CONSTRUCTION MEDIATION AND CASE STUDIES
(Article for Public Sector Construction and Development)
The Construction industry and its related professions are living in interesting times for dispute avoidance and resolution.
Moving away from confrontation
As to dispute avoidance, there is a real attempt being made to move away from the adversarial ways of the past. This is taking several forms, including partnering agreements and an increased use of the single point responsibility that comes from adoption of design and build procurement and Private Finance Initiative projects.
On major projects, dispute review boards (DRBs) are increasingly used. The best known model is that contained in the international form of construction contract, FIDIC. The members of DRBs are usually three in number, or more, and appointed by agreement between the parties to the construction contract at the outset. They may be required, as part of their retainer, to visit the site regularly, to read monthly project reports and to be ready and available to deal with disputes quickly, often within 28 days after they arise. Their decisions are binding unless taken to arbitration by either party within a fixed period.
Arbitration and adjudication
As to dispute resolution, there is the new Arbitration Act 1996 with its streamlined procedure and increased powers for arbitrators to deal with delay and cost. As if all that is not enough, the Housing Grants, Construction and Regeneration Act 1996 has introduced a right for parties to construction contracts to refer disputes to adjudication. That procedure is rigid and inflexible, short (28 days) and is already beginning to show some signs of problems: for example, ambushes by claimants are taking place (sometimes co-ordinated by several sub-contractors on the same project against one main contractor to take place at the same time). Some adjudicators are permitting the process to be akin to short form arbitration with pleadings, witness statements and hearings, all in less than 28 days, but quite often involving disproportionate expense.
As if all that was not problem enough, a County Court Judge in Liverpool decided in the summer of 1999 that an adjudicator under the statutory Scheme has the power to award legal costs as well as dealing with his own fees and expenses (John Cothliff Limited v Allen Build (North West) Limited). This decision, if not changed on appeal in this case or another case, has the effect of seriously damaging the effectiveness of adjudication as a fast and cost effective procedure, although it may be said that a County Court decision is not binding precedent.
Adjudication is also a blunt and imperfect weapon. There have already been many reported cases on various aspects of the new statutory scheme. Taking all these things together, adjudication appears to be very far away from the quick and cheap temporary fix that was the intention of Parliament when passing the Act.
The Woolf Reforms
Since 26th April 1999, a new regime has existed in the Courts by reason of the new Civil Procedure Rules pioneered by Lord Woolf. These new Rules are designed to try to cut the cost of litigation and the time it takes. It is early days yet but the initial signs are that the effect of the Rules in construction cases on time and cost will not be dramatic. This is partly because the Judges of the Technology and Construction Court have always been at the forefront of development in procedures such that the new Rules contain many procedures that have already been in use in the TCC for many years. It remains to be seen how the TCC will deal with the powers given to Judges by the new Rules as to mediation.
Mediation
So does this plethora of new ways of avoiding disputes, and dealing with them when they arise, leave mediation out in the cold in this brave new world of construction? On the contrary: it is all the more reason to look to mediation which keeps control of disputes with the parties (not giving it to lawyers) and avoids the high costs associated with High Court litigation, arbitration, and, now, adjudication. Is it true that heavy construction disputes can be resolved in a day or two in mediation? Is it true that multi-party construction disputes (a common problem in this field) can be dealt with quickly and effectively in mediation? Is it true that about 85% of cases that go to mediation settle? Yes, it is all true. Some examples based on real cases will demonstrate these propositions.
Cases about defective work and design
It is unfortunately not uncommon for defects to be found in construction after the work has been completed. Such disputes can be very expensive to resolve; not only will solicitors and barristers be needed, so will expert witnesses, one for each party. Although, of course, it is the duty of each expert to assist the Court, a party will not instruct an expert unless that expert broadly supports that party's contentions in the dispute. That, of itself, leads to increased costs in resolving the dispute.
A typical High Court action, therefore, might involve a building owner, a contractor, a sub-contractor and an architect, a total of four parties. Each party will have a solicitor (in a big case, a team of solicitors), a barrister (or two, including a Queens Counsel if the issues are difficult or if there is a great deal of money at stake), and an expert (or two or three if there are different expert issues, such as architect's liability for negligence, quantum of repair costs and quantum of a diminution in value claim). Suddenly, each party has between a minimum of 3 and 7 or more professional people working for him.
Each party’s costs are then growing fast, increasing the commercial risk to each party as time goes by. Even under the new Woolf Rules, the starting point for awarding costs is that the “winner” has his costs paid by the “loser”. It is not uncommon for the total costs of multi-party construction litigation to exceed the sum in dispute. In this example, even a relatively simple defects dispute could create costs for each party of a minimum of £150,000. That is £600,000 for the total costs of all four parties before the judge decides the question of liability. In most cases about defects, the costs will be much greater than that. That £600,000 is the potential legal cost risk to the “loser”.
What does mediation bring to that kind of dispute? First of all, it enables all of the parties to look at their own position and that of the other parties in a structured way, assisted by the neutral mediator. Positions do change in mediation as a result of that process.
Secondly, each party is able to bring into play its interests, as well as its legal rights. This is a vitally important difference between mediation and other methods of dispute resolution: courts can have regard only to legal rights and declare them; it cannot deal with the parties’ other interests.
In a recent case, a building owner believed he had a very good case in law against the contractor and his Architect. The contractor had joined one of his sub-contractors into the litigation, seeking an indemnity from him. Finally, there were proceedings for contribution between all the defending parties.
The building owner was unaware that by winning his case in court, the contractor would be insolvent and the insurers of the architect might repudiate liability on the professional indemnity policy, leaving an uninsured architect, with no substantial assets, unable to pay the judgment sum. If the case had not been mediated, the building owner would have probably won his case but received no money for repairs and no payment towards his legal costs.
In the event, in mediation, a settlement was achieved in one day that enabled the building owner to get the repairs to his building done for less than the costs he would have spent on the court action continuing, albeit the building owner agreed a less expensive repair scheme than he was contending for in the litigation; the builder contributed money to the repairs to an extent that he could afford, short of insolvency; the sub-contractor contributed to the repair cost as well; the insurer of the architect contributed a small sum, representing a payment to remove the further risk of continuing litigation cost. The saving in legal cost overall was several hundred thousand pounds.
The interests of the parties were secured: the building owner got his repairs done (on a cheaper, but satisfactory, scheme) at no cost to him; the contractor avoided insolvency; the sub-contractor and the Architect and his insurer stopped spending further money on litigation costs. Such a result would not have been possible as the outcome of court proceedings.
Cases involving multi-party disputes
As is stated above, construction cases about defective work and design involving multi-party disputes are commonplace. There are also many other scenarios where disputes involving more than one party will arise.
One type of example is where the contractor submits a claim for loss and expense based on its having been issued with late instructions by the architect. The architect may maintain the position that whilst the instructions could have been issued a little earlier, the contractor’s claim is grossly exaggerated and is based on the contractor’s desire to recover some of its costs that were incurred simply as a result of its own inefficiencies. The employer is thus in the position of being “piggy in the middle.” If the employer accepts the claim, it will need to obtain recourse from the architect. If the employer fights the claim, it will need the architect’s assistance to do so but will also need to obtain recompense from the architect if its challenge were to prove unsuccessful.
Another type of example is where a sub-contractor makes a disputed claim for the cost of carrying out a variation to the sub-contract works which was instructed by the architect on behalf of the employer by means of an instruction issued under the main contract. Whilst the “true” claim is ultimately that of the sub-contractor against the employer, the main contractor becomes “piggy in the middle” in contractual terms. In the absence of effective “name-borrowing” arbitration provisions in both the main and the sub-contract, the main contractor will have no option but to become involved in the dispute by being forced to “pass on” the sub-contractor’s claim against it under the sub-contract to the employer under the main contract. The main contractor has little or no opportunity of avoiding being “dragged into” the “true” dispute between the sub-contractor and the employer.
How then can mediation alone cut the Gordian knot (or knots) represented by such types of disputes? Ultimately the answer must be the skill and experience of the individual mediator. However, there are some guidelines for how the mediator can go about his task, which experience of such disputes indicates can be effective.
The first matter that has to be resolved is to identify the party to be paid if a resolution of the dispute is to be reached. Whilst this may seem to be merely to be stating the obvious in relation to the types of disputes cited above, this may not always be so. For example, in a recent mediation concerning repudiation, it was not clear until late into the afternoon which party was the “guilty” one such as to justify the termination of the contract. After liability was eventually agreed, the mediation process could for the first time be moved on to consider the monetary claims that flowed from this agreement. In a multi-party dispute, the potential for such a “dispute within a dispute” is even greater.
Having resolved the identity of the party to be paid, the next task of the mediator is to make it clear to the parties that the paying parties will have to be identified. Although the potential candidates to make payment is clear (ie the remaining parties), it will normally be the case that one or more of these candidates will argue that he was in fact and/or in law “blameless.” At this stage the party to be paid will effectively be sidelined, and the mediation process will concentrate on identifying the “guilty parties.” An example of such a “mediation within a mediation” was where the “true” guilty party (the specialist sub-contractor which designed and built the defective swimming pool in question) was absent (through insolvency) and the remaining parties (the professional team and the main contractor) all had very arguable cases as to why they all were “blameless.” Eventually it was agreed that they would all have to accept some degree of blame.
Having resolved the identity of the paying parties, the questions of how much the party to be paid is to be paid, and the respective contributions of the paying parties, must then be resolved. This involves the need for some adept footwork on the mediator’s part. The most convenient solution in the swimming pool case (and other mediations that have reached this point) was to persuade the party to be paid to come up with an acceptable figure in order to concentrate the minds of the paying parties as to what their respective contributions might be. Experience shows that the process of getting the paying parties to agree on an initial offer is simply too difficult logistically. Once the party to be paid has come up with such a figure, the last, and most difficult, stage of the mediation is reached. The paying parties have probably not given any real thought as to how to negotiate contributions amongst themselves and this last stage of the mediation process can be and very often is very time-consuming.
Daunting though they may be, all the above difficulties can be and usually are overcome. The swimming pool case was resolved a few days after the mediation itself was unsuccessfully concluded because the recalcitrant paying party eventually decided to make a substantial contribution. In one recent case there was a partial resolution when the party to be paid refused to reduce the overall figure it was prepared to accept but settled with one of the paying parties on the basis of the contribution that that party was prepared to make (leaving it free to pursue its proceedings against the other paying party). Even a partial resolution is one worth having and can be accommodated by the inherently flexible nature of the mediation process!
International Cases
Mediations involving parties from different countries provide a series of challenges for both the parties and the mediator. A considerable amount of construction work around the world is carried out under contracts stating that the proper law of the contract is English law, rather than the law of the place where the work is being carried out, often with provision for arbitration in a place independent of the states of each of the parties to the construction contract, such as in London or Geneva. The rules of such arbitrations are often those of the International Chamber of Commerce, UNCITRAL or the London Court of International Arbitration. London has a high reputation internationally for the quality of its arbitration services.
Increasingly, parties are looking to London for international mediation in construction. CEDR has established itself well in this field both because of its ability to organise international mediations and the quality of the mediators upon which it can call.
Cultural differences between the parties themselves and between each party and the mediator is a very important issue in international mediation. For example, a Northern European company in dispute with a company from the Far East will bring together in the mediation people with very different cultural backgrounds and very different approaches to negotiation. Add into that mix, an English mediator and it is not hard to see some of the potential difficulties and differences when compared with UK mediation involving just UK parties.
In such a case, the Chairman of the Far East Company asked the mediator, in the presence of the Northern European party, whether the mediation could be over by lunchtime on the first day of a three day mediation; when told by the mediator that was very unlikely, the Chairman said he was disappointed because he really wanted to spend the afternoon shopping at Harrods. The difficulties created by that exchange lasted several hours because the Northern Europeans took the view that this meant the Far Eastern company were not serious about wanting to achieve a settlement. The mediator was able to get the mediation back on track; without him, direct negotiations between the parties would have foundered unnecessarily on cultural difference.
In another case, a Middle Eastern party increased their $4million claim against a mid-European company by over $1 million in the opening presentation during the first ten minutes of the mediation. No doubt, this was a tactic to try to un-nerve the representatives of the mid-European company, which resulted in the mediator spending the next two hours preventing the mediation from breaking down before it had really started. This issue was a direct result of different cultural approaches to negotiation in each of those countries. The skills of the mediator in such circumstances are vitally important in assisting each party’s understanding of the cultural approach that inevitably drives the attitudes and approaches of the other party to disputes. In fact, even though there was a bad start, this particular dispute settled on the second day. If the mediator had not been present, negotiations direct between the parties would have been destined to fail.
Japanese culture in relation to disputes tends to be that once a Judge or an Arbitrator has been given the task of deciding the issues, it would be disrespectful to that Judge or Arbitrator to settle a dispute, so negotiations can be ruled out. Mediation has its role in these circumstances because it can bridge that particular cultural divide between the East and the West by providing a route to dispute settlement that is not disrespectful to the tribunal charged with giving judgment or an award.
Summary
Even though there are many changes in the construction industry in its attitudes to disputes and their resolution, mediation is a very powerful tool in the armoury of dispute resolution that complements and supports that changing attitude in a way that litigation, arbitration and adjudication can never achieve. Increasing the use of mediation agreements in construction contracts would help to ensure the deserved place of mediation as a relatively cheap and very effective form of dispute resolution in the construction industry.