Construction contracts typically include an alternative dispute resolution clause (ADR) to encourage early dispute resolution and reduce costs to parties. ADR is where parties engage a third party to help facilitate a resolution through the following approaches:
- Facilitative: A facilitator assist parties reach an agreement and provide options for parties to reach their own conclusion;
- Advisory: Advisory ADR involves a third party providing advice about the parties’ dispute, the law, desirable outcomes and steps parties can take to achieve this; or
- Determinative: A dispute resolution specialist evaluates the dispute (which may include hearing formal evidence from the parties) and makes a determination.
Below, we unpack four ADR options you may choose to include in your construction contract.
Mediation gets parties to meet, sit down and engage in ‘without prejudice’ discussions. Parties must reach an agreement themselves – that is, a third party does not make any binding decision. Your construction contract may include a provision about who or how the parties will appoint as a mediator. It is then the mediator’s role to assist the parties to engage in meaningful discussions about the dispute.
The costs of mediation are generally contained especially if the parties attempt mediation early and will depend on the following:
- Type of dispute between the parties;
- Required time to properly ventilate the issues in dispute; and
- Whether you involve Counsel.
Parties generally share the cost of the mediator and any venue costs equally.
Provided both parties attend in good faith and are willing to compromise to reach a resolution, mediation has many advantages including:
- Confidential negotiations;
- Parties try and maintain commercial relationships with their opponent after the dispute is finalised;
- Parties resolve their dispute faster;
- Parties are not constrained by the limitations of court;
- Parties can initiate mediation at any time;
- Mediation is far less intimidating for parties than court;
- Cost savings; and
- Parties can reach different outcomes (this differs to court proceedings which are limited to the award of damages).
Of course, the disadvantage of mediation is that if parties don’t resolve their dispute, they will likely need to head to court to achieve an outcome.
2. Expert Determination
Parties will appoint a third party with the requisite expertise and/or technical knowledge to settle their dispute rather than litigate. There is no procedural code governing the process. Parties instead have already agreed on a regime if a dispute arises between them, including the expert or type of expert, how costs are to be paid and timeframe.
Expert determination is advantageous for the following reasons:
- Streamlining the process;
- Parties generally don’t present oral evidence and instead use written submissions;
- Less formality in the process;
- Expert can conduct his or her investigations;
- Process is generally confidential;
- The process is cheaper, and the dispute is resolved faster.
The downside to expert determination is that the “expert” is limited in his or her scope, and cannot exceed the jurisdiction set out in the construction contract. There are also limited opportunities for parties to appeal – that is, if a party disagrees with the decision, they must show that the expert didn’t act within the terms of their appointment or fraudulent conduct. Failure to comply with a determination will see a party enforcing the decision through court.
3. Early Neutral Evaluation
Early neutral evaluation (ENE) is where parties in a dispute present arguments and evidence to a third party in an attempt to resolve their matter at an early stage. ENE is used primarily in the USA but is slowly making headway in Australia as an ADR process. In QLD, the process is known as case appraisal.
In ENE, a judicial officer considers each party’s position and will provide a non-binding evaluation either in writing or orally (depending on jurisdiction). The evaluation will include an assessment of liability, strengths and weakness of the case, and damages.
ENE provides parties with the opinion of a respected neutral individual (e.g. a retired judge or QC) who can assist parties negotiate with the knowledge of likely outcomes. This process is then best suited to disputes where issues of law need to be considered.
As with mediation, ENE’s disadvantage is that the process is non-binding, so there is no requirement on the parties to proceed with the evaluation given by the third party.
4. Senior Executive Appraisal (AKA a Mini-Trial)
Senior executive appraisal involves senior executives joining a panel with an independent, neutral party to consider and appraise the issues between parties. Although sometimes referred to as a mini-trial, it is an ADR settlement process by which the parties present summarised versions of their case to a panel of officers and the neutral third party. Once the parties present their own case, the panel will convene and try to settle the matter. Parties must establish and document the third party’s power in an agreement.
Senior executive appraisal, like many forms of ADR, allows parties to resolve their dispute expeditiously and cost-effectively. It also is advantageous for the following reasons:
- Parties are empowered to resolve the matter themselves;
- Parties are directly involved which allows them to hear each other’s positions;
- Process is private and confidential;
- Procedure is less adversarial, meaning parties can work on preserving their business relationship;
- Even if the ADR doesn’t resolve the matter, the knowledge and preparation assist with an eventual litigious trial if necessary.
Some disadvantages of this ADR process include:
- The added expense of convening the panel can be wasted if the matter could have resolved at mediation or via direct negotiations between the parties; and
- The process is non-binding.
As you can see, parties have more than just mediation in their ADR arsenal. It’s important parties consider what potential disputes can arise and draft the appropriate dispute resolution clauses in a construction contract. If need assistance drafting an ADR clause in your contract or resolving your dispute, get in touch with our building and construction lawyers on 1300 544 755.