News ADR, Arbitration & Mediation Mediating Construction Disputes by Chong Yee Leong 
| Mediating Construction Disputes by Chong Yee Leong |
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| Wednesday, 16 November 2005 05:01pm | |
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MEDIATING CONSTRUCTION DISPUTES by ©Chong Yee Leong Introduction 1. Disputes in constructions projects are common. This is largely due to the complexity of the subject matter, where many players must coordinate their works in all stages of design and development and events which affect one player may snowball to affect many others down the line. As construction projects get more and more expensive, and the pressure to complete as cheaply and quickly as possible mounts, the areas where disputes may arise also increases. Further, the construction projects are also getting more sophisticated. 2. In construction disputes, there are usually complex issues of fact, and unanticipated events or conditions frequently occur. Parties to a construction dispute often have to deal with substantive changes in circumstances and how to address these changes, giving rise to issues like “who owns the time?” “How much does labour, equipment and material really cost?” The likelihood of disagreements over such issues is also high. 3. Traditionally, litigation has been the preferred form of dispute resolution in construction projects. Parties would usually try to negotiate a settlement and if this fails to resolve the dispute, parties would go to court. 4. However, in the last decade or so, resolving disputes by alternative forms of dispute resolution has been on the rise in the construction industry. 5. Alternative forms of dispute resolution have been preferred because of the complex nature of construction disputes, the high cost of resolving these disputes in court (contributed in part by disclosure of voluminous construction documentation as required by the discovery obligations imposed by the courts) and the damage court proceedings have on the parties’ relationship. 6. Parties also increasingly want more control and autonomy in the dispute resolution process. Different forms of alternative dispute resolution can give parties different levels of control and autonomy over the process. 7. The usual forms of alternative dispute resolution include the following:
The upside and downside of mediation in construction disputes 8. Mediation, if properly carried out, can effectively resolve construction disputes in a time and cost efficient manner. As such, mediation is now one of the most cost effective and common dispute resolution process used by parties in the construction industry today. 9. Mediation is completely voluntary. The mediator has no power to impose a settlement and does not seek to. He merely facilitates the parties coming to a mutually acceptable settlement. 10. Mediation is sometimes preferred by parties to a construction dispute over direct negotiation because direct negotiations may exacerbate the dispute. In direct negotiations, parties may be bogged down by an argumentative mode of thinking. The personnel conducting the direct negotiations may be prompted to take positions as opposed to generating solutions as they get “sucked” into the fray. 11. A mediator, especially a skilled mediator, can break this negative cycle and help parties to improve the quality of the solutions available to them. Skilled mediators may also generate alternatives beyond what parties can think of. 12. As mediation is usually a one or two day affair, it also saves time and money for the parties over litigation, which may require months of work leading to weeks of hearing. Mediation can also take place early in the dispute, before legal and other costs of litigation are incurred. 13. In most jurisdictions, the entire mediation process is confidential and on a without prejudice basis. All that is said, done or produced during mediation is confidential. If mediation does not result in a settlement, parties cannot use any of the concessions or disclosures made during the mediation process in any court, arbitration or legal proceedings subsequently. 14. As such, mediation offers an attractive forum that is confidential and without prejudice for parties to a construction dispute to communicate their respective complex problems without fear of adverse result from decision maker. 15. Once parties air their problems, the other party may be more motivated to settle the dispute when they understand the nature of the other party’s complaint and the basis of the other party’s position. At the same time, parties are only motivated to air their problems with the assurance that it will remain confidential and without prejudice to their position should a settlement not be reached. 16. Mediation is also suitable for construction disputes where many parties are usually involved. As mediation is a consensual process, all affected parties can consent to be parties to the mediation. If such disputes were to go to court, the multiplicity of parties may give rise to multiple sets of lawyers, experts and witnesses, thereby increasing the cost of litigation multiple times. 17. Mediation is perhaps the most attractive to parties to a construction dispute because the relationship between the parties is maintained. Mediation is a consensual process, and the likelihood of generating hostility during the process is lesser compared to other more confrontational dispute resolution processes like litigation and arbitration. 18. Mediation can also take place before the parties’ relationship sours. 19. The maintenance of the relationship between the parties is especially important in construction disputes where the relationship between the parties is often continuing. Parties may have to work together until the completion of the works notwithstanding that the dispute may arise early in the works. Furthermore, the parties may have to work again on other projects, and the maintenance of a good working relationship would be important to their future working relations. Key issue to consider before mediation 20. Whilst mediation may be a suitable form of alternative dispute resolution for construction disputes, there are important issues to consider before parties go for mediation. 21. Perhaps one of the most important issue to consider is when to mediate. This is important in construction disputes because the earlier the dispute is resolved, the more likely parties will save costs. This is especially so if parties may be going to court if the dispute fails to be settled amicably. With the amount of discovery involved in construction disputes, if mediation is proposed after discovery, parties may have already incurred large amounts of costs at that time. 22. Mediating early in the dispute may also be effective as parties may not be so set in their positions early in the dispute, and relations between the parties may still be cordial. 23. At the same time, disputes will only settle when they are ripe for settlement. Going for mediation before parties are ready for settlement may be a waste of time and a futile effort if parties are not in the right frame of mind. It would also exhaust the avenue unnecessarily. 24. If the construction works are still in progress, deferring the mediation to a later stage may also be effective as parties may come to a commercial settlement of their own accord, usually by horse trading during the course of the works. 25. The need to resolve the dispute before parties are set in their positions must also be balanced against the need to obtain better evidence. 26. For parties to obtain the best possible settlement, they will need to know the strengths and weaknesses, and to do so they will need to have as much evidence as possible. 27. In most construction disputes, better evidence will only come to light after discovery and exchange of parties’ respective witness statements. This would be quite late in the proceedings. If the dispute is submitted too early for mediation, parties may be negotiating “blind” in that there are areas of the case which they are not fully aware of. 28. Furthermore, a good grasp of the party’s position would also be conducive towards a settlement. Parties need to know their position clearly in order to appreciate whether a proposal is fair or not. Parties are usually more likely to appreciate their position fully after discovery and exchange of witness statements. 29. Having the dispute mediated too early, before parties fully understand their positions, may be detrimental to the dispute settling. The mediation may expose gaping holes in the parties’ understanding of their respective positions, which may be solved by producing the necessary people, knowledge or documents, and these may not be readily available during the mediation because parties did not contemplate it at that time. Parties may not be able to settle, and the opportunity to settle may pass as a result. 30. Ultimately, recognizing when is the best time to have the dispute mediated is akin to knowing an elephant when you see it. Often, parties may not even have the choice of deciding when to have the dispute mediated as the contract may require parties to submit any differences or disputes to mediation as a condition precedent to resorting to other forms (usually court proceedings or arbitration) of dispute resolution. If there is no requirement to have the dispute between the parties submitted for mediation, one party may suggest mediation when it is the best time for it, and the other will agree to mediation if it views having the dispute mediated as being in its interests. The cost of unreasonably rejecting offers to mediate 31. Following the English Court of Appeal decision in Burchell v Bullard [2005] All ER 62, a party who refuses reasonable offers to mediate and other alternative dispute resolution processes in litigation may be faced with the uncomfortable situation of winning in the litigation, but being penalized in costs in disputes governed by English law. 32. Whether the English position will be followed by the courts in other jurisdictions remains to be seen, but it appears that mediation and other forms of alternative dispute resolution should be routinely considered in litigation, whether or not it is a construction dispute or otherwise. 33. The English courts’ focus on parties’ attempts to submitting the dispute to alternative means of resolving the dispute as one of the factors to be considered in making orders on costs is founded in the English CPR 1.4. The rule provides inter alia thatthe court must actively manage cases,including encouraging the parties to use an alternative dispute resolution procedure if the court considered that appropriate. Dunnett v Railtrack Plc 34. The earliest case which the English courts considered mediation as a factor in making orders on costs was Dunnett v Railtrack Plc [2002] 2 All ER 850. 35. In Dunnett, the Plaintiff claimed against the Defendant for the death of her three horses on the Defendant’s rail tracks arising from the Defendants’ negligence. The Plaintiff’s claim was dismissed on appeal to the Court of the Appeal, and the issue of the costs of the appeal was considered by the court at that stage. 36. The Plaintiff had indicated that it was willing to explore the possibility of alternative dispute resolution to the trial judge. However, the Defendant was not willing to do so, arguing that it would involve payment of money, and the Defendants were not willing to contemplate such costs over and above their offer to settle of GBP2500 to the Plaintiff. 37. Despite the Defendants succeeding in the appeal, the Court of Appeal made no order as to costs because of the Defendants’ refusal to contemplate alternative dispute resolution at a stage before costs of the appeal started to flow. 38. Brooke LJ held that:
Halsey v Milton Keynes General NHS Trust 39. Following Dunnett, the Court of Appeal again considered the impact of refusing offers to mediate on orders on costs in Halsey v Milton Keynes General NHS Trust [2004] 4 All ER 920. 40. The two appeals in Halsey raised the same issue of when should the court impose a cost sanction against a successful litigant on grounds that he refused to take part in alternative dispute resolution. 41. The Court of Appeal reinforced robust judicial recommendations for parties to refer the dispute to mediation, but the encouragement on parties to mediate was milder than in Dunnett. The court recognised that “… It is one thing to encourage the parties to agree to mediation, even to encourage them in the strongest terms. It is another to order them to do so. It seems to us that to oblige truly unwilling parties to refer their disputes to mediation would be to impose an unacceptable obstruction on their right of access to the court … If the court were to compel the parties to enter into mediation to which they objected, that would achieve nothing except to add to the costs to be borne by the parties, possibly postpone the time when the court determines the dispute and the damage the perceived effectiveness of the ADR process.” 42. The court also recognized that if the dispute was submitted to alternative means of dispute resolution but failed, the court would not look into why the process was unsuccessful. It was expressly held that “… parties are entitled to adopt whatever position they wish, and if as a result of the dispute is not settled, that is not a matter for the court … if the integrity and confidentiality of the process is to be respected, the court should not know, and therefore should not investigate, why the process did not result in agreement.” (emphasis added) 43. The Court in Halsey recognized that it was to bear in mind advantages of alternative dispute resolution, but there should be no presumption in favour of alternative dispute resolution. Nevertheless, Dyson LJ held that “…[a]ll members of the legal profession who conduct litigation should now routinely consider with their clients whether their disputes are suitable for ADR.” 44. The court in Halsey held that in deciding whether to deprive successful party of some or all of costs on the basis that he has refused alternative dispute resolution, it must be borne in mind that this is a departure from the general rule that costs follow the event. In other words, it must be shown that the successful party was unreasonable in refusing alternative dispute resolution. 45. The question whether a party acted unreasonably in refusing alternative dispute resolution must be determined in light of the surrounding circumstances, and the factors to consider included and was not limited to:
46. The court further held that where a successful party refuses to agree to alternative dispute resolution despite the encouragement of the court, this is a factor which the court will take in account when deciding whether his refusal was unreasonable. 47. On the facts of Halsey, it was held that whilst the Defendant rejected mediation, it had not acted unreasonably and as such was not penalized in costs. Burchell v Bullard 48. The most recent decision in which the Court of Appeal considered this issue is Burchell v Bullard [2005] All ER 62. Burchell is a construction dispute, and clearly the Court of Appeal’s position in this regard will apply to construction disputes in future. 49. In Burchell, the Plaintiff was a builder engaged to do works by the Defendants. The Defendants alleged the Plaintiff’s works were defective and not completed. 50. Before proceedings were commenced by the Plaintiff, the Plaintiff’s solicitors wrote a letter of claim proposing mediation. This offer to mediate was rejected by the Defendants. The Defendants' building surveyor replied that "the matters complained of are technically complex and as such mediation is not an appropriate route to settle matters". 51. Thereafter, the Plaintiff commenced proceedings against the Defendants for GBP18,318. The Defendants counter-claimed for GBP100,815 and joined the roofing sub-contractor. 52. The trial judge awarded the Plaintiff his claim of GBP18,327 and costs on his claim. The trial judge also awarded the Defendants GBP14,373 and costs on the counter-claim. The Plaintiff was thus entitled to GBP5,025 net. The trial judge also awarded the Plaintiff GBP79.50 against the roofer but ordered the Plaintiff alone to pay the roofer's costs. 53. The Plaintiff appealed the costs awards. Before the appeal on costs was heard, the Plaintiff proposed mediation under the Court of Appeal Mediation Scheme. This offer was again rejected by the Defendants on the basis that "[w]e do not see that involvement of the Court of Appeal Mediation Scheme would be necessary or appropriate". 54. In short, as in Halsey, there was only inter-party offers to mediate in Burchell. Throughout the course of the proceedings, there was no order or recommendation from the bench that mediation be considered. Directions included orders for party to meet to discuss settlement but nothing happened. More importantly, in Burchell, the offer to mediate on the substance of the dispute was made before proceedings were issued, when judges have no jurisdiction to make an alternative dispute resolution order at all. 55. The global costs were put at GBP185,000, which the Court of Appeal considered in the light of the modest net sums involved as "an horrific picture." 56. The Court of Appeal found that the trial judge's approach was flawed and ordered the Defendants to pay the Plaintiff 60 per cent of the global costs of claim and counter-claim and 60 per cent of the Plaintiff's liability for the Part 20 Defendant's costs. 57. In coming to this decision, the Court of Appeal applied some of the factors identified in Halsey:
58. The court in Burchell considered each of the Halsey factors in turn and held that the Halsey factors had been established. The court held that this being a small building claim but predictably costly to fight, it would be suitable "par excellence" for mediation. The court also found the Defendants unreasonable in believing (if they did) that they had a watertight case. The "too complex" justification for not mediating was described by Ward LJ as "plain nonsense". The court also held that the cost of mediation was trivial when contrasted with the fortune spent on litigation. The Defendants’ all-encompassing “kitchen sink” approach to their counter-claim was also criticized. The moderate approach of the Plaintiff against the intransigence of the Defendants was also considered. Ward LJ echoed Halsey in finding that an intransigent party cannot rely on his own intransigence to establish that mediation would not have resulted in settlement. 59. However, the court in Burchell declined to mark its disapproval of the Defendants’ conduct by imposing some costs sanction because “… one must judge the reasonableness of their actions against the background of practice a year earlier than Dunnett. In the light of the knowledge of the times and in the absence of legal advice, I cannot condemn them as having been so unreasonable that a costs sanction should follow many years later.” In other words, the Defendants escaped a more drastic costs sanction only by virtue of the fact that its actions were taken before the decision in Dunnett. The Defendants were nevertheless ordered to pay the costs of the appeal following their refusal to mediate it. 60. Ward LJ expressly stated:
61. In short, following the Court of Appeal’s decisions of Dunnett, Halsey and Burchell, any offer to consider alternative dispute resolution, be it prior to commencement of proceedings or after proceedings have been commenced, must be considered reasonably. In fact, mediation and other forms of alternative dispute resolution must be routinely considered in all disputes, and not just construction disputes. 62. Courts have the power to sanction any unreasonable refusal with orders on costs, and do not hesitate to use this power where applicable. Parties who unreasonably reject offers to submit the dispute to alternative dispute resolution processes do so at their own peril. *This paper was delivered at the 13th Malaysian Law Conference.
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