The Changing face of dispute resolution in construction

The following article is taken from Who’s Who Legal (WWL). Click here to go to the original article.

APRIL 2019 | CONSTRUCTION

Shona Frame and Adrian Bell, CMS Cameron McKenna Nabarro Olswang LLP

Is there a change under way in relation to the management and resolution of disputes in the construction industry?

In the UK, the “Constructing Team” report by Sir Michael Latham in 1994 made repeated references to the adversarial attitudes within the construction industry. He called for “a set of basic principles … on which modern contracts can be based” and recommended that “the best solution is to avoid disputes.”

Sir John Egan, in his “Rethinking Construction” report in 1998, still referred to the “strongly ingrained adversarial culture” within the construction industry.

The “no dispute” nirvana has, of course, not yet been achieved and in 2019 the construction industry remains adversarial in approach. Internationally, construction and engineering generated the largest number of arbitration cases administered by the ICC in recent years. However, in the UK, one lasting legacy from the Latham report was the introduction of the Housing Grants Construction and Regeneration Act 1996, which brought with it both regulation of payment practices within the construction industry and fast-track dispute resolution in the form of the statutory adjudication regime. This made it compulsory for parties to have access to adjudication for construction contracts (as defined in the Act), a process allowing for a 28-day period (or longer with parties’ consent) from referral of a dispute to a binding and enforceable interim decision. Many of the standard form construction contracts used internationally (and which therefore fall outside the scope of the Act) now also contain more informal and quicker dispute resolution procedures aimed at resolving disputes more cheaply and without the need for recourse to arbitration.

These mechanisms were all driven by the identified issues of keeping cash flowing where disputes arose during construction, and were against the background of many of the most commonly used standard form contracts (including the JCT in the UK), providing that the method of dispute resolution was arbitration and that for the majority of disputes, the arbitration could not commence until after practical completion, termination or abandonment, unless with the consent of both parties.

The industry embraced these new fast-track forms of dispute resolution and this quickly led to a transformation of the way disputes were dealt with (earlier, quicker and cheaper) but maintained a disputes culture.

Importantly, adjudication in the UK has been supported fully by the courts. Numerous judgments have been clear in stating that the courts will order enforcement of adjudication decisions, except in limited circumstances, and this has been key to the widespread adoption of adjudication.

In terms of uptake of adjudication in the UK, the 2017 Review of 12 years of data from the annual survey conducted by Glasgow Caledonian University reports that the initial take-up of adjudication in its first year (1998) was slow, but then rose exponentially before settling at an average of around 1,400 per year with, on average, 90 per cent of those having completed within 42 days of being referred. Of the cases referred to adjudication, the vast majority do not progress further to court or arbitration and parties are, in the main, prepared to accept the interim decision reached as effectively the final say on the matter.

Internationally, other jurisdictions have followed with their own versions of adjudication. Legislation introducing adjudication in various forms has been enacted in Australia, Singapore, New Zealand, Malaysia and Ireland. Other parts of the world (including Canada) are in the process of introducing the process into their legal systems.

Each jurisdiction has approached this in its own way, but one common feature is the driver for efficient and timely resolution with the aim of securing cash flow and support from courts.
In the international arbitration arena, changes are also evident. Queen Mary, University of London’s “International Arbitration Survey: The Evolution of International Arbitration” (2018) asked the question: “What are the three worst characteristics of International Arbitration?”

The results showed that 67 per cent of respondents cited cost and 34 per cent lack of speed. This is consistent with the results from previous surveys by the University dating as far back as 2006, which have shown that users are most discontent with the cost of arbitration.
This has been accompanied by growing complaints in the international arbitration world that the arbitration process has come to resemble common-law litigation in terms of procedures involving interim applications, extensive disclosure and lengthy examination of witnesses.

hese factors, coupled with arbitrators being increasingly busy, make the process long and expensive.

In response to this groundswell of opinion, many arbitration institutions have introduced expedited procedures in recent years. These include the ICC, the ICDR, the AAA, the AIAC and centres in Singapore, Hong Kong, Stockholm, Australia, Germany, Switzerland, Vienna, China and Istanbul. The expedited procedure has the benefit of a timetable of around three to six months, leading to lower costs but also a final award capable of immediate enforcement. 

It is relatively early days but they appear to be gaining traction. For example, in its July 2018 report, the ICC recorded 84 requests to opt in to the expedited procedures since their introduction in March 2017. In Hong Kong, there were 15 applications for expedited procedure out of 297 arbitrations in 2017. In Stockholm, there were 200 cases in 2017, of which 72 were on the expedited procedure. And SIAC received 107 requests for expedited procedures in 2017.

If the experience of statutory adjudication is followed, it may not be too long before expedited arbitration procedures become the new norm in international construction dispute resolution. It appears that users of international arbitration are attracted by anything that offers a viable alternative to a lengthy and costly process. This demand has also resulted in many of the institutions introducing “emergency arbitrator” procedures, which provide the parties with a mechanism to seek urgent temporary relief in circumstances where an arbitral tribunal has not already been constituted.

However, all of what is said above relates to formal means of dispute resolution by involving a third party. In the alternative dispute resolution arena, however, we have also seen change.
The latest editions of the FIDIC, NEC4 and JCT forms each contain escalating dispute resolution procedures (in differing forms) and these procedures have now become mainstream. Typically, such escalating provisions involve an initial referral to senior executives or directors followed by either mediation (by agreement) or a form of adjudication or expert determination procedure and then either arbitration or court. 

It is notable that even the language of the clauses has changed. The NEC4 dispute provisions are contained under the heading “Resolving and Avoiding Disputes”; the JCT 2016, “Settlement of Disputes”; and FIDIC 2017 has now, for the first time, split out its section on claims from that concerning “Disputes and Arbitration”. FIDIC has also included a change in language, now preferring the term Dispute Avoidance /Adjudication Board (DAAB) to the term Dispute Adjudication Board (DAB) used in its previous editions. In its Guidance notes it comments:

It is generally accepted that construction projects depend for their success on the avoidance of Disputes between the Employer and the Contractor and, if Disputes do arise, the timely resolution of such Disputes.

Leaving aside how often escalating procedures are fully used from end to end, and the difficulties that can arise with satellite litigations around whether escalation provisions have been properly implemented, this is indicative of a greater wish to nip disputes in the bud early and manage and resolve issues as they arise as opposed to saving these for a later formal dispute process. It is indicative of a shift from a dispute resolution to a claims avoidance culture.

In the 2018 International Arbitration Survey, the increasing use of these escalation clauses featured. The majority of those interviewed considered that escalation clauses are beneficial to the overall process of resolving a dispute. Engaging in a form of ADR before arbitration was considered to be of assistance in crystallising parties’ positions resulting in a significantly increased chance of reaching a settlement. 

There was a contrary view expressed that if parties are determined to arbitrate then the prior steps of the ADR process are simply going to be undertaken as a “box-ticking” exercise that will not contribute to effective resolution. These clauses are therefore not a panacea. However, they do provide a toolbox for parties and their advisers when considering options available and the way forward when a dispute arises. 

Aided by encouragement from the courts, mediation clauses have also come to the fore and mediation is becoming a recognised way of attempting to resolve disputes. These escalation clauses do not tend to require mediation as a mandatory measure but act as a prompt for parties to consider mediating as part of the escalating dispute procedure regime – sometimes a timely reminder before engaging in hostilities.

This is matched by more of a project management function in contracts with early warnings (NEC), time bars related to notifications (NEC and FIDIC) and requirements across the board for early notifications of delay and additional costs being incurred. This allows for action to be taken to mitigate the consequences of these as the work progresses rather than storing up a fight to the end. However, these do often end up being used as a weapon to bar claims where timeous notifications have not been made and again can lead to satellite disputes related to technical compliance rather than the real substance of the disputed issues which almost always relate to time and money. It is clearly the case that if parties are intent on having a dispute, these clauses will not prevent that. 

However, in tandem with this change in dispute resolution practice and procedure, there has also been an increasing trend for more collaborative provisions in contracts. Again, in the UK this can perhaps be traced back to Sir Michael Latham where he recommended that:

The most effective form of contract in modern conditions should include: A specific duty for all parties to deal fairly with each other, and with their subcontractors, specialists and suppliers, in an atmosphere of mutual cooperation.

NEC was the front-runner with this and its clause 10.1 “mutual trust and co-operation” provision preceded the Latham Report, but this has been followed by similar provisions in JCT (albeit in the optional supplementary provisions in one of the schedules) requiring parties to work “in a co-operative and collaborative manner, in good faith and in a spirit of trust and respect”. 

The inclusion of these types of clauses are more a statement of intent than clauses that create binding contractual rights and obligations – certainly in common-law jurisdictions. However, the fact that they have now made their way into these contracts is further evidence of a shifting in approach. 

Looking to the future, there has also been an increase in the number of multi-party forms of contract in the market. The first in the UK was PPC2000. It has not been widely used but it was followed by the JCT Constructing Excellence Form in 2006 and, more recently, by the NEC4 Alliancing Contract. FIDIC is also considering developing a multi-party form. The uptake of these is most likely to be driven by the necessity of a more collaborative approach as we move forward with technological developments such as BIM, where the full benefits are only likely to be realised by all parties working together to design, build and thereafter operate and maintain buildings. In that environment the current two-party contracting is likely to be found not fit for purpose. 

Clearly, further changes in both dispute resolution and forms of contracting will be driven by the market and advances in technology. There is a clear indication from stakeholders that old-style dispute resolution is not the preferred route for the construction industry. The arbitration institutions, governments through statutory adjudication regimes and the standard form contract drafting bodies are providing a framework for a new approach to meet that demand. 

It is clear, looking over the 20-year timeline, that there has been a shift in approach and, with the advent of more collaborative forms of working and technological advances driving this, that this will continue. 

On the basis of the above then, and with the benefit of a long-term look backwards, the answer to the question posed at the beginning of this article is quite clearly that there is a change under way in relation to the management and resolution of disputes in the construction industry. That change has, to date, been gradual but the construction industry is voting with its feet and there is a clear demand for quicker, cheaper and more bespoke forms of dispute resolution – and, perhaps more importantly, for alternatives to the adversarial culture that has been so prevalent in the construction industry for so long.