Preventing pain: avoiding conflict and de-escalating disputes in construction projects
Senior Associate Scott Thompson recently presented at the Legalwise Seminar. Below is a summary of the key takeaways from Scott’s presentation on avoiding conflict and de-escalating disputes in construction projects in the ‘project execution' phase.
Despite some high-profile contractor liquidations and notable issues on national scale projects in recent times, New Zealand's construction industry is nevertheless experiencing an unprecedented pipeline of opportunities. In 2018 alone, New Zealand's total construction activity netted $39 billion. However, the success of a construction project (or firm) does not exclusively depend on the circulation of money or on the abundance of work. Rather, success heavily depends on how the parties to a construction contract manage conflicts and disputes that inevitably arise during the execution of the project. Because of this, the notion that ‘prevention' is always better than a ‘cure' should be at the forefront of parties’ minds.
Below, we offer insights into some of the practical conflict prevention mechanisms and dispute de-escalation methods in the ‘project execution' stage of a construction project.
Project execution: getting off on the right foot and creating the right project culture
It is not an overstatement to suggest that the success of a construction project can depend on how the parties maintain good relationships between each other. A good project culture and co-operative partnership have been frequently raised as an effective conflict avoidance mechanism.
Partnering, sometimes referred to as alliancing, is a management mechanism that seeks to ameliorate the traditional adversarial approach to construction by creating a co-operative and collaborative atmosphere between the participants involved in the project (Stephen Furst and others Keating on Construction Contracts (10th ed, Sweet and Maxwell, London, 2016) at [1-047]). It is a dispute prevention technique imposing a procedural overlay to the underlying contractual relationship. This is because although partnering addresses how parties are to interact in times of conflict, it often does not alter the existing contractual relationship between the parties.
Partnering arrangements tend to be most effective on large, complex and high value projects that require close co-operation from the parties. To obtain the best results, partnering is often introduced at the beginning of the project before the attitudes of the parties become adversarial. Broadly, a partnering arrangement improves relationships among people, and fosters frequent communications and a free exchange of information between the parties. As a result, partnering enables the team to more easily overcome and resolve conflicts as they arise.
Recently, in a remarkable example of leadership in this area, Watercare has entered into a 10-year partnering arrangement with Fulton Hogan and Fletchers. This $2.4 billion long-term commitment is a first for New Zealand, departing from Watercare's traditional project-by-project approach to infrastructure procurement. The arrangement aims to achieve enduring collaboration to drive greater cost efficiency and innovation in delivering Watercare's infrastructure.
Overall, partnering is an attractive conflict avoidance mechanism. If the parties have worked well in one project using partnering, then they are likely to work together again in the future. In this sense, successful partnering fosters long-term relationships beyond the scope of the project.
Practices detrimental to the established relationship
Once a good project culture is set in place, the participants should strive to preserve the culture. Parties should refrain from taking actions which can undermine the co-operative values created by the partnering arrangement (for example, defending a party’s position without compromise, or taking an unrealistic or hard-line approach to conflicts).
In New Zealand, the role of the engineer in the standard form contract NZS3910 gives rise to a potential risk to the partnering model. Under NZS3910, the engineer performs a dual role, as a representative of the principal (6.2.1(a)) and as an independent and impartial decision maker (6.2.1(b)). This aspect of the contract has been criticised as adding a perception of bias where decisions go against a contractor, and insulation from poor decision-making by the engineer where decisions benefit the principal. This can undermine the co-operative project culture created by a partnering or similar arrangement. Overall, the engineer’s close association with the principal can often lead to contentious decisions in favour of the principal or can trigger accusations of partiality.
The success of a construction project depends on how the parties avoid and manage conflicts and disputes. At the project execution stage of a project, parties are able to avoid and resolve conflicts by creating a co-operative project culture via partnering. This is only one way in which parties can avoid and manage conflicts and disputes.