UK: An Introduction to Dispute Resolution Procedures – Part 1

In the first of a two-part article, which appears in the RICS Construction Journal, Nicholas Gould provides an overview of dispute resolution techniques available in the construction industry, and describes traditional and formal dispute resolution approaches.

Arbitration was for many years the traditional method for the final resolution of construction disputes. That position has changed for a number of reasons. First, the increasing use from 1990 onwards of a range of alternative dispute resolution "ADR" techniques, primarily mediation, and the introduction of adjudication on 1 May 1998. Arbitration and litigation has also been the subject of review. A new arbitration act was introduced in 1996, and litigation procedures were also reformed during that year.

This first article focuses on traditional and formal dispute resolution techniques, the main driving factors for choosing any particular route and the practical applications of the principle techniques are considered.

Arbitration is a private dispute resolution process, in which the parties to the dispute agree to have it settled by an independent third party arbitrator and be bound by the decision that he or she makes. The agreement could be entered into after the dispute has arisen or, as is more common, could be included within the contract.

The arbitrator could be chosen by agreement between the parties, or appointed by a nominated body identified in the contract, such as the RICS. The jurisdiction of the arbitrator is fixed by the terms of the arbitration agreement and the scope of the dispute referred to in the notice of arbitration. The Act allows the parties to agree how the dispute is to be resolved, subject to public interest safeguards. The arbitrator is to act fairly and impartially between the parties giving each of them an opportunity to put their case.

Three of the primary reasons why arbitration is selected over litigation are:-

• Privacy and confidentiality. Arbitration is generally private. It is only in a small number of cases in which a right of appeal by the courts is accepted that the issues between the parties are made public;
• Choice of arbitrator. The parties can choose the arbitrator or arbitration panel, but are unable to select a particular judge; and
• Flexibility. Arbitration is generally a more flexible and versatile process than litigation. For example, an arbitrator could make a decision based upon commercial principles rather than the strict application of the law.

Two separate 100-day arbitration procedures have been produced. The Construction Industry Model Arbitration Rule 5 "CIMAR" contain an optional 100-day arbitration procedure requiring the parties to:

• Serve a claim, within 14 days;
• Serve a defence within 21 days;
• Serve a reply (and any defence to a counterclaim) within 14 days;
• Subject to the above, serve all documents, witness statements and experts’ reports;
• No further documents could be served unless requested by the arbitrator.

The hearing should not exceed 5 days, and the arbitrator is required to provide his or her award within 18 days of the hearing.

In July 2004, the Society of Construction Arbitrators issued its 100-day arbitration procedure. The arbitrator has an overriding duty to make his award within 100 days from delivery of the defence to the arbitrator or the arbitrator’s direction. As a result, the 100-day procedure does not start until all of the defences have been served. However, once the pleadings are completed, there is then the benefit of concluding the arbitration within 100 days.

The main reasons for using either of the 100-day arbitration procedure are:

• Finality. The arbitrator has wide powers (unlike an adjudicator) and can make final decisions;
• Speed. It has the advantages of the faster adjudication process, but with time to consider issues, question witnesses and deal with more complex cases than adjudication; and
• Cost. It is more economic than a full arbitration.

Expert determination is a process in which the parties instruct a third party expert to decide their dispute. The parties agree in their contract (or once a dispute has arisen) that an expert will decide a technical or valuation issue. Expert determination is also encountered in multi-stage dispute resolution procedures, whereby an expert might determine a valuation or technical matter while disputes about the legal meaning of the document are referred to arbitration or the courts. This process could be used more frequently for valuation related construction disputes, as its main advantages are:

• Expertise. The expert brings their own expertise to the decisions making process;
• Speed. The process is usually over very quickly as the expert is mostly deciding a valuation or technical issue based on the representations of the parties, but more importantly that expert’s own experience; and
• Finality. It is final, and there is no appeal.

The decision cannot be appealed, providing that the expert considers the question put to him or her. In the case of Nikko Hotels (UK) Ltd –v- NEPC Ltd [1991] 2 EG 86 the judge considered that provided the expert asked the correct question, then the decision will be binding, even if the decision seemed entirely incorrect. However, if the expert answered the wrong question the decision would be a nullity.

A statutory backed adjudication procedure was introduced on 1 May 1998 under Section 108 of the HGCRA. This built upon one of the recommendations of the Latham report. It covers most of the construction operations carried out in the UK, as well as appointments of construction professionals, such as surveyors. An adjudication procedure must comply with the 8 minimum requirements for adjudication set out in Section 108 of the HGCRA. The first 4 of these relate to time:

• There must be a right to serve a notice "at any time" of an intention to refer a dispute to an adjudicator;
• An adjudicator should be appointed within 7 days of the notice;
• An adjudicator is to reach a decision within 28 days; and
• The time for the giving of the decision may be extended by a further 14 days if the referring party agrees.

The other 4 deal with the powers and obligations of the adjudicator:

• The adjudicator must act impartially;
• The adjudicator may take the initiative in ascertaining the facts and the law;
• The decision of an adjudicator is binding; and
• An adjudicator has immunity, unless acting in bad faith.

A detailed procedure for carrying out an adjudication is provided by the Scheme for Construction Contracts. This essentially provides the detail of the procedure, such as the details that should be included in the notice and the timescales for carrying out and completing the adjudication. Other standard form adjudication procedures have been produced by some of the construction bodies.

The main drivers for adjudication are:

• The right to adjudicate. If adjudication applies to the construction contract then either part has a statutory right to call in an adjudicator;
• Speed. The process should be completed within 28 days, or 42 days if the referring part allows the further 2 week extension; and
• "Temporary" finality. The decision is immediately binding on the parties, unless or until an arbitrator or the court decides the outcome in a different way. A decision is therefore immediately imposed, but either part can have another attempt at arguing their case.

The traditional approach of arbitration has given way to the much faster adjudication process. Arbitration has re-modelled itself, with the introduction of the 100-day time limited procedures. There is now the choice of a full arbitration procedure or a short form arbitration procedure.

It is adjudication that has taken the lead in resolving construction disputes. This fast, often economic, process is now widely used in the UK construction industry and many other countries have now adopted a statutory adjudication procedure, including Singapore and Australia.

Expert determination, procedure that is now being used more widely in the construction industry for valuation and technical issues. It will probably always be eclipsed by adjudication, which is a statutory backed process. However, expert determination could be used more frequently to finally and conclusively decide valuation, valuation principles and technical matters during the course of a project.

Part 2 will focus on alternative and project based techniques, including; mediation, conciliation, dispute boards and project mediation.

For further articles by Nicholas Gould please visit www.fenwickelliott.co.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.