Last week saw the launch of the much-anticipated NEC4 suite of standard form construction and engineering contracts (see our earlier Law-Now here). In this article we provide an analysis of the changes to the dispute resolution provisions and the new Dispute Avoidance Board option introduced by the NEC4.
The NEC4 philosophy
Focusing on feedback via the NEC User’s Group and the Government’s aims for the construction sector, the Institute of Civil Engineers launched the NEC4 with key changes focusing heavily on promoting flexibility, partnering, enhanced collaboration and suitability for use on international infrastructure projects. The launch also emphasised that a key aim of the NEC4 was to become the world’s number one procurement suite of contracts, following governmental and industry endorsement in the UK and Hong Kong.
The spirit of the amendments to the dispute resolution provisions are reflected by the section’s title change from “Dispute Resolution” to “Resolving and Avoiding Disputes”. The importance of the parties’ shared behaviour and active engagement in resolving issues before the need for formal dispute resolution is a clear feature of the amendments to Option W1, Option W2 and the new Option W3. The provision of a Dispute Avoidance Board (“DAB”) in the new Option W3 also mirrors a longstanding feature of the FIDIC contract suite and is specifically aimed for use on international projects and others that fall outside the scope of the Contraction Act (such as PFI projects).
Multi-tier dispute resolution
Amendments to Options W1 and W2 provide for the initial referral of all disputes to the parties’ Senior Representatives. Theses representatives are to be specified in the Contract Data prior to contract commencement. This amendment reflects a Z clause commonly required by public authorities’ for senior representatives to attempt to resolve disputes prior to adjudication.
Under Option W1 (used where the Construction Act does not apply) the initial referral process to Senior Representatives is compulsory prior to the commencement of adjudication proceedings. Under Option W2, while the contract envisages that the parties should refer a dispute to the Senior Representatives in the first instance, clause W2.2(1) confirms that the parties are entitled to refer a dispute to adjudication at any time. Comments made by the drafting committee at the launch suggested that the unfettered right to adjudicate under a construction contract at any time under UK law did not always assist the parties in resolving their disputes and should be reconsidered by Parliament.
It is clear from the drafting of the Senior Representative process that the drafting committee has also tried to walk a line between preventing the process from becoming protracted or open to abuse, while also allowing the parties the flexibility to make the process work as they see fit. For example, each party must submit a statement of case within a week of notification, limited to ten sides of A4 plus supporting evidence. However, the Senior Representatives can attend as many meetings and use any procedure they consider necessary to resolve the dispute over a period of no more than 3 weeks. At the end of this process a list of issues agreed and not agreed is produced and the Project Manager and Contractor must put the agreed issues into effect. The process is also intended to be “without prejudice” and no evidence of the statement of case or the discussions may be disclosed in subsequent proceedings.
Under both options, the intention is that the Senior Representatives process should act as the primary dispute resolution process, adjudication as a secondary process and arbitration / litigation as a third and final resolution process. The drafting of these secondary and tertiary processes remain, on the whole, unamended. However, a new NEC4 Dispute Resolution Service Contract has replaced the Adjudicator’s Contract and is also intended to be used for the appointment of the DAB.
The new Dispute Avoidance Board
This procedure, contained in the new Option W3, is only applicable where the Construction Act does not apply and provides for the obligatory referral of all “potential disputes” to an impartial standing DAB before any subsequent referral to a tribunal. The DAB is formed of one or three members as identified by the Contract Data or nominated by a DAB nomination body specified by the parties. The objective of the DAB is to resolve potential disputes before they become disputes.
The DAB visits site at specified intervals to inspect the progress of the works and review any potential disputes. Potential disputes are referred to the DAB between 2-4 weeks after the notification to the other party and the Project Manager. Alternatively, the DAB can take the initiative to review potential disputes and ask the parties to provide further information. The DAB is empowered only to make “a recommendation for resolving” a potential dispute. This terminology deliberately avoids giving any binding force to the DAB’s decision, which may lead some to question the overall usefulness of the process.
The concept of resolving “potential disputes” before they become “disputes” is an interesting soundbite, but may give rise to difficulties as a matter of law. A dispute arises at law as soon as there is disagreement between the parties or an assertion by one which is not agreed to by the other. Unless the DAB is to concern itself in matters which are agreed between the parties (which would seem pointless), it is difficult to see how the distinction between potential disputes and ordinary disputes could be meaningfully applied. Even if a distinction is drawn, the fact that only potential disputes are referred to may prompt arguments as to whether a DAB would have jurisdiction to act in relation to “potential disputes” which have already become “disputes” by the time they are referred.
Clause W3.3(2) provides that a dispute cannot be referred to litigation / arbitration unless a notice of dissatisfaction is served in relation to a recommendation of a DAB within four weeks. It is unclear whether this is intended to convert the DAB’s recommendation into a binding obligation. On the one hand, the very concept of a “recommendation” suggests that it is not to become binding. On the other, if the recommendation does not become binding, Option W3 would not appear to provide for any way of resolving disputes where a notice of dissatisfaction is not served, with the result that any preference for arbitration (which is more likely as Option W3 is intended for international projects) may fall away in favour of local court proceedings.
The NEC4 clearly reflects a desire to promote the original partnering ethos of the NEC, which has been its hallmark since its inception. The changes to the dispute resolution provisions are intended to be a step in this direction by encouraging earlier active engagement and to open up the NEC to greater international use. Time will tell whether this purpose has been sufficiently achieved to allow the NEC to challenge the dominance of the FIDIC suite.