LECTURE TWO

BUSINESS CONTRACT
DISPUTE RESOLUTION
Expected outcome
 Differentiate between conflict and
disputes.
 The growth of conflict into dispute
 Possible sources of disputes
 Dispute resolution
 Methods of dispute resolutions
 Alternative dispute resolutions
Conflict and dispute
 Construction contracts involves people
with a different behaviours, background,
nature and culture.
 These differences can easily result into
disagreements, arguments and
grievances between parties in the
contract.
 However, these disagreement depends
on the nature of the contract, complexity
of project, technology, time, legal issues,
project team etc.
Conflicts and disputes
 Conflict is the divergence of interest or
belief between the parties.
 Depends on the effort of the parties
under contract to settle the differences,
conflict will then grow into dispute.
 Therefore dispute occur when conflict is
not well managed at the beginning.
 Once conflict grow into dispute it
become difficult to manage and thus the
possibility of affecting project schedule
and cost.
Growth of conflict into dispute
 When disagreement between peoples in the
project team are not addressed early enough,
there is a possibility for dispute to arise.
 The parties need to identify the potential
source for dispute and address it at earliest
possible.
 It is difficult to avoid conflicts in the project
but disputes can be avoided by addressing
conflict early enough.
 Lack of information and poor communication
can easily facilitate conflict into dispute.
Main sources of dispute
a) Nature of contract/type of
procurement
 The nature of procurement and
contract has got huge contribution to
the dispute in the project.
 For example traditional procurement
is said to be more attractive to dispute
due to its adversarial nature
The above can be detailed in as
follows
 Lack of single point of responsibility
 Changes in the design
 Poor communication
 Use of incomplete design
 Inadequate contract drafting
 Adversarial culture
 Under pricing the tender
 Variations
 Claims
 Poor workmanship by the contractor
 Under budget or underestimating
Type of procurement cont’
 Unrealisticclient expectation
 Site/ground conditions
b) Complexity of the project
 Complexity of the project is also one of
the potential source for dispute in the
project.
 Depends on complexity project, it may
involve many changes in the design as
well as divergence from the contract sum
which are potential causes for dispute.
 Thus the parties under contract need to
handle such project according to the
circumstances.
c) Technical matters
 The interpretation of technical
matter/issue may escalate into dispute.
 This depends on how contract is drafted
or the way contractor has interpreted the
design.
 For example client may overlook the site
condition before construction starts but
when construction starts and the ground
condition become very surprise then it
escalate into dispute.
c) Technical matters cont’
 This happens normally where client
finds that under contract, liability for
ground conditions falls to him/her.
d) Legal matters
 Although some issues are very simple
to interpret under contract, others are
very difficult and may need legal
interpretation by legal body.
 When this happens it therefore result
into dispute between parties in
contract.
e) Differences in project team
 The goal of any project is to have a
project completed according to the
contract.
 Although this is project goal which is
understood by all parties in the project
team, each part/project organization has
their own goals in the project.
 When there is divergence in these goals
that is where you have disputes among
team members.
Differences in project team cont’
 To avoid such differences in the
project team, project experts have
advised for partnering approach in
forming project team.
 Partnering create mutual
understanding and objective between
parties/organizations in the project
team.
Dispute prevention and avoidance
 Make sure that clients needs must be well
understood before design commence.
 Make sure design are clear (substantial)
complete before tender.
 Make sure most appropriate forms of
contract are used based on project
circumstance.
 Choose the right type of contract eg
lump sum contract or fluctuating
Prevention and avoidance of
disputes
 Proper contract administration including
communication and managing of changes.
Dispute resolution
 If dispute has arisen it is the
responsibility of the parties to
deal/resolve it in quickest way to
continue with business relations.
 Having understood the possibility of
disputes to arise in contracts all
construction contracts have specifically
insert the clause on how to resolve
disputes in the contracts.
 Disputes can therefore be resolved
through alternative methods under the
contract and in very rare case through
litigation.
Dispute resolution cont’
 To maintain business relations, dispute
needs to be resolved quickly, cost-
effective and less adversarial means.
 The method for resolving disputes will
depend on the nature of the contract.
 For example in contracts where the
parties are enjoying collaboration it is
wise to use mediation for dispute
resolution rather than arbitration.
Methods for dispute resolution
 Disputes are expensive, time consuming,
distort client & builder relationship and
may result into escalation of project
costs.
 In resolving disputes it is important to
adopt methods which are quick, cheap
and the ones which maintains business
relations.
 The method for resolving dispute also
depends on the forms of contract.
Methods for dispute resolution
cont’
 Dispute resolution methods are
categorized into two main groups
namely;
 Alternative dispute resolution
methods (ADR) or Non-adversarial
dispute resolution methods
 Adversarial dispute resolution
methods.
Alternative dispute resolution
methods (ADR)
 These methods are cheap, quick, less
expensive and maintains business
relations.
 It is based on mutual agreement of the
parties in resolving a dispute.
 ADR normally base on a neutral third
part decision of which if parties in
dispute are not satisfied they can
proceed with arbitration/litigation.
 Parties are also allowed to withdraw
from ADR process and proceed to
arbitration or litigation.
ADR cont’
 Most of these methods are not legally
binding that is why a part can withdraw
in proceeding or refuse to implement
decisions if it is not drafted as an
agreement.
 It is therefore advised once there is
agreed decision it has to be put into
agreement which will be legally binding.
 Parties in dispute are normally the ones
dictate the procedures to follow.
ADR cont’
 ADR is further sub-divided into the
following methods;
 Conciliation
 Quasi-conciliation
 Mediation
 Private enquiry
 Mini-trial
 Dispute resolution board
Conciliation
 In conciliation an independent third part is
appointed to guide the parts in resolving the
dispute.
 Conciliator is not allowed to make decision
or judgement of the issue in debate.
 Conciliator will listen to each part separately
trying to understand their differences while
maintaining impartiality and confidentiality.
 Conciliator will latter brings all parties
together for discussions which conciliator
chairs.
Conciliation cont’
 The conciliator needs to establish
common grounds where all parties
can get into agreement.
 Conciliator must have experience on
construction disputes.
 Where this methods is used it is upon
the parties themselves to reach into
agreement.
Quasi-conciliation
 It sometimes happens that one of parties
approach a professional to advise on the
dispute.
 The aim is to advise on technical and
contractual issues.
 The expert appointed will normally need
to talk with the third part to find exactly
what is the issue.
 On other hand, another part also
appoints a professional advisor for the
similar purpose.
Quisi-conciliation
 When both have consulted another
part, the appointed professionals may
decide to talk to each other and
compare their findings impartially.
 Once conciliator has reached a
decision a report is produced which
can be used as a negotiation
instrument.
 If dispute escalate further to court it
can be used as evidence at a court.
Mediation
 This takes almost similar route like
conciliation.
 Mediator is normally appointed by a
body in charge of mediation issues.
 The parties will forward their claims
and defences to mediator.
 Mediator consult each part separately
and later bring parties together.
Mediation cont’
 However, the difference with
conciliation is that, if parties fail to
reach into agreement, mediator will
make decision based on the findings.
 This is for the purpose of making
mediator more active in the process.
 Each part bears its own costs for
mediation while each contributing to
the costs of a mediator.
Private enquiry
 This process involves the
appointment of an independent
professional to investigate some
aspects in the project.
 It is normally used in disputes of
highly technical and sensitive.
 It has no defined procedures to follow
 However, where is to be used a
professional needs to be given clear
terms of reference.
Private enquiry
 Where private enquiry has been used it
has proved to be more effective to
judicial enquiry.
 In judicial enquiry judges/arbitrators are
not allowed to use their own knowledge
in reaching conclusion rather than the
facts brought before them contrary to
private enquiry.
 Professional expert will finally produce
report which can be used by parties to
reach into agreement.
Mini-trial
 Mini-trial takes a form of court hearing.
 The disputing parties will present their
case in a panel consist of themselves and
senior executives in their organizations.
 A panel consist of contractor’s and
client’s representatives will be available.
 The senior executives should have
authority to make and implement
decisions.
Dispute Review Board (DRB)
 DRB is a generic term for dispute
adjudication board (DAB), dispute
review board (DRB) and dispute
conciliation board.
 They are very common in major civil
engineering projects.
 They replace the role of
engineer/conflict of interest in resolving
disputes.
 The establishment of the board is guided
by the agreement of the parties in
contract.
DRB cont’
 The board is normally consists of three
members (rarely one member).
 It is established at the beginning of a
project and not when dispute arises.
 They usually visited the site thus if any
conflict arises it can be resolved at the
earliest before it escalate into a dispute.
 In visiting the site they become familiar
with the project and establish good
relationship with contractor and client.
DRB cont’
 Also the familiarity of the project enable
them to have enough evidences for the
dispute.
 These enable disputes to be resolved
much quicker and at less costs.
 However, there are concerns on high
costs of maintaining these boards for all
construction period.
 As a result it is uneconomical to have
these boards in small engineering
projects.
Adversarial dispute resolution
methods
 These methods are more of court
procedures in resolving disputes.
 In non-adversarial dispute resolution
methods most of decision reached are
not legally binding but for adversarial
methods they are either temporary
binding or full binding.
 These is to reduce the number of cases
which goes for litigation.
Adversarial methods of dispute
resolution
 These methods includes;
 Adjudication
 Arbitration and
 Litigation
Adjudication

 Adjudication was introduced to obtain a

temporary legal binding decision while
waiting to proceed with litigation or
arbitration.
 Adjudicator is an independent experts
whose responsibility is to hear the
parties and make decision.
 He is required to consider every fact
brought before him as evidence of the
issue in dispute.
 He/she is normally appointed by an
institution of adjudicators.
Adjudication
 Need to be someone with
knowledge/experience in construction
contracts/law.
 Adjudicator will be served with all
documents the parties are intending to
rely.
 Similarly the same documents must be
served to the accused.
 Adjudicator will later determine the
procedures for the process.
 In UK adjudication, adjudicator is
required to give decision within 28 days.
Adjudication cont’
 However, extension of 14 days can be
granted to adjudicator on agreement
of both parties.
 Adjudicator is not obliged to give
reasons on the decision reached
however the parties have right to
demand.
 The costs for adjudication are shared
by parties in dispute.
Arbitration
 Arbitration is normally guided by the
arbitration act.
 The Act sets all procedures on how
arbitration will be carried out.
 Arbitration allow parties to have
flexibility on how arbitration should
be conducted.
 It also gives privacy contrary to
litigation.
Arbitration
 For many years arbitration has been
commonly method used in resolving
construction disputes.
 Therefore many contracts have
arbitration clause.
 However, in developed construction
industry non-adversarial methods of
resolving disputes such as mediation,
are replacing arbitration.
Arbitration cont’
 The objective of arbitration is to
resolve dispute quickly and less
expensive.
 To enable the parties to take control of
the entire process.
 To reach into legal binding decision.
 Arbitration needs to be adhere to rules
of “natural justice”.
 All documents used should be made
available to all parties.
Arbitrators award
 The decision made by the arbitrator
after listening all parties is called
arbitrators award.
 Arbitrators award is final and
binding.
 It is closely similar to court judgement
 It may include injunctions, ordering a
certain performance etc.
Challenging arbitrators decision
 Since arbitrators award is final and
binding, it is only challenged on very
few cases like serious irregularity, lack of
jurisdiction or on point of law.
 The circumstances includes;
 Failure to comply with natural justice
 Failure to conduct proceedings within
agreed procedures
 The award being obtained by fraud and
 Any irregularity in the award.
Removal of arbitrator
 Any part having the reasons may
apply for the court to remove
arbitrator from his office.
 The court will call arbitrator and hear
him/her before makes its decision.
 The following reason can cause
arbitrator to be removed from the
office
a) There are justifiable doubt of
arbitrator’s impartiality.
Removal of arbitrator cont’
b) Arbitrator lacks qualifications
required by arbitrators agreement.
c) Doubt on physical or mental capacity
of arbitrator.
d) Arbitrator has refused to conduct
proceedings
Litigation (Court proceedings)
 This needs to be the last option due to
some of its setback in construction
projects.
 The parties are encouraged to try
resolving their dispute using other
means before choosing litigation.
 Some of setback includes lack of privacy,
parties loose control, costly, lack of
speed and destroy business relations.
 However, the decision is normally of
high-quality and trusted by parties.
Litigation cont’
 It is the responsibility of a claimant to
prove to the court of the charges
against the other part.
 The court decision is final and binding
however the part can appeal to high
court.
Cost of the disputes
 Direct cost
 Indirect cost
 Hidden cost

 Direct costs – these includes direct cost

such as fees paid to lawyers, accountants,
claim consultants and all others who have
participated in assembling the facts.
Indirect costs
 These are salaries and associated
overheads paid to in-house lawyers,
managers, other experts participate in
assembling the facts and act as witnesses.
Hidden costs
 Inefficiency
 Delays
 Loss of quality that dispute cause to the
construction process
 Loss of relationship between the
contracting parties