Common mistakes in ... tiered dispute resolution clauses

Tiered dispute resolution clauses are common in construction contracts for major projects. They provide for disputes to be escalated through a number of tiers, with the intention of reducing the number of disputes which need to be finally decided in litigation or by arbitration. 

They may also avoid unwelcome publicity and mean that the project can progress while disputes are decided.

There is no “one size fits all” tiered dispute resolution clause: they must be crafted to suit the particular project, taking into account the types of dispute that might arise, big and small. 

A simple clause provides for mediation prior to litigation or arbitration, whereas a more complex  project is likely to require a more sophisticated provision.
A typical clause includes three tiers: negotiations; alternative dispute resolution (ADR), including mediation; and final dispute resolution (litigation or arbitration).

Stage 1: Negotiations

To avoid the costs, delays and publicity of formal proceedings, contracts for high-profile projects often contain clauses which provide for a series of negotiations before proceedings are issued. Meetings are held without prejudice, which means they cannot usually be relied upon in subsequent proceedings.

Avoid some common traps for the unwary when drafting these clauses:

• Don’t forget about the Construction Act. If it applies, make sure that none of the provisions cut across the parties’ right to refer a dispute to adjudication at any time. If they do, the adjudication provisions will be invalidated and replaced by the relevant provisions of the Scheme for Construction Contracts.  
• Don’t make it a pre-condition of the negotiations that the parties serve a notice of dispute. This may cause difficulties if seeking to widen the ambit of the dispute at a later stage, and in any event will be considered to be non-compliant with the Construction Act.
• Don’t make your clause so strict that neither party is able to comply with it.

Stage 2: Alternative dispute resolution

There are a number of ADR methods, the most common being mediation. Other methods include adjudication and dispute resolution boards (DRBs). If the Construction Act applies, adjudication is mandatory. However, adjudication provisions are commonly included in major projects as a cost-effective and quick way to decide disputes, even in cases where the Construction Act does not apply. DRBs are boards of experts who periodically visit the project and review progress. 

When drafting these clauses, be aware of the following points:

• Do make the clause certain enough for the courts to enforce it; not an “agreement to agree”. Provide strict time limits for compliance. In the case of mediation, include a set of rules and method of appointment of a mediator. If you do not, matters may be dragged out, adding significant time and costs and delaying a final resolution.
• Do consider appointing a DRB at the outset of the project, before any dispute has arisen. The earlier the board gets involved, the more likely it is to prevent disputes escalating, thereby avoiding delays to the project and ongoing claims post completion. 

Stage 3: Final dispute resolution

The two main ways of finally determining a dispute are arbitration and litigation. It is important to weigh up the pros and cons of each carefully, depending on the project in question. 

• Do consider whether any carve outs are necessary. For example, you will need to provide that the parties have the right to go to adjudication at any time, if your contract is covered by the Construction Act. You may want to provide for expert determination for any technical dispute. Expert determination should be treated with caution as it is a final method of dispute resolution with no right of appeal, which is not appropriate for resolution of most disputes arising on a major project.
• Don’t provide for only one named decision maker (whether arbitrator, mediator, expert or adjudicator); this can backfire if that person is of the wrong discipline, retires or is unavailable.

If drafted with care, tiered dispute resolution provisions can facilitate settlements at an early stage, saving the parties time, money and a great deal of angst. 

Melissa Moriarty is a senior associate at Berwin Leighton Paisner

This article was originally published under the headline “Ending in tiers”.