Can mediation play a role in the construction industry?

Author: Padraic Higgins, NuArk Management Limited What is mediation? Mediation can be described as a process to resolve conflict by agreement using an independent, trained and experienced mediator. In recent times, the number of construction- and development-related disputes has increased significantly. The reason for this increase is likely due to the lack of activity in the market, making it difficult for contractors to ignore perceived injustices for the good of future relationships with their clients, as may have happened in better times. It is also in no small way a result of the introduction in 2007 of the new Government form of construction contract, which can be ambiguous in its interpretation. In addition to this, the unprecedented levels of insolvency within the industry brings new challenges to clients, local authorities and guarantee providers as they navigate previously uncharted territory. The general disputes that can occur are as follows:

Developer/client – contractor;
Developer/client – consultant;
Contractor – subcontractor;
Contractor – employee;
Contractor – trade union

[login type="readmore"] Other forms of dispute in the industry:

Developer – local authority;
Client – guarantee provider, contract performance bond;
Local authority – guarantee provider, development completion bond

The first group of disputes listed above are most common historically and would generally be resolved through the specific dispute resolution clauses of the relevant contracts. Until more recent times, this would generally have been done through conciliation and arbitration. However, in 2008, the Construction Industry Federation introduced new ‘conditions of subcontract for use in conjunction with forms of main contract for public works’. In this contract, the dispute resolution clause 13 (b) (1) states: “Either party may activate the mediation process by giving written notice to the other party seeking the appointment of a mediator at any time after the expiry of 21 days from service of Notice to Refer.” This is setting precedent for the introduction of mediation to the industry and, along with the upcoming mediation bill, which is now published in draft form, will certainly mean that mediation will play a role in construction dispute resolution. The second group of dispute types noted above would generally end up in the courts for resolution. However, this is not always the case, as the mediation process was used between the residents of the ill-fated Priory Hall development and Dublin City Council, chaired by retired Supreme Court judge Mr Justice Joseph Finnegan. COSTS OF DISPUTE RESOLUTION The costs associated with the various existing methods of dispute resolution can vary significantly. Depending on the nature and complexity of the dispute, conciliation can cost anything from €6,000 to €40,000. Arbitration costs can reach anything into the hundreds of thousands of euro, as can court litigation. The most common disputes that occur within construction are in relation to compensation for variation works and associated delays, lack of design information or substandard workmanship. These can occur between client and main contractor or main contractor and sub contractor. The resolution processes are similar in each case, as the contract clauses between subcontractor and main contractor mirror the clauses of the contract between the client and main contractor. To understand fully how mediation can lend itself to dispute resolution in these cases, we must look at the root cause of disputes. Generally, a party will notify of a dispute on the basis of a contractual position. The real issue is often a financial concern or the fear of an unfair precedent taking over within the contract, and the reason for taking the position is to provide security for the remainder of the contract against any perceived unfair precedents and to provide a level of financial comfort in relation to the project profitability. In the past, and nowadays in private-sector contracts, contract claims would be allowed to build up during the course of a construction contract, leading to a large and complex dispute materialising at the account agreement stage. This would often be referred to conciliation but would inevitably end up in arbitration, which could drag out for years at enormous costs – both in terms of time and money. The party investment in this process leads to further entrenchment as time goes on. This will culminate in an arbitrator reaching a decision that will almost certainly be unpalatable to at least one of the parties and possibly both. More recently, with the introduction of the new Government form of construction contract (which contains a time-barring clause for the notification of claims), disputes are forced to light during the course of the contract. This, coupled with the fact that clients representative are still unsure about the interpretation of the contract provisions, means that the dispute resolution clause is used earlier in the course of the project and is used more often. Because of this, disputes are often more straightforward but more frequent. SWIFT RESOLUTION Mediation would allow a relatively swift and low-cost resolution to the dispute. This is becoming more and more important in an industry where cashflow is a life line. The fact that both parties enter into the process voluntarily indicates an interest in resolution that promotes a positive momentum, as opposed to the often further entrenchment of other processes. The confidentiality of the mediation process will also allow movement between parties who would otherwise have concerns about setting precedents in clause interpretation, thus opening up/preventing claims on other projects. The fact that the disputants have control over the outcome would also provide a level of comfort to both parties that the outcome will reflect each of their interests. This is of particular benefit to smaller contractors, who may not have the resources to investigate the legal basis of their claim and would otherwise not take the risk of more costly processes to achieve fairness. Possibly, the most important benefit of the mediation process in these situations is the sustainability of resolution in that, in achieving agreement and compliance with this agreement, the possibility of further disputes can be avoided by constructive dialogue. It must be remembered that at the outset of every project, each party has an understanding of the scope of works and the associated costs. Once there is a level of comfort and trust that neither party are going to attempt to alter this to the detriment of the other, then the project can flow smoothly. The mediation process can promote the reciprocal co-operation required between the parties to ensure uninterrupted progress with the works and cashflow. It can be therefore concluded that there are wide and varied reasons why mediation is useful to the construction industry and these can be summarised as follows:

The low cost and short duration of the mediation facilitate cashflow means that even the smallest contractors can take advantage of the process;
The voluntary nature of the process promotes a positive process can allow for future dealings between the parties;
The mutual promoting of solutions and agreement creates a more sustainable future working relationship;
The confidentiality of the process ensures that each case is resolved on its own merits, without fear of setting precedents for other projects;
The fact that the parties control the outcome means that there is a better chance that the parties will be able to get a resolution that is mutually acceptable;
The range of mediation types and approaches means that there is a suitable process for nearly every possible dispute type.

The process of separating behaviour from the perceptions driving that behaviour to allow exposure of the real concerns and productive dialogue to resolve these concerns has limitless potential within the construction industry, particularly considering the challenges facing the industry today.