurred, the seriousness of the allegation and the
fact that there is no substance to the claim does not give valid reason
for refusing to mediate. However, lack of any prospects of a successful
mediation, given the obsessive character and attitude of the claimant and
his repeated history of litigation, which The Court of Appeal has also recently held that there are circumstances within which it is reasonable to refuse to mediate. In the case of Alan Valentine v (1) Kevin Allen (2) Simon John Nash (3) Alison Nash (29 July 2003) the respondents had put before the court considerable correspondence which made it clear that real efforts to settle the dispute had been made, and that the offers were reasonable and generous. The respondents had also tried to arrange a ‘round the table’ meeting. Those offers were refused by Valentine who sought the payment of a large sum of money in settlement. The Court of Appeal therefore distinguished this case from the case of Dunnett v Railtrack Plc even though the respondents had refused Valentine’s offer of mediation. The Court of Appeal held that their refusal to mediate was reasonable, and so Valentine would pay the respondents’ costs in resisting the appeal. 1.6.3 Must a party always submit to mediation if offered by the other side? The case of Hurst v Leeming makes it clear that the court might
not penalise a refusal to meditate, but only in very limited circumstances.
The courts have now considered further instances, and also whether mediation
is the only option. Park J held in Societe Internationale De Telecommunications
Aeronautiques SC v Wyatt Co (UK) Limited and others v Maxwell Batley
(A Firm) part 20 defendant)(2) that a party that was
successful in the litigation should not be deprived of its costs because
it reasonably refused to mediate. In Societe, the claim against
Maxwell Batley failed completely. The judge considered that Watson Wyatt
Sarl’s motive for claiming against and seeking to mediate with Maxwell
Batley was to pressure them to make a large contribution that could
then be used to settle the main action. The case was distinguished from
Dunnett. In the Court of Appeal case of Leicester Circuits
Limited v Coates Brothers Plc(3) the parties agreed
(after delivery of the first instance decision) on 4 January 2002 to
mediate. A mediator was appointed and position statements exchanged.
Coates withdrew from the mediation. Coates then won the appeal and asked
for its costs. Leicester were ordered to pay Coates cost to 1 January
2002, with no order as to costs thereafter. Leicester were also to pay
costs of the appeal. |
2. Societe Internationale De
Tele-communications Aeronautiques SC v Wyatt 3. Leicester Circuits Limited v Coates Brothers Plc [2003] EWCA Civ 333 | ||||||
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1.6.4 When might the court make no order as to costs? On 9 June 2003 the Court of Appeal delivered its judgment in Dearling v Foregate Developments (Chester) Limited.(4) The claimant, Mr Dearling, had alleged that the house which the defendant had contracted to build for him had not been constructed in accordance with their contract. An initial application to court was settled on the basis that an expert be appointed to determine the dispute (‘the ADR proceedings’). The expert allowed some, but not all, of the claimant’s claims, and decided that the cost of the ADR proceedings should be split 50/50 between the parties. The claimant subsequently issued further proceedings claiming damages for breach of contract, but when the matter came to trial, the Judge again encouraged the parties to attempt to settle the matter. The parties duly settled, but left the matter of costs to the Judge, who ordered that the defendant should pay all the claimant’s costs apart from its half share of the costs of the ADR proceedings. The defendant appealed on the basis that the Judge should not have
allowed the claimant its costs after the last date on which the defendants
final Part 36 offer could have been accepted. They cross-appealed on
the basis that the Judge should have awarded him his costs of the ADR
proceedings. The Court of Appeal allowed the appeal and dismissed the
cross-appeal. The court affirmed previous authorities to the effect
that in the absence of a good reason to make any other order, the fall
back was to make no order as to costs. The parties had reached a commercial
settlement, which did not reflect the merits of the case, and the judge
had not looked into these. The costs of the ADR proceedings awarded
by the expert reflected the defendant’s success in reducing an initially
exaggerated claim and were upheld. Under the Civil Procedure Rules,
the court has the power to make an award of costs where parties have
settled without a trial. In two previous cases considered and approved
by the Court of Appeal, Brawley v Marczynski (2002) and Boxall
v Waltham Forest LDC (2001), costs orders were made because the
Judge concluded that it was obvious which side would have won had the
substantive issues been brought to trial. These cases therefore offer
no encouragement to litigants to defend a hopeless case up to the door
of the court in the expectation of no order being made as to costs by
the court if a commercial settlement is reached then. The amounts in
issue in Dearling were small, and the conduct of the parties
reasonable in attempting ADR and making Part 36 offers, so the Judge
had been justified in not looking into the substantive issues. In different
circumstances, it would have been proper for him to do so and then an
award of costs could have been made. As there had been an award of costs
in the ADR proceedings and not an agreement between the parties to split
them or bear their own costs, the court had the discretion to review
the award, but in upholding the expert’s award of costs, the court bore
in mind the principle of proportionality and penalised the claimant
as the expert had done for bringing an exaggerated claim. |
4. Dearling v Foregate Developments (Chester)
Limited (9 June 2003, Court of | ||||||
| 1.7 How have the courts approached contractual ADR provisions? In Cable & Wireless Plc v IBM United Kingdom Limited,(5) the Court of Appeal held that a contractual agreement to refer disputes to a dispute escalation ADR procedure was binding and enforceable. Clause 40 of the contract between the parties stated:
Clause 40 is in effect a dispute escalation clause. Any differences between the parties are referred to management in an attempt to discuss and settle the matter. Unresolved matters are then referred up to senior management. The parties are not to commence any legal action until this process has being completed. The clause 41 then provides:
The dispute resolution procedure set out at clause 41 provides that the parties must attend good faith negotiations in accordance with clause 41, before then attempting to resolve the dispute through some form of ADR as recommended by CEDR. The application to stay the legal proceedings was based upon the clause 41. The Honourable Mr Justice Coleman in the commercial court held that the contractual agreement to mediate was enforceable. He also held that the dispute escalation clause was clear and operable such that that would also be enforced. At the other end of the scale is the conclusion of a mediation. If
successful, the parties will then set out their settlement agreement
in writing and sign it. It is at this stage that the ‘non-binding’ mediation
process comes to and end with a binding settlement agreement. If the
parties had commenced litigation then they will usually bring the court
proceedings to an end with a consent order. These orders are often called
‘Tomlin orders’, after the judge who initially recognised the concept.
A consent order is quite simply a court order that confirms that the
parties have settled the litigation. The terms of the settlement are
then set out in a schedule attached to the order. In the case of
Thakrar v Thakrar, Sir Andrew Morritt QC held that a Tomlin Order
(agreed at a mediation) was not adequate and so would not be enforced.
The Court of Appeal reversed the decision. ‘There were a complicated
series of applications in respect of the CIRO Citterio Menswear Plc
administration. This appears to be the main reason why the Consent Order
was not approved at first instance. On appeal, the Vice Chancellor held
that a genuine compromise has been reached, even if some of the facts
were doubtful. He therefore found that the mediation settlement agreement
was unconditional and was enforceable’. |
5. Cable & Wireless Plc v IBM United Kingdom Limited [2002] EWHC 2059 | ||||||
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1.8 The Government’s ADR pledge On 23 March 2001, the Lord Chancellor’s department issued a formal written pledge that it and all of its departments would attempt ADR before resorting to litigation. The pledge stated:
The pledge states that all government departments and their agencies
will seek to use ADR wherever possible in order to avoid litigation.
This pledge was recently considered in the Royal Bank of Canada
v Secretary of State for Defence.(6) |
6. Royal Bank of Canada v
Secretary of State for Defence, 14 May 2003, High | ||||||
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The claimant was a landlord seeking to determine whether or not notices served by the tenant to terminate a lease were valid. At trial, the tenant’s first notice was held to validly terminate the lease, except in respect of an area known as the store room. The tenant therefore argued that it had effectively won and was entitled to its costs. The landlord had expressed on a variety of occasions a willingness to mediate the claim, but the tenant had refused. A large part of the dispute related to the factual question as to whether vacant possession was required under the lease, and the tenant had effectively lost the factual argument. Further, the Lord Chancellor’s Department on 23 March 2001 issued a formal pledge that all Government departments should settle cases using alternative dispute resolution wherever possible. The issue, therefore, was whether the tenant Secretary of State for Defence was entitled to its costs for winning the issue in respect of the notice when it had lost the factual position, and refused to mediate in the light of the Lord Chancellor’s press notice. The Judge held that the key factor in the issue of costs was the landlord’s
willingness to mediate which was refused by the tenant. The formal pledge
given by the Lord Chancellor’s Department was to be taken seriously
and the tenant should have abided by that pledge. As the tenant had
not abided by the pledge it was not entitled to recover its costs from
the landlord. In conclusion, no order was made as to costs. More recently the Government’s draft circular on Best Value and Performance Improvement states, at paragraph 49:(7)
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7. July 2002, Office of the Deputy Prime Minister | ||||||
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As a result of this case and the recent pledge it is clear that all of the government departments and their agencies must now seriously consider ADR in order to avoid adverse cost consequences. 1.9 Late offers to settle Lawyer to lawyer settlement negotiations and CPR Part 36 offers to settle were considered in the case of Corenso (UK) Limited v Burnden Group Limited (1 July 2003, Queens Bench Division, High Court) by His Honour Judge Reid QC. The claimant, Corenso (UK) Limited (‘Corenso’) supplied the defendant (‘Burnden’) with coreboard from its French factory. Burnden received a number of complaints from its customers about the quality of the coreboard, which led to them making a complaint to Corenso in September 2000. Corenso’s solicitors responded to the complaint and proceedings were issued by Corenso in February 2001. Burnden made a Part 36 offer by way of payment into court in March 2001 of £64,000 and increased this to £90,000 shortly before trial. As there were less than 21 days to go until trial, the claimant had to obtain the permission of the court to accept the Part 36 offer and in so doing had to seek an order from the court as to costs. Burnden had made offers to attempt to resolve the dispute by mediation during correspondence which preceded its Part 36 offer which was eventually accepted. Burnden submitted that Corenso should be liable for its own and some of Burnden’s costs because of its refusal to attempt mediation. While Corenso maintained that it had substantially succeeded in the action, which had included a £300,000 counterclaim by Burnden, and that it should therefore have its costs up to the date of its acceptance of the Part 36 offer in the usual way. The court held that the parties had shown a genuine and constructive willingness to resolve the issue between them and neither of them deserved to be penalised for not having gone along with the particular form of ADR proposed by the other side. Corenso was therefore awarded its costs on the basis that it had succeeded in the action. This case is the latest in a series of cases in which an unsuccessful party has sought to resist a costs order against it on the strength of a refusal to attempt mediation by the successful party. Since the decision of the Court of Appeal in Dunnett v Railtrack, the courts have given significant weight to the willingness or otherwise of parties to attempt alternative dispute resolution when assessing the conduct of the parties for the purposes of making a costs order under CPR 44.3. Part 44.3 states:
The overall circumstances of the case clearly favoured the claimant. The defendant had significantly increased its Part 36 offer very close to trial, despite a disclosure exercise, which, if anything, strengthened its position. The court therefore took the view that the defendant could just as well have increased its offer sooner when the claimant would have been entitled to its costs up to the date of acceptance as of right under Part 36 and so the court should not make a different costs order. The court nevertheless acknowledged the force of recent authorities for
costs penalties following a refusal to attempt ADR. The court
characterising the negotiation engaged in by the parties, at without
prejudice meetings with lawyers present, as a form of ADR. Such an
approach is consonant with cases such as Cowl & Others v Plymouth
City Council (2001) in which Lord Woolf characterised the defendant
Council’s ad hoc complaints procedure as a form of ADR, but is perhaps
unnecessary given the power in CPR 44.3(5) to consider various factors in
assessing the overall conduct of the parties. The conduct of the defendant
in failing to make a realistic offer to settle until very late on was more
significant than the conduct of the claimant in preferring without
prejudice negotiations to a process of dispute resolution involving a
third party. 2 Project mediation2.1 Background The construction industry benefits from a wide range of dispute resolution techniques. The traditional processes of arbitration and litigation have in part made way for mediation and, more recently, adjudication under the Housing Grants, Construction and Regeneration Act 1996. Mediation has developed slowly since around the start of the 1990s. Hybrid and multi-stage processes such as dispute review boards or dispute escalation clauses have become more widely used on some projects. At the other end of the scale, management techniques such as partnering are attempts to avoid disputes arising. 2.2 The process ‘Contracted mediation’ or ‘project mediation’ attempts to fuse team building, dispute avoidance and dispute resolution in one procedure. A contracted mediation or project mediation panel is appointed at the outset of the project. The impartial contracted mediation panel consists of one lawyer and one commercial expert who are both trained mediators.The panel assists in organising and attends an initial meeting at the start of the project and may conduct one or more workshops at the outset of the project or during the course of the project as necessary. The panel may also visit the project periodically during the life of the project. In this respect, the panel therefore has a working knowledge of the project and, more importantly, the individuals working on that project. That knowledge allows the panel to resolve contractual differences before they escalate, because the panel provides an immediate forum for the confidential discussion and potential mediation of differences or disputes. 2.3 Project mediation in practice Experiences with contracted mediation in practice are limited. However,
contracted mediation was used on Jersey Airport. The parties to the construction contract have recognised that there is a risk that they might have disputes during the course of the building work but they have also recognised that a standing mediation panel can help to avoid those disputes during the course of the work. This is because the parties to the construction contract will get to know the individual mediators, and those mediators will not only have an understanding of the project, but will get to know the individuals. There is therefore the potential for the contracted mediation panel to become involved not just in disputes, but also in the avoidance of disputes before the parties become entrenched and turn to adjudication, arbitration or litigation. The experience at Jersey raises an important observation and that is the amount of the contract sum by comparison to the cost of the contracted mediation process. Most of the structured ADR procedures such as dispute review boards are only economically viable because they are used on substantial projects. This is because of the costs associated with establishing and running a threeman dispute review board. A dispute review board is established at the start of the project, and then follows the project by making site visits. Disputes are then referred to that board, which will make recommendations only or binding decisions depending upon the drafting of the contract between the contractor and the employer. However, a contracted mediation panel is viable for projects with a much lower contract sum. Statistics indicate that around 80% of construction work carried out in this country has a contract sum in £10s of millions rather than £100s of millions. Therefore, the contracted mediation has the potential for use on around 80% of the construction projects carried out in this country. 3 Construction Conciliation Group3.1 Launch The Construction Conciliation Group (‘CCG’) was launched on 1 May 2003. The CCG’s aim is quite simply to provide a cost effective dispute resolution procedure principally aimed at disputes concerning residential occupiers and their builders (or disputes between residential occupiers and their architects or other professionals). 3.2 Background The adjudication legislation does not cover disputes involving residential
occupiers. In the absence of a contract, such as the JCT Minor Works
Agreement 1998 which contractually provides for adjudication, disputes
between residential householders and the builders end up in the County
Court. These disputes are often (although not always) of low value,
such that the legal fees are disproportionate to the amount in dispute.
However, legal fees are not the only issue in respect of these types
of disputes. The Chairman of the CCG, David Miles, states ‘such disputes
are often highly emotionally charged. They have the capacity to absorb
considerable time and costs which frequently end up exceeding the sums
in dispute’. |
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3.3 Process The essentials of the CCG procedure provide:
The parties can simply log onto the website (www.ccgroup.org.uk) in order to choose a conciliator. The rules can be downloaded for free. If the parties cannot agree upon a conciliator then the Group will appoint one for a fee of £50. The fixed timescale and fixed fee is aimed at introducing and economical manner for the resolution of these disputes. Further, in the absence of a mediated settlement, the parties know that a recommendation will be made based upon the documents, submissions and representations made. If one of the parties does not wish to accept the recommendation, then that party must issue a notice of dispute within 28 days of the recommendation and also take steps to commence either legal proceedings or arbitration within three months, otherwise the recommendation will become finally binding. The CCG hope that the procedure will provide an economic manner within which to resolve constructions disputes with homeowners. The procedure can of course be used for any construction dispute should the parties wish to adopt the CCG’s conciliation rules. An interesting aspect of the CCG’s Conciliation Procedure is the ability for the conciliator to make a recommendation if a settlement cannot be reached during the conciliation. The first stage of the procedure requires the conciliator to chair the conciliation in order to try to get the parties to reach a settlement. If a settlement can be reached, then the conciliator may even assist in preparing the terms of the settlement. If settlement cannot be reached, then the conciliator shall, within seven days after the conciliation, produce a written recommendation. This recommendation is not necessarily based upon any principles of law, and shall not contain reasons. Clearly, a conciliator will not have heard full argument on the issues in dispute. However, this procedure has been adopted because the majority of householder disputes are low in value, and the costs of taking the claim to the county court will most usually far exceed the amount in dispute. The procedure is therefore offered as an economic way of providing an opportunity for the parties to reach a settlement, but then for the conciliator to make a recommendation as to how to settle the dispute if the parties fail to agree. The recommendation is binding, in that it is to be implemented immediately and the parties will be entitled to summary enforcement of the recommendation. If a party intends to commence legal proceedings in connection with the dispute, then that party must within 28 days of the recommendation serve notice on the other party, and also commence proceedings within three months of the recommendation. Therefore, if a party is serious about continuing the dispute, then steps must be taken immediately in order to avoid the recommendation becoming final and conclusive. 4 ConclusionIn conclusion, the CPR and pre-action protocols require parties to endeavour to settle their disputes by negotiation, mediation or some other form of ADR. The courts are now enforcing those requirements by upholding contractual ADR procedures and penalising parties that unreasonable refuse to mediate in the form of adverse cost orders. Parties may agree to mediate at any time, or may include their agreement to mediate in their contract. The parties could include a dispute escalation clause in their contract. The court will enforce agreements to negotiate and mediate (or follow any form of ADR procedure) (IBM) providing those processes are conducted within a reasonable time frame (Balfour Beatty v TML, HL). This does not mean that the court will insist that the parties settle the dispute, but the court will insist that reasonable attempts are made to follow the ADR procedure. A party that unreasonably refuses to mediate will receive an adverse costs order (Dunnett v Railtrack). An unreasonable refusal to engage in any ADR process such as an independent complaints procedure (Frank Cowl) or settlement negotiations will be penalised by an adverse cost order. Basically, ADR does not just mean mediation, but any form of ADR. A winning party will not get its costs. A losing part will be ordered to pay costs on an indemnity basis. Reasons for unreasonably refusing to mediate include: costs already incurred; type of issues in dispute; or the claim being misconceived (Hurst v Leeming). Reasons for refusing to mediate include: the nature of the other party is such that settlement is extremely unlikely (Hurst v Leeming); generous offers have been made; or offers to negotiate are being made instead of mediation. In addition, the development of the CCG in the area of home owner disputes and contracted mediation or project mediation for larger projects demonstrates that mediation-based processes are readily available in the construction industry.
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