The construction risk and change management process and the pathology of the arising disputes (Chapter 3)
Introduction
Construction is a process whereby a contractor typically undertakes to carry out a specified scope of work for an amount of money that is fixed or for a variable amount of money determined using fixed rates. However when one considers how the scope of work is typically required to be changed in its implementation in construction, one can begin to understand the common problems the construction industry faces in managing the resultant risk and change. A major part of the construction process involves the management of risk and dealing with change, with the owner on the one hand demanding value for money and the contractor on the other hand aiming to achieve maximum profit.
Along the time line of the project there is typically a big focus on risk management at the pre-contract stage when the procurement method is defined and the contract is negotiated. A risk register is normally drawn up at this stage itemizing the probable risks, but how are these risks monitored and managed in the post-contract stage?
The construction industry is historically known for its adversarial approach to life however the industry has come up with new methods of procurement to deal with the problem. Partnering was designed to create a collaborative working environment between all the parties. However to what extent has partnering been successful in reducing the problems that arise in the construction process?
An important point to consider, as pointed out in Phillip Cappers article , is no matter what method of procurement or contract is used there are a number of characteristics which are common to, and largely distinctive of, almost all construction projects. It is generally in these characteristics that the seeds of eventual disputes lie. When change occurs parties will be faced with a process of agreeing on the liability and quantum. During this process it is inevitable that differences will develop from time to time as parties will naturally have their own self interests to pursue which may almost certainly be conflicting.
Commenting on the clues to the causes of disputed matters, Phillip Capper identified the problem that the construction industry faces with the diversity and sheer volume of evidentiary material.
Masses of record material are produced even on relatively small construction projects, many of them crucial as they are informal: such as eg the penciled scribblings of a gang member on daywork sheets, or mud stained card recording a piling set. Project records may be as diverse as site investigation reports, feasibility studies, specifications, drawings, tender submissions, estimating and pricing details, diaries, minutes of meetings, formal instruction, test data, payment applications and certificates, weather reports, job sheets, inspection reports, programming data and reports and so on. To all of that is added great chains of correspondence between the participants, managing reports in each of the entities and the usual periphery of any business activity: from management accounting to press publicity. It is haphazardly in these various forms of contemporary records that are found the clues as to the causes of disputed matters.
If the causes of disputes can be identified by retrospectively analysing these contemporary records then what steps need to be taken to arrange and manage these records to be able to identify problems in real time which could enable managers to make systematic decisions based on facts to take corrective actions and resolve differences that emerge?
Risk management in construction
This section considers the current practice of risk management distinguishing between the pre-contract stage and post-contract stage. At each stage there are different dynamics at play. The pre-contract stage very much involves identifying risks and negotiating their allocation while the post-contract stage is where risks need to be managed. What is the current approach and process to risk and change management in the construction industry and is it adequate? There has been a tremendous amount of interest in this area and a substantial amount of theoretical material published however this is not always helpful. As Max Abrahamson put it, all discussions on theory could be suspended until practice has caught up .
Pre Contract Stage
At this stage in the construction process there is a focus on risk identification and allocation. Once the risks have been defined they are allocated to a party. Depending on the circumstances the employer will choose a method of procurement that he anticipates will best suite the nature of the particular project. This process will largely depend on the circumstances of the owner. The owner will normally employ consultants to investigate the risks and then ultimately decide what method of procurement best suites the owner. For example an owner that is procuring a new telecommunication system which involves new technology may decide that operation and maintenance of such a system is best controlled with an expert party who has the necessary skills. This may be one of the reasons for an owner deciding that a Build Operate/Maintain and Transfer (BOT) procurement method is best suited. In another instance the owner might be highly skilled and sufficiently resourced in this area and therefore may decide on a traditional construct or possibly design and construct method and take responsibility for the operations and maintenance of the asset.
Under traditional procurement the contractor is seldom involved at the pre-contract stage and therefore does not have the opportunity to add to the upfront definition of risks, choice of procurement and allocation of risks. These are therefore to a large degree imposed on the contractor. This has been one of the criticisms of the traditional approach. However under partnering arrangement the parties are encouraged to engage early in the project cycle to encourage early participation of the contractor.
Post Contract Stage
When the contract is awarded and the work gets underway, the emphasis normally shifts to monitoring and managing risk. The possible risks and change events on a construction project are vast and there is no universal standard for categorizing them and the way they are dealt with. This is probably because these events vary from project to project. In most cases risk and change are managed intuitively as opposed to systematically. There are reasons for this, one reason being the construction process is inherently prototypical as opposed to repetitive and therefore the processes do not lend themselves to a systematic method or approach. This could result in problems because the cause of a dispute may only become apparent well after the event that caused the dispute in the first place. Therefore it is difficult, if not impossible, to manage adequately. This is believed to be largely due to the archaic methods of information management still in existence in the construction industry.
To illustrate this point, a simplified example is provided of a typical way the risk of providing sufficient resource to complete a construction project on time is managed. If this is not managed effectively it could cause delay to the programme resulting in a party either incurring liquidated damages or an entitlement to extension of time.
Example - Managing the risk of providing adequate resource levels
There will normally always be a minimum, optimum and maximum level of labour resource required to complete a defined scope of work within a fixed period of time. There also could be limitations to the availability of the necessary skilled labour. If the contractor provides a level that is below the minimum level he will not complete on time and consequently he will have to pay liquidated damages for being late. If the contractor provides a level of resource above the maximum level then he will start working inefficiently and therefore not realize maximum profit. Therefore he will aim for an optimum level where he completes on time and realizes the maximum profit. How is this risk managed? This risk is normally managed at site management level based on the opinion of an experienced manager. If the work is not completed on time how will it be decided if there was adequate labour resource to complete the scope of work within the defined timescale? Essentially if it can not be agreed between the parties there will ultimately be a retrospective delay analysis prepared based on the contemporaneous records and a comparison will be made with the contract programme.
The above is a simplified version of a scenario that in practice is normally much more complicated. The purpose of the above example is to point out the disparity between the way risk and change management decisions are made and the way liability is determined.
The above example of risk and change is simplistic but even these simple issues on a big scale can become extremely difficult to manage without adequate systems being in place that collects and analyse the contemporaneous records in real time.
Strategies that construction companies adopt for managing risk
It is evident that some large construction companies actively pursue an overall high risk and high return strategy on the basis that they accept that there will be some loss and some profit. Smaller companies tend to spread their risk, in order to reduce its overall exposure, at a lower rate of return.
To what extent does this practice result in contractors being generally complacent in the area of real time risk management and detract from the actual issues being dealt with effectively?
The decision making process in the construction industry
The decision making process in construction is to a large degree based on the intuition of decision makers as opposed to a systematic approach. Intuitive decision making involves making decisions with no immediate factual rationale and is to a large degree based on the experience of the decision maker. Where culture and experience exist in a stable environment intuitive management can perform reasonably well according to some studies . However the complexity of contractual relationships and increasing size of the mega projects that are undertaken and a host of other reasons means that the intuitive method of decision making is only reliable to a degree and very dependant on key personnel.
Gary France in his article on controlling time in construction emphasises the importance of analysis and management in the controlling of risk in construction projects. However he said that the use of computer systems like Monte Carlo which carry out simulation tests based on random probabilities are totally meaningless. He goes on to say that mathematical or quantitative risk management is the most reliable.
Would it be possible for a construction project to convert to a systematic approach to decision making? Considering the prototypical nature of construction the amount of investment required to develop a system to fulfill this function for a one-off project may be perceived to outweigh the benefits.
Pathology of the arising disputes in construction
Most of the standard form contracts are designed to identify problems at an early stage. This is normally through a notification process advising a party of a problem or a change that could result in loss being incurred by a party which the other party could be liable for. This is no coincidence, as the earlier issues are identified the more chance parties have in sorting them out by taking corrective actions and or reaching agreement on the matter. If the parties fail to resolve any differences that could have emerged from the event, it is likely that the difference will develop into a dispute. For a claimant, wanting to pursue a claim through a coercive process, it is necessary for a dispute to have arisen, in the legal sense, before it can be referred to arbitration or adjudication .
For a manager weighing up the chances of success of a claim he will want to know intimately how the dispute will be dealt with and how a decision will be reached. At this stage the manager will have to make a decision on the likelihood of success or failure and ultimately whether to pursue the claim or not, considering costs and other relevant factors. We therefore consider the process of how disputes manifest themselves and then how they are resolved.
The manifestation of disputes
A common tactic in construction disputes is to argue that no dispute exists; therefore it is important to distinguish between a dispute and a difference. The fundamental distinction between a difference and a dispute is a dispute develops in a situation where a claim has been rejected, in part or in whole, or has simply been ignored by the other party. However where a party has not rejected the claim and has requested further information it is likely to be a mere difference. However where no dispute has in fact occurred will depend on the facts of the case. In Fastrack Contractors v Morrison Construction (2000) Judge Thornton QC stated
A dispute can only arise once the subject matter of the claim, issue or other matter has been brought to the attention of the opposing party and that party has had an opportunity of considering and admitting, modifying or rejecting the claim.
The process of requesting further information can be lengthy. Even a relatively minor difference between parties can take months or years with the process recycling a many times until, adequate information is provided, a deal is made that both parties can live with or it gets to a point where it is plainly obvious that a dispute is in existence.
How disputes are resolved
The importance of contemporaneous records in the dispute process was considered in the case of Attorney General for the Falklands Islands v. Gordon Forbes Construction (Falklands) Limited (2003). A contract was let using the FIDIC 4th Edition conditions which like most standards forms provide a procedure for submitting claims. The first principle being to provide notice of intention to claim within 28 days after the event occurring and the second obligating the contractor to keep contemporaneous records necessary to support the claim. The contract went a step further requiring a detailed account of the claim to be issued within 28 days from the first notice. In the event of the contractor failing to provide a detailed account of the claim the contract provided for a fall back position stating that the contractor’s entitlement will not exceed that amount the engineer or arbitrator could consider verified by contemporaneous records. The events that unfolded on site were typical of the construction industry with the contractor failing to provide a detailed account of a claim within the required timescale. A dispute then developed because the contractor did not have sufficient records to satisfy the requirements of the fall back position. The judge considered that the requirements of the contract were clear and ordered a way to deal with the claim. Claims have to be notified at the time they arise, contemporaneous records have to be kept and regular accounts rendered. The judge explained that the whole contractual system is aimed at the early resolution of any queries at the time the claim arises. He ordered that where there are no contemporaneous records the claim would fail.
This sends out a strong message on the importance of adequate contemporaneous records in resolving disputes. A party that does not keep adequate records will be at a major disadvantage and will substantially prejudice his claim and any chances of recovering his losses.
Non-coercive dispute resolution process
It has been established by survey that negotiation is by far the most favored method of resolving disputes in the construction industry. This is largely because the process does not involve high costs and results in both parties achieving a solution that they can live with. What are the requirements therefore of achieving success in the negotiation process? Where a party has not been empowered to make decisions it will almost definitely be a barrier to successful negotiations. For example in projects that involve public funding, negotiation may simply not be possible if there is not a public servant willing or empowered to make the relevant decision . On the other hand there may be other circumstances where if a manager can be persuaded that the claim is justified and there is sufficient substantiation to prove that going to a coercive method of dispute resolution would result in failure. In these circumstances a manager may feel more comfortable to make the relevant decision.
Negotiation is a non-coercive process of communication which ultimately leads to a joint decision. Goldberg described negotiation as “communication for the purpose of persuasion; the pre-eminent of dispute resolution”. Negotiation in its broad sense is more that just the process of dispute resolution it may be considered as the process by which individuals communicate in order to arrange their business affairs and private lives by establishing agreement and reconciling areas of disagreement.
The process of negotiation on a construction project clearly is dependable on information availability and / or the ability the parties have to assimilate large amounts of information which involves data collection and analysis as well as the understanding of principles that establish liability and measurement of the quantum.
To what extent is the reason for differences evolving into disputes on construction projects down to the large amounts of documents that need rationalising, but are not? If the information was readily available and if managers had the skills or advice to define the principles to establish liability and measure the quantum would change, problems and differences develop into disputes or would they be dealt with more amicably?
Coercive dispute resolution
Adjudication, arbitration and litigation are coercive processes but adjudication is not final and can be challenged if the losing party is not satisfied. Arbitration is final and binding and litigation is final and binding with scope for appeal.
In 1998 the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) came into force. Prior to the Construction Act neither litigation nor arbitration provided the speedy resolution of disputes which are often required in the construction industry. Typically prior to the Construction Act standard contracts could provide that litigation or arbitration could not be commenced until practical completion therefore disputes could be left unresolved for the duration of the contract. The Construction Act now makes adjudication available for parties to resolve any dispute arising under the contract at any time with a decision being given within 28 days of appointment. While this legislation has been a positive move for the construction industry it has created difficulties for parties when unmanageable quantities of relevant information have to be dealt with .
Essentially the rationale behind the concept of statutory adjudication in the construction industry is the provision of quick, cheap summary procedure that applies to everyone in the construction industry . Adjudication jurisprudentially is similar to certification by an architect or engineer and is a second tier of evaluation that is made if the parties dispute a contract administrator’s determination. An important point is it aims to resolve disputes speedily because cash flow was described as the life blood of the industry by Sir Michael Latham.
The same general trends and pursuit for speeding up proceedings can be seen in the sphere of litigation. In June 1996 Lord Woolf published a review of the civil justice system saying that it was too slow, too costly and too complex. The objectives of the pre-action protocol encourages the exchange of early and full information about prospective legal claims to enable parties to avoid litigation by agreeing a statement of the claim before commencing of proceedings. Even when proceedings for litigation start they are normally settled out of court as the result can normally be predicted once put into perspective.
In arbitration the trend of speed is further continued. In the Arbitration Act 1996 the parties have the choice to decide on the degree of formality they desire, how much time will be allocated to various aspects of the process and how documentation, discovery and the taking of evidence will be handled. Essentially one of the objectives of the 1996 Arbitration Act was to ensure that the process is fair, cost effective and rapid; to promote party autonomy; to ensure that the courts supportive powers are available when required etc.
Conclusion
It is clear that in practice there is a long drawn out period from when a claim is initially identified to when the parties are in a position to resolve the matter. This is indicative that the parties do not know much about the dispute when a claim is first made. Probably the only thing that is known at this stage is that the target profit margins are probably not being met. This is then followed by a long and drawn out process of retrospective analysis to define what went wrong, who is to blame and how much is due to whom
The management of risk and change in the construction industry is currently based more on intuition as apposed to systematically . This exposes the parties to the risk of the wrong decisions being made of which may not be reconcilable with a retrospective analysis carried out by the lawyers and claim experts after the event. This leaves the construction industry in the dilemma where the real answers are only arrived at much too late in the process to deal with the problem.
In terms of the dispute resolution process it seems that an adequate legal framework is probably in place to speed up the process through adjudication, arbitration and litigation. However it seems construction industry practice is lagging behind and not capable of being able to taking full advantage of the new reforms in the law because of the archaic methods still being used to manage information.
Construction is a process whereby a contractor typically undertakes to carry out a specified scope of work for an amount of money that is fixed or for a variable amount of money determined using fixed rates. However when one considers how the scope of work is typically required to be changed in its implementation in construction, one can begin to understand the common problems the construction industry faces in managing the resultant risk and change. A major part of the construction process involves the management of risk and dealing with change, with the owner on the one hand demanding value for money and the contractor on the other hand aiming to achieve maximum profit.
Along the time line of the project there is typically a big focus on risk management at the pre-contract stage when the procurement method is defined and the contract is negotiated. A risk register is normally drawn up at this stage itemizing the probable risks, but how are these risks monitored and managed in the post-contract stage?
The construction industry is historically known for its adversarial approach to life however the industry has come up with new methods of procurement to deal with the problem. Partnering was designed to create a collaborative working environment between all the parties. However to what extent has partnering been successful in reducing the problems that arise in the construction process?
An important point to consider, as pointed out in Phillip Cappers article , is no matter what method of procurement or contract is used there are a number of characteristics which are common to, and largely distinctive of, almost all construction projects. It is generally in these characteristics that the seeds of eventual disputes lie. When change occurs parties will be faced with a process of agreeing on the liability and quantum. During this process it is inevitable that differences will develop from time to time as parties will naturally have their own self interests to pursue which may almost certainly be conflicting.
Commenting on the clues to the causes of disputed matters, Phillip Capper identified the problem that the construction industry faces with the diversity and sheer volume of evidentiary material.
Masses of record material are produced even on relatively small construction projects, many of them crucial as they are informal: such as eg the penciled scribblings of a gang member on daywork sheets, or mud stained card recording a piling set. Project records may be as diverse as site investigation reports, feasibility studies, specifications, drawings, tender submissions, estimating and pricing details, diaries, minutes of meetings, formal instruction, test data, payment applications and certificates, weather reports, job sheets, inspection reports, programming data and reports and so on. To all of that is added great chains of correspondence between the participants, managing reports in each of the entities and the usual periphery of any business activity: from management accounting to press publicity. It is haphazardly in these various forms of contemporary records that are found the clues as to the causes of disputed matters.
If the causes of disputes can be identified by retrospectively analysing these contemporary records then what steps need to be taken to arrange and manage these records to be able to identify problems in real time which could enable managers to make systematic decisions based on facts to take corrective actions and resolve differences that emerge?
Risk management in construction
This section considers the current practice of risk management distinguishing between the pre-contract stage and post-contract stage. At each stage there are different dynamics at play. The pre-contract stage very much involves identifying risks and negotiating their allocation while the post-contract stage is where risks need to be managed. What is the current approach and process to risk and change management in the construction industry and is it adequate? There has been a tremendous amount of interest in this area and a substantial amount of theoretical material published however this is not always helpful. As Max Abrahamson put it, all discussions on theory could be suspended until practice has caught up .
Pre Contract Stage
At this stage in the construction process there is a focus on risk identification and allocation. Once the risks have been defined they are allocated to a party. Depending on the circumstances the employer will choose a method of procurement that he anticipates will best suite the nature of the particular project. This process will largely depend on the circumstances of the owner. The owner will normally employ consultants to investigate the risks and then ultimately decide what method of procurement best suites the owner. For example an owner that is procuring a new telecommunication system which involves new technology may decide that operation and maintenance of such a system is best controlled with an expert party who has the necessary skills. This may be one of the reasons for an owner deciding that a Build Operate/Maintain and Transfer (BOT) procurement method is best suited. In another instance the owner might be highly skilled and sufficiently resourced in this area and therefore may decide on a traditional construct or possibly design and construct method and take responsibility for the operations and maintenance of the asset.
Under traditional procurement the contractor is seldom involved at the pre-contract stage and therefore does not have the opportunity to add to the upfront definition of risks, choice of procurement and allocation of risks. These are therefore to a large degree imposed on the contractor. This has been one of the criticisms of the traditional approach. However under partnering arrangement the parties are encouraged to engage early in the project cycle to encourage early participation of the contractor.
Post Contract Stage
When the contract is awarded and the work gets underway, the emphasis normally shifts to monitoring and managing risk. The possible risks and change events on a construction project are vast and there is no universal standard for categorizing them and the way they are dealt with. This is probably because these events vary from project to project. In most cases risk and change are managed intuitively as opposed to systematically. There are reasons for this, one reason being the construction process is inherently prototypical as opposed to repetitive and therefore the processes do not lend themselves to a systematic method or approach. This could result in problems because the cause of a dispute may only become apparent well after the event that caused the dispute in the first place. Therefore it is difficult, if not impossible, to manage adequately. This is believed to be largely due to the archaic methods of information management still in existence in the construction industry.
To illustrate this point, a simplified example is provided of a typical way the risk of providing sufficient resource to complete a construction project on time is managed. If this is not managed effectively it could cause delay to the programme resulting in a party either incurring liquidated damages or an entitlement to extension of time.
Example - Managing the risk of providing adequate resource levels
There will normally always be a minimum, optimum and maximum level of labour resource required to complete a defined scope of work within a fixed period of time. There also could be limitations to the availability of the necessary skilled labour. If the contractor provides a level that is below the minimum level he will not complete on time and consequently he will have to pay liquidated damages for being late. If the contractor provides a level of resource above the maximum level then he will start working inefficiently and therefore not realize maximum profit. Therefore he will aim for an optimum level where he completes on time and realizes the maximum profit. How is this risk managed? This risk is normally managed at site management level based on the opinion of an experienced manager. If the work is not completed on time how will it be decided if there was adequate labour resource to complete the scope of work within the defined timescale? Essentially if it can not be agreed between the parties there will ultimately be a retrospective delay analysis prepared based on the contemporaneous records and a comparison will be made with the contract programme.
The above is a simplified version of a scenario that in practice is normally much more complicated. The purpose of the above example is to point out the disparity between the way risk and change management decisions are made and the way liability is determined.
The above example of risk and change is simplistic but even these simple issues on a big scale can become extremely difficult to manage without adequate systems being in place that collects and analyse the contemporaneous records in real time.
Strategies that construction companies adopt for managing risk
It is evident that some large construction companies actively pursue an overall high risk and high return strategy on the basis that they accept that there will be some loss and some profit. Smaller companies tend to spread their risk, in order to reduce its overall exposure, at a lower rate of return.
To what extent does this practice result in contractors being generally complacent in the area of real time risk management and detract from the actual issues being dealt with effectively?
The decision making process in the construction industry
The decision making process in construction is to a large degree based on the intuition of decision makers as opposed to a systematic approach. Intuitive decision making involves making decisions with no immediate factual rationale and is to a large degree based on the experience of the decision maker. Where culture and experience exist in a stable environment intuitive management can perform reasonably well according to some studies . However the complexity of contractual relationships and increasing size of the mega projects that are undertaken and a host of other reasons means that the intuitive method of decision making is only reliable to a degree and very dependant on key personnel.
Gary France in his article on controlling time in construction emphasises the importance of analysis and management in the controlling of risk in construction projects. However he said that the use of computer systems like Monte Carlo which carry out simulation tests based on random probabilities are totally meaningless. He goes on to say that mathematical or quantitative risk management is the most reliable.
Would it be possible for a construction project to convert to a systematic approach to decision making? Considering the prototypical nature of construction the amount of investment required to develop a system to fulfill this function for a one-off project may be perceived to outweigh the benefits.
Pathology of the arising disputes in construction
Most of the standard form contracts are designed to identify problems at an early stage. This is normally through a notification process advising a party of a problem or a change that could result in loss being incurred by a party which the other party could be liable for. This is no coincidence, as the earlier issues are identified the more chance parties have in sorting them out by taking corrective actions and or reaching agreement on the matter. If the parties fail to resolve any differences that could have emerged from the event, it is likely that the difference will develop into a dispute. For a claimant, wanting to pursue a claim through a coercive process, it is necessary for a dispute to have arisen, in the legal sense, before it can be referred to arbitration or adjudication .
For a manager weighing up the chances of success of a claim he will want to know intimately how the dispute will be dealt with and how a decision will be reached. At this stage the manager will have to make a decision on the likelihood of success or failure and ultimately whether to pursue the claim or not, considering costs and other relevant factors. We therefore consider the process of how disputes manifest themselves and then how they are resolved.
The manifestation of disputes
A common tactic in construction disputes is to argue that no dispute exists; therefore it is important to distinguish between a dispute and a difference. The fundamental distinction between a difference and a dispute is a dispute develops in a situation where a claim has been rejected, in part or in whole, or has simply been ignored by the other party. However where a party has not rejected the claim and has requested further information it is likely to be a mere difference. However where no dispute has in fact occurred will depend on the facts of the case. In Fastrack Contractors v Morrison Construction (2000) Judge Thornton QC stated
A dispute can only arise once the subject matter of the claim, issue or other matter has been brought to the attention of the opposing party and that party has had an opportunity of considering and admitting, modifying or rejecting the claim.
The process of requesting further information can be lengthy. Even a relatively minor difference between parties can take months or years with the process recycling a many times until, adequate information is provided, a deal is made that both parties can live with or it gets to a point where it is plainly obvious that a dispute is in existence.
How disputes are resolved
The importance of contemporaneous records in the dispute process was considered in the case of Attorney General for the Falklands Islands v. Gordon Forbes Construction (Falklands) Limited (2003). A contract was let using the FIDIC 4th Edition conditions which like most standards forms provide a procedure for submitting claims. The first principle being to provide notice of intention to claim within 28 days after the event occurring and the second obligating the contractor to keep contemporaneous records necessary to support the claim. The contract went a step further requiring a detailed account of the claim to be issued within 28 days from the first notice. In the event of the contractor failing to provide a detailed account of the claim the contract provided for a fall back position stating that the contractor’s entitlement will not exceed that amount the engineer or arbitrator could consider verified by contemporaneous records. The events that unfolded on site were typical of the construction industry with the contractor failing to provide a detailed account of a claim within the required timescale. A dispute then developed because the contractor did not have sufficient records to satisfy the requirements of the fall back position. The judge considered that the requirements of the contract were clear and ordered a way to deal with the claim. Claims have to be notified at the time they arise, contemporaneous records have to be kept and regular accounts rendered. The judge explained that the whole contractual system is aimed at the early resolution of any queries at the time the claim arises. He ordered that where there are no contemporaneous records the claim would fail.
This sends out a strong message on the importance of adequate contemporaneous records in resolving disputes. A party that does not keep adequate records will be at a major disadvantage and will substantially prejudice his claim and any chances of recovering his losses.
Non-coercive dispute resolution process
It has been established by survey that negotiation is by far the most favored method of resolving disputes in the construction industry. This is largely because the process does not involve high costs and results in both parties achieving a solution that they can live with. What are the requirements therefore of achieving success in the negotiation process? Where a party has not been empowered to make decisions it will almost definitely be a barrier to successful negotiations. For example in projects that involve public funding, negotiation may simply not be possible if there is not a public servant willing or empowered to make the relevant decision . On the other hand there may be other circumstances where if a manager can be persuaded that the claim is justified and there is sufficient substantiation to prove that going to a coercive method of dispute resolution would result in failure. In these circumstances a manager may feel more comfortable to make the relevant decision.
Negotiation is a non-coercive process of communication which ultimately leads to a joint decision. Goldberg described negotiation as “communication for the purpose of persuasion; the pre-eminent of dispute resolution”. Negotiation in its broad sense is more that just the process of dispute resolution it may be considered as the process by which individuals communicate in order to arrange their business affairs and private lives by establishing agreement and reconciling areas of disagreement.
The process of negotiation on a construction project clearly is dependable on information availability and / or the ability the parties have to assimilate large amounts of information which involves data collection and analysis as well as the understanding of principles that establish liability and measurement of the quantum.
To what extent is the reason for differences evolving into disputes on construction projects down to the large amounts of documents that need rationalising, but are not? If the information was readily available and if managers had the skills or advice to define the principles to establish liability and measure the quantum would change, problems and differences develop into disputes or would they be dealt with more amicably?
Coercive dispute resolution
Adjudication, arbitration and litigation are coercive processes but adjudication is not final and can be challenged if the losing party is not satisfied. Arbitration is final and binding and litigation is final and binding with scope for appeal.
In 1998 the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) came into force. Prior to the Construction Act neither litigation nor arbitration provided the speedy resolution of disputes which are often required in the construction industry. Typically prior to the Construction Act standard contracts could provide that litigation or arbitration could not be commenced until practical completion therefore disputes could be left unresolved for the duration of the contract. The Construction Act now makes adjudication available for parties to resolve any dispute arising under the contract at any time with a decision being given within 28 days of appointment. While this legislation has been a positive move for the construction industry it has created difficulties for parties when unmanageable quantities of relevant information have to be dealt with .
Essentially the rationale behind the concept of statutory adjudication in the construction industry is the provision of quick, cheap summary procedure that applies to everyone in the construction industry . Adjudication jurisprudentially is similar to certification by an architect or engineer and is a second tier of evaluation that is made if the parties dispute a contract administrator’s determination. An important point is it aims to resolve disputes speedily because cash flow was described as the life blood of the industry by Sir Michael Latham.
The same general trends and pursuit for speeding up proceedings can be seen in the sphere of litigation. In June 1996 Lord Woolf published a review of the civil justice system saying that it was too slow, too costly and too complex. The objectives of the pre-action protocol encourages the exchange of early and full information about prospective legal claims to enable parties to avoid litigation by agreeing a statement of the claim before commencing of proceedings. Even when proceedings for litigation start they are normally settled out of court as the result can normally be predicted once put into perspective.
In arbitration the trend of speed is further continued. In the Arbitration Act 1996 the parties have the choice to decide on the degree of formality they desire, how much time will be allocated to various aspects of the process and how documentation, discovery and the taking of evidence will be handled. Essentially one of the objectives of the 1996 Arbitration Act was to ensure that the process is fair, cost effective and rapid; to promote party autonomy; to ensure that the courts supportive powers are available when required etc.
Conclusion
It is clear that in practice there is a long drawn out period from when a claim is initially identified to when the parties are in a position to resolve the matter. This is indicative that the parties do not know much about the dispute when a claim is first made. Probably the only thing that is known at this stage is that the target profit margins are probably not being met. This is then followed by a long and drawn out process of retrospective analysis to define what went wrong, who is to blame and how much is due to whom
The management of risk and change in the construction industry is currently based more on intuition as apposed to systematically . This exposes the parties to the risk of the wrong decisions being made of which may not be reconcilable with a retrospective analysis carried out by the lawyers and claim experts after the event. This leaves the construction industry in the dilemma where the real answers are only arrived at much too late in the process to deal with the problem.
In terms of the dispute resolution process it seems that an adequate legal framework is probably in place to speed up the process through adjudication, arbitration and litigation. However it seems construction industry practice is lagging behind and not capable of being able to taking full advantage of the new reforms in the law because of the archaic methods still being used to manage information.
posted by Will at 19.10.06
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