Dispute Resolution in Building, Construction and Infrastructure
Dispute Resolution in Building, Construction and Infrastructure
A ConnellGriffin Guide
PART 1: CONVENTIONAL DISPUTE RESOLUTION PROCESSES
Authors: Rob Nelson-Williams, Director, Sydney | Miff Storey, Director, Brisbane | Jonathan Harrison, Director, Melbourne
This Guide has been prepared by ConnellGriffin to assist clients that are negotiating contractual dispute resolution clauses or considering options to resolve an emerging dispute. Parties involved in construction, engineering and infrastructure projects will find it particularly relevant.
All construction projects involve risk and regardless of how well risks are anticipated, how carefully a project is planned or how closely contractual terms are negotiated, delivery risks often manifest in ways not contemplated by the parties.
In the normal course of events, parties will resolve issues as they arise—often taking advantage of the management and communication protocols set out in the contract. However, when an issue has significant consequences in terms of time or cost, where there are complex technical issues or a fundamental disagreement about which party is responsible for a particular risk, parties then need to look to the dispute resolution options that are available under the contract and at law. This process usually begins when a party formally asserts a contractual right or there is a determination made under a contract that is disputed by a counterparty.
This Guide describes the benefits and disadvantages of conventional dispute resolution processes and identifies when a particular process may be suitable.
Part 2 of this Guide will cover a range of unconventional dispute resolution processes, including early neutral evaluation, case appraisal, dispute review boards and independent opinions.
START WITH THE CONTRACT
Most modern contracts, including ‘standard forms’ and bespoke suites, set out a process for the notification and escalation of disputes. These processes are initiated by a party issuing a written notice, which contains a brief description of the event or circumstances relevant to the dispute. The dispute is firstly referred to senior project representatives for resolution. If the dispute remains unresolved, it progresses through senior executive negotiation, then to mediation and ultimately to a determinative forum, such as expert determinations, arbitration or litigation.
Contracts prepared for larger projects often mandate the establishment of (non-binding) dispute review boards or (binding) dispute adjudication boards in place of senior executive negotiations, expert determinations or arbitration. The escalation of disputes through a series of mandated interactions is economical and often effective, resulting in disputes being resolved at an appropriate organisational level and in a relatively timely fashion. By pre-agreeing this process, parties are protected – at least in part – from a misbehaving counterparty that might otherwise seek to delay or complicate the resolution of an issue.
This said, if there is a mutual commitment to resolving a dispute, the parties may agree that disputes can be resolved using processes other than those prescribed by the contract. For example, parties often agree to refer technical issues for a non-binding expert opinion rather than engage independent experts in preparation for a senior executive negotiation or a mediation. We will discuss these unconventional dispute resolution processes in Part 2 of this Guide.
01 MANDATED NEGOTIATIONS
"In our experience, mandated negotiations are most likely to succeed if the negotiations are structured as a formal meeting and parties have exchanged summaries of their positions before the meeting."
The first step in conventional dispute resolution mechanisms is usually mandated negotiation involving the parties’ nominated representatives (often the respective Project Directors). Failing resolution, the dispute will be referred to senior executive negotiations.
Negotiations between nominated representatives are well-suited to resolving disputes involving minor changes to scope and modest claims for extensions of time or money. They often take the form of a ‘trade’, whereby claims by each party are resolved on the basis of mutual releases, with each party ‘walking away’ from an agreed list of claims.
Larger disputes involving claims for significant amounts of time or money are seldom resolved in negotiations between nominated representatives, especially in circumstances where the claim’s value exceed the delegated authority of the representatives. These disputes are customarily referred to senior executives, who are required to have obtained all relevant corporate approvals that relate to any potential settlement.
Contracts rarely prescribe a format or process for mandated negotiations.
In our experience, these negotiations are most likely to succeed if the negotiations are structured as a formal meeting and parties have exchanged summaries of their positions before the meeting. These summaries often take the form of a spreadsheet or a modified Scott Schedule.
Negotiations should follow formal meeting conventions, including prior agreement of attendees, agenda and meeting objectives. Having subject-matter experts attend can be helpful in limited circumstances, while members of the project team can be emotive and hinder frank discussion if they attend. The better approach is for project teams to ensure that their nominated representatives / senior executives are comprehensively briefed.
Likewise, negotiations are unlikely to succeed unless the parties approach the negotiations with a legitimate desire to resolve issues. Employers must demonstrate a willingness to give claims a fair evaluation and to pay costs legitimately due to a contractor. Similarly, contractors must take a balanced view of contractual risk allocations, articulate claims in a manner consistent with contractual entitlements and present factual evidence supporting the contractor’s position. While these ambitions are laudable, external pressures can require that negotiating teams take rigid positions or adopt speculative positions: in these circumstances mandated negotiations are seldom successful.
"Mediation is a consensual, private and facilitated process involving a trained mediator who assists the parties to achieve a negotiated settlement."
If mandated negotiations are not successful, parties can usually elect to refer a dispute to mediation. Mediation is a consensual, private and facilitated process involving a trained mediator who assists the parties to achieve a negotiated settlement.
The mediation process follows a basic structure, but is largely informal:
- The mediator will liaise with the parties with a view to agreeing the time and place for the mediation and may ask that position papers be exchanged before the session.
- At the mediation itself, the mediator usually starts by introducing the participants and reminding the parties that, should they fail to settle their differences, the dispute will need to be referred to a court, arbitrator or expert for a binding determination. This will expose each party to further costs and delay, and force the parties into a formal process over which they have limited control.
- The parties may be invited to make opening remarks to present their view of the dispute. The mediator may also provide an opportunity for the parties to seek clarification of a counterparty’s position, however in our experience this is seldom helpful.
- The mediator will then invite each party to move to separate rooms and hold private meetings with each party. The purpose of these meetings is to ensure that the mediator understands each party’s perspective and to encourage each party to formulate settlement proposals. If asked by a party, an ‘evaluative’ mediator will provide a view on that party’s position, prospects and negotiating strategy. A perspective from an impartial third party can be extremely helpful, especially if a party has adopted an entrenched but untenable position.
- The mediator’s objective is to obtain instructions from one party to put an offer to the other. Once these instructions have been obtained, the mediator can engage in a form of ‘shuttle diplomacy, progressing negotiations by way of alternating meetings with each party
A successful mediation will end when the parties sign a settlement agreement. If a mediator is unable to achieve a settlement but considers there are reasonable prospects that the parties will find common ground, they can adjourn the mediation for a short time. Because the process is consensual, either party can stop participating in the mediation at any time, at which point the mediation will end. Likewise, the mediator may form the view that the parties’ positions cannot be reconciled and certify that the mediation has not been successful.
03 EXPERT DETERMINATION
"Expert determinations are, in the main, speedy, impartial and relatively inexpensive, given that the parties are not required to engage their own external experts. Importantly expert determinations are also confidential and private."
Many disputes in the construction, engineering and infrastructure sectors involve issues that are technical in nature—for example whether a design meets performance criteria or KPIs have been achieved. While it is possible for these issues to be determined by an arbitrator or a judge, it is often sensible for the dispute to be referred to a subject-matter expert for determination.
Many contracts, particularly those prepared for large projects, set out the circumstances in which a dispute is to be referred to expert determination. The contracts also explain how the expert is to be selected and identifies the rules that apply to the expert determination process.
Once the expert has been appointed, the parties normally exchange written submissions and replies, and the expert uses their expertise to determine which (or neither) party is correct. The expert is required to act in an independent manner, is free to make their own investigations and is not bound to make a determination that is consistent with the submissions of either party.
Expert determinations are, in the main, speedy, impartial and relatively inexpensive, given that the parties are not required to engage their own external experts. Importantly expert determinations are also confidential and private.
This said, while an expert determination will be less expensive and time-consuming than arbitration or litigation, clients often engage their own expert to assist with the preparation of submissions, which can add some cost and time to the process.
Advantages aside, expert determinations have limited application. While they are suitable for a dispute that is technical in nature, expert determinations are not suitable if a dispute involves competing factual or legal positions, or for disputes that cannot be entirely resolved by determination of a discrete technical issue.
Unless the parties agree otherwise, an expert determination will usually be final and binding, which is always a risk in a process that does not allow a party to test the submissions and evidence being presented by a counterparty.
"In circumstances where contracts involve parties based in different jurisdictions, arbitration will almost always be preferable to litigation, especially given that can be easier to enforce an arbitral award than a decision of a foreign court."
Arbitration is a formal process involving the presentation of evidence and the submission of legal arguments to the arbitral tribunal (usually constituted by one or three arbitrators), followed by a determination of rights by the tribunal.
The arbitration process is modelled on common-law litigation, save that the proceedings are confidential, the rules applying to the arbitration process are less rigid than rules of court and there are limited rights of appeal, especially in Australian jurisdictions.
Parties can agree to refer disputes to arbitration as and when they arise, however it is more common that the agreement to arbitrate disputes is found in the underlying contract, which will also prescribe a mechanism for selecting and appointing the arbitral tribunal and specify the applicable arbitration rules. If a contract contains an arbitration agreement, a party will normally be prohibited from commencing litigation until the arbitration process has been completed.
Proponents of the arbitration process suggest that arbitration is better than litigation for the following reasons:
- Expertise: disputes are decided by industry experts, rather than by judges, and so the tribunal has the advantage of technical expertise.
- Timeliness: the arbitration process is less formal than a court process and allows the parties to advance the process in an expedited fashion.
- Flexibility: the parties jointly agree to dates for the various procedural steps, rather than rely on timetables based on court rules or dictated by docket judges.
- Cost: because disclosure obligations are limited, arbitration is less expensive than litigation.
- Confidentiality: arbitration is private and any ‘dirty laundry’ exposed during the process will not be subjected to public scrutiny.
- Enforceability: an arbitral award is enforceable in multiple foreign jurisdictions under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’).
While parties are free to agree dates for various procedural steps, it is common that arbitration timetables emulate those prescribed by court rules, meaning that periods for the production of pleadings, documents, statements and submissions can be extensive. Likewise, arbitrators are usually sympathetic to requests to extend dates, despite objections from a counterparty, and have limited punitive powers if a party fails to comply with an agreed timetable. In these circumstances, there are many opportunities for an uncooperative party to protract the process.
In our experience, it is rare for parties to enjoy many of these perceived advantages. There are relatively few experienced arbitrators who have expertise in the sector and parties customarily need to make multiple enquiries before engaging a suitably-qualified practitioner who, in turn, may not be readily available. These delays are exacerbated if arbitral tribunals are constituted by multiple arbitrators.
The costs associated with complex arbitrations are seldom less than the costs incurred in court proceedings. In addition to the costs of engaging legal counsel and experts, parties must also pay the costs of the arbitrator(s), noting that internationally-recognised practitioners customarily charge more than AU$10,000 per day. The costs of securing suitable hearing rooms and transcription services are also significant, and there may also be further costs of travel and accommodation for the arbitration.
Finally, the fact that there are limited rights to appeal from an arbitration is a two-edged sword. While the parties can have confidence in the finality of the process, a party will have little or no opportunity for redress if the arbitral tribunal’s decision is based on mistakes of fact or law.
These issues aside, in circumstances where contracts involve parties based in different jurisdictions, arbitration will almost always be preferable to litigation, especially given that it can be easier to enforce an arbitral award than a decision of a foreign court.
"The litigation process is, on the whole, most likely to result in a considered and just resolution of a dispute, and therefore represents the ‘gold standard’ in terms of conventional dispute resolution processes."
Litigation is the formal process by which a party brings an action in a public court to be determined by a judicial officer. The decision of the judge or magistrate has ‘force of law’, which means that a party can be legally compelled to comply with the court’s decision.
Because the court’s decision will have force of law, it is important that the process giving rise to the decision is fair, robust and transparent. Likewise, parties must have opportunities to appeal errors in a judgment. Accordingly, the litigation process can be laborious and time-consuming, and therefore expensive.
This said, the litigation process is, on the whole, most likely to result in a considered and just resolution of a dispute, and therefore represents the ‘gold standard’ in terms of conventional dispute resolution processes.
The litigation process in common law jurisdictions such as Australia has evolved over centuries – it is an ‘adversarial’ process that is designed to give each party an opportunity to present their evidence and arguments, and test an opponent’s evidence and arguments, before an impartial, experienced and respected decision maker.
To achieve this objective, courts have developed procedural rules requiring each party to set out their positions in writing (known as pleadings), which are exchanged on a successive basis. Parties are also compelled to produce, and allow the other party(ies) to inspect and take copies of, all documents that may be of potential relevance to each of the issues identified in the pleadings.
A court’s procedural rules also prescribe the process for the hearing of a dispute, including the rules relating to the presentation of evidence. These rules are strict in their application and designed to ensure that party proves its case in a rigorous fashion.
It is a common perception that referral of a dispute to litigation is the worst outcome for all parties, especially having regard to the costs and delays.
While a party may choose not to pursue litigation if the subject matter of the dispute is sensitive or confidential, or there are reasonable prospects that a dispute will be resolved in a fair and efficient manner using a less-formal process, there are many instances in which proceeding to litigation will be in a party’s best interests.
For example, if a party has a strong case and the counterparty is refusing to negotiate, starting legal proceedings will usually force the counterparty to the table. Likewise, if the relevant contract does not include an enforceable agreement to refer disputes to arbitration, it may be sensible for a party to pursue litigation rather than attempt to negotiate an after-the-fact arbitration agreement with a counterparty.
The information contained within this document is general in nature and does not relate to any specific project or situation.
This is a technical guide and not legal advice. Each project and its circumstances will invariably involve complex technical, factual and legal issues in the realm of claims and/or disputes and accordingly, it is advisable to obtain legal and professional advice to help you with your specific project issues.
ConnellGriffin’s mantra is: Avoid. Contest. Resolve.
Avoid: ConnellGriffin’s advisors are deeply experienced in contract administration and commercial management, assisting client’s contractual and commercial teams to manage obligations and enforce rights. We regularly undertake forensic reviews of underperforming projects and provide strategic advice to clients with a view to avoiding disputes, and to ensure that clients are well-positioned should disputes arise.
Contest: ConnellGriffin helps clients to identify its position and prepare, so they can contest their case in a professional, informed and persuasive manner. Our team has expertise in the development of dispute resolution strategies, the preparation of cost estimates and the assessment of program impacts.
Resolve: ConnellGriffin’s consultants regularly represent and support clients in the full range of dispute resolution forums, including the conventional forums described in this paper as well less-common processes (which are covered in Part 2 of this Guide).
ABOUT THE AUTHORS
Jonathan Harrison - Director
Jonathan has over the past 25 years worked on many of the most significant infrastructure projects in Australia, New Zealand and Asia, and is deeply experienced in the identification, assessment, prosecution and defence of claims arising during the design and construction of rail, road and energy projects.
M: +61 438 851 935 | E: [email protected]
Miff Storey - Director
With more than 15 years of construction industry experience, Miff has developed significant expertise in the prosecution and management of large-scale construction disputes on some of Australia’s largest infrastructure projects.
M: +61 407 548 352 | E: [email protected]
Rob Nelson-Williams - Director
Rob has 30+ years’ experience in numerous international jurisdictions, focussing on contractual claims (time and cost), commercial and contract support work, dispute resolution and the successful conclusion of large value and/or complex commercial accounts on a wide variety of market sectors employing various forms of contracts.
M: +61 429 338 233 | E: [email protected]