Commercial construction projects typically involve pages of specifications and deadlines which various parties are required to meet. Builders, architects, interior designers and each of their subcontractors will need to be in regular communication with each other to ensure that the project is progressing as per the agreed timelines. However, it’s almost inevitable that there will be hiccups along the way requiring the parties to renegotiate aspects of their agreements. All it takes is a delay in one element of a project for parties to feel the consequences.
It’s then imperative that each of the parties has a construction dispute resolution process in place in the event things turn sour. A failure to do so can lead to significant delays as parties may seek to enforce differing aspects of the agreement in different jurisdictions to seek diverse remedies. This article will explain the construction dispute resolution process in more detail, highlighting the legal aspects.
What is a Construction Dispute?
In the context of ongoing dealings between parties, there are likely requests for extensions and modifications that the parties can and will agree to without delay or any threat of interruption to the construction process. However, issues may arise between contracting parties, and they may have differing views as to how they should resolve them. There may be questions of causation regarding delays or unexpected costs that are subject to differing opinions. There may also be previous issues that have been resolved in a particular way, so as to give rise to an expectation that future matters would be dealt with accordingly.
The construction contract should then specify the point at which a matter becomes a “dispute” so that the parties can commence an effective dispute resolution process. This may be after service of a formal notice of dispute or after a set period in which the representatives of the various parties have failed to reach agreement on the way forward.
What is an Effective Construction Dispute Resolution Process?
An effective construction dispute resolution process is one which provides for the quick, cost-effective and fair determination of disagreements between parties. This process means that it should provide timelines by which the parties are to outline the points of the dispute (including the responses to them). It should also describe the method the parties will resolve the conflict.
Parties should carefully consider what dispute resolution mechanism their agreement should include before signing. The benefit of this is that there is wide scope to construct the process the parties will adopt.
It may be that they have had longstanding dealings with each other and those occupying high-level positions are confident of being able to resolve disagreements if and when they arise. In that case, the parties should adopt a consultative process before a referral to external dispute resolution.
It may also be the case that the parties have had disagreements on particular matters in the past and have found that an expert determination or arbitration has been an effective circuit-breaker. If so, the parties can refer these particular matters to external adjudicators at an early point in the dispute.
Parties may be unable to resolve certain disputes themselves. It’s then necessary to consider the range of available dispute resolution methods. If the point in the dispute relates to a technical or industry-specific matter, then an expert determination is likely to be the best option for its resolution.
On the other hand, if the relevant question is one of the interpretation or construction of the contract, then a conciliation or arbitration presided over by a legal expert will be more effective.
For parties based in different countries, arbitration can be a useful option. It can take place in a neutral third country which will avoid either party gaining a perceived advantage by having its local laws apply to the agreement.
In general, parties should reserve litigation for disputes regarding the consequences of termination of agreements. However, if the interpretation of a particular contract may have ramifications for other agreements between the parties, and a binding judicial decision may save the parties from future disputes, it can be a sensible option.
The benefits of private external dispute resolution processes (e.g. expert determination, conciliation, mediation, arbitration) are that the parties may conduct them as they wish. They can be kept confidential and apply (or not apply) the rules of evidence and general civil procedure as suits their needs.
Litigation, on the other hand, is not a bespoke solution. It is public -except in very limited circumstances that often do not apply to commercial disputes. In most cases, the court will refer to parties to alternative dispute resolution before proceeding to a hearing anyway. Fundamentally, when parties can agree on a specifically suited form of external dispute resolution – they maintain control over its conduct; when they resort to litigation – they hand over control to the courts.
What are the Legal Aspects of Construction Dispute Resolution Clauses?
The first and perhaps most important thing to ensure when drafting or considering a construction dispute resolution clause is that it needs to be clear.
So, for example, if the first step is for the claimant party to send a notice of the dispute, then what the notice should contain should be clear. The contract should also specify the time for the other party to send its response.
If the next stage is for the parties to meet and discuss the resolution of the dispute, then it needs to specify:
- Who from each party should attend;
- Where the parties will hold the meeting; and
- Within what period the parties will hold the meeting.
If the next stage is for mediation/conciliation/expert determination/arbitration, the agreement should specify:
- Who the parties can appoint to preside;
- How the parties will choose the presiding third party;
- Who bears the cost of the appointment/venue; and
- What the process will involve regarding documents, evidence and attendance.
If a dispute resolution clause requires further substantial agreement between the parties to be effective, then it has not served its purpose. Additionally, if it’s vague or uncertain, it may not be enforceable if the other party does not abide by it.
However, courts will seek to uphold properly drafted dispute resolution clauses. This means that if one party does not follow it or a party seeks to bypass it by commencing court proceedings, the court can make an order requiring compliance or staying (i.e. suspending) the proceedings. The recent Queensland case of Santos Limited v Fluor Australia Pty Ltd  QSC 129 demonstrated this principle.
Santos sought to avoid the need for representatives of each party to meet to resolve a dispute. It argued that it was entitled to proceed to court because experience indicated that it would be the most expedient form of dispute resolution between the parties.
In response, Fluor sought to have the proceeding stayed on the basis that it was contrary to the dispute resolution process agreed upon in the contract.
In his decision, Justice Douglas confirmed that a party seeking to circumvent a dispute resolution procedure contained within a contract bears a heavy onus to persuade the court to override what the parties had agreed to. The process agreed to by the parties would have to be a ‘completely hopeless or futile exercise’.
As this would be very difficult to prove, parties who have agreed to a clear and detailed dispute resolution process should expect to be held to their bargain – just as Santos was.
For further information concerning construction law or enforcing construction dispute resolution clauses, please contact one of our specialist construction lawyers on 1300 544 755.