CON4541 CONSTRUCTION CONTRACT MANAGEMENT

4. Contract Administration (refer Private Standard Form with Quantities for HK)
Contd

M. Resolution of disputes

When claims arise, there may be occasions that both parties cannot reach agreement; it
may be possible to resolve the disagreement in courts.

The settlement of disputes arising from building contracts by methods other than litigation
() is common practice. The main reason for this is that where the substantial
questions of the dispute are matters of fact than of law, a final and conclusive decision can
be obtained in a manner which is quicker and cheaper than the formal legal process.

Arbitration () is the most widely used method of settling building contract disputes.
However, alternatives such as mediation (), and conciliation () are rapidly gaining
recognition; they are collectively referred to as Alternative dispute resolution.

Alternative Dispute Resolution ("ADR") refers to any means of settling disputes outside of
the courts. ADR typically includes early neutral evaluation, negotiation, conciliation,
mediation, and arbitration. ADR maybe carry out on voluntary or mandatory bases.

While the two most common forms of ADR are arbitration and mediation, negotiation is
almost always attempted first to resolve a dispute. It is the most effective means of dispute
resolution. Negotiation allows the parties to meet in order to settle a dispute. The main
advantage of this form of dispute settlement is that it allows the parties themselves to control
the process and the solution.

Advantages of ADR

Cost savings it is estimated that approximately 90% of cases which are started
through the courts or arbitration, settle just before the hearing stage. Therefore, it
makes sense to consider ADR as an alternative for both parties to resolve the disputes.

Control the parties in the disputes can freely choose the places, the procedures and
the schedule for conducting the disputes resolution process.

Consensus both parties agree to resolve the disputes in ADR. The matters can be
settled more easily.

Continuity of business relations

Confidentiality no adverse publicity

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Disadvantages of ADR

Non-binding nature of the settlement may be misused as a delaying tactic

The party suggested ADR may be perceived as a weakness in the disputes

Discovery of documents and sharing of information can be used as evidence collection

for later arbitration or litigation.

Common ADR methods include:

Third party expert opinion

One of the parties will engage an expert to assess the claim. For this process to succeed a
move to settle, it is important that the expert is given a free hand to come to an impartial view.
After the expert's initial assessment, he may be asked to give an award. If agreement still
fails, and provided that the expert's independent view is likely to be helpful to the case, he
may appear as an expert in arbitration or any other proceedings which will take place to
resolve the dispute.

Conciliation

Process whereby an independent person services to explain the views of the two parties to
each other and with this exchange of views encourage the parties to reach a compromise.
Conciliators, unlike arbitrators, are not supposed to make a judgement.

Mediation

Similar to conciliation except that the mediator can formally suggest a solution.

The mediator normally meets the parties separately and he may be empowered, if the
parties cannot be persuaded to agree, to make a recommendation on the matters in dispute.

Any confidential information that is made available to the mediator at private meetings with
one party cannot be divulged to the other party.

Mediation proceedings may be conducted with lawyers and other experts to present each
partys case to the mediator.

The mediator will endeavour to find common ground at these separate meetings and he will
try to find means of reaching a settlement.

A meeting with both parties present will usually be required at some stage. Whoever
represents the parties at these discussions, it is essential that they have the authority to
agree and settle the dispute. Failing agreement, the mediator may decide on the matters in
dispute.

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The parties are not normally bound by the mediator's decision. However, there is no
impediment to the parties agreeing, at the outset of these proceedings, to accept the
mediator's decision as final and binding.

Arbitration

It is a form of alternative dispute resolution (ADR), a technique for the resolution of disputes
outside the courts, where the parties to a dispute refer it to the "arbitrators", by whose
decision (the "award") they agree to be bound. It is a resolution technique in which a third
party reviews the evidence in the case and imposes a decision that is legally binding for both
sides and enforceable.

No one is compelled to submit a dispute to arbitration unless he/she has agreed to do so

within the terms of the contract.

It is most important to appoint an arbitrator by the agreement of both parties.

Appointment of the Arbitrator

An arbitrator or should be a disinterested person and is independent of both parties involved

in the proceedings. He/she is sufficiently qualified and experienced in the matter of dispute.

An arbitrator may be disqualified if it can be shown that:

Conflict of interest: He/she has a direct interest in the subject matter of dispute.
Bias: He/she may fail to do justice to the arbitration by showing a bias towards one of the
parties concerned.

Arbitration Procedure

Preliminary meeting

A preliminary meeting with both parties will be held before the hearing, itself begins; there
are several reasons for this.

The arbitrator is able to introduce himself and meet the parties informally. He will make
clear his position as arbitrator, including the important point that his decision is final and
binding.

The arbitrator will explain to the parties the procedure at the hearing and what is required

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of them.

The parties will be told that they will need to produce details of their claims, in writing,
sending copies both to the arbitrator and the other party, and that they will be required to
explain in writing to the arbitrator how they intend to conduct their case, naming
witnesses and citing any evidence they wish to use.

Finally, a date, time and place for the hearing can be arranged and agreed.

Hearing

The hearing often follows similar lines to court proceedings except that they are normally
less formal. They are normally held at a neutral venue, such as a hotel, but there is no
reason why they should not be held at the offices of one of the parties. The hearing may
take one or two days, or it may consist of several hearings over several months. Some
hearings may deal with particular issues in dispute, and some may deal with purely
procedural matters.

These set out the matters in dispute, the facts and the contractual and legal provisions
relied upon. The sequence is as follows:

Claimant submits points of claim

Witnesses are cross-examined by other party.

Respondent submits points of defense and counter-claim (if any); Claimant submits
points of reply to the defense and defense to counter-claim; Respondent submits points
of reply to defense to counter-claim.

Discovery of documents : Each party is required to prepare lists of documents for

inspection by the other party. In most disputes, discovery may be limited to documents
that are relevant to the issues in dispute. A list of documents that are required should be
made and a request for copies should be sent to the other party.

Award

The arbitrator will make two awards, the first dealing with all matters in dispute among
the parties the main award, the second dealing solely with costs the costs award.

All awards must be in writing and signed by the arbitrator who is also required to give
reasons for the main award.

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Appeal

Both parties have the right of appeal to the High Court, although such appeals are very
rarely successful. In most cases the Court will uphold the decision of the arbitrator,
unless there are real grounds for doubting the validity of the award.

Costs

The costs of the reference and the award will be at the discretion of the arbitrator who
may direct to, and by whom, and in what manner, those costs or any part of the costs,
must be paid. Such an order is known as the costs award.

The costs include:

Reasonable fees of the arbitrator
Travel and other expenses incurred by the arbitrator
The cost of providing facilities for the arbitration, including room hire, transcription fees
and similar services
Fees, travel and other expense of witnesses allowed by the arbitrator

Advantages of arbitration

Many of the advantages most frequently claimed of arbitration as alternatives to litigation are
especially relevant to those arising from construction contracts.

Freedom in choice of arbitrator

The parties in arbitration are free to choose a suitable person to be the arbitrator.
Disputes involving specialist and technical knowledge can be settled by a person with
such knowledge.

Frequently disputes arising from construction contracts involve such questions as

whether or not certain ground conditions should have been foreseen by the contractor,

whether or not it was reasonable for the architect to issue particular variations or
instructions,

whether or not the extension of time granted by the architect is reasonable and
acceptable by the contractor.

A proper understanding of these and many other points that may arise can only be
gained by, long experience in the construction industry and preferably experience both in

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contracting and administrating the contract. Hence it is desirable that the arbitrator
should in such cases be an experienced architect or quantity surveyor or engineer.

Flexibility

Technical procedural rules of a court of law are not rigidly applied, which greatly
simplifies and expedites matters. The time and place of the reference can be chosen to
suit the convenience of the parties. If litigation is used to resolve the dispute, the parties
will be instructed when and where to appear; they have no say in the matter.

Economy

The arbitrator's charges are often much less than those of the parties' solicitors and
counsel. Furthermore where technical matters are involved it is likely that experts will be
needed to present such matters to a judge, but not to a technically qualified arbitrator.
Again, proceedings in court are likely to be more protracted, and hence more costly than
in arbitration.

Expedition

Generally arbitration, if properly used, provides the means of resolving a dispute with the
minimum of delay. The disputes can be settled in a faster way than litigation.

Privacy

Arbitration proceedings, unlike those in the courts, are not open to the press or to the
public; only those persons involved in the proceedings are entitled to attend.

Usually the parties to construction disputes have no wish to publicize either the matters
disclosed at the hearing or any other details of a reference. Frequently the dispute will be
more rapidly solved where there has been no publicity.

Finality

Having chosen their arbitrator by agreement, the parties should be content to accept his
decision whether strictly in accordance with legal precedent or not.

Although the awards can be challenged through the courts, the right to appeal is strictly
limited and may, in some circumstances be eliminated entirely.

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Disadvantages of Arbitration

The arbitrator may be required to seek the decision of the courts on points of law which
may be lead to delay. If there are a number of points of law referred to in a case which
require a court ruling, it may turn out to be cheaper and quicker to refer the whole matter
to the courts in the first instance.

There is no automatic right of appeal to a higher court as in litigation; the decision of the
arbitrator is final.

There is no precedent in arbitration as there is in court cases. This means that no

previous case decisions are taken as the rule; the award will be entirely at the
arbitrators discretion.

Comparison between Arbitration and Mediation

Arbitration may be invoked unilaterally.

Mediation is not governed by any legal provisions, neither the award nor the procedure
itself.

Legal representative is usually excluded during mediation.

Arbitration: - Costs follow the decisions by the arbitrator.

Mediation: - Costs are usually equally borne by the two parties and the overall cost
involved is relatively less.

The Proceeding of meeting or hearing are not formally recorded for Mediation.

A mediator is not compelled to take evidence only. With the presence of both parties,
he/she is also allowed to use his/her own 'knowledge' on factual evidence.

The time limit to invoke mediation usually shorter.

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The Standard Form of Building Contract (2005 Edition) has introduced a 3-tiered
dispute resolution mechanism under Clause 41 and this is by reference to:

Designated Representatives
Mediation
Arbitration

1. Designated Representatives (Clauses 41.1 & 41.2)

Each party of the Contract shall designate one of its own senior executives as its
representative within 14 days of the acceptance of the Contractors tender. The duty of this
representative shall endeavour to settle the disputes that arise during and carrying out of the
Works

The Designated Representatives must have the authority to settle disputes and shall not be
involved in the day to day administration of the Contract.

If a dispute arises related to the Contract, the Architect shall at the request by either party,
immediately refer the dispute to the Designed Representatives which shall meet within 7
days from the Architects notice.

2. Mediation (Clause 41.3)

If the dispute is not resolved by the Designated Representatives within 28 days of the
dispute referred to them by the Architect, either party may give a notice to the other party, by
special delivery, to refer the dispute to mediation. The person to act as the mediator shall be
agreed between both parties.

If the parties fail to agree on the person to act as the mediator within 21 days from the notice,
the mediator may be appointed by Presidents or Vice-presidents of the HKIA and HKIS
respectively and co-jointly.

The mediation shall, unless otherwise agreed by the parties, be conducted in accordance
with and subject to the Hong Kong International Arbitration Centre Mediation Rules.

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3. Arbitration (Clauses 41.4 to 41.7)

If the dispute is not settled by mediation within 28 days of the commencement of the
mediation, either party may give a notice to the other party, by special delivery, to refer the
dispute to arbitration. The person to act as the arbitrator shall be agreed between both
parties.

If the parties fail to agree on the person to act as the arbitrator within 21 days from the notice,
the arbitrator may be appointed by Presidents or Vice-presidents of the HKIA and HKIS
respectively and co-jointly. Alternatively, they may jointly request the Hong Kong
International Arbitration Centre to appoint the arbitrator.

The arbitration shall be a domestic arbitration conducted in accordance with the Arbitration
Ordinance except otherwise agreed.

Time at which arbitration may be commenced

Provision for arbitration during the progress of the Works is made under Clause 41.5, in the
event of dispute arising out of the following situations:

the appointment of a new Architect or Quantity Surveyor under Article 5 of the Articles of
Agreement.

the Architect is empowered by the Conditions to issue an instruction;

whether a certificate has been improperly withheld or is not issued in accordance with
the Conditions of the Contract.

the assessment of the Employers loss of value is reasonable regarding accepting the
Contractors inaccurate setting out of the Works

the Contractors objection to a Variation is reasonable in respect of changes of an

obligation or restriction on the Contractor regarding access to the Site, use of any part of
the Site, etc.

the Employer would take possession of a Relevant Part and the Contractors consent is
not provided.

Apart from the above, the arbitration for other disputes shall not commence until after
Substantial Completion of the Works.

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Arbitrators powers

The arbitrators powers include:

rectifying the Contract to accurately reflect the true agreement made by the parties;

directing measurements or valuations to determine rights of the parties;

assessing and awarding any sum which ought to have been the subject of or included in
a certificate; and

opening up, reviewing and revising, without limitation, the giving, submitting or issuing
of any agreement, approval, assessment, authorization, certificate, confirmation,
consent , instruction, notice, request, Valuation, etc.

The place of arbitration

All proceedings of arbitration shall be in Hong Kong.

Contractor to continue to proceed diligently

Despite of the dispute having arisen, the Contractor shall continue to proceed regularly and
diligently with the Works and without prejudice to any of other rights and remedies that he
may possess.

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