CONSTRUCTION JOURNAL

Act early to avoid disputes

Various approaches can help prevent disputes in the construction industry – saving both time and expense

Author:

  • Shy Jackson

02 December 2020

The third annual CRUX Insight report from HKA, a review of 1,185 construction projects across 88 countries, shows the cumulative value of sums in dispute exceeds $48.6bn, with the average claimed value accounting for over half of planned capital costs.

The report suggests that one of the global impacts of the pandemic will be a greater willingness, and pressure, to pursue less adversarial routes to resolving disputes, meaning less litigation and arbitration and an increased use of adjudication, negotiation, mediation, and expert determination.

It notes a wider use of collaborative forms of contract across Europe, leading to less adversarial dispute resolution, coupled with a growing use of conflict avoidance panels and dispute avoidance boards, which are now seen as representing industry good practice.

According to the Arcadis Global Construction Disputes Report 2020, the UK continues to be the jurisdiction with the quickest average dispute resolution time at 9.8 months, and an average dispute value of $17.8m in 2019.

Both reports highlight that managing disputes is a costly and lengthy process that should be avoided where possible. Once a dispute escalates and positions become entrenched, it is much more difficult to find a way out.

One way to reduce the impact of potential disputes is to use collaborative forms of contract, such as partnering or alliancing contracts. In the UK, the NEC4 Alliance Contract, JCT Constructing Excellence Contract or FAC-1 Framework Alliance Contract, for example, seek to align the interests of the parties by including provisions for open communication and cooperation, often as part of a target cost arrangement.

Such contracts help reduce the scope for disputes; but they also recognise that differences can arise, so they often include detailed procedures to support the early resolution of differences without adversely affecting the relationship between the parties.

When a dispute does arise, it is important to step back and see whether it can be resolved without formal proceedings.

“Once a dispute escalates and positions become entrenched, it is much more difficult to find a way out”

Dispute resolution clauses

It is common to see contractual clauses that require parties to try to resolve differences through discussions before commencing formal dispute proceedings, subject to their statutory right to adjudicate at any time.

The JCT 2016 suite of contracts advises that, where disputes cannot be resolved by direct negotiations, each party should give serious consideration to any request by the other to refer the dispute to mediation. This step should be taken, if possible, before any adjudication, arbitration or court proceedings.

In 2017, NEC4 introduced a process based on the parties' senior representatives meeting over a 3-week period, following the exchange of statements of case, to try to resolve disputes ahead of potential adjudication. Parties may not always use such provisions as intended, and the ability to enforce them will depend on the original contractual wording; but it is worth noting that the courts have supported the principle that parties need to follow such processes.

In Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm), the court considered an obligation to seek first to "resolve the dispute or claim by friendly discussion" for a continuous period of 4 weeks, failing which it would be referred to arbitration. It was held that where commercial parties have agreed a dispute resolution clause aimed at preventing an expensive arbitration, the courts should seek to give effect to this.

If early attempts to resolve a dispute have not been successful, direct negotiation between senior members of staff – who are removed from the detail and can take a wider view – will be highly effective, and also provides an opportunity to preserve a relationship. Sometimes, however, it is useful to involve a third party.

Third parties and dispute boards

An independent third party can help identify the risk of conflict at an early stage and provide guidance before matters develop into a full-blown dispute. The use of dispute boards, usually comprising 3 individuals from relevant disciplines such as engineering, law or surveying who have the necessary experience, is common on international projects. The FIDIC 2017 suite of contracts includes a provision for a dispute avoidance or adjudication board.

Similarly, in 2017 NEC4 introduced the use of a dispute avoidance board as option W3 and, in April 2019, issued a Practice Note on Using a Dispute Avoidance Board for contracts covered by the Housing Grants, Construction and Regeneration Act 1996. The intention is that such boards can help parties to avoid or resolve disputes at an early stage, rather than just providing a recommendation or decision. It is therefore good practice to establish such boards at the beginning of a project; although in practice this sometimes happens at a later stage.

The same thinking underlies RICS' development of the Conflict Avoidance Process (CAP), which Transport for London has been successfully using for years. The CAP uses a conflict avoidance panel, based on a third party providing a recommendation as part of an environment that is more collaborative and less hostile than adjudication.

This process has proved to be successful on a number of occasions and is now being used on other projects to avoid adjudication and legal proceedings, by helping the parties resolve disputes at an early stage. A similar process has been developed by Network Rail using a disputes avoidance panel.

“An independent third party can help identify the risk of conflict at an early stage and provide guidance before matters develop into a full-blown dispute”

Alternative dispute resolution

There are other ways to benefit from a third party's input, however. Mediation is a common form of alternative dispute resolution (ADR), in which a mediator helps parties gain a better understanding of their respective positions and identify opportunities for resolution in a less adversarial way.

Proposing a mediation is no longer seen as a sign of weakness, and it is often a quick process, usually completed within a day. It is therefore difficult to see why parties should not attempt it before embarking on an adjudication or court proceedings.

The growing popularity of mediation can be seen by the UN Convention on International Settlement Agreements Resulting from Mediation, referred to as the Singapore Convention on Mediation, which came into force on 12 September 2020. This requires that signatory states recognise and enforce mediated settlements, subject to conditions such as having agreements in writing between two parties based in such signatory states.

The EU and the UK have yet to sign up to the convention, and at present the EU Mediation Directive (Directive 2008/52/EC) provides for recognition and enforcement of mediation settlements in the union. The UK's position will therefore need to be reconsidered following Brexit.

Courts in the UK have been generally supportive of ADR, and where possible have urged parties to try to avoid court proceedings. In Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] EWHC 2246 (TCC), for instance, the court stated that there is a clear, strong policy in favour of enforcing ADR provisions and encouraging parties to attempt to resolve disputes before litigation.

Apart from mediation, though, there is early neutral evaluation (ENE). This lesser-known process involves a third party – an expert in the subject matter in dispute – giving a provisional evaluation or opinion on the issues that can be used as a basis for negotiating a settlement. It differs from a mediation in that a mediator supports a negotiation but does not provide any views on the merits of the respective cases.

ENE is also supported by the courts. In Telecom Centre (UK) Ltd v Thomas Sanderson Ltd (Early Neutral Evaluation) [2020] EWHC 368 (QB), the master considered that the case was appropriate for judicial ENE, pursuant to Civil Procedure Rule 3.1(2)(m), and provided guidance on how such a procedure would operate in the Queen's Bench division. This followed an earlier Court of Appeal decision in Lomax v Lomax [2019] EWCA Civ 1467, where it was held that the court can order ENE even when one of the parties does not agree to it.

RICS can help in the appointment of persons, such as adjudicators from the RICS panel, to provide an ENE, and can appoint mediators as well. RICS was also involved with other industry bodies in the publication of a Guide to Conflict Avoidance & Dispute Resolution for the Construction and Engineering Industry, and the introduction in 2018 of the Conflict Avoidance Pledge by the Conflict Avoidance Coalition Steering Group, which comprises several professional bodies for construction and engineering in the UK. Both initiatives aim to foster behavioural change by encouraging all organisations to consider their working practices and the way they deal with disputes.

Disputes have an adverse effect on businesses, but this can be avoided if conflict doesn’t arise in the first place – which is where collaborative contracts can help – or if it is dealt with sooner rather than later. Parties should therefore use the resources available to them, and where appropriate embed such procedures in their contracts, at all levels of the supply chain, to reduce and manage the risks of disputes affecting their projects.

“Proposing a mediation is no longer seen as a sign of weakness, and it is often a quick process, usually completed within a day”

shy.jackson@pinsentmasons.com

Related competencies include: Conflict avoidance, management and dispute resolution procedures, Contract practice

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