The cost of avoiding disputes

It is often said that disputes on a construction project are inevitable and lead to a waste of resources which consequently increase costs. But what truth is there in this? It is not so much disputes that are inevitable as problems and it is how we manage problems that is the issue. Manage them badly and disputes inevitably arise; manage them properly and the chances of a dispute diminish significantly, if not entirely.

During the course of the pre-contract stage problems will arise - these are what the project delivery team is paid to resolve. For each problem encountered a solution is sought that is consistent with providing as little risk regarding the construction project as is consistent with “best” value. That usually means issues still manifest themselves post contract because the price of seeking to secure certainty was too high. As the risk is not provided for, the contracting parties often assume, wrongly, that it will not occur. Regrettably but understandably, fixed price lump sum competitive tendering tends towards such risks being ignored or overlooked - the tender has to succeed. Consequently, when such risks/problems arise, there is generally shock horror followed by a claim and dispute.

Disputes pre-contract are something that we hear less about. The main reason for this is that frequently the procurement adopted and contractual relationships formed at that stage provide a less competitive financial environment and one that is more flexible. Furthermore, at this stage the resolution of problems is seen as a principal issue and the providers are able to shape and deliver their services within their financial constraints. So can anything be learned from these arrangements to reduce the incidence of claims and disputes post contract?

The concept of the client paying for all construction risks as they arise is anathema to most clients and is partly the reason for the infrequent use of construction management procurement. Consequently, there is an allocation of risks - the accurate identification of risks and the determination as to who is to bear each risk. However, that is only part of it because the allocation of a risk may be badly priced and even if it were possible to ensure the risk to be carried is “properly” priced, it does not stop a claim where the cost provision is still insufficient. Disputes sometimes follow even where there is no sound basis for the claim.

In addition to the occurrence of an accepted risk, there are problems that arise because some aspect of physical construction is not done as it should be or as expected or is not done at all. In those situations the rather more flexible pre-contract arrangements referred to earlier seldom work satisfactorily for the client organisation that will see itself as paying more than it should.

Managing expectations is also part of resolving problems and when a problem arises the first thing to do is enter discussions; not ignore it in the hope it will go away. Under JCT contracts where the Supplemental Provisions 1 and 6 apply, there are obligations to work in a collaborative manner, in good faith and also to notify those matters that appear likely to give rise to a dispute or difference.

If negotiations do not provide a solution fairly speedily, it may be necessary to move through the other processes provided in the contract for determining disputes.

For a dispute to exist, in a legal sense, there must be both a proposal and a negative response to that proposal, either actual or inferred, but an adequate timescale for such a response is essential. That time should be used to reflect on the merits of the arguments and to weigh the advantages or otherwise as to the next steps. Discussion is generally the best way - many disputes, where legal action is taken, are settled before a hearing. Providing the right framework to analyse the problem and to focus minds is key. The contract provides support to resolve matters in those ways and only when they fail should the formal dispute resolution mechanisms be implemented.

Full consideration of the project will aid the reduction of problems that lead to disputes, but trying to avoid disputes may cost more than resolving them. That is why quick crude solutions are sometimes seen as better than debating the finer points. Even so, that will seldom overcome the problem of a party that has entered a contract where circumstances have turned out very differently from those expected or hoped for.

Peter Hibberd is the chairman of the Joint Contracts Tribunal