Dispute resolution and the Construction Contracts Act 2013
24 April 2014
Author: Brian Bond, chartered civil engineer, arbitrator and conciliator/adjudicator
Arbitration and litigation are very expensive, slow and uncertain methods of dispute resolution. Arbitration, originally promoted to avoid litigation, has become as bad or worse. In many cases, the cost is quite disproportionate to the size of the dispute.
The quest for an alternative to arbitration began in Ireland and in the UK in the mid 1980s. Various alternatives were tried, with ‘conciliation’ favoured and progressively incorporated in contracts from 1988 onwards. In 1994/1995, the Institution of Engineers of Ireland (IEI – now Engineers Ireland) and the Institution of Civil Engineers (ICE) collaborated in producing a Conciliation Procedure, with the ICE publishing first in 1994 and the IEI in 1995.
The 1995 IEI Conditions of Contract for Civil Engineering Works (fourth edition) introduced conciliation as a mandatory step before arbitration, which remained as a fall-back.
In 1990, the ICE published the New Engineering Contract (NEC), which introduced adjudication. In 1994, the UK Latham Report1, which favoured the NEC, advocated adjudication as the best alternative dispite resolution (ADR) method. So, the UK Housing Grants, Construction and Regeneration Act (1996) created a statutory right to refer any construction contract dispute to adjudication.
Although conciliation remained in UK contracts, it was often struck out by employers and has virtually disappeared from use. The UK construction industry has adopted adjudication as the standard way to resolve disputes, with possible appeal to the courts or arbitration.
In 1997, the Irish Strategic Review of the Construction Industry (SRCI)2 reached the opposite conclusion: it recommended “the industry should use conciliation as a favoured mechanism for dispute resolution”. And the industry did. From the late 1990s, mandatory conciliation was incorporated in all the standards forms of building and civil engineering contract and it has become the standard way to resolve disputes.
WHAT IS CONCILIATION?
Conciliation was originally entirely consensual and did not involve a recommendation (it was, in effect, what we now call mediation). Conciliation procedures introduced the conciliator’s recommendation: the primary purpose is to assist the parties to reach an agreed settlement but, if that is not achievable, the conciliator is to write a recommendation stating how the dispute should be resolved.
The recommendation was to “state the conciliator’s opinion as to how the parties can best dispose of the dispute … not necessarily based on any principles of common law or equity”. A limited time (usually two weeks) is then allowed for either party to reject the recommendation. If neither does, it becomes final and binding. If is rejected, it is null and void. It is also confidential, so the next attempt (usually arbitration) has to start from scratch.
Conciliation is – or should be:
- Quick (42 days proposed duration);
- Inexpensive (no need for lawyers and no place for advocacy),
- Informal; and
To achieve an agreed settlement requires constructive participation of the parties.
Public Works Contracts (PWCs) were introduced in 2007. Clause 13 changed ‘conciliation’ again. The parties are to appoint a conciliator who is “competent to adjudicate the dispute”. The primary purpose is still to achieve an agreed settlement but, if a recommendation is required, it must be based “on the parties’ rights and obligations under the contract”.
The recommendation, if not rejected, becomes final and binding. If rejected and it recommends payment, the money must be paid provided the other party gives notice of arbitration and provided the other party provides a bond as security for the money. If a settlement cannot be agreed, the conciliator has to change from being a mediator to being effectively an adjudicator.
CONCILIATION AND THE CONSTRUCTION INDUSTRY
Conciliation has been the standard method of resolving contractual disputes for 15 to 20 years. To assess how it has served the industry, the writer conducted a survey by sending strictly confidential questionnaires to other conciliators and to employers, main contractors and sub-contractors. Details of the survey’s findings are given in a paper2 by the writer.
The survey showed that conciliation has been hugely successful at resolving disputes, with an overall average success rate (resolution without recourse to arbitration/court) of perhaps 97%. Most (average 67%) were resolved by agreed settlement, which is the best possible outcome as both parties must be reasonably satisfied. However, this success was not universal – the success rate for conciliators ranged from only 44% to 100% and the number of rejected recommendations ranged from none to 56%.
Some conciliators consistently achieve a very high percentage (over 90%) of agreed settlements (and some do not). The expertise of the conciliator is clearly a major factor. Conciliation’s overall success rate, however, is very high.
As well as statistics, the questionnaires sought opinions from parties with experience of conciliation. Details are available in the paper2, but the main findings are:
- Parties were generally satisfied with conciliation. Contractors were most satisfied (13 out of 15), employers next (six out of eight) and sub-contractors least (four out of only six with an opinion);
- Some of the reasons for dissatisfaction can be attributed to the procurement process rather than to conciliation (e.g. below-cost tenders being accepted, exaggerated claims, et cetera);
- Some conciliators are incompetent and some are very slow;
- Conciliation causes minimum damage to the relationship between the parties;
- Binding conciliators’ recommendations are preferred;
- Employers and main contractors think that conciliation is the best form of ADR. Six sub-contractors had an opinion: three thought conciliation or mediation was best, while three thought adjudication was best.
CONSTRUCTION CONTRACTS ACT 2013 AND ADJUDICATION
When the Act is implemented, any party to a construction contract will have a statutory right “to refer for adjudication …. any dispute relating to payment arising under the construction contract (in this Act referred to as a ‘payment dispute’)”. This right may exercised “by serving on the other person who is party to the contract at any time notice of intention to refer the payment dispute to adjudication”. The Act applies “whether or not the parties to the construction contract purport to limit or exclude its application”.
This Act reversed the 1997 Government policy on ADR. It has also ignored existing ADR provisions in all the Irish standard forms of contract, which have been working very successfully for over 15 years.
Adjudication under the Act is very quick: five days for the parties to appoint the adjudicator (failing which the chair of the panel selected by the Minister will appoint one) and the adjudicator’s decision is to be issued within 28 days, extendable to 42 with the consent of the referring party and further with the agreement of both parties.
If the UK model is followed, conciliation will, in effect, be extinguished. Adjudication has been the standard ADR method in the UK since 1998, during which time it has evolved. Reports of it are mixed. Some relevant facts about adjudication, as it is now practiced in the UK, with a comparison of the two methods, are given in the writer’s paper3.
Some 76% of UK adjudications are on documents only. Adjudication is necessarily (like arbitration) an adversarial and inflexible process with an imposed decision the only possible result. Conciliation and mediation are very flexible and can achieve an agreed settlement, over which the parties have control.
Adjudication will be much inferior to conciliation for the resolution of complex disputes, such as are regularly referred to conciliation (frequently settling the final account). For smaller and relatively simple disputes, however, adjudication is probably the best method. In the UK, numerous grounds for challenging the adjudicator’s jurisdiction have evolved and are regularly exercised. As a consequence, there is very extensive involvement of lawyers in adjudication there.
When it comes to dispute not related to payment, in the UK, legislation all disputes can be referred to adjudication whereas the Irish Act intentionally limits the right to payment disputes. Some argue that all disputes ultimately relate to payment, so the Act will apply to all disputes. This was not the intention of the drafters who deliberately qualified the type of dispute to which the statutory right applies. It may be expected that challenges will be made on this distinction and only time will tell how the courts will rule.
HOW SHOULD FORMS OF CONSTRUCTION CONTRACT BE AMENDED?
None of the existing standard forms of construction contract are compliant with the Construction Contracts Act 2013. Payment arrangements and the dispute resolution provisions will have to be revised. The statutory right to refer payment disputes to adjudication must be incorporated, but a decision must be made on how to treat disputes which are not payment disputes.
In the survey of parties who have experience of conciliation, the majority thought conciliation the best ADR method – better than adjudication. As already pointed out, only conciliation and mediation can achieve an agreed settlement, which is the best possible result.
There is no reason why the parties, when a payment dispute arises, should not choose to use conciliation (or any other ADR method) instead of availing of their statutory right to refer it to adjudication. The majority of the parties who completed the questionnaires favoured retaining conciliation as an option in standard contracts. For payment disputes, it can be no more than an option as the statutory right to adjudication cannot be affected.
For these reasons, it is proposed that existing conciliation provisions should be retained in standard forms of contract. They should be mandatory for disputes which are not payment disputes and available for optional use for payment disputes, should the parties agree to use them.
- Constructing the Team by Sir Michael Latham. HMSO July 1994
- Strategic Review of the Construction Industry 1997 published by the Stationery Office, Government Publications, Dublin.
- Brian L. Bond: ‘CONCILIATION: How has is served the Construction Industry and has it a future?’ Paper presented at Engineers Ireland on 12 March 2014, which can be downloaded from http://www.engineersireland.ie/Services/Dispute-Resolution.aspx