As part of the review into civil litigation costs being carried out by Lord Justice Jackson, Nicholas Gould and Claire King lead a research project conducted by The Centre of Construction Law and Dispute Resolution, King's College London and The Technology and Construction Court into the use of mediation in construction projects. An extract from that project is set out below.
Introduction
The use of mediation can no longer be said to be a new phenomenon for the resolution of construction disputes. Mediation has now been used, in the commercial context, for the resolution of disputes in a wide range of industry sectors both before the commencement of and during formal proceedings. It can of course be used, in theory, at any stage not just during litigation but during or when other forms of dispute resolution, such as arbitration, are contemplated or progressing.
The use of mediation within contracts or as part of a dispute escalation clause has also become more popular, not just in the construction industry but in other commercial sectors as well. A large range of dispute resolution techniques is available for use in the construction industry. Arbitration is sometimes still the default dispute resolution procedure, perhaps because it was originally included as the only procedure in the most popular standard forms of contract. Adjudication is now well established within the construction industry, and in other common law jurisdictions. Litigation of construction-related disputes has received special attention from the courts, originally with the establishment of the Official Referees, in 1998 renamed the Technology and Construction Court (TCC).
Existing Data
Some statistical data in respect of the use of mediation is available. In the UK, the Central London County Court undertook a pilot mediation scheme, commencing in April 1996. This was initiated as a result of Lord Woolf's Access to Justice report. Parties to litigation in that court were invited to attempt mediation on a voluntary basis (as a result, it was known as the VOL Scheme). The take-up was low, but nonetheless interesting.1 As a result of this scheme, an automatic referral to a mediation pilot project was undertaken for a 12-month period from April 2004. 100 cases each month were randomly allocated to mediation. Findings show that the settlement rate followed a broadly downward trend over the course of the pilot: as high as 69% of cases initially referred in May 2004, but dropping to 37% for cases referred in March 2005.
New Research: Aims And Purposes
There is, therefore, some useful data in respect of the use and effectiveness of mediation in the construction industry, and court annexed mediation services. However, the use, effectiveness and cost savings associated with mediations that take place in respect of construction industry litigation is mostly anecdotal. To address this, an evidence-based survey was developed between King's College London and the TCC. Working together, it was possible to survey representatives of parties to litigation in that court.
Parties to litigation in the TCC provide a good opportunity for a survey of a group with similar issues and interests. They have all commenced formal proceedings in the High Court in relation to construction and technology matters and will be progressing towards a hearing. Many of them will of course have settled their dispute before the hearing. Almost all of those parties will be represented by lawyers, so will be incurring legal fees and taking the risks of paying the opposing parties' legal fees. The obvious questions are:
- To what extent do they use mediation in order to settle their dispute?
- At what stage do they settle? and
- Do they make any costs savings by using mediation, rather than conventional negotiation?
This group can be divided into two sub-groups: first, those that settled their dispute after commencement, but before judgment; and second, the (no doubt smaller) group who progressed all the way to trial, but nonetheless might have been involved in a mediation that did not resolve all or any parts of the dispute.
The research therefore focused on issues specific to those two sub-groups, with three main research aims:
- To reveal in what circumstances mediation is an efficacious alternative to litigation;
- To assist the court to determine whether, and at what stage, it should encourage mediation in future cases; and
- To identify which mediation techniques are particularly successful.
The objective was to collect meaningful data that could assist not only parties, practitioners and mediators in respect of the use of mediation (in commercial disputes as well as construction disputes), but also to provide the court with objective data to assist it in the efficient management of cases.
Methodology
The two different questionnaire survey forms were designed for respondents in the two sub-groups, but also to reflect the characteristics of TCC litigation processes. The commonality between the two forms was to aid analysis and comparison between the two sub-groups, whilst allowing specific responses to reflect the peculiarities of those that had settled during litigation and those that had pursued litigation to judgment. It was vital that the second sub-group should be able to comment upon any attempts to settle that had not been successful.
Three TCC courts participated in the survey: London, Birmingham and Bristol. Between 1 June 2006 and 31 May 2008, these courts issued questionnaire survey forms to respondents. All the respondents had been involved in TCC litigation, receiving a survey form because they were the point of contact for a party to the litigation, either the party itself or a representative. A large proportion of the respondents were therefore solicitors, many of whom were familiar with TCC litigation. One form was issued where a case had settled; another where judgment had been given. Both forms asked about the nature of the issues in dispute, whether mediation had been used, the form that mediation took and also the stage in the litigation process at which mediation occurred.
For those that settled during the course of litigation, it was of course highly unlikely that they would have been involved in a mediation during the Pre-Action Protocol process. They would not have commenced litigation (and therefore have been on the record at the TCC) if this had not been the case, although they might have held a mediation before which did not result in the case settling. However, those that progressed to a judgment could have attempted a mediation before the commencement of litigation. The completed survey forms were then returned to the Centre of Construction Law and Dispute Resolution at King's College London, where they were collated.
The TCC gathers some statistics in respect of the work that it carries out. However, the TCC's reporting period runs from 1 October to 30 September, so statistics are not directly available for the same period as covered by the survey. It is possible nonetheless to estimate from the TCC's two most recent Annual Reports (2006 and 2007) the approximate number of cases commenced during this period. These suggest that approximately 1,136 cases were commenced in the three courts during the survey period. The number of cases concluded during the survey period would not be precisely the same, but the figures would no doubt be very similar. In addition, there would also be a substantial overlap between the 12-month period in any event. Further, not all of the TCC cases necessarily reached a reportable conclusion for the purposes of the survey. For example, a claim form might be issued, but not pursued; there might be judgment in default of acknowledgment of service; or the parties might simply have resolved their dispute without taking any further action. In this last case, there must of course have been some level of negotiation.
A further characteristic of the distinction between the number of cases identified in the TCC's Annual Reports and the number of cases to which the survey responses relate derives from the timing. The TCC counts cases commenced in the court; but the survey focuses on cases that have settled. The time period between commencement and judgment is now quite short in the TCC when compared to other courts: typically now only 12 months. However, some cases will take longer, quite simply because the parties and those involved in the case require the time. On the other hand, enforcement of an adjudicator's decision can be dealt with extremely quickly. Clearly, not all the cases commenced in a 12-month period will be neatly resolved within the same period. Some will be settled within a very short period of weeks, while others may take many years. So the survey period, covering cases that had settled or received judgment, included ones where the original action in the TCC had been begun many years before the survey started.
Adjusting the TCC figure of 1,136 to take these factors into account leads to approximately 800 cases concluded in the London, Birmingham and Bristol TCCs during the 24-month survey period. There will be at least two parties for each case, so during the survey period there were at least 1,600 parties (claimants, defendants and third parties) progressing through the TCC.
The number of responses received was 261, 221 responses to Form 1 and 40 to Form 2. The number of each category of response is in proportion to the size of each sub-group. More than 90% of TCC cases settle before trial, so there were far more potential respondents to Form 1 than those for Form 2. In respect of the Form 1 responses, 25 were discounted as they had been spoiled or incorrectly completed. This resulted in a very good response rate of almost 17%, against a projected population of around 1,600 (there must in fact have been more than 1,600, because some of the matters would have more than two parties).
Analysis And Discussion
Before considering mediation in particular, the nature of the issues in dispute between the parties is of interest. The list of issues reported in Forms 1 and 2 was almost identical to those of an earlier survey carried out in 1997, reported in 1999. That survey sought to gather data about the types of dispute resolution techniques being used by the construction industry, in particular ADR, before the introduction of adjudication. It is possible to compare the responses, although some adjustments are needed in order to show a meaningful comparison. First, the original survey collated information about negative and positive experiences with dispute resolution, and so the aggregate of those figures is taken in order to compare those figures to the most recent survey. There was of course a different number of respondents, and those responding to the earlier survey were from a broader background. Nonetheless, a comparison of the following six key issues in dispute can be made:
- Changes in the scope of works;
- Project delays;
- Differing site conditions;
- Payment issues;
- Defective work or products; and
- Design issues.
Adjusting the 1999 survey report figures in order to compare an average of 100 of those responses against an average of 100 responses from the most recent survey provides a simple way to compare the results. The results are set out in Chart 32 below:
Chart 1: Types of issue from 1997 survey, compared with those from present survey
Clearly, the number of disputes in respect of payment has remained at a similar level whilst those relating to defective work have increased, as have disputes relating to design. However, issues about changes in the scope of works have halved, as have disputes dealing with delays, while disputes relating to differing site conditions are also now substantially reduced. Regardless of any abnormalities caused by adjusting the figures, it seems clear that the court appears to be dealing with fewer disputes which relate to changes in the scope of works, project delays and site conditions than those that generally arising ten years ago.
One obvious explanation is that adjudication, introduced shortly after the conclusion of the older survey, is now dealing with delays, variations and site condition issues, while defects and designs are more likely to find their way to the court. A line diagram showing perhaps more clearly the differences between the two survey results appears at Chart 33.
Chart 2: Further analysis of differences between types of case in the two surveys
Grouping the most frequently encountered issues referred to the TCC for resolution, it was clear that defects (18%) was the most common category of case, closely followed by a second group comprising payment issues (13%), design issues (12%), professional negligence (13%) and property damages (13%). Change to the scope of works, delays and differing site conditions were now less likely to become matters that the TCC dealt with.
Taken as a whole, the data derived from the various surveys charting the use of mediation over the years (both court-annexed mediation and 'free standing' mediation), show how it has been transformed from a novel idea into its current position as an indispensible tool for construction litigators.
Timing
In terms of the timing for mediation, the parties did not wait until the hearing was imminent before trying and settle the dispute. Successful mediations were mainly carried out during exchange of pleadings or as a result of disclosure. Having said this, there were still a substantial number of respondents who mediated shortly before trial. A timetable leading to the hearing should therefore allow sufficient flexibility for a mediation along the way. Ultimately, it is perhaps best to leave the timing of an attempt to mediation to the parties' advisors, especially where they are sophisticated and commercial advisors such as practise in the TCC.
Summary And Conclusions
The completed survey forms provide an interesting insight into the types of claim being dealt with by the TCC. The TCC Annual Report 2006 does not provide an indication of the number of payment disputes coming before the court; our survey indicates that a surprisingly low number of typical mainstream construction disputes (variations, delays and site conditions) now do so, suggesting that adjudication is successful in settling such disputes promptly. However, the percentage of payment disputes increases from 18% of claims for which settlement was reached prior to judgment to 21% where no settlement was reached prior to judgment. Arguably, payment claims that do not get resolved by adjudication are less likely to settle by negotiation or mediation after the commencement of TCC proceedings, so are more likely to result in a hearing and be resolved by the court giving a judgment.
The number of defects claims being dealt with by the TCC is also high (18% for both Forms 1 and 2), suggesting that the courts are better placed to deal with such claims (which often require extensive expert evidence) than adjudication. Design issues, also technically complex, represented 13% of Form 1 cases and 12% of Form 2 cases.
Where a settlement was reached prior to judgment, the most successful method used was conventional negotiation, not mediation. That said, the majority of respondents who had used mediation said it resulted in a settlement. Even where the mediation did not result in a settlement it was not always viewed negatively.
Mediation was undertaken on the parties' own initiative in the vast majority of cases. Of the successful mediations only 22% were undertaken as a result of the court suggesting it or due to an order of the court. Even where mediation was unsuccessful, 91% occurred as a result of the parties' own initiative: only 1 out of 11 unsuccessful mediations was ordered by the court. This suggests that the incentives to consider mediation provided for by the CPR (namely, costs sanctions) are effective; and that those advising the parties to construction disputes now routinely consider mediation to try and bring about a resolution of the dispute.
The cost savings attributed to successful mediations were also significant, providing a real incentive for parties to consider mediation. Only 15% resulted in savings of between zero and £25,000. 76% resulted in cost savings of over £25,000, with 9% saving over £300,000. The cost savings were generally proportional to the cost of the mediation itself with greater cost savings being found the higher the costs of the mediation were. This may be an indication that high value claims spend more money on the mediation itself presumably because they realise that the potential savings resulting from the mediation will be higher.
The parties themselves generally decided to mediate their disputes at three key stages: as a result of exchanging pleadings; during or as a result of disclosure; and shortly before trial. The results are similar in respect of mediations undertaken as a result of the indication from the court and/or an order; these tended to occur during exchange of pleadings (possibly as a result of a first case management conference), as a result of disclosure and shortly before trial (possibly as a result of a pre-trial conference). Of successful mediations, a higher percentage of respondents believed that the dispute would have gone progressed to judgment if mediation had not taken place when this was undertaken during exchange of pleadings and shortly before trial. This suggests that mediation may have been comparatively more successful at these stages.
The vast majority of mediators were legally qualified; only 16% were construction professionals. The uptake for the TCC Court Settlement Process appears very limited; only five respondents stated that they had used it, though these five experiences resulted in settlement. The general lack of enthusiasm suggests that the TCC may not encourage much additional 'business' in the long term by offering the service.
Unsuccessful mediations used a range of mediators similar to those in successful mediations, so conclusions are hard to draw about what type of mediator is most likely to result in success.. What is clear is that the parties generally opt for legally qualified mediators, perhaps diminishing the strength of the arguments for greater regulation of mediators and supporting the market-based approach adopted by the recent EC Mediation Directive.
For the vast majority of mediations, the parties were able to agree between them on the mediator to appoint; appointing bodies were only used by 20% of respondents. There was also a tendency to use the same mediators again, suggesting a comparatively mature market, parties' advisors suggesting well-known mediators within the construction disputes field.
To read a full version of the report please click here.
Footnote
1. This includes 9% of respondents, who did not answer this question.
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