Construction Dispute
Resolution:
The New Regime
Robert Fenwick Elliott[1]
The adjudication revolution in the UK
In the mid-1990s there were two interesting and important reports that came out in the UK, both government initiatives.
One was the report of Lord Woolf into the civil law system. Unsurprisingly, he found that there were major flaws in the UK system. He said:
The defects I identified in
our present system were that it is too expensive in that the costs often exceed
the value of the claim; too slow in bringing cases to a conclusion and too
unequal: there is a lack of equality between the powerful, wealthy litigant and
the under-resourced litigant. It is too uncertain: the difficulty of
forecasting what litigation will cost and how long it will last induces the
fear of the unknown; and it is incomprehensible to many litigants. Above all it
is too fragmented in the way it is organised since there is no-one with clear
overall responsibility for the administration of civil justice; and too adversarial
as cases are run by the parties and not by the courts and the rules of court,
all too often, are ignored by the parties and not enforced by the court[2].
As a result of his report, major changes were made. Equally unsurprisingly, these are widely thought to have had the practical effect of increasing the cost of litigation yet further, and there is nothing very interesting about that for Australian purposes. The interesting thing I want to highlight was not the headline, but a bit of statistical information tucked away in an appendix which contained data as to the taxed costs in various classes of cases, including those cases conducted as Official Referees’ Business i.e. construction cases. Although limited to cases in which a taxation had taken place, the majority of the cases had not reached trial. When presented in graphical form, the figures show that for smaller cases, i.e. where the sum recovered is less that £12,500, the average amount of the taxed costs exceeds the sum recovered (see Appendix 1 below). This reflects the costs of just one party. The aggregate costs of the parties, even assuming that there are just two parties, are thus at least double (see Appendix 2 below).
But that is still by no means the end of the story, because the amount taxed in respect of costs is in England typically no more than about 70 per cent of the amounts that parties actually pay to their solicitors. Grossing up to take account of this factor leads to the conclusion that typically in Official Referees’ cases, where the sum was less than about £100,000, the total amount paid by the parties by way of costs exceeded the amount recovered (see Appendix 3 below).
Now, this is pretty remarkable. Consider a comparable: what if doctors prescribed medicine which usually (not just sometimes) caused more damage to the patient than the illness being treated? So there was a very strong case for a radical reform.
At about the same time, Sir Michael Latham was conducting a review of the way the construction industry was working in the UK. That was not great either. Comparing the UK system with continental Europe, he found that building in the UK more expensive that any other country in Europe, bar none, and yet the UK paid its operatives less in real terms that any other country, bar only one. One of the main cause he found a failure of trust, and in particular, subcontracts could not trust main contractors to pass money down the line. He recommended, among other things, a restriction on rights of set-off and a right to adjudication that could not be contracted out of.
There
is no definition of adjudication as such, although there are eight compliance
points under the Housing Grants, Construction and Regeneration Act 1996[3]. It is a process that shares some features with ADR, others
with expert determination, and yet others with certification and arbitration;
as such it sits more or less in the middle of the matrix of available dispute
resolution techniques. Some adjudications are constrained by that legislation,
others are not. The key features of
adjudication are typically as follows:
The adjudicator can be anyone;
either his identity is agreed by the parties or he is nominated by an
Adjudicator Nominating Body. He will normally have been trained.
If there is either a statutory
right or contractual provision for adjudication, either party can refer a
dispute to an adjudicator at any time.
The adjudicator takes a very fast, quasi-legal approach, giving his
decision with a month or so even in complex cases. There are usually written
submissions of some sort, and often one or more hearings, but not the other
trappings of litigation such as disclosure of documents, experts’ reports and
so forth. The loser has to write a
cheque for whatever the adjudicator decides, but if either side is unhappy with
the result it can then litigate or arbitrate in the usual way. In practice,
this is very rare, although the loser sometimes refuses to pay, and hopes that
the court will deny enforcement[4].
Lawyers are not required, but are
often instructed. Each side bears its own costs, which are a small fraction –
typically about a tenth - of the costs of litigating or arbitrating the same
subject matter.
Adjudication is rough justice,
generally popular with the parties but not necessarily at the bar or, it seems,
the first instance bench.
The mechanism of the legislation
is that parties to a construction contract (as defined) are entitled to
adjudicate. Either they agree a compliant procedure, or the statutory Scheme
applies. Parties can, of course, agree
such a procedure even if they do not have such a construction contract. On principle, it would appear that such
“volunteers” would be in the same position as the “conscripts”; the point is
not certain[5].
The right to adjudication under
the Housing Grants, Construction and Regeneration Act 1996 applies to all
construction contracts. That means, broadly, all contracts in writing for
construction operations (most construction work except in the energy field) in
the UK after 1st May 1998 except contracts with residential
occupiers. Section 108, provides a statutory right to adjudication as follows:
(1) A party to a construction contract has
the right to refer a dispute arising under the contract for adjudication under
a procedure complying with this section.
For
this purpose “dispute'' includes any difference[6].
(2) The contract shall—
(a) enable a party to give notice at any
time[7]
of his intention to refer a dispute to adjudication;
(b) provide a timetable with the object of
securing the appointment of the adjudicator and referral of the dispute to him
within 7 days of such notice;
(c) require the adjudicator to reach a
decision within 28 days of referral or such longer period as is agreed by the
parties after the dispute has been referred;
(d) allow the adjudicator to extend the
period of 28 days by up to 14 days, with the consent of the party by whom the
dispute was referred;
(e) impose a duty on the adjudicator to
act impartially[8];
and
(f) enable the adjudicator to take the
initiative in ascertaining the facts and the law.
(3) The contract shall provide that the
decision of the adjudicator is binding until the dispute is finally determined
by legal proceedings, by arbitration (if the contract provides for arbitration
or the parties otherwise agree to arbitration) or by agreement.
The
parties may agree to accept the decision of the adjudicator as finally
determining the dispute.
(4) The contract shall also provide that
the adjudicator is not liable for anything done or omitted in the discharge or
purported discharge of his functions as adjudicator unless the act or omission
is in bad faith, and that any employee or agent of the adjudicator is similarly
protected from liability[9].
(5) If the contract does not comply with
the requirements of subsections (1) to (4), the adjudication provisions of the
Scheme for Construction Contracts apply.
(6) For England and Wales, the Scheme may apply the provisions of the Arbitration Act 1996 with such adaptations and modifications as appear to the Minister making the scheme to be appropriate.
The effect of the legislation was dramatic, after a slowish start, there are now in the UK many times more adjudications than arbitrations and litigation combined. The reaction of the industry has been positive; most parties – even losers – reckon that the process produces a result that is at least as fair as the traditional system.
The spread of adjudication around Australasia and the common law world
It is hardly surprising that the system has spread to other common law jurisdictions[10]. The current picture seems to be as follows:
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England & Wales |
Housing Grants, Construction and Regeneration
Act 1996[11] |
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Scotland |
Housing Grants, Construction and Regeneration
Act 1996[12] |
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Northern Ireland |
The Construction Contracts
(Northern Ireland) Order 1997[13] |
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New South Wales |
Building and Construction
Industry Security of Payment Act 1999[14]
(amended 2002) |
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Victoria |
Building and Construction
Industry Security of Payment Act 2002[15] |
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New Zealand |
Construction Contracts Act 2002[16] |
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Queensland |
Building and Construction
Industry Payments Act 2004[17] |
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Western Australia |
Construction Contracts Act 2004[18] |
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Singapore |
Building and Construction Security of Payment Bill[19] |
The likelihood is that adjudication will arrive in South Australia before long.
Evaluative ADR; mini-trial and hybrid systems
ADR usually stands for Alternative Dispute Resolution[20]. Outside the USA, it usually means a non-binding system. As to the main variants[21]:
Mediation/conciliation
This is by far the most commonly used technique. The terms ‘mediation’ and ‘conciliation’ are sometimes used interchangeably. In the past, the term conciliation was sometimes used to distinguish the variant of the process whereby the neutral makes a recommendation if settlement cannot be reached, but on other occasions, the distinction has been made the other way round. More recently, mediation has become the more widely used term.
A mediation typically follows the following course:
• Parties exchange brief case summaries, and a day for the mediation is arranged.
• At the mediation, the mediator starts by making a brief opening statement.
• The parties then each make oral opening statements.
• The mediation then breaks into caucus, each party retiring to a separate room and the mediator shuttling between the two.
• These caucuses, perhaps with further joint meetings, continue for the duration of the mediation.
• If the mediator has been able to obtain an agreement, the parties come together and draft and sign a settlement agreement.
• If the parties have not been able to reach agreement at that point, the position depends upon whether it has been agreed that the mediator should make a recommendation. If so, the mediator may make a recommendation on the spot, or on a later day. If there is not to be a recommendation, the mediator will typically discuss with the parties why they have not been able to reach agreement, and will suggest further steps which may achieve an agreement.
In all but the most complex cases, the mediation itself typically takes place on a single day[22].
The legal basis of a mediation, and often some of the procedural elements as well, are set out in an agreement between the parties, the neutral, and the ADR organisation involved (if any).
Mini-trial
Mini-trial
procedures are a suitable ADR method where it is appropriate to test the
relative strength of the parties’ legal and technical positions and where an
element of semi-formal presentation will assist that process. It is sometimes
thought more suitable than mediation in very large cases, or where it is desirable
to bring in senior executives on behalf of each party who have not previously
been involved with the case. The major steps in a mini-trial procedure are
typically as follows:
• There is a preliminary meeting at which the
parties agree the timetable for the mini-trial itself. Occasionally, the
parties will agree a number of pre-hearing steps, such as paving meetings with
a view to seeking agreement on technical points.
• The parties exchange brief case summaries.
• The mini-trial itself may be scheduled to last
up to about four days (depending on the complexity of the case).
• The time-table typically allows ½ day or a day
to each party to present its case, with further specific time being set aside
for each party to answer the other side’s case. These presentations are
typically, but not always, made by lawyers, but the nature of presentations is
often more akin to the documentary television programme than any court
proceedings. Presentations will typically include contributions from eye witnesses;
models, overhead projectors, slides and even video film are used and of course
there is considerable scope for each party to put its best foot forward in
terms of its best legal and commercial arguments.
• These presentations are typically made to a panel
of three consisting of the neutral and a senior executive from each party,
preferably one who has not been involved in the case previously.
• Following the presentations, the panel of
three retires to negotiate. The underlying philosophy is that these senior
executives will have heard together and at first hand what the two respective
cases look like when put up in this way, and being individuals with authority
to settle but without a background of involvement in the case, they should be
able to arrive at a commercially sensible settlement. The neutral will
typically endeavour to separate the executives from their respective teams, and
will encourage the panel to see itself as an entity in itself. The neutral may
even function as a mediator between the two senior executives, using private
caucus sessions if necessary.
Hybrid procedures
In practice, the features of different ADR processes may be combined to produce hybrid procedures. This is particularly consistent with the underlying approach of ADR, namely to apply to each dispute the process most appropriate to it, hybrid or otherwise. In particular, in large cases, parties will often combine the key features of mediation and mini-trial.
Med-arb
A technique sometimes, but not widely, used is med-arb, whereby the parties agree that if the mediated negotiations do not succeed, then the mediator changes role, becomes an arbitrator, and makes a legally binding award. Med-arb gives rise to a number of jurisprudential difficulties, and offends against a number of principles of what is regarded as good ADR practice. Nevertheless, there are some who prefer the robustness of such an approach.
Dispute Review Boards; the American variant
DRBs are used fairly widely on large projects in the United States, and sometimes elsewhere. The concept is summarised thus by the DRB foundation[23]:
The DRB is a panel of three experienced, respected, and impartial reviewers.
The Board is organized before construction begins and meets at the jobsite
periodically. The Board is usually formed by the owner selecting a member for
approval by the contractor, the contractor selecting a member for approval by
the owner, with the two thus chosen selecting the DRB Chair to be approved by
both parties.
DRB members are provided with the contract documents, become familiar with the
project procedures and the participants, and are kept abreast of job progress
and developments. The DRB meets with owner and contractor representatives
during regular site visits and encourages the resolution of disputes at the job
level. The DRB process helps the parties head off problems before they escalate
into major disputes.
When a dispute flowing from the contract or the work cannot be resolved by the
parties, it can be referred to the DRB. The Board review includes a hearing at
which each party explains its position and answers questions from the other
party and the DRB. In arriving at a recommendation, the DRB considers the
relevant contract documents, correspondence, other documentation, and the particular
circumstances of the dispute.
The Board’s output consists of a written, non–binding recommendation for
resolution of the dispute. The report includes an explanation of the Board’s
evaluation of the facts, contract provisions and the reasoning which led to its
conclusion. Acceptance by the parties is facilitated by their confidence in the
DRB-in its members technical expertise, first-hand understanding of the project
conditions, and practical judgment; as well as by the parties opportunity to be
heard.
While the DRB recommendation for resolution of a dispute is non-binding, the
DRB process is most effective if the contract language includes a provision for
the admissibility of a DRB recommendation into any subsequent arbitration or
legal proceeding.
Nine Elements of a Dispute Review Board
According to the Construction Dispute Review Board Manual[24] there are nine essential elements necessary
for a DRB to be successful. If any of these elements are missing, success is
jeopardized. These elements are:
All three members of the DRB are neutral and subject to the approval of both parties.
All members sign a Three-Party Agreement obligating them to serve both parties equally and fairly.
The fees and expenses of the DRB members are shared equally by the parties.
The DRB is organized when work begins, before there are any disputes.
The DRB keeps abreast of job developments by means of relevant documentation and regular site visits.
Either party can refer a dispute to the DRB.
An informal but comprehensive hearing is convened promptly.
The written recommendations of the DRB are not binding on either party but are admissible as evidence, to the extent permitted by law, in case of later arbitration or litigation.
The members are absolved from any personal or professional liability arising from their DRB activities.
DRBs are treated seriously: parties will apply substantial resources to them, and whilst the recommendations are not legally binding, anecdotal evidence from experienced American practitioners suggests that the compliance rate may be of the order of 99%.
The effect of the intermediate dispute resolution success on litigation and arbitration
The old idea that disputes in the construction industry being resolved by litigation or arbitration, with some cases being settled at the court door, has gone, at least in international cases and in most of the larger jurisdictions. There is now a wide armoury of methods available:
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More binding |
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Negotiation |
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Certification/ Engineer’s Decision |
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Mediation |
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Hybrid form ADR |
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Expert Determination |
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Adjudication |
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Mini-trial |
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DRB |
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International Arbitration |
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↓ |
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Domestic Arbitration |
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More formal |
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Litigation |
How to win and how to lose in the new environment
For this purpose, a win means a result that is satisfactory to both lawyer and client: many cases are lost by both sides.
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Winning strategies |
Losing strategies |
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Choose a forum that is cost effective |
Tell your client that he will get his costs back when he wins |
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Cooperate with your opponent in choosing a suitable forum |
Assume that what is bad for him must be good for you |
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Prioritise, cutting corners if need be |
Leave no stone unturned |
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Agree a legal cost budget; do what can be done in the budget |
Tell you client that these things cost what they cost |
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In ADR, aim high |
In ADR, listen to the mediator |
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In adjudication, keep it simple and take 2 or 3 examples. Think live documentary |
In adjudication, be thorough and rely on cross-examination on the detail to see you through |
© Robert Fenwick Elliott
Adelaide 2004
Appendix
1
Appendix 2
Appendix 3
