Industry Insight No. 13: Alternative dispute resolution (ADR) in construction
This article was first published on Lexis®PSL on 9 November 2016.
Construction analysis: Sarah Schütte of Schutte Consulting Limited explores the use of ADR in resolving disputes arising on construction and engineering projects. She looks at how ADR can be used, the problems commonly encountered with non-binding ADR, and the measures that could be taken to improve the ADR options currently available in the market.
What is ADR?
ADR covers all the ways in which disputes can be resolved which do not involve litigation (court proceedings, which are generally public) or arbitration (which is private). In the UK, the most common forms of ADR used by the construction industry are:
• mediation • expert determination • adjudication • dispute resolution boards, which can be ad hoc or standing (DRBs)
• negotiation (solicitorassisted or not)
I will explore each in turn using a real-life case study, and also comment on online dispute resolution (ODR).
An individual client was unhappy with the quality of work done by a builder and suggested they ask a mediator for assistance to resolve the issues. The builder was unresponsive, and despite several attempts to engage him, it became clear that mediation would be futile. This client is now proceeding to court. We will ask for costs, relying on Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd  EWHC 3148 (TCC), 156 ConLR 141 in support, because the issues are capable of resolution and the sum involved (£20k) is relatively low, although significant for the individual.
An employer and its contractor could not agree a specification for a walkway so as to satisfy accessibility laws. They agreed to engage a technical expert for an opinion. The expert’s identity, scope of work and his powers were negotiated. His opinion had no contractual force, but the parties agreed to use it as the basis for the specification, as it sensibly balanced the needs with the costs.
As the industry’s most popular ADR process, and arguably the most powerful one available, adjudication can be a relatively cheap and quick method of obtaining a contractually binding and enforceable decision. For example:
• a small business subcontractor brought an adjudication against a contractor over nonpayment of £700k worth of invoices on a £3m project, where no pay less notices had been served by the contractor. The adjudicator awarded the whole sum, noting that while "proof" of certain items had not been met, this was less important than procedural regularity. He rebuked the employer, who had stymied the subcontractor’s cash flow;
• a contractor is considering referring a dispute to adjudication as to the ‘Completion Date’ and ‘Total of Prices’ in an NEC3 contract, in circumstances where the employer refuses to discuss £500k of compensation events added to a £1.8m contract sum;
• a developer faces the threat of an adjudication claim for an extension of time of 20 weeks and £500k of additional costs under a JCT contract, on a tenmonth programme and £1.6m contract sum. The claim seems disproportionately high. A planning expert is undertaking programme analysis to plot the effect on the critical path, using my opinion on liability for each event;
• a consultant holds early discussions with its employer to recover £15k of fees (out of a total fee of £21k), which have been outstanding for six months. While the consultant instinctively prefers to issue court proceedings, the low sum means it is important to balance the time and cost involved carefully and so adjudication is preferable
DRBs are especially useful in mega or major projects, long-term arrangements and international projects. The advantage of having expertise on hand to solve problems during delivery phase outweighs the potential costs of resolving problems later. See my previous article
Carefully-structured negotiations, whether with solicitors at the table or behind the scenes, can avert disputes and help common sense to prevail, as well as save the costs, time and energy that would have to be spent on formal proceedings. To be effective strategically and at an authority level, senior executives must invest time, which can be difficult to find—they should be briefed by project directors as to facts and guided by lawyers as to liability and privilege. Professional negligence allegations add a layer of complexity with insurers (and possibly their lawyers too).
Negotiation is especially useful where ongoing relations are important, eg framework arrangements or design, build, (finance) and operate (DB(F)O) contracts. SMEs like it because their pool of clients may be vulnerable to market change, or geographically limited. They report getting paid quicker when they continue to engage.
In one case, the contractor miscalculated the geotechnical conditions, and fell out with the employer partway through a DBO contract. The contractor's solicitor and I guided them to resolve the issues directly, drafted a settlement agreement to encapsulate the terms, and supported them to finish the job satisfactorily.
What is ODR all about?
Since January 2016, ODR is a EU-promoted platform aimed at resolving consumer-to-business disputes quickly and cheaply. Industry organisations who supply goods or services to individuals (e.g. architectural services on a domestic project) must be aware of it. Alternative Dispute Resolution for Consumer Disputes (Competent Authorities) Regulations 2015, SI 2015/542 Alternative Dispute Resolution for Consumer Disputes (Amendment) Regulations 2015, SI 2015/1392
What are the common problems with non-binding ADR?
There are a variety of common problems with non-binding ADR. The main ones are these:
• consensual—the success of the process depends on the parties engaging. Even when people are arguing, they have to find common ground, otherwise they have no choice but to ask a third party to decide their situation for them. I encourage clients to retain control (hence I often work in the background), and research consistently shows that this results in better outcomes. However, where the parties' relationship is beyond saving, it is better for a court or arbitrator to take control, and direct the parties to the finish line. One sulks, the other gloats. Both probably end up exhausted and bruised, emotionally and financially;
• the money is better spent on a process where an answer is guaranteed (even though it may not be the one I want...)— although ADR costs money, the costs will almost certainly be smaller than those required to be spent on litigation or arbitration, and, in my opinion, are never ‘wasted’ since the work can be recycled for the formal process. In addition, the costs represent a positive investment in the business to learn lessons and grow for the next project (a sort of risk management exercise);
• reliability—court and arbitration are tried and tested;
• flexibility equals uncertainty—while a flexible process is useful, it is also vulnerable to the skill of the strategic player;
• expertise—court judges and arbitrators are highly trained legal professionals, and often also technical experts (engineers, surveyors etc). ADR can be a bit of a minefield so it is worth researching the market thoroughly.
As a snapshot of dispute resolution in action, what is the breakdown of your contentious work during 2016 so far?
So far this year, most issues have negotiated to settlement with support, and that’s how it should be! I encourage clients to engage in without prejudice dialogue alongside an open process. Those aside, the rest fall into adjudication, mediation, litigation or, possibly, expert determination. Arbitration seems be less popular, and DABs are project-centred. This is probably a fair representation of the construction industry, generally.
What does the industry say is needed now to encourage the use of ADR?
Happily, ADR is well-received, and already extensively used. I encourage clients to explore the full range of options for resolution of issues. Often I will start will work in the background, supporting and steering strategy and exploring strengths and weaknesses. This requires an intense period of work to achieve momentum and traction with the right people on both sides.
An unscientific strawpoll of clients and contacts suggests the following could boost the take up of ADR even more:
- referrals for procedural irregularity are still underused but are a powerful tool. Expand training and force behavioural changes up the chain. The Prompt Payment Code is a good start but SMEs need to be aware of their statutory rights
- costs continue to creep up as the process becomes evermore ‘legal’
- mandate the Scheme for Construction Contracts (Scheme for Construction Contracts (England and Wales) Regulations 1998, SI 1998/649). I have never really understood the advantage of a ‘Scheme compliant’ contractual adjudication process. Perhaps if the industry agreed on the few ‘flaws’, which contractual processes seek to cure, then the Scheme could usefully be revised and apply across the board to adjudication of ‘construction contracts’;
Some clients advocate compulsory mediation, although I am not a fan of it, because it seems to get the parties off on the wrong foot, as I have discussed previously. To my mind, the court has a more powerful weapon for persuading warring parties to try mediation: costs sanctions, which hit the pockets hard (as exemplified in Northrop v BAE), and, perhaps, the risk of bad publicity from the public reporting of hearings
• expert determination: Improve the quality of 'expert' by establishing an accreditation scheme
When I talk to clients about the Society of Construction Arbitrators’ 100 day procedure, they find it attractive
- expand advertising about the availability of ODR
- assist a complainer to get started e.g. defendant tracing service
What does the future hold?
The benefits of availing of ADR are clear and yet there remain obvious obstacles to industry take up. Further progress could be made by improving the quality of experts and adjudicators. Generally, the court and arbitration will provide the ‘right’ answer. But the ‘right’ answer is not necessarily what parties are looking for, when considered in the round with time, cost, stress and PR. That's where ADR, with its myriad of options, has strength.