No one who does business under a contract with another person wants to end up in a dispute with that other person. Indeed, most contracting parties are able to transact between each other without getting into a dispute (allowing these transactions to benefit the wider economy).

However, disputes will arise under some contracts, especially large construction and engineering projects. Therefore, it is imperative that the parties to a business relationship have a suitable dispute resolution clause.

The dispute resolution provision within a contract, like all other provisions, needs to be carefully reviewed and negotiated as appropriate before the parties enter into their contract.

For the majority of contracting parties, the last option they want to take, if a dispute arises, is to issue a formal claim.

All standard forms of contract (including the NEC, JCT and FIDIC) provide for dispute mitigation and avoidance.

All these contracts provide an impartial third party (known as the Employer's Agent/Contract Administrator in the JCT, the Engineer in FIDIC and the Project Manager in the NEC), who will review the payment applications, claims for extensions of time, and loss and expense claims made by a Contractor. This impartial third party therefore has to act in a way that is fair to the Contractor as well as the Employer, as their determination on the issues raised will act to mitigate any contention which may arise if the Contractor made these claims directly to the Employer.

In the case of FIDIC, any disputes which do arise will initially be submitted to the Engineer for their determination.

The FIDIC form of contract also provides that a Dispute Adjudication/Avoidance Board ('DAB') is set up, which have may a representative chosen by the Employer and the Contractor and a neutral member. Any disputes which arise under the contract (which the Engineer could not resolve) will be submitted to the DAB. The DAB would then encourage the parties to have a meeting to discuss the issue and try to resolve the dispute.

If the DAB and Engineer are unable to resolve a dispute then the parties are allowed to engage in arbitration proceedings. Under FIDIC, a party is usually obliged to attempt to resolve the dispute before it starts proceedings (ironically, they may be in breach of contract if they start proceedings first).

Under the JCT, there is usually no obligation to engage in dispute resolution before starting adjudication, litigation or arbitration proceedings. However, the parties are encouraged to try and resolve a dispute through mediation before issuing any formal proceedings.

The NEC provides for a variety of options, which allows the parties to choose one which may be suitable for the project. Broadly, the options provide that parties can resolve the dispute by adjudication, arbitration and/or DAB referral.

The dispute resolution provisions in a contract will, and should, vary from project to project. Both parties to a contract need to consider how they may want to approach a dispute, if one arises, and what mitigation procedures they want to put in place in order to avoid any dispute.

The parties need to be aware of the scale of the project. If a project involves constructing a large building or a complicated structure (such as a power plant), which is likely to complete over a longer period than other projects, then creating a DAB may be a viable option. However, if the project is less involved; for example, building an extension to a factory, then using a DAB may be a waste of time and resources.

You should also consider what other forms of dispute resolution may be appropriate and how you may utilise them. For example, if a dispute arises over a payment valuation, and the parties are generally content to continue the project whilst the matter is resolved, then the parties may agree to adjudicate over the dispute. This will allow the issue to be considered and determined by an impartial adjudicator quickly.

You need to understand what type of disputes may arise on your project. For example, if your project is large and issues may arise over payment, delay and structural issues (amongst others) then you may not want to include a specific adjudicator in the contract. This would allow the aggrieved party to apply to the adjudicator nominating a body of its choice.

You must ensure you and the party you are contracting with are aware of such issues and are prepared if a dispute does arise.

Dispute Resolution provisions were discussed in our webinar on 23 September 2021 with Marion Smith QC, 39 Essex Chambers and Rob Gerrard, R A Gerrard Ltd. Click here to view the webinar and detailed notes.

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.