Smoothing the path to dispute resolution in construction projects

Perhaps what is most important to parties involved in construction projects is having the project completed in a manner that meets the parties’ commercial objectives. Ideally, this means achieving project completion on time and within budget.

 Janine Stewart And Grant De Lisle

Two of the main issues impacting on this ideal are delays to the project works and cost blowouts. These issues are commonly the subject of disputes, the resolution of which almost always involves significant cost. Robust contractual dispute resolution processes can help ensure that such costs are not unnecessarily exacerbated.

NZS 3910:2013 is widely used in the construction industry, and the dispute resolution clauses contained within it have remained largely unchanged since 2003. In the majority of cases, the dispute resolution process will afford the parties sufficient ability to resolve any dispute that may arise. However, there are gaps in the process that can prolong disputes and put the parties to extra expense.

In this article we speak to two of these gaps and how they can be addressed.

The role of the Engineer and adjudication

The role of the Engineer is central to the resolution of disputes under NZS 3910:2013. Clauses 13.1.2 and 13.2.1 require that every dispute or difference concerning the contract that is not precluded by specified provisions must be referred to the Engineer, who must issue a formal decision in writing within 20 working days of receiving the notice requesting the decision. Clause 13.2.4 provides that, subject to any decision made in mediation, adjudication or arbitration, an Engineer’s formal decision is final and binding.

This provisional finality has been confirmed in the Court of Appeal decision SOL Trustees v Giles Civil [2014] NZCA 539, [2015] NZLR 482, where it was held that an Engineer’s formal decision is not dissimilar to a judgment subject to appeal. In both instances, the decision remains final and binding until formally set aside or varied (at [52]).

While in some situations an Engineer’s formal decision may be sufficient to resolve the dispute, it can be overruled. If either the principal or contractor is dissatisfied with the formal decision, or the Engineer fails to issue a formal decision within the prescribed time, then either party is entitled to refer the dispute to mediation or arbitration. It is also open to the parties to have the matter referred to adjudication under the Construction Contracts Act 2002.

It is at this stage of the process where gaps can arise. For instance, what is the position of a party (Party A) who is satisfied with an Engineer’s formal decision, but knows that the other party (Party B) is planning an adjudication? Here, Party A may wish to refer the matter directly to arbitration to run in parallel with the adjudication, as a way of keeping costs down by avoiding the possibility of re-litigation and achieving finality in respect of the matter. However, because Party A is not dissatisfied with the Engineer’s formal decision, it cannot refer the matter directly to arbitration. In this situation, Party A can only wait for the adjudication process to run its course and, if dissatisfied with the outcome of the adjudication, re-litigate the issue in arbitration. Similarly, Party B could refer a dispute to adjudication before requesting an Engineer’s formal decision. This again leaves Party A without an ability to refer the matter directly to arbitration.

These situations are problematic because, depending on the nature and scale of the issues, it is not uncommon for adjudications to be re-litigated, a reality that carries obvious cost implications. Adjudication is a quick-fire dispute resolution process decided on the papers and with strict time requirements. As such, adjudicators are often not afforded the time required to address the issue(s) involved with the necessary level of consideration – especially in cases where the dispute involves multiple issues and/or issues of a highly complex or technical nature.

These situations could be addressed by amending the special conditions of NZS 3910:2013 to include a clause that: (a) allows the parties to refer an Engineer’s formal decision to arbitration whether they are satisfied with the decision or not; and (b) allows parties to refer any adjudication determination directly to arbitration even in the absence of an Engineer’s formal decision.

Notices of arbitration

Another gap that can arise in respect of the NZS 3910:2013 dispute resolution process relates to the issue of notices of arbitration. Clause 13.4.1 provides that if either party is dissatisfied with an Engineer’s formal decision, or if the Engineer fails to issue a formal decision within the prescribed time, then either party may issue a notice referring the matter to mediation or arbitration. Such notice must be in writing and issued one month after the relevant circumstance as set out in clause 13.4.2 (a) to (c). Once notice has been given referring a matter to arbitration, clause 13.4.3 provides that “the dispute shall be referred to a sole arbitrator”. No timeframe is expressly set out in the contract as to when this referral must be made, and so time in relation to the dispute effectively stops running.

While this may be beneficial for the party who referred the matter to arbitration (Party A), it can be problematic for the party who is satisfied with the current contractual position (Party B). For as long as Party A remains inactive in respect of the dispute, Party B will be left with a lack of finality. Technically, Party B could drive the matter forward by taking the first step and referring the dispute to a sole arbitrator. However, given Party B is already satisfied with the status of the dispute, it is in Party B’s best interest to simply have the notice lapse.

The question then becomes, in the absence of a specified timeframe, when does a notice of arbitration lapse? The answer likely lies in the implication of a reasonable time. In contracts that fail to specify a time for performance of an obligation under a contract, it is common for a reasonable time to be implied. However, in a situation such as the one described above, Party B cannot simply sit back and wait for what it considers a reasonable time to pass. Party B would likely need to send notice to Party A making time of the essence and giving Party A a reasonable time to take action. If the stated time expires and Party A fails to act, then Party A will no longer be able to rely on the notice of arbitration.

Again, this is an issue that can readily be addressed by amending the special conditions of the NZS 3910:2013 to include a clause specifying a time within which a dispute must be referred to an arbitrator.

Conclusion

Even in the best of circumstances, construction projects are subject to considerable cost and time pressures. Robust dispute resolution processes can ensure that these pressures are not unnecessarily exacerbated. Parties to NZS 3910:2013 need to be mindful of the potential situations within which disputes may arise and consider how they would like them to be dealt with. More particularly, parties should carefully consider what options they would like available to them in the event of a dispute.

While, in the majority of situations, the dispute resolution process set out in NZS 3910:2013 may be sufficient to resolve disputes, there are gaps that, if left unaddressed, can leave parties at the mercy of procedure, prolong disputes and put the parties to extra expense. 

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