Multi-Tiered Dispute Resolution Clauses in Construction Contracts

From house renovations to the construction of mega public infrastructure projects such as roads, disputes are inevitable in construction projects. Contractual disputes in construction projects arise due to various factors owing mainly to differences in human and organizational behaviour. These factors include, without limitation, time constraints, environmental issues, project costs, technological issues with the site or equipment, bespoke nature of the project, multi-cultural environments, multiple stakeholders involved and public interest. Most disputes thus relate to delays, payments, workmanship, changes in the scope of work, unsubstantiated claims, and contracts. Disputes mean delays, and delays translate to unbudgeted costs or eventual abandonment of the project. One way to mitigate the threat of disputes is the inclusion of Multi-tiered Dispute Resolution Clauses (“MDRC”) within the construction contract. MDRCs provide practical, informal, and affordable dispute resolution methods that enable the contracting parties to determine the nature of their disputes and the preferred resolution procedure.

What are MDRCs

An MDRC provides for mandatory steps which the parties must take to resolve any dispute before arbitration or litigation. They are sometimes referred to as “escalation” or “multi-step” clauses. MDRCs can be straightforward single-step processes such as negotiations or complex multi-step processes including a combination of processes such as mediation, conciliation and expert adjudication. MDRCs were first featured in standard international construction contracts such as theInternational Federation of Consulting Engineers (“FIDIC”) and New Engineering Contract (“NEC”) contracts. Parties may include them in smaller non-standard building contracts as well. By including an MDRC, parties intend to avoid an adversarial approach to resolving their disputes and wish to escalate the dispute resolution method should the preceding method fail. By creating different dispute resolution stages, the MDCR facilitates a rapid and cost-effective dispute resolution method.

Why we should include MDRCs

MDRCs enable parties to resolve disputes between themselves without resorting to traditional dispute resolution methods such as arbitration or litigation. Notably, arbitration may sometimes be included in an MDRC clause as the last step. By enabling parties to settle disputes between themselves, MDRCs provide an opportunity for parties to avoid an adversarial approach, thereby maintaining their business relationship for longer. Traditional dispute resolution methods which require a third party are often adversarial in nature and will likely lead to frosty business relationships on their conclusion due to the imposing a win/lose outcome. MDRCs provide steps that reach decisions swifter than arbitration or litigation, thereby reducing the number of times parties and their employees have to attend to disputes instead of conducting business. Given that most MDRC steps do not require third parties or institutions and take less time to resolve, they require fewer resources. This is particularly important in large-budget projects where a slight delay impacts a significant dent within the project budget. The flexibility of MDRCs means that they can be tailored to the bespoke nature of a project or to meet certain project idiosyncrasies, such as technological or environmental issues. MDRCs give parties the power and control of the outcome of disputes meaning that they can opt for agreed win/win solutions instead of win/lose outcomes. This allows parties to settle on methods that meet their interests.

MDRC Steps

There are several multi-tier dispute resolution methods that parties may include in their construction contracts. While standard construction contracts such as FIDIC prefer a three-tier system, parties may opt to add their unique methods to such standard construction contracts. Some of the most popular dispute methods outside of litigation are discussed below within the construction industry are described below. 

Negotiation

Negotiation is the most readily available dispute resolution method available to parties and often the quickest. It involves the parties in dispute attempting to reach an agreement on the solution to their differences through discussions where both parties are prepared to accept and live with the agreed terms. This method is ideal when long-standing relationships between disputing parties exist, non-complex disputes or in smaller projects where parties cannot afford other methods. However, it may not be favourable when the relationship between disputants is newly formed or one of the disputants is upset and unwilling to cooperate with the other. Negotiations may complicate issues as they are not automatically binding on the parties. In order for the agreed settlement to be binding, the disputants may need to amend the construction contract. 

Mediation

Mediation is, in essence, extended negotiation, which involves a third party. The role of the mediator is to facilitate negotiations towards reaching a compromise between the parties. The mediator cannot make a decision which is binding on the parties but merely makes suggestions to the parties on how to reach a settlement. Mediation is a form of shuttle diplomacy and requires the mediator to be a negotiator for both disputants, thus requiring the appointment of an expert negotiator. Mediators can be appointed under the rules of a selected dispute resolution centre, such as theMediation Rules of the International Chamber of Commerce.

Mediation is ideal where negotiations would have worked but owing to non-complex issues, it would have failed. It is particularly ideal when a party is upset or unwilling to enter into direct negotiations with the other. However, it is more expensive than negotiations, and the process will be longer. Moreover, the settlement reached between the parties is not automatically binding and will require an amendment of the construction contract. 

Conciliation

This process is very similar to mediation, such that the terms conciliation and mediation are sometimes used interchangeably. The major difference between mediation and conciliation is the role played by the third party. In conciliation proceedings, the third party takes a more active role than a mediator. The conciliator, in this instance, examines the parties’ cases, makes suggestions to them, advises them on their cases, finds persuasive arguments for each party’s case and may even draft a proposed solution to the dispute between the parties. Unlike the mediator, the conciliator is more active in the negotiation process and influences the outcome to a greater extent. Although the conciliator is entitled to draw up a settlement, it will not be binding on the parties unless they amend the construction contract. Conciliation should be the chosen dispute resolution method where the dispute involves complex matters and mediation has failed. The cost difference between the two methods is often negligible.

Adjudication

The process of adjudication involves the appointment of a neutral third party who must ascertain the facts and law emanating from the dispute. Only disputes which have crystallized can be brought to adjudication. This means that both parties must be aware of the claim and relevant relief sought, of which the disputants must provide the same to the adjudicator in writing. Persons with the necessary knowledge, experience and skills related to the legal dispute must be appointed as adjudicators. The adjudicator acts as a quasi-judicial officer meaning senior lawyers or retired judges are often appointed. They have the power to investigate the issues surrounding the dispute, including visiting the construction site, inspecting documents or interviewing any relevant individuals. Where necessary, the adjudicator may appoint experts to assist in ascertaining the facts and law of the dispute. Such experts are merely advisors to the adjudicator, who must make the final decision.

Unlike negotiation, mediation and conciliation, the adjudicator’s decision is final and binding on the parties. The adjudicator’s decision does not, however, automatically become binding unless agreed otherwise by the parties. In most instances, it becomes final and binding upon the expiry of a period of 30 days without either disputant challenging it at arbitration or litigation. Adjudication can be a viable option for smaller construction projects where the parties cannot afford lengthy legal proceedings or time-sensitive projects. It is ideal for highly technical and complex legal disputes that require specific expertise to understand, such as payment calculations. 

Expert Determination

Expert determination is similar to adjudication but differs significantly. While adjudicators are neutral third parties tasked to determine the facts and law of a dispute, in expert determination, the third party determines a technical issue only. Unlike adjudicators, which adjudicate a dispute which has crystallized, experts may make a determination over a non-contentious manner. The determination is often limited in the contract to specific technical issues relating to the project. This means that determinations are made by qualified experts such as chartered accountants, auditors, engineers and architects. These experts will have the authority to investigate the dispute or matter in order to come to a determination. As such, they can visit the site, review particular documents and interview individuals. Upon completion of the investigation, the expert must make a final and binding decision. The expert may be held liable if it were to be established that in making the determination, the expert acted negligently. It is, therefore, quintessential that experts that are appointed possess the substantial technical expertise to decide over the dispute or matter.

This dispute resolution method is best suited for highly technical and complex non-legal disputes between the parties. Having an expert make determinations lead to more equitable outcomes that safeguard the technical integrity of the project. 

Dispute Boards

Dispute Boards (“DB”) are a growing dispute resolution method of choice within the international construction industry, particularly large public infrastructure works. Depending on the contract between the parties, DBs may be referred to as Dispute Avoidance Board, Dispute Avoidance and Adjudication Board or Dispute Resolution Board. TheInternational Chamber of Commerce defines DBs as “a standing body composed of one or three DB Members. Typically set up upon the signature or commencement of the performance of a mid or long-term contract, they are used to help parties avoid or overcome any disagreements or disputes that arise during the implementation of the contract. Although commonly used in construction projects, DBs are also effective in other areas. These areas include research and development, intellectual property, production sharing and shareholder agreements.”

DBs monitor the project and engage in regular and unsolicited dialogue with all parties to the contract, including sub-contractors and third-party contractors. The DB carries out its duties throughout the duration of the contract in order to prevent and resolve disputes. DBs can consist of a single member or more, and three members are often preferred depending on the project size. Members ought to people highly qualified in project management and the specifications of the project in order for them to be effective. Generally, members are expected to be independent of the parties; however, parties may be non-independent members.

DBs have gained popularity mainly due to their success and advantages. Listed below are some of the numerous advantages:

• They bring objectivity and neutrality as DB members are appointed by consensus;
• DB members have intimate knowledge of the project;
• Periodic engagements with project parties ensure DB members stay abreast with project issues and potential disputes;
• When disputes arise, they are given early attention;
• DB members are incentivized to maintain a cordial business relationship;
• Major disputes are resolved in shorter periods than arbitration and litigation;
• DBs cost far less than arbitration and litigation; and
• Procedures and formalities of the DB are tailored to the needs and interests of the parties.

There are three main forms in which DBs are set up. These are Dispute Review Board, Dispute Adjudication Board, or Combined Dispute Board. Under the Dispute Review Board, members visit the construction site regularly and attend to disputes only after the engineer/principal agent has made a determination. The dispute review board may, in its deliberations, hold hearings and review project documents. Thereafter, it will issue a non-binding decision which becomes final and binding on the parties if not challenged by either party within a specific period, usually 28 days. A Dispute Adjudication Board carries out the same functions as a dispute review board, its decisions are final and binding on the parties. Nonetheless, the decision can be revised by mutual agreement or by an arbitral panel. A Combined Dispute Board is a combination of the Dispute Review Board and Dispute Adjudication Board. It can make a recommendation or decision relating to a dispute. Where it fails to provide either, a party is entitled to bring the matter before an arbitral tribunal.

Concluding Remarks: Considerations when drafting MDRCs

Most construction contracts are concluded using the standard-form contract, which has been developed over the years by both international and national construction industry associations. The most used set of standard-form construction contracts is theFIDIC Suite of Contracts. Depending on the contract selected by the parties, the FIDIC Suite contains a multi-tiered dispute resolution clause.Clause 20 of the Red Book provides for the consideration of disputes by the (i)Engineer; (ii)Engineer and DAAB, (iii) amicable settlement (negotiation, mediation, conciliation and (iv) arbitration or litigation. Even though standard form contracts are used, it is important that parties pay attention to the MDRC. Parties tend to pay little attention to dispute resolution when concluding a contract as, at that time, they do not foresee a dispute arising.

The pacta sunt servanda doctrine, generally applied in most (if not all) common law jurisdictions, stipulates that parties will be bound to the four corners of their contract. Moreover, general principles of contract interpretation stipulate that where the wording of a contractual clause is clear and unambiguous, such a clause must be applied as it reads. As such, it is crucial that parties pay particular attention to the wording of a standard form contract as they are drafted for international use. In some instances, the standard form contract is drafted for use within a particular jurisdiction but still needs to be tailored to the project.

The parties’ major consideration should be whether the MDRC will be enforceable and effective. The following are some considerations to ensure the enforceability and effectiveness of an MDRC:

• The dispute resolution methods stated in the MDRC must be applicable and available within the jurisdiction in which the parties wish to resolve the disputes. Particular attention must be paid to the effectiveness of using such a method within that particular jurisdiction and whether an arbitral tribunal or court may adjudicate the matter.
• In some cases, legislation may provide for certain disputes to be referred to a specific forum. Due regard must be paid to such legislative provisions; otherwise, a dispute resolution method which would have been perfect for the project will be rendered useless.
• To save both time and money, it is also advisable to expressly provide for certain disputes to be referred to a particular dispute resolution method instead of all processes following the same path. Some disputes are not suitable for certain dispute resolution methods. For example, a technical dispute is best resolved using adjudication or expert determination compared to using negotiations or mediation when the disputants are not well qualified in the disputed area.
• Clear and unambiguous language ought to always be used in such agreements. The wording of the MDRC must be mandatory and compel the parties to use certain methods prior to arbitration or litigation. In order to be effective, parties must not have the option to follow the multi-tier procedure or otherwise.
• Vague terms such as “amicable solutions” or “best endeavours” must be avoided to the greatest possible extent.
• To ensure that the process is both swift and cost-effective, the MDRC must expressly state the applicable timelines for the use of a particular dispute resolution method. The consequences of a failure to adhere to such timelines must also be clearly set out.
• Where a third party is required, the procedure of appointing the relevant third party needs to be clear and ensure the appointment of an appropriately qualified person. Dispute resolution centres often provide appointment rules which ensure the swift and transparent appointment of an appropriately qualified person.
• Generally, common law courts do not accept agreements to agree as valid contracts. This means that the process applicable to each dispute resolution method must be expressly set out and not be left to the parties to agree at a later stage. Most importantly, this reduces abuse of procedure by disputants and the likelihood of subordinate disputes.

Disclaimer

The views, thoughts and opinions belong solely to the author. Author reserves the right to depart from these views.

About the Author

Mr. Takunda Gumbu is a legal consultant based in Harare and a postgraduate researcher in construction, international investment, and financing laws at the University of Namibia. He is also a Regional Representative with the Afronomics Law Academic Forum and a member of the Chartered Institute of Arbitrators.

Editorial Team

Preferred Method of Citation

Takunda Gumbu, “Multi-Tiered Dispute Resolution Clauses in Construction Contracts” (IJPIEL, 28 December, 2022).

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