Mediation for Construction Contract Dispute Resolution

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23/09/19 Law Reference this

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Table of Contents

Assignment Title

Introduction

Aims of the Report.

How Does a Dispute Arise?

What is Mediation?

NEC4 ECC Construction Contract.

The importance of the Procurement in the Construction Sector. ECC Procurement.

Early Warning in NEC4 ECC Contract!

The NEC4 Philosophy Over the Dispute Resolution Techniques.

Options W1 and W2 in NEC4 ECC.

Option W3 in NEC4 ECC, the new Dispute Avoidance Board (DAB)!

Construction Adjudication!

The Procedure.

Arbitration in the Construction Industry.

Litigation in the Construction Industry.

Summary

Appendix A

The table below compares the processes of litigation, arbitration, adjudication and mediation on a typical construction dispute.

References:

Introduction

People in the construction industry strongly believe that disputes are a bad thing. Over the last years there have been many efforts to make the construction sector function better and making it less adversarial is an important step in improving it.

The construction industry has spent a very large amount of money in disputes and none of it has benefit the construction process. Most of arguments arise from the misinterpretation of the contractual documents and the dissimilar opinions over the financial and time effects of later events. These disputes result in unnecessary expenses and sometimes distract people in key positions from their target. They harm the contractor’s and their subcontractor’s financial situation, when at same time increase the financial uncertainty of the Client.

Two of the basic objectives of the NE4 ECC contract are to decrease the number of disputes arising during the construction works and to improve the confidence in the implementation of the contract for all Parties. According to the NEC drafting team, disputes needs to be resolved quickly and in fairness. (NEC4, 2018)

Aims of the Report.

This report aims to satisfy the Client’s requirement, to insert mediation as a dispute resolution technique in the NEC4 ECC contract, however, inserting a new term in a contract may result in a disagreement with the other Party, as the main contractor may ask for more money. There is a risk in every choice we make, and we should carefully decide which is the best solution in this case.

After careful examination of the Client’s requirement and according to the type of construction contract (NEC4 ECC), that we have already proposed, and they have already agreed, we will propose the best method do be followed in case of a complication during the construction Works and in case of a dispute resolution.

This report also aims to demonstrate some parts of the NEC4 ECC contract that are very important and play a significant role in the final decision of the Client on what to include and not include in the contract they wish to sign. The procurement method offered in the ECC contract guarantees the client of a successful implementation of the contract.

How Does a Dispute Arise?

First thing is to examine the reasons behind a dispute. How does a dispute arise and why? According to the ICE (Institute of Engineers), two of the main reasons of disputes under the ECC are the Scope and the Site Information. It is significantly important the information that are provided to all parties at the tender stage to be accurate and as absolute as possible. Therefore, being transparent in the preparation of documentation is vital. Any ignorance of the Client during this period can cost a lot, however, assumptions can be made upon which tenderers can base their bids. (NEC4, 2018)

The lack of proper administration is a reason for disputes too. Bad administration leads to an increase in risks. Any decisions or indecisions taken under the contract can be grounds for a dispute to arise. Most of the disputes are possibly avoidable, however, understanding how they arise can teach us how to avoid them. Another reason for disputes is the disagreements about the assessment of compensation events, the delay to completion date or dates, and the changes to the prices. (NEC4,2018)

What is Mediation?

Mediation is a dispute resolution technique usually used before other more adversarial dispute resolution techniques, such as adjudication, arbitration or court proceedings are used. In Mediation a Mediator is used as a neutral third party to ease settlement between the two parties. Mediation can be used at any time but after the events have begun. The Mediation technique of dispute resolution is usually selected for its speed, the low cost, its collaborative nature, its low risk and less formal nature, its flexibility and its finality. (Richbell, D., 2009)

The Mediator aims to restore relationship between the two parties and not to enforce a decision but to assist both parties in achieving an agreement. In order to have an efficient mediation process all parties must commit and cooperate. Mediation is a private process based on confidentiality. All cost of the process should be shared equally between both parties. (Richbell, D., 2009)

Some of the disadvantages of an unsuccessful Mediation are the risk occurring after the process. After the non-agreement result, parties realise that they have spent money and consume valuable time, when same time a lot of evidence have been exposed to the opposing party. The lack of formality is not always a positive thing. (Richbell, D., 2009)

NEC4 ECC Construction Contract.

One of the main goals of NEC4 construction contract is to avoid disputes happening or at least reduce the effect if they do happen under the neck forms of contract. There is a number of processes built into the contract itself to try to mitigate and decrease the numbers of disputes arising over the construction period. The most important one is clause 10.2 for the parties to, ‘act in a spirit of mutual trust and co‑operation. However, we should not forget that the main clause of the contract is 10.1 where is stated that all parties to act as stated in the contract! (NEC4, 2018)

NEC4 promotes collaboration, good communication and project management. Most of the problems in a real construction project are generated from the lack of response and slow decision-making. NEC4 uses short, plain English, and emphases on establishing a successful procurement strategy. (NEC4, 2018)

The importance of the Procurement in the Construction Sector. ECC Procurement.

A survey from the Chartered Institute of Building (CIOB) into procurement shows that construction professionals consider procurement as the most critical element in the delivery of a project on budget, on time and to a high quality. Most of the participants believed that a transparent procurement procedure leads to a successful construction industry, and that transparency in procurement leads to better communication between all parties. (CIOB, 2010)

ECC offers flexibility of design and performance specification allowing contractors and employers productive mixture.  One of the advantages of the ECC is the variety in procurement options. A modern construction contract like ECC offers payment based on progress and not quantity of work done. An accurate distribution of function and responsibility brings liability and motivates people to play their part efficiently. All actions taken by the parties involved in the construction contract are focused on finding a solution and not on the problem. (Anon, 2018)

There is an early assessment of the compensation events, guaranteeing all parties involved in the project an early awareness of the cost and time implications of events, offering flexibility in planning and reductions in disputes. This offers the Project Manager and the team a chance to be proactive and co-operative. (Anon, 2018)

Another part of the ECC type of contract includes an Early Warning procedure. All parties are required to notify each other quickly when they are aware of something that may have a negative impact on the cost, time and performance of the Construction Works. (Anon, 2018)

Early Warning in NEC4 ECC Contract!

In the Clause 16 of the NEC4 construction contract it is stated that the Project Manager should make a primary early warning register within the first week and give a notice to the other party. Regular early warning meetings are then scheduled to start within the period of two weeks from the starting date. More specifically, clause 16 states that the Contractor will not be compensated if an early warning was not given by him on the date that he should have had to. The experience of the Contractor obliges him to give an early warning on time. This aims to encourage parties into being proactive and collaborate in order to resolve any issues before attending to a formal dispute resolution method. (Glover J., March 2018)

The NEC4 Philosophy Over the Dispute Resolution Techniques.

One of the changes in the terminology of the new NEC contract describes its intention best. The new NEC dispute resolution section’s title has changed from “Dispute Resolution” to “Resolving and Avoiding Disputes”.  The New Nec4 contract includes options W1, W2 and W3, which shows clearly the significant need for all parties to co-operate and collaborate to resolve any issues before a formal dispute resolution technique is chosen. Option W3 includes the stipulation of a Dispute Avoidance Board (“DAB”), which is specifically designed for use on international projects and others that fall outside the scope of the Contraction Act (such as PFI projects). (CMS Low-now, June 2017)

Options W1 and W2 in NEC4 ECC.

In options W1 and W2 is stated that all disputes must be firstly referred to the parties’ Senior Representatives. These Representatives should be clearly stipulated in the Contract Data before the implementation of the contract. This adjustment reflects a Z clause which is common in the public sector, were Senior Representatives are required to try to resolve disputes before going to adjudication. (CMS Low-now, June 2017)

It is obligatory under Option W1 (used where the Construction Act does not apply), Senior Representatives to try to resolve disputes before going to adjudication. In option W2 (used where the Construction Act does apply) the contract advises all parties to refer a dispute to the Senior Representatives before all else, however, in clause W2.2(1) it is stated that parties can refer a dispute to adjudication at any time. It is their absolute right to adjudicate at any time in contracts to which the Construction Act 1996 applies. (CMS Low-now, June 2017)

When choosing option W1 or W2 and not going to adjudication in the first instance, each party must give a notice within the first week. The report should not be more than ten sides of A4 plus supporting evidence. This does not forbid Representatives from attending as many meetings as they want and use any technique, they think is best for them to resolve the dispute in no more than three weeks. When the process ends, the Contractor and the Project Manager must put into work all decisions taken during the process. There must be not disclosure of evidence and discussions, following the events after the process. (CMS Low-now, June 2017)

The main purpose of W1 and W2 options is to establish the Senior Representatives process as the basic dispute resolution process, adjudication as a secondary process and arbitration / litigation as a third and final resolution process. (CMS Low-now, June 2017)

Option W3 in NEC4 ECC, the new Dispute Avoidance Board (DAB)!

Option W3 is used where the Construction Act does not apply. It requires all mandatory of potential disputes to be referred to a neutral DAB before deciding to go to the court. The Contract data should include the number of persons that will consist the DAB, it can be from one to three members. They can be nominated by a professional body or by the parties forming the Contract, however, these persons must be members of a professional body! (CMS Low-now, June 2017)

DAB aims to resolve any potential disputes before they become disputes. At specified periods, the Dispute Avoidance Board visits site to see the project at set intervals and reconsider the facts leading to any potential disputes. Any potential dispute should be referred to the DAB between two to four weeks after giving notice to the other party and the Project Manager. By its terminology, the decision taken by the DAB are not compulsory and this makes the process less useful. (CMS Low-now, June 2017)

Construction Adjudication!

The Construction Adjudication method of dispute resolution is available to almost all parties to a written construction contract. Its basic purpose is to provide a primary solution to a dispute in order to allow the continuance of the payments from the Client. The method is based on the Construction Act, first enacted in 1996 (and in force from 1998) and amended in 2009 (in force from 2011). The Act achieves to improve the payment process within the construction supply chain and offers a quick and frank method of dispute resolution called adjudication. According to the Act, all construction contracts must include Adjudication as a dispute resolution technique choice. (Glover J., March 2018)

The Procedure.

When deciding Adjudication as a dispute resolution method, either party gives a notice to the other party that they will go to Adjudication, giving a clear explanation of the reasons that led them to this decision. The contract and the notice set the Adjudicator’s basic powers and jurisdiction. Therefore, the scope of the contract must be clear, and the notice must be precise.

(Glover J., March 2018)

There are specific requirements regarding the communication process for the notice of Adjudication. Within 7 days of the issue of the notice, the party that asks for the dispute must send its statement of case to the other party. If the Referral is not sent within that time, the Adjudication may be annulled. The statement of case must illustrate an analytical explanation of the claim made from the party in respect of the dispute identified within the notice, together with any supporting documentation. (Glover J., March 2018)

The appointment of an Adjudicator must be declared from the referring party. This can be a person that is primary named in the contract data, appointed under Dispute Resolution Service Contract (DRSC), or an approved member of a professional body. (NEC,2018) The Adjudicator will form the agenda to be followed by the parties included in the process. (Glover J., March 2018)

It is the Adjudicators’ duty to set any rules to be followed and decide within 28 days of the Referral. The decision is binding on the parties; however, the parties can take the same dispute to arbitration or litigation if they want. The Adjudicator decides usually how the costs are shared between the parties. If either party does not agree with the Adjudicator’s decision, they only have 4 weeks to decide if they want to go to litigation or arbitration. (Glover J., March 2018)

Arbitration in the Construction Industry.

The efficiency of Arbitration is based on the law. The verdict that comes out from the process of Arbitration is insignificant if the other party does not accept it. Only the courts can enforce an arbitration award, nevertheless, the English law requires arbitration procedures to have been conducted in conformity with that law. When the parties have made an Arbitration agreement, Arbitration comes as an alternative to litigation. In some cases when Arbitration is not officially included in the contract agreement, the dispute will go to the courts. (Stephenson DA., Sep 2003)

Some of the advantages of arbitration are: The freedom to choose an arbitrator by using   arbitration agreement in the contract. Flexibility in the type of Disputes arising from construction contracts. It usually cost less than going to the courts. There is no delay when properly used. It provides privacy, in contrary with the courts and it is based on the Law. Some of the disadvantages of arbitration are: The cost of arbitrator and of court facilities.  Legislative difficulties when more than two parties are involved in a dispute. There is risk in appointing the right arbitrators. (Stephenson DA., Sep 2003)

Litigation in the Construction Industry.

Litigation is based on the law and it is the traditional form of resolving dispute in the UK. A Litigation process starts when an offender makes a claim. Documents are provided by each party and the choice of expert’s assistance is given to the parties. The court examines the declarations, reports and statements. Experts’ examinations are provided to the court too, and following the process, the verdict is made by the judge. The decisions made by the judge are binding, however, appeals to a higher court are possible. The cost of Litigation is high and there is no privacy. (Safinia S., 2014)

Summary

NEC4 ECC construction contract promotes collaboration and aims to bring innovation and efficiency in the construction sector. By establishing a transparent and accurate procurement strategy we can decrease the number of possible disputes, and by choosing an alternative dispute resolution technique we can save our customer from unnecessary expenses and prevent them from losing valuable time. Clause 16 in the NEC4 ECC contract encourages parties to be proactive and collaborate in order to resolve any issues before attending to a formal dispute resolution method.

Option W2 in the NEC4 ECC contract suggests a dispute resolution method similar to the one that the Client has asked to include in the contract.  In option W2 (used where the Construction Act does apply) the contract advises all parties to refer a dispute to the Senior Representatives before all else, however, they can refer a dispute to adjudication at any time. Mediation works in the same spirit with the Option W2 of the NEC4 ECC construction contract, therefore, there is no need to add Mediation as a primary resolution technique. There is no need to insist on inserting Mediation into the contract as it will change the balance and it may lead into the Contractor asking for more money. We can recommend on selecting Mediation, but we cannot insist!

There is always the availability to refer to Arbitration or Litigation if neither option W2 or the Adjudication dispute resolution technique option does not satisfy either party. However, if deciding to include Arbitration in the contract, it is important to place the seat of arbitration in London, as the requirement of the Client is the contract to be based on the English Law and Arbitrators use ICC rules to make decisions.

Appendix A

The table below compares the processes of litigation, arbitration, adjudication and mediation on a typical construction dispute. (Ali, N.A.N.A., 2006)

DESCRIPTION

LITIGATION

ARBITRATION

STATUTORILY PROVIDED ADJUDICATON

MEDIATION

Basis of resolution of dispute

Rights based; based on facts, evidence and law

Rights based; based on facts, evidence and law

Rights based; based on facts, evidence and law

Interest based; need not be based on facts, evidence or law. Parties may agree anything (that is lawful)

Tribunal cost* (RM)

5 K

50 K – 300 K

10 K – 50 K

2 K – 15 K

Parties ‘costs – both sides** (RM)

100 K – 600 K

100 K – 500 K

50 K – 100 K

10 K – 20 K

Duration***

2 – 7 years

1 – 5 years

4 – 8 weeks

1 – 14 days

Rights to the process and pre- conditions

Usually right to litigation precluded if there is an arbitration clause in the contract, but may be used to challenge an arbitrator’s award although only on very limited grounds

May only resort to arbitration if there is a written arbitration agreement in the contract or if agreed by the parties at any time

With an enabling Act, adjudication would usually be permitted at any time

Mediation can always be used by the parties at any time

Timing

If there is no arbitration clause, anytime. If there is an arbitration clause, only if an arbitrator’s award is being challenged which may be done only on very limited grounds

Usually in construction contracts arbitration clauses provide that arbitrations on most disputes may only start after completion or termination

Anytime

Anytime

Extent to which it may be binding and appealed

Binding, but may be appealed to a higher court

Binding, but the arbitrator’s award may be challenged in court although in very limited circumstances

Binding but the same dispute may be reopened in arbitration/litigation

Not binding at any time during the process, except when settlement agreement is reached

Relationship between disputing parties

Usually confrontational

Often quite confrontational

May be a little confrontational

Usually amicable

References:

  1. Ali, N.A.N.A., 2006. A “Construction Industry Payment and Adjudication Act”: Reducing payment-default and increasing dispute resolution efficiency in construction. Master Build, pp.4-6.
  2. Anon, 2018, ICE’s new NEC4 Alliance Contract set to move collaborative procurement to the next level. 171 (4), 147–147. [online]. Available from: http://search.proquest.com/docview/2111106897/.  , accessed on January 2019
  3. Black, C., Akintoye, A. and Fitzgerald, E., 2000. An analysis of success factors and benefits of partnering in construction. International journal of project management18(6), pp.423-434.
  4. Book Review: Construction Contract Claims, Changes, and Dispute Resolution Third Edition”, 2017, Design Cost Data, vol. 61, no. 2, pp. 53.
  5. Bronwyn M., Trebes B., (2018). Managing Reality (3rd Edition) – Complete Set. ICE Publishing. Retrieved from,https://app.knovel.com/hotlink/toc/id:kpMRECS002/managing-reality-3rd/managing-reality-3rd
  6. Cheung, S.O., 1999. Critical factors affecting the use of alternative dispute resolution processes in construction. International Journal of Project Management, 17(3), pp.189-194.
  7. CMS Low-now, June 2017, NEC4: New dispute resolution and dispute avoidance provisions, http://www.cms-lawnow.com/ealerts/2017/06/nec4-new-dispute-resolution-and-dispute-avoidance-provisions?cc_lang=en , accessed on January 2019
  8. Coulson, P., 2011. Coulson on construction adjudication. Oxford University Press.
  9. Glover J., March 2018, The NEC4 And FIDIC Approaches To Dispute Avoidance And Dispute Resolution Compared, https://www.adjudication.org/resources/articles/nec4-fidic-approaches-dispute-avoidance-dispute-resolution-compared , accessed on January 2019
  10. Ismail, Z., Abdullah, J., Hassan, P.F. and Zin, R.M., 2010. Mediation in Construction Industry? Journal of Surveying, Construction and Property, 1(1).
  11. NEC, 2018 , How to avoid and resolve disputes under NEC4 webinar, https://www.neccontract.com/NEC4-Products/NEC-Webinars/How-to-avoid-and-resolve-disputes-under-NEC4 , accessed on 12 January 2019
  12. Palaneeswaran, E., Kumaraswamy, M. and Ng, T., 2003. Targeting optimum value in public sector projects through “best value”-focused contractor selection. Engineering, Construction and Architectural Management, 10(6), pp.418-431.
  13. Pickavance J, 2016, A Practical Guide to Construction Adjudication Chichester, West Sussex, United Kingdom: Wiley/Blackwell,.
  14. Richbell, D., 2009. Mediation of construction disputes. John Wiley & Sons.
  15. Rowlinson, M., 2018. A Practical Guide to the NEC4 Engineering and Construction Contract. Wiley-Blackwell.
  16. Safinia S., (2014). A Review on Dispute Resolution Methods in UK Construction Industry. International Journal of Construction Engineering and Management.
  17. Stephenson DA., Sep 2003, Arbitration practice in construction contracts. Routledge;
  18. Watermeyer, R. 2008, “Effective implementation of NEC3”, Civil Engineering: Magazine of the South African Institution of Civil Engineering, vol. 16, no. 7, pp. 28-31.

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