Worldwide: How To Contain Construction Disputes

Last Updated: December 29 2015

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:

  1. Continue with the standoff;
  2. One or both parties seek to terminate and then seek to recover damages;
  3. One or both parties refer the matter to dispute resolution under the contract;
  4. 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);
  5. 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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.