Imagine if, when a dispute involving defective design or
defective construction first arose, it could be dealt with in a
safe environment so that the defects could be remedied and the
possible impacts of them limited, reduced or avoided?
There is no reason why this cannot occur. All that is necessary is
an environment where relevant experts (internal or external) are
free to focus on remedying the defects.
Background
In the author's experience, complex commercial construction and
engineering projects often suffer defects and, at least
occasionally, these defects will, if not addressed quickly, result
in serious financial consequences for the owner/user of the
building, plant or equipment. The defects might also require
significant analysis and engineering, with input from all parties,
before a cost-effective remedy can be found and a partial or total
rebuild is avoided. Sometimes the most cost-effective remedy might
involve the owner being left with something different from that
which was originally promised but which will be more than adequate
for the owner's purposes.
Consider the following scenario. An owner of a mineral reserve
engages an engineering, procurement, and construction
("EPC") contractor to design, procure, and construct a
processing plant for many hundreds of millions of dollars. The
owner provides the contactor with a run of mine ore specification
along with the specification required for the product. The
contractor, in the EPC contract, promises that the plant, as built,
will have a minimum output of product that will meet the product
specification.
After a number of years of design and construction, the plant is
commissioned and it is discovered that the plant will not produce
the quantity of "in specification" product required. The
owner alleges that the plant is defective, and the contractor
alleges that the run of mine ore contains elements that were not
mentioned in the run of mine ore specification in the contract. A
dispute ensues. The superintendent refuses to grant commissioning,
the contractor disputes this refusal and refuses to accept
responsibility, and the owner refuses to take the plant and operate
it. While the plant sits idle, many millions of dollars are being
lost due to lost production. The contract contains a limitation of
liability clause, but there is no limit in respect of a failure to
achieve commissioning.
If the dispute is allowed to continue, without the plant being
fixed, the commercial problem will increase in size.
What Are the Options?
The options available to the parties include the following:
- Continue with the standoff;
- One or both parties seek to terminate and then seek to recover damages;
- One or both parties refer the matter to dispute resolution under the contract;
- One or both parties give up some or all of their rights (e.g., the owner accepts the defect or the contractor takes steps to remedy the defect);
- One or both parties take steps to rectify the defect while reserving their rights (e.g., the contractor rectifies the defect but argues that it is entitled to a variation and extension of time for doing so).
None of these options is likely to see the parties working together
to arrive at a cost-effective way to rectify the defect.
The ideal option would be for the parties to combine their
experience and expertise and analyze the problem, consider all
possible methods of rectification and agree on the most
cost-effective method of rectification, while also reserving their
legal rights.
How can this option be pursued?
How Do We Create a Safe Environment?
In order for the parties to work together in the manner set out
above, it is necessary for the parties to come together and work as
a team, and for the result of their work to affect the parties'
rights as little as possible.
Creating Teamwork. According to Katzenbach and
Smith, "A team is a small number of people with complementary
skills who are committed to a common purpose, performance goals,
and approach for which they hold themselves mutually
accountable."1
Therefore, if teamwork is to be achieved, it will be necessary to
bring together, from the various parties (and possibly from beyond
the parties), individuals with complementary skills that are
relevant to the rectification of the defect. It will also be
necessary to ensure that they have, and are committed to, a common
purpose (e.g., to work in good faith together to work out the
problem and arrive at a rectification of the defect), performance
goals (e.g., a timeline to arrive at rectification of the defect),
and approach (e.g., sharing ideas and information). Finally, it is
important that they hold themselves mutually accountable to the
purpose, goals, and approach. This can best be achieved by ensuring
that all of the parties contribute equally in terms of resources
and that all work is carried out in an environment free of blame
and risk. This environment can be created if the environment in
which they work is without prejudice, is confidential, and will not
result in any rights being lost due to participation in the
process.
A Without-Prejudice Environment. The parties can
agree that their interactions will be without prejudice and that
all documents created in the process will be privileged from
production, and not require to be produced, in any
proceedings.
This will allow the parties to communicate openly and without
needing to be concerned about admissions made and documents created
being used against them later in proceedings.
Some parties might want to go further and also cloak with privilege
documents used in the process. The risk of this approach is that
documents that would otherwise not have attracted privilege and
would have been required to be produced in proceedings might no
longer be required to be produced. If this approach is going to be
adopted, it is recommended that the parties discuss and agree upon
the documents or categories of documents that are going to be so
protected, in order to guard against any party being
unintentionally prejudiced by being unable to call for production
of documents that were created before entering into the
without-prejudice process.
Confidential. It is easy to make all
communications confidential, but thought needs to be given to what
will be excluded from any obligation of confidentiality. For
example, communications might include information that was in
existence prior to commencement of the process and that would not
otherwise have been confidential (and might have been required to
be disclosed in any proceedings). Unless there is some good reason
for preventing preexisting information from being used or disclosed
for other purposes (including being used in subsequent
proceedings), it might be appropriate to exclude it from the
obligation of confidentiality.
Likewise, if the information is going to be required to rectify the
defect, it may be necessary to disclose it to contractors and
others involved in carrying out the rectification work. It will
therefore be necessary to exclude communication of information to
the extent it is necessary to carry out that work.
In addition to dealing with confidentiality, it might be
appropriate to include a restraint on the use of all or some of the
information. For example, it might be appropriate to restrict the
use of information created during the process to use for the
purpose of rectifying the defect.
Preserving the Parties' Rights. Teamwork and
open and honest communication, and therefore good problem solving,
are unlikely to occur if the parties are concerned about losing
their rights, or worse still, prejudicing their positions.
A number of rights need to be protected.
First, there are the rights that might be affected by the efluxion
of time. These can be protected by the parties agreeing that time
stands still in respect of these rights while the process is
ongoing. Time bars which affect the prosecution of rights in the
future may need to be dealt with by these stand still arrangements.
Care needs to be taken in the drafting to ensure that rights that
have already been lost due to the passage of time are not enlivened
by mistake.
Second, there are the rights that might be affected by the exchange
of information (e.g., the making of admissions). These can be
protected by the mechanisms discussed above (privilege,
confidentiality, and restraints on use of information).
Third, there are the rights that might be affected by the finding
of a cost-effective method of rectification. These are best left to
be considered once a cost-effective solution has been found.
What Should Go into the Agreement?
The process should be governed by an agreement between the parties
to the original contract who will be involved in the process. It
would also be wise to include any other parties who will be
involved in the process (for the purpose of dealing with privilege,
confidentiality, and restraints on use of information).
The agreement should include provisions that deal with:
- The contribution to be made by each party (and the payment of expenses);
- Acting and communicating in good faith;
- The standstill arrangements;
- Confidentiality;
- Use of information; and
- Privilege.
Does It Work?
The author recently used the process on a major project. It
resulted in the defect being satisfactorily rectified and the
losses suffered by the owner being reduced to about one fifth of
what they otherwise would have been.
Conclusion
When disputes on major projects involving defective design or
defective construction first arise consideration should be given to
dealing with the defect in a safe problem-solving oriented
environment, so that the defect can be rectified and the impacts of
it avoided or at least limited or reduced. This can be done by
creating an environment that allows the parties (and possibly
others) to work together and combine their experience and expertise
and analyze the problem, consider all possible methods of
rectification, and agree on the most cost-effective solution, while
also reserving their legal rights.
Such an approach can work and makes sense.
Footnote
1 Katzenbach, J. R. & Smith, D.K. 1993, The Wisdom of Teams: Creating the High-Performance Organization, Harvard Business School Press, Boston, Massachusetts.
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.