ARTICLE
4 February 2013

Do I Really Need a Dispute Resolution Clause in a Construction Agreement?

A DRC that takes effect without thoughtful drafting could lead to years of protracted, unnecessary legal wrangling.
Australia Real Estate and Construction
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A dispute resolution clause ('DRC') is sometimes regarded as a boilerplate term in construction agreements: something that's necessary, but that doesn't require the care or consideration given to the basic elements of the project. In fact, both aspects of this assumption are wrong. Sometimes, such clauses are undesirable and, in cases where they are used, they can be extremely important from a commercial perspective.

When considering a DRC in a draft construction contract, your first question must be, 'Do I need this?' A dispute resolution clause may well be undesirable. Sometimes, a dispute is best resolved by taking it straight to court, without formal mediations and arbitrations that could mean wasted time and money. In the absence of a dispute resolution clause, litigation can be commenced as soon as it becomes clear that negotiation will be fruitless.

However, mediation and arbitration can be excellent resource- and relationship-savers. Unsurprisingly, then, they are extremely popular ways of addressing difficult construction disputes. A DRC that takes effect without thoughtful drafting can lead to years of protracted, unnecessary legal wrangling.

AGREEING TO NEGOTIATE

Negotiation precedes the upping of the ante in most construction disputes. Therefore, in most cases it makes sense to agree in advance about how negotiations will be handled.

Any formal negotiation clause should set strict and relatively short time limits for negotiations, so that they do not preclude the use of other means to move forward.

It can be counter-productive to include subjective elements in negotiation clauses. Requirements to negotiate 'in good faith' or 'with all reasonable endeavours' sometimes generate provocative disputes about the parties' attitudes to resolving problems.

Negotiation clauses should generally not be used as preconditions to litigation in a crossborder transaction. They may be unenforceable in the relevant jurisdiction and, in any event, it may be difficult for the parties to meet within reasonable time frames.

MEDIATION

Serious consideration should be given before agreeing to a mandatory mediation clause. Mediations can be used as delaying tactics, so it is sometimes preferable to establish mediations on an ad hoc basis, rather than setting up a mediation regime in advance. Like negotiation clauses, mediation clauses should be time-limited to avoid unnecessary delay.

If a mediation clause is to be used, it should be quite detailed. It should specify the rules of the mediation (for instance, by reference to the rules of a recognised mediation organisation).

By contrast, it is not helpful to nominate a particular mediator in the construction contract, although the parties may wish to specify qualifications that must be held by any mediators that are to be used. In highly technical projects, for instance, it may be appropriate for the person to be an engineer or other construction professional.

ARBITRATION

Arbitration is typically the final form of dispute resolution to which parties turn before litigation is contemplated and it resembles litigation in some ways.

Arbitration is useful when particular aspects of a construction transaction require a binding decision to be made by a third party familiar with construction matters, or when confidentiality is imperative.

Arbitration is not, however, a perfect alternative to the courtroom. Arbitral proceedings can be as lengthy and expensive as litigation, and there can be difficulties in joining third parties to them. Of course, the parties may end up in court in any event, if the arbitrator's decision or manner of conducting the proceedings are challenged.

If arbitration is to be provided for, either alone, or subsequent to negotiation and/or mediation and provided that there is an arbitration agreement contained in the dispute resolution clause, a suggested basic clause is as follows:

'If a dispute arises then that dispute is hereby submitted to arbitration in accordance with the requirements and procedures set out in this clause.'

APPOINTMENT OF ARBITRATOR

It is suggested that the chosen arbitration body's rules are checked to see if the suggested clause relating to the procedure for the appointment of an arbitrator requires amendment in light of the particular rules.

PROPOSED CLAUSE FOR APPOINTMENT OF ARBITRATOR

'The parties must agree on the appointment of an arbitrator. If the parties do not agree on the arbitrator to be appointed within [insert suitable time period, eg 10 business days] of the dispute proceeding to arbitration, the arbitrator is to be appointed by [insert arbitration body] in accordance with [that body's arbitration rules].'

QUALIFICATION OF ARBITRATOR

It is not usually helpful to specify in advance of a dispute arising the particular arbitrator to be appointed. However, it may (in rare cases) be useful to specify the person's qualifications if the likely nature of the dispute can be anticipated with some degree of certainty. By specifying particular qualifications of an arbitrator, there is a real risk that you will severely limit the pool of available arbitrators once the dispute has arisen. It is also important to check the chosen arbitration body's rules to see if the clause requires amendment in light of the particular rules. Without very particular reasons, it is advised that a clause such as 'a person of at least 10 years' technical experience in the [insert type] industry' not be used.

PROPOSED CLAUSE FOR QUALIFICATION OF ARBITRATOR

If you want to particularise the qualifications of the arbitrator in advance, a suggested basic clause is as follows:

'The parties agree that an arbitrator appointed in accordance with this clause must be (unless the parties agree otherwise) [insert relevant qualification].'

DETERMINATION

The time period in which the arbitrator is to make its determination is not mandatory. It is recommended that you avoid setting a mandatory deadline, as this may give rise to issues over the arbitrator's jurisdiction to render an award outside the stated time period.

PROPOSED CLAUSE FOR DETERMINATION

If the parties want to place a time limit within which the arbitrator's award is to be rendered, a recommended basic clause is as follows:

'The parties agree to request the arbitrator to make their determination within [insert suitable time period (eg three months)] after the dispute was referred to arbitration.'

OBLIGATIONS

This clause to confirm the parties' obligations to continue performance of the contract can be onerous. It is recommended that it only be inserted if it is clearly in the interests of your client.

PROPOSED CLAUSE FOR OBLIGATIONS

'Unless the parties otherwise agree in writing or until the arbitrator hands down an award, the

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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