Dispute Resolution in Construction Contracts; The 5 Methods available

Dispute Resolution in Construction Contracts

Table of Contents

1. Introduction

Dispute Resolution in Construction Contracts, arising from contracts not being adhered to, changed, or broken is common to varying degrees in all industries. However, because of the nature of the type of work some industries perform, more issues can develop into disputes than others. Construction is one of the industries prone to dispute because there can be so much change within the construction process and with the supply chain, which can be the responsibility of the employer, the general contractor or the subcontractor.

Because of this, there are standard construction contracts such as the RIAI and the PWC, which set out the contract’s terms and how the risks are managed and allocated to each party, and more specifically, to this report, how disputes are settled. The contract is based on years of experience in contracting and is designed to allow for some latitude in known pinch points, essentially to allow for change. For example, a variation to the contract may be as small as the specification of a floor covering – a change from timber to tile. The allowance for this type of variation is written into the terms of the contract and is perfectly acceptable, but it must be agreed upon by all parties at the time of the change, and the change agreement should be in writing and signed by all parties.

However, not all changes are as straightforward; some may be more subjective, such as poor weather conditions, too wet, too windy, and some because of a delay in materials to site due to outside influences. These changes can be more challenging to quantify if each party’s allowance of risk and responsibility was not allocated in the original contract. As a result of this, a dispute may arise that cannot be solved between the two affected parties. In this case, an alternative dispute resolution process is needed, and this is built into most standard contracts.

The five most often used methods of dispute resolution in construction contracts in Ireland are mediation, adjudication, arbitration, conciliation, and litigation.

1.1 Mediation

Mediation is often the first port of call when a dispute arises, which cannot be resolved by conversations between the parties alone. It can be very effective when used because the issue is kept private between the parties, but the conversation is framed in more of a structured environment. This environment is created by The Mediation Act 2017. It is especially useful when the parties must continue to work together during and after mediation, as if successful, that would mean an agreement would have been achieved between both parties and an independent mediator, and not the courts and a judge.

For mediation to work effectively, three parts are required. Firstly, an openness on both sides to want to find an amicable solution, secondly a mediator that is experienced and can be trusted by all, and finally, an agreement that the proceedings will be confidential, that the timetable works for all, and that good faith is present from both sides.

The mediation process is broken down into five separate sections, each of which must be worked through to get to the next

The preparation stage is where the parties agree to the structure of the process that the mediator sets out. This includes the mediator’s fees, the venue, the timing and the independence of any future proceedings. It is important to note that the mediator is not a decision-maker, but is a facilitator for the parties to use

a. In the opening stage, the mediator sets out how the process will work for both parties and then they can each put forward their case to the mediator. This can be done together or individually, and the mediator can make this decision.

b. The exploration stage is where the mediator speaks with each party individually, looking for common ground and for each party’s goals.

c. The negotiation stage, this is where the mediator has talks with both sides, together and apart and explains the best possible and worst possible outcomes. It is also possible that the ‘professionals’ from both sides meet to determine if an agreement is achievable.

d. The concluding stage is the point where, if an agreement is reached, the solicitors from both sides draw up an agreement, and it is only at this point that the agreement becomes legally binding.

The advantages of mediation are that both sides are in control of their own destiny; it is not being imposed on them. It also allows the real possibility of an ongoing professional relationship, which can only be a positive thing if the mediation is during an extended project.

The clear negative is that if one side is agreeable but resistant to mediation and subsequently refuses a mediated agreement, then there has been a time delay – which can cost money.

1.2 Adjudication

Adjudication is provided for in the Construction Contracts Act 2013. One of the Act’s primary functions is to solve payment issues between the contractor and subcontractor, which may arise during the course of the contract. It is designed to be a quick process that can resolve the issue between the parties in a private and confidential way, in a way that they can continue their working relationship during the term of the contract.

The adjudication is on a statutory basis and is designed to protect both parties, but usually, it is to protect the subcontractor from the non-paying general contractor. This has been used by general contractors in the past to deny payment for many reasons, meaning the subcontractor would not be paid for possibly years, by which time the subcontractor may be out of business, so the general contractor no longer has pay. To countenance this, the Act has statutory procedures, which means that once the work has been completed and invoiced for, the contractor has 28 days to pay. If this is not done, then the claimant can serve notice that an adjudication is being sought and that the parties should nominate an adjudicator within five days; if they are not in agreeance with a nomination, then one can be appointed from the adjudicators’ panel. Within seven days, the adjudicator should be given the details of the disputed claim, and then within 28 days, the adjudicator must make a decision unless that is an extension of 28 days is granted by both parties.

1.3 Arbitration

Arbitration is essentially a form of litigation behind closed doors, akin to a court operating in camera. The outcome is as binding as a court case. It does not incur court fees but can attract legal fees from legal counsel, so it is typically used in higher-value projects.

It is conducted within the framework of the Arbitration Act 2010. The Act is based on Model Law as set out by the United Nations, which was drawn up to assist member states in cases of Arbitration, especially where there is an international element.

The process involves the parties selecting an arbitrator; this is normally set out in the terms of the contract but would typically be a request to the President of a professional body to nominate an arborator or a panel of arbitrators. The parties can also set out the procedures; this is set out in Model Law s.19, but if the parties cannot agree on procedures, then the tribunal can set it out for the process.

The Arbitrator has to be fair and base their decision on the testimony given and the facts presented. They must be impartial and look for the facts if they are not immediately obvious.

The advantages of arbitration are that the decision is final and confidential, and an Award is made. The disadvantage is that the decision is not open to appeal, so the choice of the Arbitrator at the outset is of vital importance.

1.4 Expert Determination

This is, as the title would suggest, where an Expert in the field of the dispute is nominated between the parties to determine the solution to the dispute. The decision of the expert is final, which is similar to arbitration and litigation, but the expert is given much more of a free reign to make that decision without the need for a fixed procedural framework to negotiate through. This decision can be made through conversations with both parties and the use of the expert’s own knowledge.

The advantages of this are confidentiality, speed, and cost, and the dispute can be resolved quickly, which may help the continued professional relationship between the parties if the contract is ongoing. The disadvantage is the difficulty faced if the decision needs to be changed because the expert made a mistake in coming to the final decision.

1.5 Litigation

This represents the end of the road for any form of conversation between the parties which will stay out of the public eye. It is the time when papers are served, the conversations start between legal teams, and the parties become litigants.

There are five levels in the Irish court structure. They are the District Court, Circuit Court, High Court, Appeal Court and the Supreme Court. The case is entered into the system at the financial value of the summons, so the District Court is < €15,000, the Circuit Court is < €75,000, and the High Court is everything above that. There is an exception, though, which is the Commercial Court, which is a branch of the High Court that deals with claims usually over €1 million.

The Court process is very ordered: the summons’ is issued, dates are set, defences are made, discovery is made, which is the exchange of documents between the litigants with which they intend to prove their case, and then, ultimately, a trial. If it is in the Commercial Court, this process is done according to a strict timetable, and the Judge will make a ruling in the case. Appeals are possible, which would be to the Appeal Court or, if of unusual importance, to the Supreme Court.

The advantage of litigation is that it is the end of the road for the dispute, and the decision is made by the Judge. The disadvantage is financial; High Court proceedings and all they entail can have life-changing costs for the losing litigant if that litigant is a subcontractor.

2. Conclusion

There are merits to all methods of dispute resolution as it would suggest that both parties are looking for a resolution with equal good faith. There are various options to choose from, and one may be more suitable than another for a particular issue. The clear aim is for a decision to be made which resolves the issue and for the contract, if ongoing, to continue with an amicable relationship.

However, for the process to be successful, good faith is required from both parties, and this is where the process can be frustrated. Because if one party has no intention to settle from the outset, but carries on with the alternative dispute resolution process and draws it out in the extreme, then clearly that is unfair and an abuse of the system. This can be because its pockets are deeper than those of the other party, and it has the potential to outspend the other with legal fees, and it really had no desire to pay for the disputed service from the outset.

However, fortunately, most companies are honest, and professional and seek to maintain a good relationship with their suppliers, contractors and employers, and when a dispute arises, they want to solve it quickly, quietly and efficiently with the minimum of fuss. This is where the alternative dispute resolution has the potential to excel and help the construction industry solve some of the many problems it faces in the process of construction.