Building and Construction Law - Different Methods of Dispute Resolution in Construction Disputes
BUILDING AND CONSTRUCTION LAW
DIFFERENT METHODS OF DISPUTE RESOLUTION IN CONSTRUCTION DISPUTES
The Australian construction industry is regarded as one of the most litigious and dispute-ridden industries. Traditionally, parties would rush to litigation which is often a costly and long-winded means of resolving a dispute.
Over the last twenty years, various methods of Alternative Dispute Resolution (“ADR”) have been introduced into the construction industry in order to avoid lengthy and expensive litigation.
There are various types of ADR processes available to construction disputes. They include mediation, adjudication, arbitration, expert determination and court proceedings. Sometimes, construction contracts will specify one or more methods of these dispute resolutions.
Adjudication is a process in which a neutral third party will give a decision on a dispute. Adjudication is sometimes known as “pay first – argue later”.
Normally, adjudication will be contained in a contract such as a building contract between parties. In this way, the adjudicator’s decision can be enforced as any contractual provision can be enforced. Sometimes, however, parties which have no binding ADR processes can still agree to adjudication and enter into a specific adjudication agreement. Adjudication is receiving renewed interest in Australia due to the large number of retired senior judges from Supreme, Federal and the High Court re-entering legal practice as expert determiners and adjudicators.
The benefits of adjudication include:
The adjudicator is a neutral person not involved in the day-to-day running of the construction contract;
Adjudication is a quick process designed to ensure that cash flow is maintained during the construction process;
Although it is possible to go to court, in most cases, the adjudication resolves the dispute; and
Adjudication is less expensive than court proceedings.
However, adjudication has its disadvantages:
The dispute must have been raised and ventilated between the parties before the adjudication can be commenced so that the issues are clear;
The adjudicator’s powers are limited. The adjudicator lacks the compulsive power either of an arbitrator (whose powers can be supplemented by a contract or by statute) or of a judge; and
Court proceedings are still required to enforce the adjudicator’s decision if the “losing” party does not pay up.
Secondly, expert determination is often used to resolve issues or disputes of a specialist nature. This is one of the most informal but quickest forms of dispute resolution in the construction industry.
Expert determination is often used when there is a valuation dispute. If an expert is to be used in determining the dispute, the parties will agree this by contract and will agree that the expert determination will be binding.
In this way, expert determination has the following benefits:
It is an economic way of finally resolving valuation disputes; and
It is less expensive and quicker and a less formal method of dispute resolution.
The disadvantages of expert determination are:
The use of experts is much less tied to legal processes. It is much more difficult to challenge the decision of an expert; and
An expert’s final report cannot generally be enforced without further court or arbitration proceedings.
Even with the different types of ADR, court proceedings are still one of the most common forms of resolving disputes within the construction industry.
Most State and Federal Courts now have specialist construction and building lists. Most States also have specialist tribunals to deal with domestic building disputes. This means that specially trained and experienced judges will normally hear technology and construction disputes.
Increasingly, the advantages of litigation will be that the claim processes will be managed by a judge throughout. This judicial management can identify and deal with complex issues quickly. Most importantly, litigants will obtain a binding and enforceable decision.
However, owners, builders and other building professionals will only be too well aware of the costs of litigation in construction disputes. Even with judicial management, it can be a slow process. Furthermore, the proceedings will nearly always be in public and will often lead to damaged long-term commercial relationships.
Mediation is commonly used within the construction industry to resolve disputes. Even within specialist court lists, court rules require early mediation as a matter of course. Other statutes like the Civil Procedure Act (Vic.) 2010 also require anyone involved in a legal dispute to engage in genuine negotiation before commencing legal proceedings. Increasingly, Victorian judges and magistrates are using this Act to impose financial penalties on parties and on their legal advisers who do not engage in genuine dispute resolution prior to commencing court action.
There are many benefits of mediation:
The mediator will be an independent person who will not make a decision or advise or judge the dispute;
The mediator facilitates discussions between the parties and is an agent of reality;
They are also generally highly experienced in the area of the dispute;
Mediation has the best chance of maintaining business relationships;
Mediations are relatively quick and are considerably less costly than litigation;
Everything that happens in a mediation is not only private but is also confidential and “without prejudice”; and
Mediation has the best chance of allowing the parties to create a solution suitable to everyone rather than having a judge or arbitrator impose a decision from outside a business relationship.
Nevertheless, there are disadvantages to mediation. For example:
There is always the prospect that, during the mediation, a party may disclose an important aspect of the case or of a commercial position which will lead to forensic trial benefits to the other party; and
If the parties do not come to an agreement, the dispute remains unresolved and the costs of the mediation will be wasted.
Arbitration is another alternative to litigation. It is a process in which the parties agree to refer the dispute to an arbitrator. Disputes are resolved on the basis of material facts, documents and relevant principles of law.
Arbitrations within Australia are governed by State and Federal legislation. These enactments ensure that arbitrations are fair, cost-effective and rapid. The enactments also ensure that the law is followed whenever possible.
Increasingly, arbitration is used in the context of international construction disputes. Arbitrations are becoming increasingly important for Australian builders engaged in cross-border building activity in Asia.
The benefits of arbitration include:
A confidential process like mediation;
Parties can agree on an arbitrator who has relevant technical experience in the construction area;
Compared to traditional court proceedings, arbitrations can be cheaper and quicker; and
It is highly flexible compared to court proceedings.
There are, however, disadvantages of arbitration such as:
The costs of the arbitrator will have to be borne (initially at least) equally. The parties will also have to pay for the arbitrator and the venue. ;
There are limited powers of sanction available to an arbitrator if one party fails to comply with directions. In a court, the judge or magistrate’s ultimate weapon is to award costs either against the parties or against their legal practitioners; and
There are limited appeal rights available during arbitration. These can become costly and time-consuming.
Each of the above methods of ADR have strengths and weaknesses. It is important for businesses involved in construction to carefully consider which particular type of ADR suits their particular dispute best.
An intelligent ADR choice can be the difference between survival and disaster.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
For any further information concerning this article, please Michael Pickering, Managing Principal, De Marco Lawyers. His contact details are as follows: