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CONSTRUCTION DISPUTES

Ir. Dr. Rosli Mohamad ZinFaculty of Civil Engineering

Universiti Teknologi Malaysia

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CONSTRUCTION DISPUTES

• Construction projects are generally complex , for this reason, delays and disputes are always present

• Involved many parties.

• When a project ends up in a dispute, the project will fail to meet its original goals and expectation.

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Disputes (cont’d)

• Clients will suffer from high legal fees, delayed completion and occupation and general dissatisfaction.

• The contractor’s profits will diminish and to these will be added additional legal fees.

• No winners under these circumtances

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CAUSES OF DISPUTES

• May arise on a construction project for a number of reasons:Late or non-payment for works satisfactorily

completed when payment is due.Inaccurate valuation of variations and works in

progress.Delays in the supply of general construction

information

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Causes of disputes (cont’d)

Late issue of instruction varying some sections of the works.

Shortcomings, omissions and errors in contract documentation giving rise to ambiguities in contract requirements.

Failure of contractor to construct the works diligently and to programme.

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Causes of delay (cont’d)

Increase in scope of work (changes, extras and errors) without proper consideration for extension of production time.

Untimely issue of variation instructions, which disrupts the contractor’s progress and programme of works.

Acceleration to complete within original programme without proper agreement over the payment.

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Causes of delay (cont’d)

Poor workmanship and failure to use specified materials, skilled operatives and recognised methods.

Failure to inspect works in progress regularly and condemning only when works are completed.

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(Cont’d)

• It can be deduced from the above list that the main areas of construction disputes revolve around:

payments contract documentation Time and cost overruns Construction information and site supervision

Owing to their diverse status, the view points of the project participants towards disputes areas vary;

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View points of project participants

Disputes areas

Client Contractor Sub-contractor

Consultants

Time for completion

Late completion and payment for extended period expected

Insufficient: speed up production to avoid payment of penalty for non-completion

Under pressure to speed up production to programme

Sufficient; invocation of penanlty clause should contractor default

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View points of project participant

Quality work’ship

Good quality product to specification assured

Good quality work’ship ensure future commission

Production to specified quality

Inspection; non payment for work below specified quality level

Payment Uncertainty of final cost of product due to variations and claims

Prompt; should reflect production cost and aid maintenance of good cash flow

Same as main contractor

Avoid over-payment, keep cost of variations within client’s budget

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View points of project participant

Contract documentation

Should be reliable if all contentious points covered

Inadequate; ambiguous with hidden extra cost

Only part disclosed; inadequate

Adequate; clear enough for the execution of work

Construction information

Assured that is adequate, clear and timely issued

Late issue by client; inadequate; causes delay and disruption

Late, inadequate, disrupts production programme

Contractor possess enough information to carry on

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Time completion

• Normally, project completion time is specified by the client, but when it is made an object of completion it is specified by the contractor.

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RESOLUTION OF DISPUTES

• Construction contract documents are often long and complex and contain contract terms (as guidance on courses of action should they have a difference of opinion)

• In theory, the express term of the contract should provide solution to any contractual disputes that arise.

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RESOLUTION OF DISPUTES (cont’d)

• In practice, some difficulties do arise in the definition of the express terms and their relation to the legalities of the event or events causing the dispute.

• This is likely to result in the need for a third party (court, arbitrator or mediator) to assist in the resolution of the dispute.

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LITIGATION

• Litigation is a dispute procedure which takes place in the courts.

• It involves third parties who are trained in the law, usually barristers, and a judge who is appointed by the courts.

• Often expensive and can be a very lengthy process before the matter is resolved.

• Frequently extended to higher courts involving additional expenses and time.

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ARBITRATION

• Is an alternative to legal action in the courts, in order to settle an unresolved disputes.

• All of the standard forms of contract used in the construction industry include an arbitration provision. (JKR 203A, CL. 54)

• Most commonly used for dealing with disputes that arise between the various parties concerned.

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ARBITRATION (cont’d)

• Exercise of freedom in the selection of a third person (arbitrator) does not mean that an arbitration overrides the jurisdiction of the courts.

• The reverse rather is true as arbitration tends to follow the rules of the High Court.

• For this reason and also affirmation of this fact, pleadings, reports and evidence can be expected in arbitration hearing just as in a High Court.

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ARBITRATION (cont’d)

• In spite of these, the two systems have major difference;

In arbitration, the parties may be represented by whoever they wish as opposed to barristers and solicitors normally retained in litigations.

Parties are obliged, under the principle of discovery, to disclose to each other the existence of all documents known to them which are relevant to the matters of dispute.

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ARBITRATION (cont’d)

• Litigation is a procedure handled in public courts, while arbitration is handled within the construction industry.

• For this reason, arbitrators who are construction experts, and have also worked within the industry, hear construction disputes and hand down decisions.

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ARBITRATION (cont’d)

• An arbitrator’s power are very wide.

• They may review and revise certificates and valuations.

• They may also disregard opinions, decisions or notices that have already been given.

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THE ESSENTIAL FEATURES OF A VALID ARBITRATION AGREEMENT:

1. The parties must be capable of entering into a legally binding contract.

2. The agreement should whenever possible be in writing.

3. It must be signed by the parties concerned.4. It must state clearly those matters will be

submitted to arbitration, and when the proceedings will be initiated.

5. It must not contain anything that is illegal.

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Arbitration and litigation comparisonArbitration Litigation

Duration Expedited process from start to decision

Lengthy process from start to judgment

Cost Saving in expense can be expected

High cost of legal representation

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Arbitration and litigation comparisonArbitration Litigation

Privacy Assured; held in private, public excluded

No privacy, held in public

Flexibility Flexible; place, time and conduct to suit parties

Inflexible; place, time and conduct decided by the court

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Arbitration and litigation comparisonArbitration Litigation

Formalities/advocacy Parties represented by anyone (matured/sane) parties may decide

Parties represented by qualified lawyers

Technical expertise Arbitrator has expert knowledge relating to technicalities of the dispute

High Court judge is well versed in the law but may lack expert knowledge relating to dispute

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Arbitration and litigation comparisonArbitration Litigation

Business relationship Business relationship may be resuscitated

Relationship damaged by the outcome

Decision Made private; hence not damaging

Judgment made in public and hence damaging

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Arbitration and litigation comparisonArbitration Litigation

Settlement finality

With few exceptions, final and binding

Operates appeals procedures

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ALTERNATIVE DISPUTE RESOLUTION

• Is a non-adversarial technique which is aimed at resolving disputes without resorting to the traditional forms of either litigation or arbitration.

• Was developed in USA & widely used.• Claimed to be less expensive, fast and

effective.

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ALTERNATIVE DISPUTE RESOLUTION (cont’d)

• Less threatening and stressful.• Offers the parties who are in dispute the

opportunity to participate in a process that encourages them to solve their differences in the most amicable way that is possible.

• Parties should have genuine desire to settle their differences without recourse to either litigation or arbitration.

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CHARACTERISTICS OF ADR

The peculiar characteristics are as follows:

Non-binding proceedings: Proceeding are non-binding until a mutually agreed settlement is accomplished. Therefore, either parties can resort to (resume) litigation or arbitration if the procedures fail.

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CHARACTERISTICS OF ADR (cont’d)

The peculiar characteristics are as follows:

Predisposal to settle : Before commencement of negotiation, the parties should genuinely predisposed to effect settlement without litigation or arbitration and, hence be prepared to compromise.

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CHARACTERISTICS OF ADR (cont’d)

Senior management’s role: They play an active role in the resolution.Even when they are represented by a lawyer, senior management make the final decision that effect the settlements.

Influence of commercial interest:Negotiations and settlement are governed by commercial interest rather than rule of law.Therefore, ADR revolves around technical and commercial issues and seeks to maintain good business relationship.

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characteristics Litigation Arbitration ADR

Place/conduct of hearing

Public court; unilateral initiation; compulsory

Private ; bilateral initiation ; voluntary

Private; bilateral; voluntary

Hearing Formal; before judge

Formal; conforming to rules of arbitration; before an arbitrator

Informal; before a third party (neutral)

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Characteristics of Dispute Resolutioncharacteristics Litigation Arbitration ADR

Representation Legal; lawyers influence settlement

Legal; lawyers influence settlement

Legal only if necessary; disputants negotiate settlement

Resolution Imposed by judge after adjudication; limited right of appeal

Award imposed by an arbitrator; limited right of appeal

Mutually accepted agreements; option of arbitration if dissatisfied

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Characteristics of Dispute Resolutioncharacteristics Litigation Arbitration ADR

Outcome Unsatisfactory :legal win or lose

Unsatisfactory : legal win or lose

Satisfactory; business relationship maintain

Time/cost Time consuming; uneconomic

Can be time consuming and uneconomic

Fast and economic

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Common forms of ADR

Conciliation• A process whereby a neutral adviser listens to the

disputed points of each party and then explains the views of one party to other.

• An agreed solution may be found by encouraging each party to see the other’s point of view.

• With these approach, the neutral adviser plays the passive role of facilitator.

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Common forms of ADR (cont’d)

• Recommendations are not made by the adviser, any agreement is reached by the parties agreeing to settle their differences.

• Where an agreement is achieved, then the neutral adviser will put this in writing for each of the parties to sign.

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Common forms of ADR (cont’d)

Mediation

• In this scenario the neutral adviser listens to the representations from both parties and then helps them to agree upon an overall solution.

• An active role is played by the adviser by putting forward suggestions, encouraging discussions and persuading the parties to focus upon the key issues.