Dispute Resolution in Construction – An Overview

Disputes are unfortunately common in the construction industry due to several factors, most of which can be traced back to issues concerning payment or workmanship.

One example area would be a difference in assessment of a change in scope or, before even getting to the assessment, disputes can arise due to differing opinions on entitlement. Such issues can be due to ambiguous scope or incorrectly amended contract clauses. It could simply be the contract documents do not adequately describe or reflect the works required or there are contradictory terms over what scope was needed and therefore has been allowed for in the contract sum.

Another common area where disputes arise is defects. For example, once a defect is identified the contractor may contest that workmanship is the cause and refuse to correct the defect without the assurance of payment. In these cases, the issue can stagnate and a dispute arises.

To avoid a dispute occurring in the first place what can be done to reduce the risk?

Ensure the contract is clear and unambiguous in terms of drafting. A page turning exercise between the parties including signing each page is good practice and provides an opportunity to resolve any issues pre-contract. An independent third-party checker could carry this out. Also, a statement from the contractor, in the form of a technical query response, that can be bound into the contract confirming they have priced all that is required in the contract documents. This can also assist in negating any sharp practice post contract.

It is not in the interests of either party to prolong an issue that could lead to a dispute arising and therefore, proactive management is required to reach an amicable or contractual solution as soon as possible.

Progression of Works during a Dispute

In all forms of contract there is an implied requirement on the contractor to progress the works in a manner that will not delay completion. For example:

• in NEC ECC the contractor “does the work so that Completion is on or before the Completion Date”, and
• in JCT the contractor is required to “regularly and diligently proceed with and complete the Works” and under ICE (ICC) if there are rate of progress concerns the Engineer instructs the contractor to submit a revised programme “to expedite progress and complete within the time for completion”.

In the event of a dispute these clauses remain in force, therefore the contractor should diligently proceed with the works regardless. This is reflected to a greater degree in NEC Clause W2 Dispute Resolution Procedure, which states that in the event of an adjudication being launched “Unless and until the Adjudicator has notified the Parties of his decision, the Parties, the Project Manager and the Supervisor proceed as if the matter disputed was not disputed”.

Irrespective of the above, if there is any uncertainty as to how the works are to proceed due to ambiguity, this should be clarified as soon as possible even under instruction from the developer. Bear in mind that not all instructions issued will form the basis of entitlement for additional monies, but the contractor must act on an instruction irrespective of entitlement or else face claims of breach of contract. In the event of a breach, the developer has the option to terminate the contract and appoint another contractor to complete the works. They would then claim any extra costs as damages caused by the breach.

Despite the obligation placed on contractors to diligently proceed with the works, the employer may still be faced with a contractor or subcontractor that deliberately slows down the works in an attempt to maintain power over disputed items. In instances like this, there are a number of formal dispute resolution options in the contract such as Adjudication, Arbitration and Litigation. There are also informal options such as Alternative Dispute Resolution or Mediation.

Adjudication

In the 1994 Latham report, “Constructing the Team”, commissioned by the UK Government to review the construction industry to consider how it could work more effectively, one of the recommendations was for contracts to contain a swift and decisive method of resolving disputes.

Fast forward to 1996 and the Housing Grants, Construction and Regeneration Act comes into force. The ‘Construction Act’ brought Latham’s recommendation to life by the introduction of adjudication as legislation.

A Notice of Adjudication can be a cost-effective alternative to court proceedings delivered in real time as an adjudicator is required to reach a decision within 28 days of its referral. The adjudicators decision is binding unless overruled by arbitration or litigation. The emphasis behind the adjudicator’s decision is there is no right of appeal and the decision must be enforced. However, note that as the successful party in an adjudication, you may still have to take further court action to enforce the adjudicators decision.

As the Construction Act is legislation it applies to all ‘construction contracts’ as defined in the Act irrespective of the choice of differing forms chosen by developers such as NEC, JCT, ICC etc. Therefore, these forms of contracts make allowance in their standard wording for adjudication and arbitration. In some, such as JCT, mediation is recommended before launching more formal proceedings.

It’s worth noting that in the Construction Act, there is no prerequisite that the parties must follow adjudication first then arbitration. However, in NEC it is a condition precedent that you follow adjudication before taking the dispute to arbitration or litigation.

In the event one party does not accept the adjudicator’s decision and they want to take the case to arbitration or litigation, the timescale to notify this should be adhered too. For example, in NEC you only have 4-weeks to notify and if you miss this deadline, the adjudicator’s decision is final.

Arbitration

Arbitration differs from adjudication as it is a private tribunal with a hearing by a third-party arbitrator or arbitration panel selected by the parties. One clear advantage for arbitration over litigation is that the parties appoint the arbitrator. This is someone with suitable experience as opposed to a Judge with perhaps less practical construction experience. The outcome also remains private.

Individual contracts should be checked for what they state about arbitration. But, in principle, the process is for one party to request that a dispute is referred to arbitration. The parties then agree on who the arbitrator will be and whether it is one person or a panel. Once appointed, they will meet with the parties to agree on or clarify process and timescales and request a statement of claim from the first party and then a response from the second. Note this will include disclosing information in support of any claim. After this exchange a hearing takes place followed by the arbitrator issuing their decision and award.

The lack of a prescribed timescale, as in adjudication, is a disadvantage as the process is likely to take a considerable amount of time. It is possible to agree a tight timescale with the arbitrator but there is no guarantee. Also, arbitration is likely to require a significant amount of work to prepare a case and therefore, the value of the matter at hand should obviously be considered before a referral is issued.

Litigation

Litigation, formal court proceedings, carried out under Her Majesty’s Court and Tribunal Service, are generally an uncommon way for construction disputes to be resolved. This is largely because disputes that make it all the way to litigation can cause high profile reputational damage. One case that most still remember is Multiplex Construction (UK) Limited v Cleveland Bridge UK Limited in 2008 where Cleveland Bridge were ordered to pay Multiplex a purported £6m in damages but the cost of litigation was claimed to be £14m.

There is a court that specifically deals with disputes arising from construction, the Technology and Construction Court (TCC). The concept being that TCC Judges have experience in the field and are therefore better placed to review evidence including witness statements, expert advice, allegations of malpractice and complex legal arguments.

Alternative Dispute Resolution

To refer a matter to adjudication, the dispute should be crystallised by the parties before an independent adjudicator can rule on the matter. For the parties involved to agree on the dispute they will have to work through the matter at hand. Therefore, it would be logical if the same parties also try to amicably resolve the dispute along the way through these discussions.

To this end, Alternative Dispute Resolution (ADR) or mediation, should be considered before starting more formal proceedings in the event a dispute should arise. This can include escalation within each party. If a contract is drafted to include ADR, then ensure the timescales stated are similar or shorter to the twenty-eight days allowed for an adjudicators decision.

Mediation operates where a third-party mediator is appointed by agreement and works towards a negotiated settlement of the dispute. Clearly such an approach is preferable as it is likely to be more cost effective plus it can be achieved in a short timescale. However, remember that as a mediator they have no formal powers and therefore enforcing their decision may be difficult.

What should be included in the contracts to prepare for Dispute Resolution?

It is important for the dispute in question to have been made open so that both parties are aware of its clear existence. The point of this is that good practice is for the parties to agree on the dispute i.e. ensure your claim is clear and understandable, that you have detailed what you wish to be resolved, the basis or evidence that supports your claim and the timing of the contract is adhered to.

Also, be aware that when referring to an adjudicator, each notice should refer to a single dispute and cannot contain multiple disputes. In the event there is more than one issue, these would need to be dealt with in separate adjudications. When preparing your claim, keep records of any documentation that you refer to, as you will need to have evidence that supports your position.

Check the contract before referring a matter for formal dispute resolution. The contract will state who the dispute should be referred to. For example, in NEC Contracts the adjudicator should be named in the contract, if not either party may ask an adjudicating nominating body to appoint one. In standard JCT Contracts, adjudicators and arbitrators can be chosen by the parties or nominated by an appropriate body, usually referred to in the contract.

Case Studies

The successful party in an adjudication may have to take their case to the TCC to enforce the decision. However, at this point, the unsuccessful party may lodge an application to have the decision overturned. Most of these applications prove to be unsuccessful. A case in point here is John Sisk & Son Ltd vs Duro Felguera UK Ltd 2016 where Duro resisted the application on the grounds there were breaches of natural justice i.e. they claimed the adjudicator had approached the issue with a closed mind and the adjudicator unlawfully delegated their powers to a third party. Both were investigated and found to be “plainly incorrect” and the adjudicators decision was enforced.

An interesting and second case study example is on the principle of a dispute needing to be crystallised between the parties. In St Austell Printing Company Ltd v Dawnus Construction 2015, the adjudicators decision was referred to the TCC on the basis St Austell claimed the adjudicator did not have jurisdiction on two grounds. The first was that the dispute had not crystallised at the time of the notice to which Mr Justice Coulson dismissed as a “well-worn suggestion” and noted this was almost never successful.

The second point was a technical one centred around the adjudication and it being related to part of an application and expressly excluding other parts, therefore the adjudicator was not empowered to order the payment of any sum due. The Judge found this second point “rather more novel” before dismissing it on the basis that if supporting information was missing it could be addressed by the developer in any subsequent payment assessment i.e. it did not affect the adjudicators final decision.

Conclusion

Early engagement and ensuring there are strong lines of communication is important to avoid disputes escalating and to reach amicable solutions as early as possible. Be prepared to compromise. The worst-case scenario is a dispute moving up through the contract then into the courts, becoming expensive for all parties, damaging reputations and supply chain relations.

Remember that even in the midst of an escalation, there is nothing to stop the parties meeting to try and resolve a dispute and that such a meeting can take place at any time through proceedings.

About Dean Suttling

A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.