Several Construction Dispute Resolution Methods are available to parties when disputes arise.
Construction Disputes can arise from time to time when parties to a contract fail (or at least are believed to have failed) to meet their contractual or legal obligations. These disputes are most commonly around increased costs, time delays, or the quality of the works completed. Even the most diligent operators can find themselves involved in disputes, and unfortunately, all disputes can be emotionally and financially taxing on all parties involved.
Fortunately, there is a range of Dispute Resolution options available to parties to help resolve disputes when they do arise. Available options may be stipulated by the contract or relevant legislation, but in any case, your first port of call should always be your legal service provider. Getting the right advice early in the piece will maximise your chances of successfully resolving a dispute and keeping costs and other impacts to a minimum.
Morrissey Law + Advisory specialise in construction disputes and are available to manage or advise in any and all disputes you may find yourself in. If you find yourself in a construction dispute or are anticipating that your current project may lead to a dispute, reach out to our team today.
Construction Dispute Resolution Methods
What is Litigation?
Litigation is the process where a dispute is determined by a court or tribunal, and should typically be a last resort after all other efforts to resolve the dispute have been exhausted. Parties will often be required, either because of the terms of a contract between them or the procedures adopted by the relevant court or tribunal, to resolve the matter through alternative dispute resolution before commencing litigation.
What are the benefits of litigation?
- The parties are legally bound by the outcome.
- It is generally a means of finally determining a dispute (unless the decision is appealed).
- It offers a thorough examination of the evidence and legal issues in dispute.
What are the pitfalls of litigation?
- It is time-consuming
- It is expensive.
- The parties will be bound by the processes adopted by the court of tribunal.
- The parties will be subject to the decision of a third party
What to expect?
Parties pursuing litigation should generally be prepared for a complex, time-consuming, and expensive process. There are a number of procedures that parties pursuing litigation should be aware of, which include:
- Determining the appropriate forum to pursue litigation,
- Statutory time bars,
- Pleadings and communications between parties,
- Intensive case management requirements,
- Discovery processes,
- Obtaining expert witnesses,
- Interlocutory disputes, and
- Attending pre-trial conferences and hearings.
Parties should continuously evaluate the costs of litigation against any possible benefit that may flow from obtaining a favourable judgment, and reassess the need for litigation when the former outweighs the ladder.
What is Adjudication?
It is commonly referred to as the 'pay now argue later', adjudication is a dispute resolution process designed specifically for the construction industry to resolve disputes quickly and at a much lower cost than traditionally litigation or other dispute resolution processes. The objective is to promote cash flow down the contractual chain and ensure works are not delayed as a result of the dispute.
An adjudication determination is only provisionally binding and can be revised in subsequent arbitration or litigation.
The legislation governing the adjudication process is known as Security of Payment (SOP) legislation. Each state & territory have their own versions of SOP legislation - all very similar in most respects, however, care must be taken to ensure you comply with the correct legislation in the jurisdiction that the works are being undertaken. The NSW legislation is the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).
We have a large number of articles on SOP Legislation in the different jurisdictions around Australia which you can access here: Morrissey Law + Advisory SOP Articles.
What are the benefits of Adjudication?
- Disputes are resolved quickly, cheaply, informally and with minimal impacts to the works.
- The determination is immediately binding on the parties, subject to it being able to be revisited in subsequent arbitration or litigation.
- Improves payment practices and cash flow.
What are the pitfalls of Adjudication?
- Some inconsistency across jurisdictions.
- The provisionally binding nature of adjudication does not offer parties the same degree of legal certainty as litigation and arbitration.
- Jurisdictional grounds for appeal to the Supreme Court can undermine the enforceability of the determination where the requirements of the Act are not strictly adhered to.
What to expect?
The right to apply for Adjudication under the SOP Act is triggered by the issuing of a payment claim. Where the other party fails to respond within a particular time or responds with a payment schedule setting out the basis for any dispute in relation to the claim, steps can be taken to apply to appoint an Adjudicator to determine the matter. The SOP Act provides that an adjudicator is to determine an adjudication application as 'expeditiously as possible' and in any case within 10 business days of accepting an appointment. Even though the parties are not prevented from commencing Court proceedings to determine their rights under the construction contract on a final basis in the traditional way, it is an effective means of obtaining an interim decision that is enforceable against the other party.
What is Arbitration?
Many standard-form construction contracts contain provisions that nominate arbitration as the default means by which to resolve disputes. Arbitration is a private and voluntary dispute resolution process that requires the parties to appoint an independent third party expert (the arbitrator) to make a final and binding decision about the dispute. Arbitration is designed to encourage cooperation between the parties by facilitating open and constructive conversation around a dispute. If utilised in good faith, arbitration can be an effective alternative to litigation.
What are the benefits of arbitration?
- The parties can determine the process by agreement.
- Private and confidential.
- Flexible and efficient.
- The decision is binding and enforceable.
- There are minimal avenues to appeal the decision.
What are the pitfalls of arbitration?
- One of the more expensive forms of alternative dispute resolution, depending upon the complexity of the matter and the costs charged by the arbitrator as a result
- The parties will generally have to pay an initial fee, the arbitrator's fee and costs of the facilities associated with the conduct of the arbitration.
- Arbitration generally follows a formal process and can be intimidating and confusing for parties not aware of the process.
- Sometimes criticised as becoming indistinguishable from litigation.
What to expect?
Although arbitration is intended to be an alternative to litigation, it is usually conducted in a similar manner. Parties will attend a pre-hearing conference with the arbitrator where they will agree to the manner in which the arbitration process will be conducted. Parties will need to prepare written statements outlining their positions with supporting evidence as well as any damages they seek. Laying a solid foundation at the pre-hearing conference will enable the efficient conduct of the subsequent hearing to minimise time and costs for the parties. The duration of the hearing will depend on the facts and complexity of the matter and the number of issues in dispute.
Following the hearing, the arbitrator will determine the dispute and produce his or her decision in writing, known as an 'award'. The award will set out the reasons for the decision and is only permitted to be challenged in limited circumstances.
What is Expert Determination?
Expert Determination (ED) is a process where parties to a dispute agree to appoint an expert with specialist qualifications and industry experience on the subject matter of the dispute in order to determine a dispute. ED often provides parties with a relatively quick answer to disputed technical or valuation questions, particularly in a construction context.
For example, if there was a dispute about the extent of defective work, the parties could appoint a building consultant to undertake an assessment and determine the matter. ED is often invoked pursuant to a clause in a construction contract that specifies that disputes shall be resolved by an expert.
What are the benefits of Expert Determination?
- Relatively inexpensive when compared to the cost of litigation.
- The parties can decide upon the process.
What are the pitfalls of Expert Determination?
- Is not always suitable to solve multiple and diverse disputes.
- It is generally limited to issues relating to a particular technical or valuation question in which the expert has specific experience and knowledge.
- The parties have little scope to challenge an ED that is expressed in the contract to be 'final and binding'.
What to expect?
ED is conducted as an inquisitorial process rather than an adversarial process. The expert will receive and take into account facts and arguments of the parties (verbally or in writing) and then make a decision based on a combination of evidence presented by the parties and their own inquiries, knowledge and experience about the subject matter. ED is not a judicial process and the rules of evidence generally do not apply. If a contractual term does not specify whether the ED is final and binding, binding in the interim or non-binding, the parties will need to agree on the effect of it on them.
While there is a growing trend in the construction industry to refer all disputes under the contract to 'final and binding' expert determination, using ED as a non-binding means of attempting to resolve a dispute (or agree that will only be binding if a particular amount is in dispute) will allow the parties to retain ultimate control of the resolution of their dispute in accordance with the principles of alternative dispute resolution.
Dispute Review Boards
What are Dispute Review Boards?
Dispute prevention has never been more important in a time when construction projects are larger and more complex than ever before. Dispute Review Boards (DRBs) are a pro-active dispute prevention mechanism that facilitates the resolution of issues as they arise before becoming protracted and unnecessarily disruptive and costly. DRBs act as an intermediate step prior to arbitration or litigation and depart from the traditional adversarial approach to resolving disputes.
What are the benefits of Dispute Review Boards?
- Prevents conflicts from escalating into disputes.
- Promotes the resolution of conflict through negotiation without the need to resort to litigation and arbitration.
- Facilitates cooperative behaviour among parties and improves working relations and open lines of communication during times of conflict.
- Creates a collaborative working environment allowing parties to focus on the successful completion of the project.
- Cost-effective for large projects.
What are the pitfalls of Dispute Review Boards?
- Ad hoc and single-member panels could affect the dispute prevention capabilities of the DRB and be reactive in nature instead of proactive.
- Low levels of awareness and understanding of DRBs in Australia.
What to expect?
Traditionally, DRBs are comprised of a three-member panel of experts possessing technical expertise and industry experiences relevant to the subject matter. The DRB is established at the beginning of the project and is authorized by the contract. The DRB conducts informal site meetings with the parties to ask questions and follow-up on outstanding issues to prevent them from progressing into disputes. These site meetings can be used as a forum for parties to raise any new issues with the DRB where the panel members will act impartially to resolve any issues. At the request and agreement of the parties, the DRB can also provide an informal, non-binding advisory opinion which can act as a non-prejudicial basis of the party's negotiations.
For smaller projects, the DRB can be modified to comprise of a single panel member and/or making it ad hoc for cost efficiency purposes. However, modification to DRBs can have pitfalls as listed above.
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.