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12 Mar 2009

Is that a project in distress? Revisiting dispute resolution

by Doug Jones, Mathew Stulic, Faye Ashworth

Each process in the dispute resolution toolbox has its place, and forms part of an overall spectrum and can usefully be evaluated and compared against common criteria.

Tight credit conditions have manifested themselves in the deferment of many planned projects and the scaling back of many existing projects. Recent empirical data and surveys confirm a trend towards increased competition for contracts. This is a far cry from the market conditions of recent years, which were characterised by demand in the industry outstripping supply. In these changing market conditions, the first ripples of a rise in the number and scale of disputes are starting to surface. As we move into a new phase of the cycle, it is timely to revisit the array of tools that are available to project participants to mitigate and manage risks when disputes arise.

Each process in the dispute resolution toolbox has its place. The reality is that each process is in fact part of an overall spectrum and can usefully be evaluated and compared against common criteria.

This article is the first in a series in Project Insights during 2009 which will provide a critical evaluation of some of the processes against objective criteria, including the use of dispute review boards (DRBs), expert determination and mature dispute resolution processes such as arbitration and litigation. An overview of some of the objective criteria is set out in this article.

Administrative issue resolution v mature dispute resolution

Parties to a construction contract are signatories to a document that regulates their rights and liabilities. During project implementation, a multitude of issues in the day to day administration of the contract need to be dealt with consistently with the pre-agreed allocation of risk. Often there are differences of opinion as to how issues should be resolved. For example: rights concerning payment have a direct impact upon cash flow and rights concerning delay events affect the time for completion and associated costs. Parties need mechanisms for dealing with these issues which minimise the risk of their resolution escalating into major dispute.

Most contracting models provide for a contract administrator. Traditionally, contract administrators have performed two distinct functions:

  • acting as the agent of the principal; and
  • acting independently of the principal when performing an administrative issue resolution or certification function.

The difficulty with this model is the challenge of maintaining actual and/or perceived neutrality of the contract administrator, a necessary characteristic of the model effectively solving issues between the parties. Dissatisfaction with this model has seen a trend towards either:

  • the use of a truly independent certifier as the contract administrator; or
  • the use of independent expert determination for disputed administrative issues which depend upon technical, valuation or measurement disciplines for the purpose of resolution.

The popularity of DRBs is on the rise, particularly in larger projects. A DRB is agreed as part of the parties' contract. It usually consists of two party-appointed nominees and a chairman who act as independent, impartial members of a panel throughout the course of a project. DRBs are not concerned purely with disputes, as the name implies. The panel deals with administrative issues as they arise during the course of a project. The idea is to proactively deal with the everyday commercial tensions before they become disputes, but also provide a mechanism for effectively dealing with problems that do become disputes.

Sometimes, administrative issues on a project develop mature and complex characteristics which outgrow the usefulness of some of the processes described above as the most effective and efficient means of resolution of the issues. The complexity may be driven by the quantity of the issues that need to be resolved, claims and counterclaims, the complexity of an array of legal and technical issues, or the breakdown of project relationships. In these circumstances, consideration must be given to the use of "mature" forms of dispute resolution, including litigation, arbitration and mediation. These are processes which are equipped to deal with multi-strand disputes involving large numbers of complex legal, factual and technical issues.

Binding v non-binding

One of the criteria which requires consideration in evaluating the effectiveness of dispute processes is the desirability of finality and certainty. Unless stayed or successfully appealed, judgments of courts are binding. The rise of the use of court-ordered references in NSW provide limited opportunities to resist the findings of referees. Domestic arbitration in Australia provides minimal scope for appeal.

Mediation has been used widely as a form of mature dispute resolution for many years. It is a structured negotiation with the assistance of an independent third party. As opposed to litigation or arbitration, it is a non binding process. While mediation is not binding without agreement between the parties, it is often an attractive process, particularly where the parties have an ongoing commercial relationship.

There is a choice of DRB models for administrative issue resolution. These range from DRBs where the role is advisory only (more commonly used in the USA) to DRBs where the decision is final and binding on an interim basis (ie. until overturned in a subsequent arbitration or litigation). Similarly, expert determination can be either advisory or final and binding on an interim basis, or up to a certain value.

Flexibility and cost

Parties looking to resolve issues during the administration of contracts will usually be looking for a quick and cost-effective process. While DRBs can be effective, the costs of maintaining a DRB through the course of a project may not necessarily be cost-effective for smaller projects. Expert determination should in theory be quick and relatively cost-effective . Sometimes this is not the case, often because expert determination is being used as a de facto mature dispute resolution process, rather than an administrative issue resolution process. This may be a partial response to the decreasing popularity of domestic arbitration and the search for a viable alternative.

While some project participants are attracted by the potential for flexibility and the confidentiality that arbitration provides, the reality is that domestic arbitration has generally become slow and costly. By contrast, there is resurgent confidence in the Technology and Construction List of the Supreme Court of New South Wales. The 2007 Annual Review published by the Court revealed a 10 percent growth in caseload and a median finalisation time of 8.1 months (compared to 21.9 months in 2003). The List has imported concepts which have historically been used in arbitration to increase speed and efficiency, such as provision for stopwatch hearings and expert conclaves, particularly in the context of Court-ordered references. The costs of litigation can still be high, but the recent reforms have increased the scope for flexibility and efficiency.

Reform of domestic arbitration is now firmly on the policy agenda. The construction industry is uniquely placed to be at the forefront of the process of reforming domestic arbitration so that the potential for flexibility and cost effectiveness can be realised. Fast-track arbitration under institutional rules (for example, the new IAMA fast track rules) and bespoke arbitral rules aimed at creating speedy processes that break the mould of mimicking the worst features of litigation are options that can be considered where appropriate. An overhaul of the legislative framework which supports domestic arbitration is currently the subject of detailed policy debate.

Summary

In current market conditions, disputes are on the rise. Disputes arising out of construction and major projects are a commercial risk that parties have to identify and manage to mitigate against the possibility of costly processes which tie up management time and commercial resources. Tying up these resources diverts them from the main game - delivery of successful project outcomes. How do project participants manage those risks? The answer requires a closer analysis of each process, the nature of the project and the types of disputes that may arise in order to tailor the processes that are available in the dispute resolution toolbox to best serve the commercial needs of the industry when the spectre of a distressed project arises.

In the next edition of Project Insights, we evaluate in more detail Mature Dispute Resolution Processes - Are They Ripe for the Picking?

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.