Creating the Right Dispute Resolution Clause

Tuesday, March 10th, 2015
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Think of the dispute resolution clause in your construction contract as the extended warranty of the build.

You’re assuming that the product comes with a warranty, but you haven’t read the fine print to see exactly what is covered and what is not.

There are two types of dispute resolution clauses – those that progress and facilitate, and those that wheel spin or stall the resolution.

Obviously this knowledge is best served cold when negotiating a contract, rather than hot when both parties are locked in conflict.

The best dispute resolution clause is one that gives traction to the process and delivers both parties a definitive path to follow in the shortest time period toward a determination. Avoid clauses that “agree to agree” to things, as the superior courts take a very dim view of such clauses.

Disputes flare up on construction contracts almost daily, and some argue that most disputes are a healthy means of risk taking and risk management at its best. Let’s face it, personal relationships have ups and downs and disagreements, so why wouldn’t the same apply to the relationship dynamics of a construction project?

Ensure that your contract allows for dispute resolution without having to litigate. Irrespective of the quantum involved, the more flexible your dispute resolution clause is, the more progressive the productivity on the project. Alternative dispute resolution (ADR) through tribunals are informal, quick and best of all commercial in confidence. Litigation is very, very public and can be damaging even to the prevailing party.

When designing your dispute resolution clause, keep the time factor tight. Once a party disagrees with the other party, then limit the time period from the time of knowledge of the dispute to time that the party has to present the dispute to the other party, in writing, clearly advising what the dispute is and most importantly what relief is sought. It’s a bit pointless kicking up a fuss telling the main contractor you disagree with their variation pricing without offering an alternative price to do the work.

So the notice of dispute has now formally been handed to the other side. Now what? Again, keep the time line tight. Your clause should allow no more than 14 days from the date of the notice before the parties have to meet to attempt to resolve the issue in dispute.

At this juncture, you could insist that it is the company representatives that must meet, or even senior executive management. Try and avoid multiple levels of meetings to resolve the matter – these usually favour the upstream party and do nothing more than spin wheels and delay resolving the dispute.

Use terminology such as “best efforts” and “good faith negotiating.” The upstream lawyers hate these terms, as it compels their client to actually make a real effort to resolve the issue in a decent manner.

If or when this meeting of representatives or senior executives fail to resolve the issue, then your clause should accommodate that at this time either party, albeit usually the aggrieved party, has the right to make application for the appointment of an expert, or mediator, or arbitrator.

All the states and territories now are aligned with the UNCITRAL Model Law for Commercial Arbitration, so your local act (Commercial Arbitration Act 2012 in WA) has pathways that allow for the appointment of an expert/mediator/arbitrator through the local court, which is the Supreme Court in all states and territories.

Alternatively you could direct the clause to allow the parties to seek an appointment through any of the industry recognised appointing bodies, such as Institute of Arbitrators and Mediators Australia (IAMA/LEADR), Master Builders Australia (MBA) or other similar organisations.

Generally speaking, the tribunal (which is the formal vessel of arbitration/mediation/determination) will only consist of one arbitrator, however some contracts have tribunals consisting of three members, particularly where big dollars and cross-national jurisdictions are concerned.

If you do choose to go with the Appointing Body model, and this is definitely my own preferred model, then try not to limit yourself to any single appointor. At the end of the day, all of the appointors will apply due diligence and duty of care in nominating a tribunal member, so whether you use IAMA or MBA or Engineers Australia doesn’t really matter.

IAMA has a practical set of clear rules of arbitration (including mediation and determination) which you could reference in your dispute resolution clause as the pathway to follow. This will give you the quickest path to determination.

As an example the timeframe for a standard arbitration is a bit like this:

a. Day 1 – Disagree on point.

b. Day 14 – Serve notice of dispute

c. Day 28 – Meeting of company representatives of executive management

d. Day 35 – Apply for Appointment of Tribunal

e. Day 42 – Tribunal nominee contacts party and calls preliminary conference

f. Day 56 – Preliminary conference – nominee accepts the reference and becomes arbitrator on record.

g. Applicant (aggrieved party) then has 14 days to lodge and serve points of claim

h. Respondent (the other party) then has 14 days to reply and counterclaim

i. Applicant then has a further 14 days to respond and defend counterclaim.

j. Add another 14 days for a flurry of “further particulars” and discovery, and you’re ready to argue your case in front of the tribunal.

So realistically, provided you have a clear dispute resolution clause in your contract, and you have your administration of your contract well in hand, you could easily be obtaining relief within 16 weeks or just over three months. Try to get that right through the courts!

Best of all, it’s all commercial in confidence, nobody gets hurt by rumour or innuendo, natural justice is done, and the determination of the tribunal is as binding as a Supreme Court order.

Like I said, best served cold.

As always, risk safely.

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