Bringing disputes to a satisfactory end

By Jeff Walters and Andy Glenie

Improving outcomes for all parties when relationships break down

Increased pressure on the construction industry is bringing with it increased disagreement between principals and contractors.

But many of those using NZS:3910 are telling us that the dispute resolution procedures provided for under the contract are just not helping to bring such disputes to a satisfactory end.  This article puts forward an alternative dispute resolution mechanism which could improve outcomes for all parties when the pressure causes relationships to break down.

NZS:3910 dispute resolution procedures

Currently, a disagreement under a NZS:3910 contract could be brought to an end in one of several ways:

Engineer’s review: Most disputes are referred to the engineer to the contract for decision.

Expert determination: The parties can agree to refer a question to an agreed expert. Costs are shared.

Mediation: Following the engineer’s decision, either party can refer the matter to mediation. The mediator then seeks to broker a deal. Costs are shared.

Arbitration: If mediation fails, either party can refer the matter to arbitration. The arbitrator will then conduct a formal arbitration process, before deciding the matter. Costs can be awarded in favour of one party by the arbitrator.

Adjudication: Sitting alongside those contractual procedures is the statutory mechanism of adjudication under the Construction Contracts Act 2002. Either party can seek an adjudication. The adjudicator will decide the matter, but his or her decision can be revisited by an arbitrator.

Each of those mechanisms has its advantages and its disadvantages.

Aims of dispute resolution

There will be differing views about what a dispute resolution procedure should try to do. But in our experience, construction industry players tend to be straight-forward characters. We think that most would favour a process which has the following aims:

Speed: To state the obvious, the process needs to be quick. Disputes always squeeze cashflow and often threaten the programme, so the faster the matter can be put in the past the better.

Cost-effectiveness: Equally, the process needs to be efficient. No principal or contractor will be happy spending a big percentage of the sum at stake on lawyers and experts.

Accuracy: The process should produce an outcome that is just, rather than arbitrary. For instance, the parties should not just be forced by the spectre of legal costs to agree to a 50/50 compromise.

Durability: The outcome should seek to bring the dispute to a permanent conclusion, without further challenge by the parties. Of course, those objectives can conflict; a balance is required.

Evaluation

Evaluation, or early neutral evaluation as it is sometimes called, is a well-established process. It involves asking a senior lawyer  to give an independent and non-binding  view on the matter in dispute. In simple terms, the evaluator is invited to predict  for the parties how the matter would be decided by an arbitrator.

So, what are the pros and cons of using evaluation to resolve disputes in the NZS:3910 context?

Speed: The model we propose provides for the evaluator to set the process for the evaluation (which could involve
limited exchange of documents or witness statements), culminating in a one-day hearing. Like mediation and adjudication, that process could be readily completed  well within eight weeks. In contrast, an average arbitration could take six months  or even longer.

Cost-effectiveness: The costs of preparing for an evaluation would be broadly comparable to mediation and adjudication. The parties would need to incur some preparation costs, and then share the evaluator’s costs (perhaps two or three days’ worth). In an average case, our sense is that those costs are unlikely
to exceed 25 percent of the costs of a full arbitration.

Accuracy: There would of course be a trade-off here. An evaluator given limited evidence and time is of course less likely to reach a perfect decision than an arbitrator. The margin of error would be greater. But in our view an evaluator is more likely to reach a just conclusion than an adjudicator, who would just review the matter on the papers and without hearing from the parties directly.

Durability: Again, there would be a trade-off here. The model we propose contemplates a non-binding evaluation. Parties could still choose to proceed with arbitration (as they often choose to go to arbitration following adjudication). But it would be a brave party who would go against the reasoned view of a senior lawyer and push ahead with arbitration. The evaluation process need not be without prejudice, so either party could refer during the arbitration to what was said during the evaluation – meaning that work would not be wasted. And a party which ignored the evaluation then lost at arbitration could be disciplined by the arbitrator with a higher costs award.

Next steps

Evaluation will not be suitable for every construction contract, but it has real potential to improve outcomes in a large number of cases. We have developed some precedent wording to provide for the evaluation process in the NZS:3910 context. That wording could be tailored for the particular circumstances, then incorporated into Schedule 2 – Special Conditions when the contract is signed.  Alternatively, parties could enter into a short evaluation agreement after the dispute has arisen.

Jeff Walters is a property and construction law partner at K3 Legal, and can be contacted at jeff@k3.co.nz. Andy Glenie is a dispute resolution specialist at Glenie Legal, and can be contacted at andy.glenie@glegal.co.nz.