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Disputes and dispute resolution techniques

Introduction:

The construction industry is known for its awfully litigious nature. Many associate the
industry’s inefficiency and litigiousness to the adversarial relationship often manifested in
the supply chain relationships within the industry. For example, the Latham (1994)
report, which along Egan’s (1998) report had a revolutionary effect in the UK’s
construction industry, highlighted the adversarial nature of construction. Latham, in his
report, criticized the industry and urged for swift change in the way construction does its
business. As a highlight of the industry’s concentration on finding pitfalls rather than
trying to curb differences and get on doing the job, Latham drew attention to ‘claim
consultants’ whose duty is basically to advise some participants of the project
organization how they should seek to make money out of alleged mistakes or
shortcomings of the other party. Since this monumental criticism of the industry by
Latham, various researches have been conducted to seek for a better supply chain
relationship in construction.

Change clauses in construction contracts:

One of the most challenging and defining characteristics of construction projects is the
changes and extra works that are bound to be involved in the execution of the project. In
all its practicality, it is almost impossible to stipulate a construction contract document
that can be strictly followed for the proper and functional execution of construction
projects.

Thus, unlike many contractual relations in other industries, construction contracts are
often susceptible to change in scope due to the very nature of construction projects.
Construction projects are often started with no adequate information about the conditions
affecting the nature of the project: Sub surface conditions may not be as expected; as
most of the industry’s works are exposed to inclement climate, weather changes may
affect the work; unlike many products, the industry’s product are expected to last decades
hence clients demand stricter quality control and may even want to change their demands
after the project is incepted, etc. These and many other peculiar characteristics of the
industry and its product make change in construction contractual arrangements almost
inevitable. In deed, cognizant of this fact, most construction contracting documents give
provisions for a change clause as long as the change is within the scope of the work, i.e.,
non-cardinal change.

Construction changes: are changes that could be initiated either by the contractor, the
engineer or the client. They usually refer to the changes associated in the processes and
requirements of the processes agreed upon for the execution of the project such as delays
caused by engineer/client, improper rejection by engineer etc. The most common causes
of changes in construction projects can be traced to one of the following
 Errors or omissions: Errors and omissions are almost the norm in construction
projects. Errors or omissions could be traced to the design work or even to the
actual work executed by the contractor. In most cases, especially if the
error/omission is from the design, they cause change to the contractual items
agreed upon.
 Differing conditions: As one of the defining characteristics of construction,
projects, most often, are executed in open conditions, without the privilege of a
controlled factory work, with changing environmental [physical (surface or sub
surface), social, economical, etc] condition. These conditions, if not anticipated in
the original contractual agreement between the parties, may lead to changes.
 Post bid decisions on the part of the owner to change the characteristics of the job.
Most construction projects commence without full knowledge of the factors
dictating the construction process or viability of its product. This, coupled with
the fact that most construction projects take long and the product very expensive
and supposed to last long forces clients to change their mind during the course of
execution of the project.
 Non performance of duties: changes can also be caused by non performance of
duties by the parties in the project organization. For example, an Engineers failure
to supply appropriate drawings or approve/check execution according to
agreement may lead to change.

Changes and claims

As practically as unavoidable as they are, changes shouldn’t be perceived as negative in


construction projects. In fact, if handled properly, most changes are meant for the
successful delivery of the project or success of its product. However, the problem
emanates when changes are allowed to escalate to claims and then to disputes.

In its simplicity, a construction claim is nothing but unresolved change order. Thus,
generally claims are handled practically in the same way as change orders. Problems
arise, as claims start to come fast and thick, parties will become less willing to cooperate
or even start to develop an antagonistic relationship to each other. Thus, the general
advise is, if possible at all, parties should try to look things at unresolved business issues
and try their at most to curb the differences from escalating to personal level. However,
once they escalate to disputes and conflicts, claims have a ‘spiral effect’ that could
hamper subsequent relationships to work together.

Claims usually emanate when two parties disagree whether a condition differs from what
is agreed on the original contract, or when after agreeing that a condition differs from
what is agreed but fail to agree on the impacts and costs of the change. Thus, it can be
said that all claims relate back to one or more of the following: Is it a change? What is
the impact? What are the costs? Thus, as much as possible, the parties concerned need to
settle these issues as early as possible and as amicably as possible before they escalate to
claims and thereby to disputes.
Major causes of disputes in construction

Effective management of disputes between parties to construction projects is of great


importance to any construction industry. However, effective management action can only
be taken if the causes of the disputes are identified and traced properly.

It is argued that disputes emanating in construction are dependant on many factors


including the general culture of the society in which the industry is functioning. For
example, it is claimed that in the Eastern construction industries where mutual
beneficiary relationship is given more wait in the general public than the quite
individualistic Western culture, disputes are reported be much less than in their Western
counterpart. Thus, when discussing disputes, it is necessary to view is as a social
phenomenon and try to analyze it as a holistic issue which can’t be separated from
society’s way of life. This implies one has to look into the major causes of disputes in a
given construction industry in light with the way of life of its society, the legal
frameworks governing the disputes, economic and educational capabilities of the playing
parties, trade and business experience of the specific country’s economy, etc.

Unfortunately, there aren’t many studies that explored the major causes of disputes in
Ethiopia. However, save the importance of tailoring causes of disputes to our specific
construction industry, there are some common causes, which are often manifested, in
different industries. Studies in the UK, Canada, Australia, Honk Kong, the USA and the
Middle East show that, as discussed above, the major causes of disputes are claims
associated with variations.

Some of the major causes identified by the researchers are:

 Poor management,
 Poor communication,
 Inadequate design [design errors],
 Unrealistic [incomplete] tendering,
 Adversarial culture,
 General economic environment,
 Claimed failure by subcontractor resulting in attempted determination,
 Claims arising from variation,
 Unrealistic expectation by parties,
 Ambiguous contract document,
 Lack of team spirit among participants,
 Failure of participants to deal promptly with changes and unexpected conditions,
 Delayed design information,
 Delayed possession of site,
 Client changes,
 Site condition change,
 Error in BOQ,
 Exaggerated claims (by contractors),
 Inadequate site investigation,
 Estimation error,
 Inadequate contract administration
 Misunderstanding of contractual obligation by the party dealing with the contracts
 Legislative changes (often experienced in developing countries)
 Undue involvement from top management (sometimes for political reasons)
 Culture (language), clash, especially in international contracts

Dispute resolution methods

Critics of the construction industry state that, construction projects ‘start with an
agreement, followed by construction and culminate in disagreement!’ For good reason or
not, the industry, nearly in every corner of the world, has developed this bad reputation of
being dispute laden. Disputes are costing the construction industry dearly. For example,
studies showed that in the 1980s, disputes costed as high as about 20% of building costs
in America. Thus, having efficient and less costly dispute management mechanism has
been one of the most important issues in construction.

The Dispute Management Continuum

In dispute management theories, there are two major alternatives available. The first one,
perhaps the recommended one is the preventive approach that anticipates reducing the
occurrence and impact of disputes. This approach calls for cultivating an industry culture
based on trust and mutually beneficial problem solving. The other alternative in dispute
management is to try to get an efficient and amicable dispute resolving mechanism after
they occur. It is generally classified as non-judgmental and judgmental.

Prevention

Following Latham’s damning criticisms of the UK construction industry, policy makers


have been looking into ways of averting the adversarial relationship between major
parties in the supply chain relationship. As it seems, the most advocated means of
dealing with it is a complete change of culture in the industry. Currently, most researchers
in the UK construction industry dealing with construction delivery mechanisms advocate
a partnerships form of relationships whereby they are trying to persuade the government
to scrap the open competitive tendering requirements which was meant to minimize the
cost on the client by pitting together potential suppliers but clearly didn’t serve its
purpose. The proponents of ‘partnering’ argue that, it is to the advantage of both the
industry in general and to the contracting parties if they are encouraged to form some sort
of partnering.

Project partnering is a synergetic, cooperative and collaborative management effort


among contracting and related parties to complete a project in the most efficient, cost-
effective method possible, by setting common goals, keeping lines of communication
open, building mutual trust, and solving problems together as they arise.
In the short run, partnering enables the parties involved in the partnership, to deliver the
project at a lower price, with better quality and in less time by enabling them share their
resources, develop better understanding of the needs and expectations of the other party
and their common customers, develop a communicative, collaborative open working
environment as opposed to the usually adversarial working relationship in competitively
selected contracting bodies, etc. In the long run, it helps them to develop a sustainable
business partnership and expand their customer base and enhance their allied
competitiveness by developing a common culture and working ethics and procedures that
is founded on win/win relationship that fosters risk taking and responsibility acceptance
and commitment to it. Hence working together to exploit leverages and combat obstacles,
sharing their knowledge pool and expertise and further invent new knowledge and
procedure by sharing the risk associated in trying new way of doing things, developing a
stable and continuously improving work relationship there by focusing in addressing the
needs and expectations of their ultimate (and common) customers.

For partnering to work though, the researchers argue that, the currently Western ideology
of doing business should give way to the values and principles of life in the East.

Several items form the nature and process of partnering. These criteria include
commitment, equity, trust, preparation, development of mutual goals/objectives, use of
appropriate partnering tools and procedures, inclusion of appropriate parties, continuous
joint evaluation, timely responsiveness to problems, concentrating on problem and
interests; not on blaming people/parties, empowerment of stakeholders, willingness to
accept mistakes, improvement of communication, etc.

However, it has to be noted at this point that ‘partnering’ also attracts strenuous criticism
for being a ‘Mr. nice guy’s’ approach and not easy to implement in public projects.

Another suggestion as a preventive measure is to use a Dispute Resolution Advisor


(ADA). The ADAs are normally experts in the field and may provide the contracting
parties with contractual issues that may lead to disputes and suggest ways of averting
them.

Resolving disputes

Even the proponents of ‘partnering’ agree that , with the increasing development of
complex and fast track construction projects, disputes are virtually inevitable. Disputes in
the construction industry often involve the resolution of complex technical and factual
issues. Thus, resoling them in an efficient manner in of paramount importance for the
success of the project.

Non-judgmental
The non-judgmental methods bring the disputants to a round table and mutually resolve
their dispute

Negotiation: According to Fisher (1991), negotiation is a common dispute resolution


process in which parties themselves, or their representatives, try to resolve the dispute
without involving any neutral third party. It is a voluntary and an unstructured process
agreed by both parties, privately and confidentially. The features that contribute to the
success of negotiation include avoiding taking entrenched positions in the dispute, but
rather seeking solutions which meet the needs and interests of both parties. However, the
success of negotiation depends on interpersonal communication skills of the parties
during the entire process. Negotiation would be the first port of call when a dispute
occurs and should resolve a dispute at this stage. If a negotiation collapses, the next stage
would be mediation.

Mediation, on the other hand, is a mechanism in which a neutral third party meets with
the disputants and facilitates negotiation to help the parties come to their own solution. It
is voluntary but structured with ground rules agreed upon by the parties. The mediator
assists the disputants to generate options; helping both parties understand better their
respective positions and manage emotions.

Although the mediator controls the process, he or she does not impose any resolution or
opinion on the merits of the case, promoting a win/win situation, leaving the disputants
themselves to control the outcome. Hence the process is flexible, private and confidential
with legal rights of the parties protected when there is no agreement reached. Mediation
is a rapidly growing form of ADR and has been effectively adapted for multiple party
dispute resolution with tremendous success. For example, the South African Commission
for Conciliation, Mediation and Arbitration CCMA (2003) report indicates that the
average success rate of mediation in SA ranges from 80% to 85%.

Conciliation is a process similar to mediation except that the conciliator can express an
opinion on the merits of the case and is required to recommend a solution if the parties
fail to agree. The power of the conciliators is can be conferred by statutes and its
characteristics are similar to mediation.

Mini-trial: Another process involving a neutral third party in the dispute is the mini-trial
which brings together senior decision makers from each disputant to hear presentations
by junior representatives or their respective legal representatives and help them negotiate
a resolution in private. This is mainly used in big projects where the senior decision
makers may not be aware of the real situation and the subordinates may not be aware of
the needs and priorities of the parties.

Jobsite resolution is mostly considered before the start of a project and involves the
selection of a single neutral expert or a panel of experts sometimes refereed to us the
Dispute Review Board (DRB), who would be involved throughout construction process.
The parties select jobsite neutrals, with costs shared equally. Jobsite neutrals visit the
project at regular intervals to review construction progress, confer with parties and deal
with disputes. Given their knowledge of the project and familiarity with the relevant
players, they are often in a position to resolve disputes in a timely and cost effective
manner. In addition, their mere presence on the jobsite over extended periods of time may
actually discourage disputes. When a dispute does arise, however, the neutral would
generally hold informal hearings with the parties and offer solutions. While decisions by
the neutral are generally not binding, the process has historically enjoyed a great deal of
success.

Judgmental

When all efforts by the parties to resolve differences amicably have failed, by which time
the parties have developed entrenched adversarial positions in the dispute, then, a third
party has to listen to both sides and make a judgment.

Adjudication or Expert Appraisal or determination: This is a process whereby the


disputants present their cases to an independent expert who then evaluates the evidence
according to the relevant law, rules, contract and practice which is applied appropriately
in the dispute and gives a confidential opinion on the likely outcome of the case if it were
to go to court or arbitration. The disputants agree before hand that they will be bound by
the opinion of the expert and that this decision is binding on the parties in the interim,
until a further decision by a court of law or arbitration is reached.

Arbitration, on the other hand, is a dispute resolution process in which one or more
neutral third parties hear the evidence and arguments of each disputant and make a
decision for them. The outcome is one of a win/lose situation and is not based on any
precedent(s). The decision of the arbitrator is legally binding and, often, there is no
provision for appeal to a court of law. There are exceptions, such as misconduct of the
arbitrator. Rules of evidence used in arbitration depend on the prior agreement between
the parties. It may take a long time, same as for a litigation process, and may even be
more costly. What makes it attractive is the mutual agreement by the parties, appointment
of arbitrator, privacy and confidentiality

Litigation (used when all other avenues have failed) is a dispute resolution method that is
inquisitorial and adversarial, whereby the disputant initiates legal action against the other
party by going to court. It has a win/lose outcome and rarely satisfies both parties. Mostly
litigation is costly and results into much delay for the disputants and may not do justice to
the parties. However, the benefit of litigation is that the court has authority to find out the
“truth” from the parties and the enforcement of the order or judgment is supported by
other law enforcement agencies. It is also used when parties have low resources and need
an umpire or when they cannot agree to other forms of dispute resolution.

Litigation Vs ADR

As the cliché goes ‘when a case goes to court, there is only one winner- the lawyers’,
litigations are often classified as a lose/lose dispute resolution methods for disputants.
Litigations, nearly all over the world are known to be highly costly and notoriously time
consuming, let alone damaging the relationship and reputation of the parties involved.

Various reasons are sited why litigations are not so inadvisable as a way of resolving
disputes: Nowadays, courts are filled with very sensitive criminal cases which demand
immediate decisions than civil cases; there is an explosion of cases going to court; due to
the notoriously lengthy and complicated nature of construction disputes, most judges
prefer postponing construction cases, etc.

Cognizant of the inefficiency of the court system and the fact that it rarely satisfies the
parties involved, courts suggest an alternative dispute resolution method to litigation.
Accordingly, many legal systems have adopted a mandatory nonbinding pre-requisite
before a case goes to trial.

The ADRs are espoused to have the following advantages over litigation

Reduce time to disposition


Less costly discovery of facts
More efficient case management
Increase confidentiality
Facilitation of early, direct communication and understanding among the parties of the
essential issues on each side of the dispute
Preservation of ongoing party relations
Saving in trial expenses
Providing qualified, neutral experts to hear complex matters.

Generally, any form of conflict resolution method is expected to satisfy

Fairness
 Institute better rules, procedures and precedence
Satisfaction
 Provide acceptable solutions
 Maintain desired level of privacy
Effectiveness
 Improve relationship
 Teach parties to manage disputes
 Prevent repetition
 Create more clarity
 Alter approach to relationships

Efficiency
 Settle conflict in a timely manner
 Reduce cost and resource