04 May 2017
Construction has justifiably earned a reputation as one of the most conflict and dispute ridden of all industries. And despite the efforts to promote a less adversarial culture on our building sites, evidence suggests that disputes are becoming more protracted.
So why are projects becoming embroiled in ever longer and more costly construction disputes? It’s far better to avoid the conflict in the first place.
An annual survey conducted by Arcadis shows that such disputes are taking longer to resolve: up to an average of 13 months in 2016, compared with nine in 2010.
There has to be a better option than the constant rows that end up poisoning relationships across the industry. In an effort to head off such disputes, the industry is starting to focus on a more grown-up approach: seeking to avoid such conflicts in the first place.
Arbitration, slow and unwieldy?
On international construction projects, arbitration has become the de rigueur mechanism for sidestepping expensive and protracted litigation over the past 50 years. “Nobody in the international arena wants to throw themselves on the mercy of foreign courts,” says one leading dispute resolution expert, speaking off the record. Furthermore, most countries have adopted the 1958 New York convention, under which the decisions of arbitration panels must be enforced.
However, arbitration can be slow and unwieldy, concedes Cyril Chern, a barrister who has been handling construction disputes across the globe for nearly 50 years. “It’s one step better than court but it takes time,” he says, pointing out that it can take well over a year to achieve an outcome via arbitration, during which time relationships on a project can thoroughly sour.
Abdul Jinadu, a London-based barrister who works extensively on African construction projects, agrees: “It used to be thought that arbitration was always cheaper and quicker than litigation. That’s not the case any more.”
“You can have extra costs such as arbitrator fees and hiring a room, which you don’t have with litigation because the court is free,” says Kevin Owen, managing partner in the Singapore office of global commercial law practice Meyer Brown.
Avoidance is the key
Chern says that the “biggest trend” in construction disputes is to take one step back from arbitration and seek to avoid the conflicts in the first place. The principal mechanisms for doing this are dispute boards and conflict avoidance panels, much like those recently introduced by public agency Transport for London.
Most dispute boards typically consist of one or three members. If the board just contains one individual their appointment will have to be agreed by all parties. The alternative is three members, two of whom will be nominated by each of the parties, plus an independent chair. Each party’s board member must be acceptable to the other.
Mark Entwistle FRICS, a lawyer and dispute resolution expert, says: “Although two of the members have been nominated by the parties, they are independent of the parties and will be completely impartial.”
RICS maintains an international panel, which parties can draw on when putting together a dispute board.
Establishing a standing board at the beginning of the project is the best option, argues Jonathan Cope FRICS, vice-chairman of the Society of Construction Law. “Standing board members should be appointed at the beginning of the project and go to meetings even before the dispute has arisen,” he says.
Jinadu agrees: “When a dispute arises you are not starting from scratch and you will have an idea of what’s going on.”
What’s the benefit?
For Chern, speed is the main benefit of dispute boards, which must reach their decisions within 28 days. This makes them particularly well suited to dealing with problems that crop up during projects, he explains. “With arbitration it will take a year or two: even mediation is at least a year.
Dispute boards are faster, and prevent the problem becoming a problem,” says Chern, who also likes the inquisitorial nature of the dispute board system.
“They are not sitting passively like an arbitrator does. The dispute resolution » board can start ferreting out information that it feels is necessary.”
Whether it is worth setting up a standing board partly depends on the scale of the project. A conflict avoidance panel has been set up to oversee the Queensferry Crossing over the River Forth in Scotland, which has a budget of £1.35bn. “If a value of a project is less than £500,000, it would be difficult to justify paying for a board,” says Entwistle.
Preserving relationships is one of the principal reasons for setting up conflict avoidance mechanisms. This factor will be particularly important with a client that has a dominant position in a marketplace, argues Cope, pointing to a UK example. “If you are carrying out a motorway contract, most of your turnover will be for one client: the Highways Agency. You can’t afford to fall out of bed with them unless you have to.”
Entwistle agrees: “[The contractors] want to maintain harmonious relationships with their client and have a fruitful partnership. I suspect that will be less of an issue at the smaller end of the scale.”
A costly process
The biggest drawback to dispute boards, however, is their cost. Parties often fail to see the point of paying to prevent disputes that might never crystallise.
Jinadu acknowledges that cost can be a bugbear, particularly when setting up a three-person board. “Dispute boards are generally expensive because you are employing three people for the duration of the project.”
The counter argument, says Cope, is that the costs generated by conflicts outweigh those involved in running dispute boards.
And the bigger the contract, the greater the likelihood that costs will be hefty. One dispute avoidance expert estimates that on major projects, parties are unlikely to get “much change out of a million dollars” when they become embroiled in a dispute.
Chern adds that, on large projects, dispute boards can deliver economies of scale. “You have a pretty good idea what [a panel is] going to cost, as opposed to arbitration. With dispute boards you can have 10 or 100 issues and the fee will be the same,” he says. “The larger and more complicated a project, the better it works.”
One way of economising is to keep the board updated about the project by reports, rather than via site visits. Another is to appoint a board on an ad hoc basis when a conflict has arisen. Going down this route can be a false economy though, warns Jinadu. As well as the time it takes to set up a panel, “you lose the advantage of being involved from the get-go”.
Cost is not the only factor holding back the adoption of dispute boards, either. All parties involved in a contract need to be willing participants before one can even be set up. Securing agreement on who sits on the panels can also cause delays, says Cope, who also acknowledges that conflict avoidance will not be to everybody’s taste. “Some people will want their day in court because they can’t agree.”
But, he adds, the anecdotal evidence from board members is that they have helped to stop disputes arising. And their take-up is spreading. RICS has teamed up with several professional bodies to form a joint working party on conflict avoidance, which is developing a pledge to embed dispute avoidance procedures into a range of construction and engineering contracts.
Cecily Davis, a partner at law firm Fieldfisher in London, predicts that the government’s decision to give the green light to schemes of national importance, such as Hinkley C nuclear power station and the High Speed 2 rail line, will provide a fillip to the use of the boards in the UK. “There is likely to be significant investment in infrastructure that will merit the use of dispute boards,” she says, noting that their use has been enthusiastically adopted on transport projects.
It may be too early to declare peace in our time for the construction industry, but many professionals will be hoping that wider take-up of conflict avoidance will make it a better tempered place to work.
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