Marion Smith QC, Hannah McCarthy and Joe-han Ho, 39 Essex Chambers
This is an extract from the third edition of GAR’s The Guide to Construction Arbitration. The whole publication is available here.
This is the simplest method of ADR. Parties to a dispute can try to negotiate a settlement at any time, whether or not it is provided for in any contract between them. Negotiation can be informal: by email, telephone or face-to-face. It can also be more formal, undertaken with the assistance of lawyers and other third parties such as experts. It can take place at any stage of the dispute, and be as quick as the parties want. Negotiation can be between two parties or many parties. Typically, negotiation is private and confidential. In situations where English law applies, the negotiations are subject to the ‘without prejudice’ doctrine. The parties retain control of the outcome as they decide whether the proposed terms are acceptable, and give instructions and approve any agreement reached. Many standard-form construction contracts and other construction contracts for long-term or large-scale projects provide for negotiation to escalate through various levels of management. This is a useful way of raising awareness of the dispute at more senior management levels. It creates the opportunity for a more objective assessment of the position by senior decision makers, thereby increasing the opportunity of settlement. A successful negotiation increases the chances of maintaining the relationship between the parties. However, negotiation can be used as a stalling tactic. The absence of a neutral party to manage the process may reduce the chances of reaching agreement, particularly in complex disputes or those involving many parties. In a sophisticated industry sector such as construction and infrastructure where the participants are well placed to identify and manage risks, there is every reason to expect parties to be able to reach a settlement through simple negotiation.
Mediation is a process whereby the parties attempt to reach an amicable settlement with the assistance of an independent and impartial third party. The mediator has no authority to impose a solution on the parties. Mediation can be arranged at anytime, anywhere and at short notice. A mediator is appointed by the parties. There is no need for the mediator to be legally qualified. There are a number of initiatives attempting to develop global, professional standards for mediators and advocates in mediation.
There is no set procedure for a mediation. It can take place online or by telephone, but in many cases takes place in a face-to-face meeting. The framework usually is established by the relevant provisions in the underlying contract, and in the mediator’s appointment. All mediation is broadly private and confidential, and in England subject to the ‘without prejudice’ doctrine. Mediation can be used in cases involving two parties and those involving multiple parties.
There are two main types of mediation: facilitative and evaluative. In both, the parties are given the opportunity to voice their point of view. In a facilitative mediation, the mediator simply facilitates agreement between the parties. The mediator helps the parties to focus on the real issues in the dispute and find their own solution. She gives no view on the merits of each party’s position nor of the likely outcome if the matter is ultimately decided by a judge or other final determiner. In an evaluative mediation the mediator provides the parties with an assessment of the merits or the likely outcomes. These views are not binding unless the parties agree that they will be. The parties agree which of these two types of mediation should apply. They can change that approach during the mediation. Facilitative mediations are far more common than evaluative.
Mediation in many jurisdictions is not mandatory. Judges in England and Wales have no statutory or other power to order parties in a construction dispute to mediation. However, its use is strongly encouraged. An unreasonable refusal to mediate will be taken into account when determining costs, even in situations where a party is otherwise entitled to recover their own costs.
Mediation is used to resolve domestic and international disputes, as demonstrated by the number of global providers of mediation services such as the International Chamber of Commerce (ICC), World Intellectual Property Organization and American Arbitration Association/International Centre for Dispute Resolution, together with more regionally based institutions such as the Hong Kong International Arbitration Centre, Singapore Mediation Centre and Centre for Effective Dispute Resolution. The European Union actively promotes mediation. The principal objective of the EU Mediation Directive is to encourage recourse to mediation in the Member States. It applies to cross-border disputes in civil and commercial matters.
The main advantage of mediation is that it can produce a quick and cost-effective settlement. Insofar as there is data available, it seems to have a good success rate. Referring a matter to mediation reduces the instances where a dispute leads to the termination of a commercial relationship. Mediation allows the parties to find their own solution, and to accept a range of outcomes broader than any court or arbitrator has the power to grant.
The main disadvantage of mediation is that the resulting settlement agreement is only binding contractually and is not directly enforceable in the courts. Its enforceability relies on the parties to honour the deal they have made. Where this does not happen, the parties remain in dispute and litigation may be necessary to enforce the settlement agreement or resolve the dispute entirely. This perceived weakness is now addressed by the United Nations Convention on International Settlement Agreements Resulting from Mediation, named the Singapore Mediation Convention. It was signed by 46 countries on 7 August 2019, including the world’s two largest economies, the United States and the People’s Republic of China, as well as several of the largest economies in Asia. The Convention (and the related Model Law) aim to provide an efficient and harmonised framework for cross-border enforcement of mediated commercial settlement agreements. Other problems with mediation are that, although less expensive than litigation, it can be expensive, particularly for smaller parties or projects. Parties may take advantage of the mediation process to uncover the other side’s case with no real intention to settle.
Early neutral evaluation
Early neutral evaluation (ENE) is a process whereby the parties instruct a neutral third party to provide a non-binding assessment of the merits of their claims. There is no set procedure for ENE, and the key elements of the process are likely to be set out in the underlying construction contract. ENE is usually conducted on a ‘without prejudice’ basis. It may relate to factual disputes, technical issues, legal merits or a combination of these. The evaluator may be a judge, lawyer or expert. Many professional bodies maintain lists of approved evaluators. The evaluation is privileged and non-binding, unless the parties agree otherwise. ENE may be used as a means to bring the parties directly to settlement, or may be followed by further forms of ADR. ENE can provide a quick, authoritative and objective assessment of the merits of a claim without incurring the costs of arbitration or litigation. It can be particularly useful where the parties have very differing views of the prospect of success and an inadequate understanding of the risks of litigation itself. It can focus the parties’ expectations of litigation, and offer a realistic indication of the likely outcomes. It narrows the issues to facilitate other forms of ADR. However, ENE may be less suited to disputes involving issues of fact where oral evidence needs to be heard. It is less likely to be useful in large complex disputes, where the necessary preparations may result in a process that is disproportionately expensive for a non-binding result. It may entrench the dispute and compromise further negotiation.
A mini-trial, sometimes known as an executive tribunal, is a non-binding, flexible form of ADR. Each party presents its case, usually by legal advisors, to a mini-trial panel. The panel normally consists of a company executive from each party, as well as a neutral third party who may act as a mediator or advisor. The executives who appear on behalf of the parties will not usually have been involved in the dispute, and should have sufficient authority to settle the dispute. The object of a mini-trial is to identify the strengths and weaknesses of each side’s case as quickly as possible. The parties, or their legal advisors, make short and often informal presentations to the panel, all of whom are free to ask questions. Documents, including witness statements and expert evidence, can be exchanged in advance. Following submissions from each party, the panel will negotiate. The role of the neutral on the panel is usually to provide advice on matters of law and evidence during the presentations, and to advise of the outcome in litigation if the parties fail to reach agreement in the course of the mini-trial. The neutral may also act as a mediator between the two senior executives. The mini-trial process gives senior executives an opportunity to consider the legal arguments of both sides and to then negotiate settlement from an informed position, without relying on further legal procedures or remedies. It remains an uncommon form of alternative dispute resolution, even in the United States, where it originated in the 1990s. It is seen as being more suitable than mediation in very large cases or where it is desirable to bring in senior executives who have not previously been involved with the case.
Adjudication is particularly used in construction and infrastructure industry disputes. Parties have always been able to agree to use an adjudication process – statutory adjudication was introduced in England and Wales in 1996. The process has been adopted in other jurisdictions although not in identical form.
In England and Wales, statutory adjudication gives the parties to a construction contract the right to adjudicate a dispute ‘at any time’ if a referral is made. It is a quick process. Unless the time limit is extended by the referring party or by agreement the adjudicator must provide a decision with 28 days. It is a confidential process unless enforcement action is taken. The process involves an adjudicator reaching a decision that is temporarily binding. The vast majority of adjudicators’ decisions in England and Wales are enforced by the court using a summary procedure. The underlying policy is ‘pay now argue later’. The parties, however, remain free to have their dispute finally determined in the courts or by arbitration. Anecdotal evidence suggests that in many cases the adjudicator’s decision is accepted or the parties negotiate a final settlement of the dispute.
Its advantages are that it is quick, relatively cheap and provides an interim decision. Referring a dispute to adjudication gives the referring party a number of tactical advantages. The referring party has the time to prepare for the adjudication, and to choose the issue to be decided. The receiving party can be vulnerable to ambush. It may have no notice of any intention to adjudicate and is faced with the need to respond within a very short period of time. It is regarded as a rough and ready form of justice that can lead to decisions being made that are wrong. Given its temporary binding nature, in England the Technology and Construction Court will not refuse to enforce an adjudicator’s decision on the grounds that it is wrong in fact or law.
Expert determination is a process in which a dispute is submitted by the agreement of the parties to one (or more) independent experts who make a determination on the matter. Typically, the parties agree that the expert’s decision will be final and binding save for in a limited number of circumstances such as fraud, partiality or a material departure by the expert from her instructions. The expert is permitted and entitled to use her own expert knowledge. Unlike a judge or an arbitrator, the expert does not decide matters solely on the basis of submissions and evidence put before him or her. Unless required by the parties, the expert does not have to provide reasons for his or her decision.
An expert determination is a confidential process. It is particularly suited to disputes involving matters of valuation or those that involve technical issues. Expert determinations are entirely dependent and controlled by the agreement between the parties. There is no statutory basis or control of the process. There are a range of institutions that provide their own rules that can be incorporated into the contract such as the ICC.
The main advantages of the process are that it is usually a quicker and cheaper process than litigation or arbitration, and the parties can create their own procedure. It allows parties to go straight to the expert and cut out the involvement of a judge or arbitrator who would turn to the expert for assistance in reaching their decision. The main pitfalls are that if the expert gets it wrong the parties are usually stuck with the result. There is no appeal. It is not usually suitable for factual disputes, as so many construction disputes tend to be.
ADR compared with arbitration and litigation in construction disputes
Irrespective of the industry sector, settlement requires communication and a willingness to compromise. ADR can assist with both. The processes set out above give the parties in any commercial dispute the opportunity to communicate their understanding of the dispute to each other, and to seek if they want an objective evaluation by an independent party of the strengths and weaknesses of their respective positions. Save for adjudication and expert determination, these consensual processes can produce creative commercial solutions that are not available through litigation and arbitration. ADR is private, confidential, quick and flexible, as well as generally inexpensive. Even if ADR does not generate a settlement, it can help the parties refine and define the dispute, making it ultimately less costly to resolve. ADR permits the parties to collaborate to find a solution and to thereby preserve the commercial relationship. One of the simplest ways to demonstrate an acknowledgment of the advantages of ADR is the fact that many courts around the world offer ADR as an adjunct to their own trial processes. Court annexed mediation is prevalent, and the courts in a number of countries offer judicial early neutral evaluation.
However, ADR does not suit all disputes. Certain complex disputes will need a full trial process with disclosure, witness statements and expert reports. There are others in which an important point of legal principle needs to be resolved in order to address the underlying dispute.
Construction and infrastructure disputes in particular can be factually and technically complex. They can generate difficult points of law involving specialised forms of contract. They also frequently involve multiple parties, making it more difficult to reach agreement to use ADR effectively. These disputes may still need to be finally decided by judges and arbitrators, and both litigation and arbitration respond to the challenge of resolving construction and infrastructure disputes. Both litigation and arbitration have introduced procedural innovations to provide shorter and earlier hearings at reasonable and proportionate cost. Recognising the need for judges and arbitrators with industry experience, specialist commercial courts are opening across the world such as in Singapore, Amsterdam, Paris, Frankfurt, Brussels, Dubai and throughout China.
However, ADR should be more attractive to the construction and infrastructure industry as a means of risk management. Disputes in this sector can be particularly costly to litigate and arbitrate as they require many more documents to be examined and the use of expert evidence, in many cases across a number of disciplines. Typically, those involved with a construction project at the outset do consider the appropriate dispute avoidance and resolution mechanisms for the particular project. Once identified, these processes are incorporated within the contract between the parties. Many of the widely used standard forms used in this sector provide for ADR. The 2018 ICC Dispute Resolution statistics show that, in 2018, 35 per cent of the ICC total mediation caseload in 2018 was in the construction and engineering sector. With the exception of adjudication, however, ADR is less popular in the construction and infrastructure industry than would be expected. It is likely a question of education, bringing the undoubted benefits of ADR to the attention of the decision makers in the industry.
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