Alternative dispute resolution during times of conflict
When conflicts in construction projects escalate into formal disputes, the immediate concern for the parties is the method of dispute resolution. Litigation and arbitration tend to be lengthy and expensive for all parties involved and, realistically, they should be considered as a final option. In the industry where cash flow is important, it is clearly undesirable for the parties to wait months or years to have their disputes resolved. To address this problem, the construction industry has taken innovative steps to develop other alternative forms of dispute resolution.
One solution was the introduction of the adjudication process under the Construction Contracts Act 2002. Adjudication can be a useful and quick process, particularly for straightforward disputes (e.g payment claim, no payment schedule). However, as determinations are made on the papers and with short timeframes for responses, it is not well suited for complex multimillion-dollar disputes. Many participants have negative experiences with the process – it is considered contractor-friendly, the costs can be significant, and procedural fairness is often questioned (particularly given the short timeframes). While adjudication determinations are intended to be interim binding decisions until the matter is determined through the contract dispute resolution mechanism (e.g arbitration), they often become the final determination.
Alternative Dispute Resolution
There are other alternative dispute resolution options. The attractiveness of these approaches is that they can provide a prompt and relatively inexpensive resolution of disputes compared to litigation and arbitration (and even adjudication). Although the decisions obtained from the process are not typically binding, it gives an early reality check for the parties in relation to the dispute (as to how a court or a tribunal might rule) and can enable the parties to resolve disputes as they arise. By doing so, the expectation is this can enable them to preserve co-operative working relationships. The alternative dispute resolution mechanism consists of a wide range of possible methods including mediation, executive negotiation, dispute boards or a standing neutral. Two key methods require particular attention: negotiation and the standing neutral.
In negotiation, parties resolve disputes at first instance through discussions and mutual agreements. Given the informal nature of negotiation, no strict rules are applicable other than principled negotiation, ethical conduct, sensitivity and mutual respect. Processes can be put directly into the construction contract to set parameters and expectations around invoking resolution by negotiation.
Negotiation is distinct from other dispute resolution processes in which the parties submit to a decision by a third party. In some circumstances, the negotiation process would involve a third party (negotiator) facilitating discussions on the basis of the parties` respective interests. Depending on the parties` need, the role of the third party may vary. In some instances, the third party`s role is limited to advising parties to the dispute. An example of this is the early neutral evaluation, where parties obtain legally non- binding advice on matters in dispute from a jointly chosen third party. On the other side of the spectrum, a third party might participate in the actual negotiation process in the role agreed on by the parties. Mediation is an obvious example of this category.
Regardless of what process is adopted for negotiation, it seems worthwhile to invest time and cost in negotiation to deal with disputes while they are fresh, rather than let them linger. This was effectively how many parties dealt with COVID-19 issues, particularly in the private sector.
The concept of the standing neutral is relatively new in New Zealand. It involves a pre-selected neutral, or the board of neutrals comprised of experts, serving the parties as a dispute resolver throughout the course of the construction project. A standing neutral is chosen jointly by the participants in an early stage of the project relationship and is expected to make competent, impartial and reasoned recommendations on short notice.
To maximise the efficiency of standing neutrals, it is important to continuously involve them in the project (i.e. provide with the specification of the contract, regularly attend site meetings, and keep up to date on progress). As a result of continuous involvement, standing neutrals have the opportunity to observe problems when they occur or as they are occurring. Although the decisions of the standing neutral are not binding, the neutral`s decision acts as a foundation on which the parties can resolve their disputes. Should the parties be willing to give some additional weight to the neutral`s decision, it is possible to draft a contractual provision that allows the decision of the standing neutral to be admissible as evidence in subsequent arbitration or litigation.