Adjudication, Mediation, Arbitration… 1

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Tuesday, February 3rd, 2015
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I just read a very well researched paper from an American Law professor, which looked at managing conflict in construction, and the various forms of dispute resolution and how they performed in resolving disputes.

America does not have adjudication, which is in effect here in the form of a Security of Payment Act.

As we know, the US is a very litigious environment and construction is no exception. I thought it might be interesting to look at what they contend with over there versus what adjudication offers the industry in Australia. The professor noted that one English QC thought adjudication decisions were is simply a ‘gut reaction’ to the claim, but the findings in the UK tell a different story.

Cost

The landscape in the US is still most inhabited by lawyers. It was noted that obviously this made even informal and ‘alternate’ dispute resolution very expensive and often akin to a full-on court case. It was also noted that there contractors would wear the entire cost of preparing for a court case only to have the matter settled out of court. It was specifically noted the discovery process alone provides a bulk of the fees the firm may earn. The issue here is to maximise the ability for the parties to settle their differences as early as possible and not as a by-product of the journey to full litigation. Adjudication offers exactly that outlet; in adjudication the parties can argue about what they are really arguing about: the work and what it’s worth.

Mediation is simply a legal fight by stealth

Mediation is supposed to be an informal non-legalistic process where a mediator seeks common ground between the parties in an attempt to settle the dispute. However, one of the outcomes in the US has been the evolution of mediation into a pit stop on the way to a hearing. The parties got to mediation represented by their lawyers. The entire point of the process is lost. Here we have such things as court ordered mediation and this suffers the same problems. It also adds to cost.

Flawed assumption of non-payment

Mediation has not flourished anywhere, really. And the reason is simple: payment disputes are adversarial. No one wants to mediate. Most of the time they want to punch the other guy out. The reason for this is that more often than not, the parties aren’t actually in dispute about the work. Arguments about the work are simply a mask for a desire to recover losses on the job, or a total lack of money with which to pay. There is simply no mediating your way out of these issues. A party’s desire to stave off insolvency or to protect its profit will always win out over sitting around a table to seek common ground. Too often, mediation rests on the assumption that there are actually things to mediate about. Often there isn’t.

Adversarial Process

The paper notes that in the UK, adjudication was very successful in giving the parties a final determination on issues in dispute, even if many times the issues are unmeritorious. The parties accept the determination in the UK reportedly over 80 per cent of the time. In Australia, it is over 98 per cent of the time, with hardly any going to court. I think it is because adjudication provides two things that contractors want out of dispute resolution process: it is adversarial in nature, and it is a forum where you can have a detailed argument about the actual work, as opposed to concocted posturing about entitlements, damages, etc.

In adjudication, on each point someone will win and the other will lose. Each side can run its arguments. These two factors will, most of the time, leave each side feeling that they have been heard, that they squared off with their opponent, and the matters were decided one way of the other. The fact that so few are taken further, even by parties that can afford to do so, speaks to the authenticity of the process.

Law vs other skills

The paper also raised the interesting question of whether construction disputes are better served with a mix of skills rather than only legal skills. To be sure, the legal standing of provisions of the contract plays its part, but that is not the totality of the dispute. One of my previous points was that adjudication allows the parties to argue about the actual work. It is reasonable to say that well over 80 per cent of disputes are about alleged defects, variations, and back-charges. The contribution to be made by skills rooted in construction knowledge and experience are invaluable.

Consider the civil contractor arguing over whether the correct roadbase product was used, or the plumbing contractor arguing about the whether the hydrant pipe was properly specified, or the electrician who had to install five extra distribution boards that were not in plan revision A. And so on. These are the things contractors argue about. These are the things that need to be decided with finality. Avenues other than adjudication do not offer a way for such things to be decided where the sides do not offer each other any compromise position. The experience in the US is that other forms of dispute resolution end up mired in legality and huge costs without court as the only forum for a decision.

I have found great value in the contributions of various experts in expert reports which often finalise arguments parties have had for months over supposed defects, with neither side being properly informed. This brings finality to the matter and puts it beyond further argument. Adjudication provides a forum where such information can be reviewed and argued at relatively low cost.

I think Australian contractors ought to be grateful for their access to a system that is fast and low cost and where the arguments about the work can be slugged out in a bitter fight to the death. It sounds ferocious but that’s how we like it, and above all, it works.

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  1. Tony Fendt

    My observation over many years in the industry is that ignorance of Contract is the biggest single cause of disputes between the parties … and a little bit of knowledge in the wrong hands is exceedingly dangerous. Don't for a moment think because you foster a superficial "paly-paly relationship" with the other party that all manner of disagreement will cease to exist. That will come spectacularly unstuck once one of the parties feels the grounds of the "relationship" tilting away from their advantage. Know your contract, execute your responsibilities strictly in accordance with your contract, and keep your contract on top of your desk in your full view to remind you of your obligations and responsibilities.

    Final observation … we've been talking about these things in building and construction for a very long time … when is the wisdom going to be aggregated?