"CONSTRUCTING THE TEAM": A U.S. PERSPECTIVE V. KING (J.D.) Minneapolis, Minnesota, U.S.A. Copyright 1996, 1998.

. All Rights Reserved. I. Summary There are interesting parallels as well as interesting differences between the problems identified and solutions recommended in Sir Michael Latham's Report, Constructing the Team, and the state of the U.S. Construction Industry in the mid1990s. The parallels support the conclusion that the problems facing the construction industry worldwide are universal, while the differences can be explained by reference to differing approaches to project organisation. This paper reviews selected chapters from the Report (Three -- "Project and Contract Strategies and Briefing"; and Nine -- "Dispute Resolution"), compares the problems identified therein with the current situation in the U.S., and compares the various recommendations with current trends or practices in the U.S. construction industry. The paper will then endeavour to rationalise the parallels and differences by references to differing approaches to project organisation and to the underlying social, political, and legal factors in each country. The paper will conclude by attempting to discern what can be learned from the previous analysis by construction professionals on both sides of the Atlantic. II. Background The early 1990s were a terrible time for the construction industries in the United States and the United Kingdom. Overbuilt markets, overheated economies, overextended developers and, indeed, simple greed and mismanagement, led to a significant decline in construction volume. The effect on each country's economy -construction accounts for 8% of GDP in the UK [1] and 4. 4% of GDP in the US [2] -cannot be understated. However, it can be argued that the industry's litigiousness as much as anything else played a major rle in its decline. In the UK, disputes surrounding major projects such as Canary Wharf and the Channel Tunnel came to exemplify what many saw as the decline of a once-magnificent industry which had built an Empire. In the US, where the absolute number of claims peaked in 1989 [3], somewhat earlier than reported in the UK, the cost per claim for design professionals insured by one PI carrier climbed steadily from $179,000 in 1985 to $268,000 in 1993 [4]; and similar results were reported for the aggregate amount of damages claimed in construction arbitration cases in general [5]. Whether the claims explosion of the '80s and early '90s was a cause, symptom, or effect of the construction industry's other difficulties may be left to others to sort out. What is certain is that -- on both sides of the Atlantic -- the industry's factiousness cannot have helped to ameliorate an already desperate situation. In sorting through the debris, one might examine a number of possible explanations for this phenomenon. Undoubtedly, there are many opinions: high interest rates, inflation, feverish competition for fewer projects, and speculative frenzy can all take their place in the line of suspects. Certainly, however, poor project organisation -- a lack of attention to the details relating to project structure, communication, and execution -- can be singled out anecdotally as a key factor in many claim-ridden projects. In response to this perception, Sir Michael Latham, a former Conservative MP and ex-director of the UK Housebuilders Federation, was commissioned by H.M.

Government to lead a year-long, 250,000 enquiry with the purpose of ending "the culture of conflict and inefficiency that dogs Britain's biggest industry" [6]. The report, entitled Constructing The Team, Final Report of the Government / Industry Review of Procurement and Contractual Arrangements In The UK Construction Industry [HMSO, London, 1994 (hereinafter "the Report")], was initially greeted with "almost universal praise" [7]. In addition to reviewing the state of the UK construction industry, Sir Michael makes 30 recommendations for improving the industry. Among the recommendations were: creation of a standard form of contract based upon the New Engineering Contract; establishment of a building clients' lobbying organisation (called 'NewCo' by Sir Michael [8]); clarification of building liability responsibilities; implementation of 10-year building defects insurance similar to the insurance utilised in many parts of Europe; implementation of productivity improvements leading to a 30 per cent reduction in real construction costs (Sir Michael points out that construction costs about 30 per cent more in the UK than in the US [9]); requirement of trust funds to ensure companies get paid; broader utilisation of so-called "alternative dispute resolution methods"; and more extensive use of contracting strategies such as design and build. This paper proposes to focus on the final two recommendations in the foregoing list. These recommendations are discussed in chapters 9 and 3, respectively, of the Report. Chapter 9 of the Report is entitled "Dispute Resolution," and Chapter 3 is entitled "Project and Contract Strategies and Briefing". After summarising each chapter, the paper will describe how the issues raised and recommendations made by Sir Michael have been dealt with in the US; attempt to explain the differences; discuss the similarities; and suggest how the US experience might be of use in developing a further understanding of Sir Michael's recommendations. III. Discussion A. Summary In Chapter 9 of the Report, Sir Michael expresses dissatisfaction with the current methods available for resolving disputes in the UK construction industry. He points out that arbitration is unsatisfactory because of frequent delays and the "constant spectre of appeal", and recommends development of a project adjudication process which would permit speedy resolution of disputes essentially as soon as they arise. Ironically, although arbitration has been the subject of criticism in the US, it is precisely because in the majority of cases there is no right of appeal from the arbitrator's award. As recommended in the Report, the US construction industry has also moved to establish dispute resolution methods other than arbitration, and seems to have travelled farther down this road than the UK industry. In Chapter 3, Sir Michael emphasizes the importance of developing appropriate project and contract strategies so as to establish proper allocations of risk, divisions of authority, and lines of communication. In the US, clients have been utilising design and build on private projects for many years, with considerable success in avoiding claims. Government agencies in the US have flirted with design and build but, due in large part to public bidding laws as well as inertia, have been slow to implement it in any serious fashion. B. Chapter 9: Dispute Resolution Dissatisfaction not only with the frequency of construction disputes but with the manner of resolving them seems strong in both the US and in the UK. Arbitration, which until recently has been a favoured method of resolving such disputes, is under attack in the UK because of its "perceived complexity, slowness, and expense" [10]. Similar criticisms [11] have been levelled in the US, where arbitration for many years

has been well entrenched as the preferred method of private construction dispute resolution [12]. Interestingly, however, despite the superficial similarities of the criticisms levelled against arbitration in the US and the UK, Sir Michael summarises a basis for dissatisfaction with arbitration in the UK which is the exact opposite of the main cause for criticism of arbitration in the US. In the UK, according to Sir Michael, it is the "constant spectre of appeal" to the High Court from an arbitrator's decision "which has emasculated the whole {arbitration} process" [13]. In contrast, in the US it is precisely the lack of ability to appeal from an arbitrator's decision in most cases, except for the most egregious circumstances such as demonstrated fraud or bias [14], combined with the lack of a requirement for the arbitrator to offer any reasons whatsoever for his or her decision, which has resulted in the most withering attacks upon US-style arbitration [15]. In the US, according to one study "a significant number of arbitrators" admit to not following either the law or the parties' contract in rendering their awards [16]. Although and arbitration award can be set aside because the arbitrators exceeded their authority (which presumably includes the duty to apply the parties' contract including its governing law provisions) [17], in practise since the arbitrators need not explain their decision it is very difficult to establish this ground as a basis for vacating the award. This attitude appears to enjoy considerable support in the courts. In one case in which the author was personally though (fortunately) tangentially involved [18], a dispute developed between the owner of a townhome development and the designbuild contractor who had constructed the project. Approximately $250,000 worth of repairs were needed. Instead of awarding the owner damages for the cost of repairs, the arbitrators ordered the contractor to purchase the entire development from the owner at a cost of several million dollars -- an equitable form of relief which not only far exceeded the scope of the arbitrators' authority, but also ran afoul of the Statute of Frauds. Notwithstanding, the Minnesota Supreme Court refused to vacate the award "merely because the court may believe the arbitrators have erred." [19]

C. Chapter 3: Project Organisation and Strategies In his introduction to the Report, Sir Michael points out that "Clients are at the core of the process" in construction, but their "interests are dispersed and vary greatly" [*]. Chapter 3 of the Report, "Project Organisation and Strategies," attempts to review the common factors involved in the early planning stages of a construction project in an effort to determine the key elements needed to References 1. Latham, M. (1994) Constructing The Team, Final Report of the Government / Industry Review of Procurement and Contractual Arrangements In The UK Construction Industry HMSO, London, 1994, p. 7. Yuskavage, R. (1993) Gross Products By Industry, 1988-91, Survey Current Business, November, 1993, at 33, 34 (table 2). A record 5,132 construction arbitration cases were conducted in 1989, Thomson, D. (1994) "Arbitration Theory and Practice: A Study of AAA Construction Arbitrators," 23 Hofstra Law Review 1, p. 138. Ichniowsky, T. (1995) "There's No Claims Crisis Now, But New Challenges Loom," Architectural Record, August, 1995 pp. 22, 24. Thomson, supra, note 3, p.138.

2. 3. 4. 5.

6.

Tieman, R. (1994) The Times of London, Business Section, 19/7/94, quoted in DataTimes Online. 7. Taylor, A. (1994) Financial Times, p. 9, 19/7/94. 8. Barrie, G. (1995) Building, 13/1/95, p. 7. 9. Latham, supra, note 1, p. 64, citing W.S. Atkins (1994) from OECD data, Table 5.1 of "Strategies for the European Construction Industry -A Programme for Change", European Commission, 1994. 10. Latham, supra., note 1, p. 90 11. Thomson, supra, note 3, p.140, citing Pollock, E. (1993) "Arbitrator Finds Rle Dwindling As Rivals Grow," Wall Street Journal, 28/4/93, p.B1. 12. American Institute of Architects (1987) AIA Document A201: General Conditions of the Contract for Construction, (14th ed. 1987) 4.5. 13. Latham, supra, note 1, p.88, quoting paper by Knowles, R. (1994), Construction Contracts Consultants, April 1994. 14. See, e.g., the United States Arbitration Act, 9 U.S.C. 10(a)(3). Most arbitration acts in the various States are similarly restrictive. 15. Thomson, supra, note 3, citing Hinchey, J. (1991) "Yes, We Do Need Special Rules for Complex Construction Cases!", Construction Lawyer, August 1991, American Bar Association, p.1. 16. Thomson, supra, note 3, p. 156. 17. Id., citing 9 U.S.C. 10 (Supp. V 1994); Ziegler Coal Co. v. United Mine Workers, 484 F.Supp. 445, 447 (C.D. Ill. 1980). 18. David Co. v. Jim W. Miller Construction, Inc., 444 N.W.2d 836 (Minn. 1989). 19. Id., at 840; cited in Thomson, supra, note 3, p. 154. *. Latham, supra., note 1, p. 3.