Introduction
This book is all about the necessary techniques and habits of effective clients, and this particular chapter will show how a client can avoid disputes and, if that is not possible, next steps are described.
The need to avoid disputes
Why should clients want and need to avoid disputes? Primarily, they are costly in terms of money, time and reputation. An often hidden cost is the management time required to deal with disputes and the souring of relationships can make the going even harder. It is sometimes surprising just how early in the construction period disputes can arise and their negative impact may be felt throughout the project. It is worth taking into account that an average of 50% of all legal costs in the construction industry are related to disputes. In 10% of projects, 10% of total project costs are legal costs. Litigation will cost hundreds of thousands of pounds for a dispute that ends up in court, and an arbitration could cost at least that much.1 This is all time and money that could be spent on the project itself or by improving margins and the financial performance of the industry.2 Effective clients are aware of the risks of moving too hastily through key stages, cost cutting particularly on fees or using the wrong criteria to make decisions. They are open to innovation – both in terms of products and new processes that have proven to be successful learning the lessons of others. They have the skills and experience to instruct their professional teams well and to evaluate their advice properly. Their approach to projects both large and small is collaborative and their egos are suppressed. Effective clients think critically and sceptically and, above all, are sensible.
The nature and type of disputes
Disagreements and disputes arise out of uncertainty. However, few clients are prepared to acknowledge this inevitability at the outset under the influence of project optimism. This optimism usually flies in the face of the client’s experiences in previous projects where confidence is seldom realised in practice. They will soon find out otherwise! Why are construction projects uncertain?
- Buildings are not mass-produced identical products – every project is a prototype. Even repeating the same design on a different site leads to uncertainty caused by unique site conditions.
- Project briefs may be inadequate or poorly defined.
- There are uncertainties in design because it is not possible to design everything before it is constructed (even using BIM) and the design is never complete until the building is finished. This is particularly appropriate for work to existing buildings.
- Choosing an ill-considered procurement process.
- Uncertainties in contractual arrangements and an imbalance of risk-sharing.
- Uncertainties in the construction phase including site conditions, weather, resources, and supply of materials, political and economic risks.
What type of disputes might arise?
- Disputes in construction typically arise from issues of:
- Contract interpretation.
- Quality of work.
- Progress.
- Information (quality of or lack of).
- Payment: ultimately (almost) all disputes arise as a result of financial issues.
- Construction projects involve teams of professionals who are connected only by the contractual arrangements specifically set out for the project. Disputes in construction commonly occur between:
- Employer and consultants.
- Employer and main contractor.
- Main contractor, subcontractors and suppliers.
What is a dispute?
Almost all contracts avoid defining a dispute, the exception being the FIDIC Gold Book3 which defines a dispute as:
Disagreements are not always bad and may lead to innovation, but in construction projects clients should focus their efforts on ensuring that they do not end up in fully blown disputes. Different parties have different commercial interests: the client wants the best quality product at the best price and usually within the shortest time; however, the contractor sees the project as a commercial transaction from which it has to make as much profit as possible.6 Quality will be a secondary consideration for most contractors, unless the provision of quality impacts the contractors’ ability to be paid. The contractor will almost always want the programme to reflect the availability of resources and materials, and its need for cash flow. Recognising that the two main parties to a contract have different and sometimes opposing priorities means it is possible to understand how and why there are always two sides to a situation. Then there are the priorities of the various consultants.
Human issues
The human dimension is important at the project level; disputes are ultimately about people. Human traits leading to failures may be:
- Poor communications.
- An inability to communicate:
- Resorting to formal legal methods too quickly.
- Cultural differences and misunderstandings.
- Dysfunctional team (personality problems).
- Uncertainty making people defensive.
- Uncertainty leading to mistrust.
- Uncertainty preventing a proper assessment of risk.
The effective client will aim to avoid disputes and will encourage the contractor to adopt the same approach. Dispute avoidance aims to tackle differences before they become crystalised disputes requiring a formal process of resolution. Arguably, dispute avoidance is a state of mind but good project management is the basis for proactive dispute avoidance, that is a process with two main stages:
- 1 Management methods: focus on the construction process.
- 2 Non-escalation methods: focus on containing disputes.
Management methods
Management methods should be implemented throughout the project and should begin pre-contract, or as soon as possible thereafter. At this stage the only party involved will be the client and it is now that the client has an opportunity to set the tone for the whole project. One of the best ways of assessing the potential for disputes is to learn from previous projects. The next step is to be realistic about the possibility that problems will arise and consider what unpredictable scenarios might arise out of or during the course of the current project. This process is similar to the Risk Register included in NEC 3 Contracts7 that allocates risk between the client (employer) and the contractor.
An effective client can help the project by providing all the information in their possession about the site and anything else that might adversely affect the project. It may be tempting simply to leave all the risk to the contractor but this will only lead to problems later. For instance, if you own the site, now is a good time to carry out a thorough site investigation and provide the information to the contractor.
Many clients want their project to be on-site as soon as possible and want to spend as little as possible on design. In Chapter 1, Figure 1.1 shows the relationship between design cost and the financial benefits of the project. The naïve client falls into this trap, often truncating the design period. Paying too little for design and giving the designers insufficient time to do a proper job may result in inadequate or inaccurate design information, and this almost always proves to be a fertile breeding ground for disputes.
Clients may choose a design/build form of procurement to reduce the time and cost of design. In principle, there is nothing wrong with this provided the pitfalls are recognised. The results of design/build can be capricious: some projects work out well, others do not. In particular, the quality of design, workmanship and materials can be unpredictable and sometimes disappointing. D&C procurement does not necessarily mean the project will be delivered quicker and because the contractor takes more risk, it is likely to prove more costly.
Designing everything before works start on-site will normally provide more certainty, however this approach may not suit the pace of a modern commercial environment. Whatever method of procurement is chosen, fewer disputes will arise when the production information, specifications and employer’s requirements have been properly considered and well produced. In most cases it is worth investing a little more time and money in the project before the contract is let, to ensure that it is as well designed and coordinated as possible. The likelihood of disputes is reduced along with the need for changes during construction.
The choice of contract relates to the chosen of method of procurement. It is helpful to consider a contract that contains provisions for dispute avoidance as a precursor to formal dispute resolution procedures. The only standard form of construction contracts that make dispute avoidance mandatory are those published by FIDIC,3 which includes the Gold Book.3 Their contracts are used for international construction projects and are less common in the UK. In the context of dispute avoidance, the NEC 3 contract was used for the London 2012 Olympics project.
Prudent management techniques should also be adopted at the second stage of the project where other parties, such as the main contractor, are involved. It is wise for clients to conduct due diligence on those they may be contracting with. Reputation, financial standing, organisation, people, methods and attitude are some of the topics to be assessed by clients.
It may be tempting for a client to adopt tender procedures that are not entirely fair to the potential contractor, for instance by not revealing factors that could affect the works and instead leaving the contractor to carry the risk. This will almost always result in disputes. The effective client will do its best to conduct a fair and open tender process, which is no guarantee that disputes will not arise.
All clients want best value for money and some also want the cheapest price. The effective client checks to ensure that the tender price is realistic. An unrealistically low price leaves the contractor with no alternative but to find ways to make a profit by making claims, and these usually result in disputes at best and at worst an insolvent contractor with all the attendant problems that entails.
Towards a collaborative, no-blame project culture
There is much to be said for encouraging a collaborative, no-blame regime. This is harder to establish than might at first appear because the parties each have different priorities, as described earlier in this chapter.
Such a collaborative, no-blame culture was successfully implemented on the Heathrow T5 project.8 This was achieved by actively monitoring project costs and progress, but taking little account of any other alerts which may have resulted in delays to the work or prevented timely action being taken to keep the project on track. The key to active monitoring of the project is the recognition of problems as, and, if possible before they arise. Problems must be tackled as they arise and clients should not be tempted to leave dealing with them until the end of the contract, perhaps in the faint hope that they may go away.
Unfortunately, the sensible practice of making dispute avoidance a on-site process is rarely carried out in practice. Parties will leave problems until later, perhaps also fearful that airing problems might mean the deterioration of relationships. It is a natural human reaction to avoid dealing with conflict, but if the correct project management procedures are put in place they can be dealt with openly and promptly and not at the end of the project when the mistakes have already been made, positions have been taken, the seeds for disputes sown, and when memories have begun to fade.
Non-escalation methods
Having accepted that disagreements will arise, the next step is to contain them and ensure – if possible – that they do not progress to become formal disputes. Non-escalation is likely to take the form of a layered dispute resolution procedure beginning with negotiation. Roundtable negotiation is the cheapest, easiest and most direct method of dispute resolution that leaves the outcome entirely in the hands of the parties.
Solutions can be discussed and implemented that may reflect the terms of the contract or may depart entirely from those terms: it is entirely in the hands of the parties.
Reactive and proactive methods
It is not always possible for two or more parties to resolve issues without outside help in the form of a third party neutral. This assistance can take a number of forms and be more or less formal. Such assistance is preferable to the common mistake of implementing formal legal proceedings too quickly. Methods are:
- Mediation/ENE (reactive).
- Dispute Avoidance Panel (2012 Olympics, proactive).
- Ad hoc Statutory Adjudication (reactive).
- Ad hoc Dispute Board (reactive).
- Standing Dispute Board (proactive).
- Arbitration/litigation (reactive).
- Expert determination (reactive).
Reactive methods usually involve dispute resolution and are carried out after dispute has arisen. Mediation, which is known to be successful, sets out to be a non-confrontational form of dispute resolution, and is often preferable to court or arbitral proceeding because the parties retain some control over the outcome of their dispute.9 Even at mediation the parties will have taken up positions and the process can become one of commercial (or personal) negotiation. The mediation process is without prejudice, unless the parties sign a settlement agreement, so creative methods of solving the dispute that might lie outside the contractual framework can be considered.
Adjudication and ad hoc dispute boards both involve adversarial processes and take place in a very short time. Although quick and relatively cheap, they can amount to ‘rough justice’. However, neither process is final and binding, so if a party is sufficiently unhappy with the decision, it can proceed to litigation or arbitration, although most disputes end with the adjudication process. Remember that under most construction contracts the parties have a statutory (and usually also a contractual) right to adjudicate disputes. The process is quick,10 so it is important to have dispute avoidance procedures in place long before any disputes are likely to arise.
One of the most effective methods of proactive dispute avoidance is the use of the standing dispute board.11 The parties choose a panel of one or three experts and they start monitoring the project from the start of the contract. By making regular site visits and having meetings with both parties, the dispute board can proactively assist the parties in avoiding disputes, which at the request of the parties it can do by making informal recommendations or giving non-binding opinions. If a dispute does arise, the parties can refer it to the board for an adjudication decision.
Expert determination is a form of adjudication, which results in a final and binding decision, which is usually very hard to overturn. The process is not bound by the normal rules of natural justice, so while it can be very effective for some disputes the effective client should seek legal advice before implementing it.
Conclusion
There are many ways of getting into trouble because of the uncertainties that are inherent in the construction process. There are equally many ways of getting out of trouble, some more expensive in terms of time, money and reputations than others. However, the most effective way of keeping out of trouble is to implement proactive methods of dispute avoidance. If you do get into trouble, then consider all the options for getting out of it because there may be more effective (and private) ways than simply commencing arbitration or court proceedings. ◼
Perspective
by DDJ Stuart Kennedy
The construction client
The role of the client
The attitude of the client – or to use the contract term, ‘the employer’ – under a construction contract sets the tone for the whole project. An experienced and knowledgeable client has a much better understanding of the process of producing a new building and of what to expect from that process. For the less experienced or first time client, the role can be very stressful and frustrating, but it need not be so.
The starting point must be to properly identify performance of each party. An informed client and define what is required. This sounds obvious should have realistic expectations as to what but so often difficulties arise when the finished the contractor can and will supply under the product delivered by the contractor does not meet the client’s expectations. There can be many reasons for this mismatch between what The contract is what it says – not what you wish the client wants and what he gets, but failure to clearly define the specification from the outset the occupier of the building, thought must be given to the intended use of the building and the particular needs of the client, as well as the anticipated running and maintenance costs.
A key aspect for any client will be to appoint appropriate consultants, such as an architect, engineer and quantity surveyor. The number role and type of consultants will depend upon the method of procurement of the building. Will it be a traditional contract with the design by the the architect or perhaps design and construct by the contractor? Who will fulfil the role of project manager – the architect or a separate project manager? Ensure that the role of each consultant is defined in a written agreement and that there are no gaps between the scope of each role.
During the design process, the client should be actively involved and should be continuously reviewing the design to ensure it meets their needs.
Time and cost are fundamental issues. How long will the project take and how much will it cost? Both of these should be agreed at the outset and the continuously monitored for changes.
Using the correct contract form
The type of contract to be used should be carefully considered. The use of an inappropriate form of contract can create difficulties, as can bespoke amendments to standard forms. The choice of the form of contract will also be affected by the chosen method of procurement.
Knowing rights and obligations
When the contract has been chosen, and preferably before it is signed, the client should understand the terms of the contract and the rights and obligations of each party. Important terms cover issues such as payments, the completion date, extensions of time, liquidated damages, variations, quality and defects liability period. Understanding the contract can help avoid unreasonable expectations as to the performance of each party. An informed client should have realistic expectations as to what the contractor can and will supply under the contract. The client cannot re-write the contract later when it does not suit their changing needs. The contract is what it says – not what you wish it had said.
Be an informed client – get informed
Having employed all the right consultants, it is important to take and follow their advice. Be aware that an architect can have two separate and distinct roles, one as the designer of the works and the other as a certifier. In the latter role, the architect must act independently and not as the agent of the employer.
Avoid disputes
When the contract is produced and signed, the parties are the best of friends and hopefully they have no intention of getting into dispute. However, disputes are not uncommon in construction projects and so thought should be given as to how they can be avoided and, if they do arise, how they can be resolved.
Many disputes can be avoided if the parties behave in a reasonable manner and are realistic about their position and that of the other party. Recognising the potential for a dispute to escalate and the consequent cost in terms of time and money can help to focus on the desired outcome rather than the strict legal position.
When drafting the contract, think about what you will do if a dispute arises. Most construction contracts must, by law, incorporate a clause which entitles either party to refer a dispute to adjudication, which is a fast-track method of obtaining a binding but temporary decision. Many construction disputes are resolved by adjudication and do not go beyond that stage. However, in most instances a dispute can still be finally decided by arbitration or litigation, and clients should make a conscious decision about which to adopt. Other methods of resolving disputes include mediation, conciliation and expert determination. Some contracts (such as FIDIC) include an escalating dispute resolution process whereby disputes are first referred to a process of ‘amicable settlement’ (or negotiation), followed by mediation or conciliation and, finally, if the dispute has not been resolved at those two stages, to arbitration.