ADR in the construction industry: a spectrum of control (Part 2 of 3)

So the last post was part one of this series on dispute resolution. I looked at the various means of resolving a dispute where the parties retain control themselves. Oddly; a trial by combat or a war would fit into that category but I’m not considering those. I think realistically most people would just describe those as a “dispute” rather than a means of “dispute resolution”. In this post, I will be considering those means of resolving disputes where a third party is chosen by the parties themselves to resolve their dispute. This ranges from MedArb at one end, where an arbitration is only a threat in the majority of cases, through to arbitration at the other end, which is about as close to court as you can get in the private sector.

MedArb

The mediators still reading this, by the way, should be proud of themselves. They have shown the patience and restraint necessary to be a good mediator and have managed to get through the section in the last post on ENE that was necessary before launching into the next item on the spectrum, which is MedArb. I know many mediators will have been furious (does a mediator get furious?) that MedArb had not been considered earlier but it is a means of dispute resolution where the parties have put some of their control into the hands of a third party, whereas ENE remains voluntary and non-binding. MedArb is simply a process whereby mediation is combined with arbitration. Where an agreement cannot be found, the mediator will switch roles and, acting as an arbitrator, will render an arbitration award. There doesn’t appear to have been a massive take up of the process so far, which is probably mainly due to the fear that parties might not open up so much to a mediator who subsequently becomes an arbitrator. That’s entirely understandable. The parties, however, can clear with the mediator the extent to which confidential information disclosed during mediation can be used in the event of an arbitration hearing.

That’s only one type of MedArb. A mediator can provide a service where he/she will make an award in favour of one party at the end of the mediation if the parties do not reach a settlement voluntarily. As I said, there is the understandable risk that the parties may not open up as much to a mediator who may turn into an arbitrator at the end of the mediation. There is the further prospect of having an entirely independent arbitrator set an arbitration award, only after failing to reach an agreement through mediation. Both the mediator and the arbitrator could be present for an opening session where each party set out their position. The arbitrator would then only be called to render an award after the mediator failed to broker an agreement between parties. Alternatively the arbitrator could simply be called in at the end as and when needed, perhaps at a further session. This would act as a reassurance for parties who would be able to exhaust mediation, being confident that the disclosure of confidential information would not compromise their position in case of an arbitration award.

A further alternative under this heading is pendulum arbitration. I have raised this prospect myself as mediator in a few disputes as a method of breaking a deadlock. It works as follows: Both parties provide the arbitrator with a sealed draft award reflecting their final position (e.g. one party offers to pay £80,000 and the other party offers to accept £100,000) after briefly presenting their case at a hearing and the arbitrator has to decide between those two offers on the basis of the evidence and argument available. The advantage of the method is that it encourages parties to move a bit closer, in the hope that their offer will be the one that is chosen. The more reasonable the draft award is, the more likely it is for it to be chosen by the arbitrator, motivating parties to submit relatively reasonable draft awards. In practice, I have never had to refer the parties to pendulum arbitration; their positions have always moved sufficiently after the suggestion that actually going to pendulum arbitration has proved to be unnecessary. This process however would make arbitration more time and cost efficient, as the arbitrator would only have to deliberate on the reasonableness of the awards rather than crafting an award itself, therefore presenting commercial benefits.

Expert determination

This is where we get to the real substance of losing control. Once parties give the decision to a third party, it is no longer theirs to control. It is true that MedArb might involve losing control, but that is only after every other alternative has been explored by way of the mediation process. Expert determination allows for the appointment of an expert in the field to resolve the issue in a quicker and cheaper way compared to arbitration or litigation. It deserves to be considered first in the spectrum, because the parties at least have a degree of control over who is appointed, what that person is appointed to do and how the process will operate. Significantly, however, the parties will contractually agree to be bound by the expert’s decision. They have given over their control to this third party who has specialist knowledge necessary to make a determination. Matters such as boundary disputes or questions of valuation are the obvious candidates for this kind of procedure. Ultimately, however, it is always for the courts to determine whether an expert has jurisdiction, and if jurisdiction was to be challenged; the courts will have final say, and could find an expert not to have jurisdiction if determined conditions have not been fulfilled (Barclays Bank PLC v Nylon Capital LLP [2011]). This may present a risk with regards to the finality of the expert’s decision.

I find this decision somewhat frustrating myself; it comes from the case law relating to arbitrators. It would be my preference to allow parties to have absolute choice as to which expert to choose to decide their dispute. If the parties decide to instruct Mickey Mouse to resolve their complex derivatives dispute, that should be fine, and equally Warren Buffet should be allowed to resolve disputes about coloured crayons, if that’s what the parties want. However, despite the courts’ usual approach over the past couple of decades in trying to farm out the work of Her Majesty’s Courts and Tribunals Service to private providers (by encouraging ADR), the courts appear to have rowed back in certain specific areas such as this by giving the court a paternal role over this, and other, methods of dispute resolution.

Adjudication

Given that this is a construction and planning blog, it may seem surprising that here we are, about 2,500 words in, and on our second post, and only now does adjudication get a look in. But this is the appropriate place for it. Any parties involved in any kind of dispute are, in theory, entitled to agree to refer their dispute to an adjudicator. This may be almost identical to expert determination, although the person making the determination may not necessarily be an expert (they may, for example, be a barrister or a retired judge). In practice, adjudication is the child of the construction industry. Broadly speaking, any dispute relating to a commercial construction project entitles the parties to refer a dispute to adjudication. Significantly (both for those parties involved and for my decision as to where to place adjudication in my spectrum of control), an adjudicator’s decision is binding on an interim basis only. What some call a “pay now, argue later” approach.

Once payment has been made pursuant to an adjudicator’s award, the parties are still free to reach their own settlement terms before a final order has been made at court. In practice, most disputes do not go any further once an adjudication has concluded. Adjudication is also an optional process (i.e. the parties are free to ignore it if they wish, though if one party refers the matter to adjudication where the 1996 Act applies, the other party will be bound) but many construction contracts contain a mandatory adjudication clause. If there is such a mandatory clause, one party may be able to force a stay in subsequent court proceedings (whereas a stay would be discretionary in the case of a non-mandatory adjudication provision). In any event, once one party has properly referred a dispute to adjudication, the other party is effectively bound by the process. The Technology and Construction Court (TCC) holds jurisdiction to enforce an adjudicator’s decision, and will do so unless it is found that the adjudicator exceeded his jurisdiction or materially breached rules of natural justice. This “rules of natural justice” point is not to be overlooked lightly. As with expert determination, the court is once again exercising a paternal role over the parties’ otherwise free choice as to which method of dispute resolution they wish to use. I said that I would try to be neutral in this blog post but I just cannot see the justification for taking away the parties’ freedom

Dispute Review Board

I have to confess that this is one of the few methods of ADR relating to construction disputes that I have never been involved in. I am told by one of the sources for this article that they are useful for major projects such as the Hong Kong International Airport. Leathes Prior does punch above its weight, but even we know our boundaries. Actually Dispute Review Boards are relatively common. They are usually comprised of three individuals who are experienced, impartial and respected construction professionals. They are standard in FIDIC contracts, for example. I don’t have a great deal more to say about the process but it’s there as an option.

Arbitration

Then we come to the meat of it: arbitration. Traditionally, this was the go-to means of dispute resolution outside of court and that remains the case for international projects. I worry about treading on toes when discussing arbitration because there is such a huge body of law out there. There’s a United Nations model law on international commercial arbitration, an Arbitration Act 1996, countless bodies with their own rules and procedures and a vast body of case law to consider. Arbitration should be cheaper, though in practice it usually isn’t. There are some arbitration services that are provided very cheap, and sometimes even free but that isn’t how it tends to be in the more common scenario of an international commercial arbitration. Take the fee to start the process, for example. The civil courts have recently increased the maximum issue fee to £10,000, whereas the registration fee can be as little as £1,750 (LCIA).

However, that hides the vast cost that is usually associated with arbitration. A judge at a trial will only charge the hearing fee (£1,090 for multi-track), whereas an arbitrator, or worse a panel of arbitrators, will often charge their hourly rate, which can be well over solicitors’ usual hourly rates (most would consider £300 per hour quite cheap). Moreover, given the complexity of arbitration proceedings, solicitors and Counsel are often involved. You may have been involved in arbitration proceedings yourself. It is not uncommon to be able to fill one of the hearing rooms at the IDRC with lawyers all charging breath-taking hourly rates and the costs can spiral up and up. There are other advantages. The hearing can be held in secret, which is often a bonus for sensitive commercial disputes. It can also be a bit quicker, though that is not always the case. If you’re a fan of drinking proper Yorkshire tea and eating proper Yorkshire biscuits, it will come as no surprise to you that there appears to be a Yorkshire Arbitration Scheme. I have to confess to having only come across their website when researching for this article (before you ask, yes they have a white rose at the top of the website, as if Henry Tudor never existed). I have no doubt that other schemes will start popping up across the country in an attempt to bring arbitration into the realm of smaller disputes.

Intermission

So that concludes our overview of dispute resolution procedures where the parties have chosen their means of dispute resolution and voluntarily handed over control to a third party. In the next post I will look at state imposed means of dispute resolution. That includes court, but also encompasses ombudsman schemes, tribunals, inspectorates and similar. I know what you’re thinking: fun, fun, fun!