Conflict, Claim or Dispute?

Many would consider that for a project to be successful it should be completed within budget and on time – the biggest risk to project success is the existence of conflict. Given the typical complexities in construction projects, it’s little wonder that the construction industry holds the unenviable reputation of being highly adversarial, which leads to a high occurrence of conflict.  Furthermore, the severity of disputation is considered higher in the construction industry than in any other major sector.

Given the potentially adverse ramifications of conflict escalating into dispute, the paramount task for industry professionals should be a focus on avoidance and prevention. As such, if either party to a contract lacks the necessary skills to resolve and prevent conflicts from escalating, then it is inevitable that destructive and expensive disputes will arise.

On many occasions I have been asked by a client about preparation for litigation or arbitration as a result of “irreconcilable differences”.  Others have walked into meetings with an expensive team of lawyers ready to do battle over a “difference of opinion”. Then there are those too afraid of the financial burden associated with a dispute that the simple way out is to accept the demands of the dominant party.  

It would seem then that even the smallest of disagreements on construction projects can be misinterpreted and can quite often lead to a breakdown in communication between parties. As such, this paper intends to provide an understanding of basic terminology and the remedies available for a party to avoid, mitigate or manage any potentially negative impact on a project’s success. 

Terminology Confusion

Often, I have had a client inform me that they are in dispute when in fact there has simply been a disagreement or a difference of opinion between opposing entities.  The misconception is that if ‘X doesn’t accept what Y has proposed, then there is a dispute’.This is understandable when considering what the English definition for dispute is, this being a ‘disagreement or argument’.

Whilst many authorities on the subject have laid down basic guidelines on how to distinguish between disputes, claims and conflict, confusion still remains throughout the construction industry. It can be said that despite the terms often being incorrectly interchanged, the meaning of each is significantly different and requires clarification

The definition of dispute, for example, as proposed in Halki Shipping Corporation v Sopex Oils Ltd, [1] (the Halki Principle) established that a ‘dispute’ does not exist until a ‘claim’ has been submitted and subsequently rejected. This definition has been argued by others in that there can be no definitive meaning of ‘dispute’. Claiming that the existence of a ‘dispute’ is subjective and requires a practical common-sense approach relying on the facts, as well as law and policy considerations which suggests that application of the Halki Principle may breach natural justice.

In summary, it is clear that the conflicting arguments of meaning and purpose of terms in addition to the potential for interchangeability necessitate the requirement to define each independently.

Definition of Conflict

The term ‘conflict’ is synonymous within the construction industry and can be considered unavoidable due to the complexity of construction contracts and high differences in interests among the participants to a construction project.  One prominent definition of ‘conflict’ is ‘the process which begins when one party perceives that another has frustrated, or is about to frustrate, some concern of his’.

The cause of conflicts is numerous and without resolution can lead to claims and disputes such as increased project cost and delay, reduced productivity, loss of profit, damage to business relationships and even resulting in costly litigation.

It could also be argued that conflict is not always a bad thing. The constructive resolution of conflict can produce high quality decisions, encourage growth and strengthen teams and individuals involved.

Definition of Claim

Within the construction industry, the word ‘claim’ is commonly used to describe any application by the contractor for payment which arises other than under the ordinary contract payment provisions or a request for compensation for damages incurred by any party to a contract which was not anticipated in the terms of the original contract.

Claims are intrinsic to a construction contract and the submission of a claim is simply an extension of sound contract management. For example, the definition of a claim in FIDIC 2017 confirms that they are made under the contract:

“Claim means a request or assertion by one Party to the other Party for an entitlement or relief under any Clause of these Conditions or otherwise in connection with, or arising out of, the Contract or the execution of the Works”.

Definition of Dispute

The Construction Industry Institute defines a ‘dispute’ as:

“… a problem or disagreement between the parties that cannot be resolved by on-site project managers”.

A ‘dispute’ can also be defined as a situation where two parties differ in the assertion of a contractual right which results in a contractual decision being given, which consequently becomes a formal dispute.

It is important to understand that whilst the previous definition of ‘conflict’ can be defined as an ‘argument’ or a ‘contest with words’, the meaning of ‘dispute’ has a much more precise and formal meaning in the construction industry. For example, the ICE Conditions of Contract define a ‘dispute’ as:

“… a dispute shall be deemed to arise when one party serves on the Engineer a notice in writing (hereinafter called the Notice of Dispute) stating the nature of dispute”.

Furthermore, it should be noted that before any party can serve a Notice of Dispute, the receiving party must be given opportunity to respond and that certain steps must have been taken in accordance with the contract to mitigate the dispute.

Root Cause of Disputes

The causes of construction disputes are numerous and trying to identify a specific cause is impossible given the complexity of projects. Much research has been undertaken to determine that the following events were contributing factors to a dispute:

• imprecise specification of works
• conditions on a construction site
• change of construction conditions
• change of equipment
• changes in the scope of works
• improper choice of workers

It can be found that the above factors centre on definition, interpretation, operation and clarification of the contract. Furthermore, the root cause of the above can be identified in three distinct categories:

• PEOPLE - Behavioural/Organisational
• PROCESS - Contractual
• PROJECT - Technical

Whilst all three issues play a role in influencing the likelihood of contract disputes, the influence of ‘people’ holds the key to avoiding contract disputes. Despite the best efforts of all parties, change is unavoidable in construction contracts. However, it is the way that they are handled by the people that determine whether or not they escalate into dispute.

Dispute Resolution Methodologies

Negotiation

Aside from the prevention of disputes in their entirety, negotiation is often viewed as a low cost, cooperative endeavour, and favoured over more adversarial and expensive processes. Party to party negotiation is consistently considered the number one method utilised to resolve disputes. Indeed, most forms of contract prescribe that parties should endeavour to reach amicable agreement in resolution of disputes.

‘‘Negotiation is a technique that keeps the dispute in the hands of the parties and will incur fewer costs whilst keeping hostilities to a minimum".

It could be argued that one major failing of negotiation can be due to the misunderstandings and tactical miscalculations that take place during informal negotiations as well as spiralling hostilities between the parties.

Further initiatives include fair and appropriate risk and balance within the contract as well as accurate contract documentation. It could be said that all of the issues fall into contract administration and/or negotiation, reinforcing the ‘people’ factor alluded to previously.

Mediation

Mediation can be defined as “a process where the third part neutral, whether one person or more, acts as a facilitator to assist in resolving a dispute between two or more parties”. It can also be said that the mediator may or may not be an expert in a given industry, but rather they are presumed to be knowledgeable in the techniques of mediation and that the techniques for conducting mediations vary greatly depending on the mediator; however, the mediator does not render a decision but rather helps the parties reach a settlement on their own.

On 1st May 2014, the International Chamber of Commerce (ICC) held the Middle East and North Africa (MENA) launch of the ICC Mediation Rules 2014 and introduced the new rules brought into force on 1st January 2014. One feature of mediation in the Middle East which distinguishes it from other mediations is that the respect of both parties to the mediator makes it difficult for the parties to withdraw from mediation or terminate mediation and therefore, whenever mediation commences there is a likelihood that both parties will see the process through and consequently reach an amicable settlement.

Despite this, mediation isn’t the resolution method of choice in the Middle East, with parties generally preferring alternative methods.

Adjudication/Expert Determination

Expert determination is defined as “a private process involving an independent expert with inquisitorial powers who gives a binding decision”.  This term is most frequently encountered within the UK construction industry through the process of adjudication, this being a binding decision made by an appointed neutral, either by deciding on the basis of submitted documents, or as is increasingly the case, after a hearing.  It is designed to provide a speedy, if not always elegant, resolution to enable work to continue on site without interruption and either party may appeal the adjudicator's decision to court or arbitration, or indeed settle the dispute by mediation.

The recent judgment in ICI Ltd v Merit Merrell Technology Ltd (MMT) [2] stated the case was a good advert for adjudication. Despite spending millions of pounds in both legal and expert’s fees, MMT’s account had barely increased by 1% above that decided in five previous adjudications. Also, the judgment on who repudiated the contract was the same as previously decided. Both parties were criticised for thinking that the justice system would devote unlimited resource to them to resolve each and every disagreement.

Dispute Boards

A dispute board (DB) is a mixture of both expert opinions and neutral evaluations. The basic structure of a DB normally consists of a one or three-member expert panel appointed by both the owner and the contractor and typically set-up at the commencement of a contract. The ICC Dispute Board Rules for example consist of a comprehensive set of provisions for establishing and operating a DB. The rules provide parties with the option of engaging one of three options:

1. Dispute Adjudication Boards (DABs) issue decisions that must be complied with immediately.
2. Dispute Review Boards (DRBs) issue recommendations that are not immediately binding on the parties, unless no objections in 30 days.
3. Combined Dispute Boards (CDBs) offer an intermediate solution between DRB and DAB. They normally issue recommendations but may also issue decisions if a party requests without objection, or if the DB so decides on the basis of criteria set out in the rules.

In addition to the above, FIDIC contract conditions 2017 introduced a new term, Dispute Avoidance/Adjudication Board (DAAB). The additional powers granted to the DAAB being the provision of assistance/discussion in an attempt to resolve conflict during the course of the contract.

The critical difference between a DB and other forms of alternative dispute resolution is that the DB team meets both before and during construction operations. This allows the DB members to familiarise themselves with the people, process, and project specifics.

Arbitration

Arbitration is the private, judicial determination of a dispute by an independent third party, typically an individual arbitrator or a tribunal. It is an alternative to litigation and the decisions are typically just as final and binding. The construction industry, more than perhaps any other, has experience with arbitration for resolving its disputes and is a widely accepted form of alternate dispute resolution outside the courts.

Anecdotes about the process, the arbitrators, and the decisions have shown that arbitration proceedings are becoming more and more like litigation. The main criticism of arbitration being stated that:

“… the process is regulated by strict legislation and follows similar formal court hearing procedures requiring rules of evidence and the process of discovery. This in addition to the adversarial nature aligns it with litigation”.  

It has also been stated that:

 “Arbitration can be an expensive, unending kangaroo court in which the concepts of justice and fairness are trampled and neither the arbitrators nor the arbitration association seems to have any interest in anything other than maximising the fees paid to them by the parties”.

Despite these criticisms, arbitration still remains within the top three dispute resolution practices used within the construction industry today.

Conclusions

This paper has discussed the difference in terminology between conflict, claim and disputes in addition to providing an overview of current dispute resolution methodologies. 

In simple terms, any successful project should first seek to avoid conflict. Should conflict be unavoidable, then the submission of a claim for the reimbursement of any loss and expense should be considered. Finally, any failure to agree claimed values could result in a dispute crystallising which requires appropriate resolution techniques.

The avoidance of conflict and disputes has never been more relevant to the industry. The introduction of the DAAB in FIDIC 2017 could prove to be radical in terms of introducing a widespread emphasis on dispute management and avoidance. The expansion of the former General Conditions of Dispute Adjudication Agreement and the Procedural Rules provides clear objectives for the DAAB:

• to facilitate the avoidance of disputes that might otherwise arise between the parties; and,
• to achieve the expeditious, efficient and cost-effective resolution of any dispute that arises between the parties.

It is clear from the aforementioned that there are many discussions to be had with regards to achieving a successful project outcome. The nature of both avoidance and resolution of the matters discussed above require specialist attention during each construction stage and with the right skills…

• Conflicts can be avoided.
• Claims can be managed.
• Disputes can be resolved.

This article is published with the purpose of promoting discussion only. The contents must not be relied upon or applied without first seeking professional advice.

[1] [2018] EWHC 1577 (TCC)

[2] [1998] 1 WLR CA