The Construction Industry and Alternative Dispute Resolution (ADR) Mechanisms

1. Introduction

A construction contract being one that involves multiple parties is most likely to lead to disputes. Due to the nature of construction contracts, or better yet, the construction process, conflicts and disputes are almost inevitable. This is because, in construction projects, a number of different contracting entities with different needs are expected to cooperate and coordinate their efforts. When a dispute arises in a construction contractual relationship, the parties often spend a great deal of time in negotiations in an attempt to resolve the dispute, rather than resorting to the courts. The reason for this disposition is not farfetched. To put it in better words:

A building contract, being essentially a contract of reciprocal promises, presents a pattern of integrated actions of both parties, so correlated and timed that delay or default of any one step by any party would put out of gear the entire machinery of construction, entailing extra time and expenditure to put it back in proper gear. Sometimes the machinery may even grind to a halt, and to put it back into gear again would entail tremendous time and expense. Such a situation leads to mutual recrimination and raises differences and disputes that call for a settlement process, expeditious and amicable, by an independent and impartial authority acceptable to both, well qualified to appreciate the technical points involved, preferably pre-selected by name or designation or to be appointed by a designated authority.

A number of factors in the construction industry have been shown to occasion disputes. They are not limited to the following:

• Breach of contract
• Non-settlement of payment as per time schedule;
• Lack of proper communication;
• Insufficient specifications, drawings, designs and plans;
• Non-provision of safety practices and job site injuries;
• Alterations in the works without proper orders and
• Improper management and non-coordination between parties.

Traditionally, construction disputes and conflicts were handled by litigation. However, the court system has proven to be neither cost-effective nor timely in resolving construction issues. Quite often, a spirit of give and take prevails, and the matter is settled amicably. To solve the inevitable disputes that arise in the process of performance of obligations under construction contracts through litigation may take years and will definitely result in the spending of huge amounts of money, not to mention the stress and the feeling of distrust that it will be putting on the contracting parties. Due to the need for an effective, economic, and efficient means of dispute resolution in construction contractual relationships, alternative means of dispute resolution are highly utilized. The emphasis on the need for alternative means of dispute resolution is highlighted by the fact that almost all construction contracts contain specific provisions or clauses on alternative dispute resolution. Accordingly, we will proceed to deal with litigation as well as the different alternative means of dispute resolution.

• Dispute Resolution Mechanisms

2.1   Negotiation

This is simply direct, face-to-face negotiation between the parties, without the use of a third party. It involves the exchange of offers and counteroffers and a mutual discussion of the strengths and weaknesses of each party’s position. This method is usually most effective if the parties are represented by skilled and knowledgeable counsel and if both have an incentive to reach an agreed settlement.

2.2 Mediation

If a dispute arises out of or relates to a contract, or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation rules before resorting to arbitration, litigation, or some other dispute resolution procedures.

Mediation is a process whereby the parties, with the assistance of a neutral third party, negotiate a resolution to their differences. Mediation, in many instances, has been extremely effective in resolving contract disputes, thus avoiding the time, energy, and cost of arbitration or litigation. Mediation is a structured negotiation in which the mediator provides the structure. The mediator will establish ground rules and act as a referee, facilitating communications between the parties. The mediator assists the disputants to generate options and understanding of their respective positions and manage emotions. Although the mediator controls the process, he or she does not impose any resolution or opinion on the merits of the case, promoting a win-win situation and leaving the disputants themselves to control the outcome. Hence the process is flexible, private, and confidential, with the legal rights of the parties protected when there is no agreement reached.

The mediator’s role is to guide and assist the parties to fashion their own settlement, serving as a facilitator to help the parties reach the desired goal of a resolution of their conflict. Parties will settle a dispute as soon as they decide it is in their mutual best interest to do so. At the most basic level, the mediator’s function is to keep the parties talking and searching for ways to resolve the dispute.

A mediation clause can pressure one party to compromise and ultimately accept less than litigation would have awarded. Nevertheless, it may result in fewer or more benefits to one of the parties. Even when parties assert that they are going to refuse to settle, the courts recognize that, in fact, settlements and compromises are often obtained through mediation, notwithstanding the parties predisposition. Thus, although mediation, unlike arbitration, concludes a dispute only through agreement of the parties, courts generally enforce a mandatory mediation clause.

If both parties are prepared to negotiate and compromise in good faith, mediation can be one of the least expensive and most effective dispute resolution methods. In addition to the cost benefit of mediation, there are many benefits that flow from a creative solution crafted by the parties themselves. Understandably, parties are more likely to abide by an agreement that they helped negotiate, and, frequently, their business or personal relationship is left intact to allow future constructive dealings.

2.3 Adjudication

It should be underlined here that “adjudication” is meant to refer to a disparate pre-arbitral dispute settlement method in the construction industry; it is commonly used in a technical sense. In the construction industry, „adjudication can be defined as:

a process whereby an appointed neutral and impartial party is entrusted to take the initiative in ascertaining the facts and the law relating to a dispute and to reach a decision within a short period of time.

„Adjudication‟, as a first tier in dispute resolution, was introduced in the UK by the

Latham Report of 1994 and incorporated in the Housing Grants, Construction and Regeneration Act of 1996

¹ Nael Bunni,, Fidic Form of Contract (The Third Edition), 1991, p. 437.

² Keren Tweeddale and Andrew Tweeddale, A Practical Approach to Arbitration Law (London: Blackstone Press Limited, 1999), p. 85.

This Act provided that in all construction contracts, the dispute is first submitted to adjudication as a condition precedent to the bringing of arbitration or litigation.³ It is not clear as to when and how it was introduced to the Ethiopian construction contracts; it can be safely said, however, that it has earned itself a cherished place in the resolution of construction disputes for quite some time.

According to Article 34 of the Federal Standard Bidding Document for the Procurement of Works, the adjudicator is required to act as an impartial expert to resolve disputes between the parties as rapidly and economically as is reasonably possible. The Bidding Document further expounds the role of the adjudicator as “to include, but not limited to, requiring and examining any relevant documents and written statements, making site visits, using his own specialist knowledge, and holding a hearing.”. Furthermore, the adjudicator’s decision should “reflect the legal entitlements of the parties and his fair and reasonable view of how the dispute should be resolved.”. The adjudicator’s decision is binding on the parties unless challenged within a specified period and then varied in an arbitration or litigation depending on the terms of the contract. If the decision is not challenged within the specified period, it then becomes final and binding.

2.4 The Consulting Engineer as a Quasi-Arbitrator

The FIDIC Standard Form of Contract highlights the importance of the consulting engineer in playing parties—the role of a quasi-arbitrator. As we have seen in the previous sections, both contracting parties and third parties play pivotal roles in the amicable resolution of construction disputes. Among such persons is the consulting engineer. As so eloquently put by Nael Bunni:

In the commercial activities of today’s highly complex society, standard

Forms of contract have become an essential part of the day-to-day transactions of most agreements. The majority of standard forms have been developed by commercial organizations for the purpose of efficiency, to build on the experience gained from the repeated use of these forms, but most of all for the optimum protection of none or both parties interests. Standard forms of contract developed for the construction activities, however, have mostly been drawn up by independent professional organizations rather than by one or other of the parties to the contract, in order to establish or consolidate a fair and just contract.

¹ Nael Bunni, Fidic Form of Contract (The Third Edition), 1991, p. 437.

⁴ Nael bunni, Fidic Form of Contract (The Third Edition),1991, p.438

The consulting engineer, in addition to the normal services of counseling, pre- investment studies, preparation of documents, project management, supervision, etc. that he/she provides, is also entrusted by the Red Book to “resolve most of the day-to-day differences of opinion which frequently occur during the construction process. The consulting engineer, who is an agent of the employer of a particular project, is entitled to the pre-arbitral decision-making process whose non- acceptance by the parties will lead to the initiation of arbitration.

“Arbitration agreement‟ is an agreement by the parties to submit to arbitration, all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. The arbitration agreement must be in writing. An agreement is in writing if it is contained in a document signed by the parties or in an exchange of letters, telegrams or other means of telecommunication which provide a record of agreement, or in an exchange of statements of claim and defense in which the existence of an agreement is alleged by one party and  not denied by another. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement provided that the contract is in writing and the reference is such as to make that clause part of the contract.

Once the parties have agreed in writing to resolve their disputes by arbitration, it is not possible for one party to unilaterally seek the court’s intervention unless it can be established that a claim cannot be met by a valid defense. Moreover, arbitration bestows upon the parties, the freedom to choose one or more arbitrators; the right to determine the powers to be conferred on the selected arbitrator(s); the freedom to choose the venue of the arbitration; the right to determine how the arbitration is to be conducted; and the ability to keep the dispute private.

The parties to an arbitration are free to choose one or more arbitrators. The chosen  arbitrator should have the necessary expertise to resolve the technical disputes arising from the construction contract. Accordingly, a quantity surveyor is usually chosen for disputes relating to quantities, an engineer for engineering disputes and for disputes relating to the administration of the building contract like variations, defects and extension of time, the architect would be an ideal arbitrator. As the nature of the dispute is unknown at the time of the execution of the contract, it is practical to leave open the choice of which construction profession the arbitrator should be appointed from.

If the arbitrator is not given adequate powers, he/she cannot cure the situation by acting beyond his/her powers. If he/she does act beyond his/her powers, he/she is then said to have misconducted him/herself and the parties may seek the court’s help to remove  him/her as the arbitrator. On the other hand, the arbitrator will suffer the same fate of removal if he/she fails to decide on all the disputes validly brought before him/her for his/her decision. To avoid this, an arbitration clause should be wide enough to empower the arbitrator to decide on all the likely disputes that may arise from the contract and to award suitable remedies as desired by the claimants. Further, the arbitrator must be aware of the scope of his powers and conscientiously ensure that he/she does not act beyond his/her powers nor fail to exercise them when required.

The essence of arbitration is that a third party renders an opinion about how the dispute

should be settled. The arbitration award can be binding or nonbinding, depending on the contract or other agreement of the parties. In binding arbitration, the parties select an arbitrator or panel of arbitrators who help design the arbitration process, conduct a hearing, evaluate the evidence, and make an award. The award is then binding on the parties and may be entered and enforced as a judgment by the court. There is a very limited opportunity to appeal an arbitration award. Nonbinding arbitration is identical to binding arbitration except that the parties are not bound by the result and either party still has the option to proceed to court if either party does not accept the arbitration award.

Summary

The involvement of multiple parties in construction contracts makes the relationships arising out of these contracts highly prone to conflict. The different types of dispute resolution mechanisms that are applied to disputes arising out of construction contracts are the ones that are ordinarily applied in resolving any dispute. Thus, arbitration, negotiation, mediation, conciliation, adjudication, and even litigation are basically used to resolve disputes arising out of construction contracts. However, in the case of construction disputes and claims, disputes are best resolved through alternative dispute resolution mechanisms rather than through the courts.

References

Books

• John K. Sykes, Construction Claims (London: Sweet and Maxwell, 1999)
• Nael Bunni, The FIDIC Form of Contract: The Fourth Edition of the Red Book, 2^nd ed. (London: Blackwell Science Ltd., 1997)
• Eyvind Finsen, the Building Contract, A commentary on the JBCC Agreements, 2^nd

Ed., (Cape Town: Juta and Co Ltd, 2005)

• Keren Tweeddale and Andrew Tweeddale, A Practical Approach to Arbitration Law, (London: Blackstone Press Limited, 1999)
• M. Beth Lyon, The Role of the Consulting Engineer in Developing Country Construction under the FIDIC Form Contract, 26 Law & Policy Int‟l Business, 1994- 1995
• M. A. Sujan, Law Relating to Building Contracts, 3^rd Ed., Delhi: Universal Law Publishing Co. Pvt. Ltd., 1999
• Borham Atallah, FIDIC: An Analysis of International Construction Contracts, (ed.) Robert Knutson, (Kluwer Law International: The Hague, 2005)
• Frank McKinney, Substantial Performance in Building and Construction Contracts, 28 Bench and Bar 61, 1912
• I.N Duncan Wallace, Hudson‟s Building and Engineering Contracts, 10^th ed., (Sweet and Maxwell: London, 1970)
• International Trade Center UNCTAD/WTO, Arbitration and International Dispute Resolution: How to Settle International Business Disputes (Geneva, 2001)
• John Murdoch and Will Hughes, Construction Contracts Law and Management, 3^rd ed., (Spon Press: London and New York, 2006)
• M. C. Kuchaal, Mercantile Law, 5^th ed., (Vikas Publishing: New Delhi, 1999)
• P. D. V. Marsh, Comparative Contract Law: England, France, Germany, (Gower Publishing: London, 1994)
• Richard Posner, Perspectives on Contracts Law, (ed.) Randy Barnett, (Aspen Law and Business Publishers: United States, 1995)
• Yemi Akinseye-George, Legal System, Corruption and Governance in Nigeria, (New Century Law Publishers: Lagos, 2000)
• Trade usages, and, Construction lex mercatoria or lex constructionis, in case of international construction contracts.

Laws

• The Federal Proclamation on Determining the procedures of Public Procurement and establishing its Supervisory Agency Proclamation No. 430/2005
• The Ministry Of Finance and Economic Development‟s (MOFED‟s) Federal Public Procurement Directives;
• Public Procurement Proclamations and Directives of the Federated States (kilils);
• The 1960 Civil Code of Ethiopia
• The National Building Code
• The May 1994 Edition of “Standard Condition of Contract for Construction of Civil Works Project” published by the Ministry of Works and Urban Development (Hereinafter the “MOWUD Standard Conditions of Contract”)
• The FIDIC (Red Book) Form of Standard Condition for Works of Civil Engineering (applicable whenever the Contractor is a foreign company and/or if the project is funded by the World Bank).
• The Federal Standard Bidding Document for the Procurement of Works issued by the Public Procurement Agency (PPA) as of January 2006.
• Guide to the Use of FIDIC Conditions of Contract for Works of Civil Engineering Construction (Fourth Edition), FIDIC (1987).

About the Author: Daniel K. Kap is a legal practitioner, notary public, arbitrator, rights activist, & writer.

kipdann@gmail.com