Building projects can be expensive, complicated and time critical. They are also vulnerable to being affected by factors outside the parties’ control. It is therefore common for disputes to arise on construction projects. This guide has been written to assist you when handling a dispute with your builder.
Common disputes during construction projects:
- minor inconveniences, which will have no lasting effect on the project or the parties;
- seriously damaging, which may have lasting consequences for the project and/or the parties; and
- potentially ruinous, which may jeopardise the future of the project, and the financial security of the parties.
There is a commercial decision for the parties about how they treat any disputes that arise on their projects. However, before doing so it is important that they assess the importance of a dispute, understand your leverage in the dispute and make decisions that fit with your objectives.
All parties to disputes undertake their own assessment of how important their dispute is to them. There will often be significant personal investments on both sides of the project. Disputes can therefore give rise to issues of principle, pride, embarrassment, self-justification, anger and animosity.
Parties should look at their disputes in colder, more detached terms. At the least, it is important to consider how the other parties involved, and third parties such as the Court, may assess the importance of their dispute. This can apply at a number of levels:
The fact that the parties are in a dispute means that the contractor and/or the employer will need to find additional money to complete the project that may not have been budgeted for. This involves considerations of:
- immediate cash flow, as the project needs to continue to be funded in the short term unless and until the dispute can be resolved;
- consequential effects, as the dispute might have knock-on effects for the projects and the parties, particularly in respect of timing; and
- overall outcomes, and whether the employer or contractor thinks they will ultimately be the paying party in the particular dispute.
Disputes require effort to resolve, and this will divert the parties’ attention and resources away from their other responsibilities and activities. This will mean that the parties will need to consider their need for additional:
- individual time, as disputes are very time-consuming for the individuals who need to respond to the dispute;
- expertise, as there may be technical and/or legal issues in the dispute that require third party input; and
- resources, as a financial investment will be required where the dispute is going to be progressed.
Disputes often cause the parties’ attention to narrow to the issues between them. It is however essential for parties to also keep in mind the bigger picture, both for the particular project and wider position. This involves parties considering:
- commercial relationships, as both the dispute and the parties’ response to it will influence their future interactions for the rest of the project and beyond;
- completing the project, and how the prospects of this being achieved with the existing contractor will be affected; and
- securing a replacement, and the ease with which the employer can secure a new contractor and the likely effects of this.
Understanding your leverage during a dispute with a builder
Disputes often leave parties with a series of unpleasant options where they have to choose the one they believe is least worst. Employers therefore need to have sufficient information available to inform their decision-making to identify and understand the different options and angles they have available.
Information and evidence gathering
Parties will usually need more information about the events that have led to the dispute in order to decide how to respond, and understand what evidence might be available if the dispute escalates. This will involve reviewing the information that is held by:
- the parties already, either in the documents the parties hold or from their first-hand recollection of events, which need to be preserved and gathered appropriately, including evidence of the condition on site;
- friendly third parties, where their involvement has been required to provide additional expertise and resources for the project and/or for the parties’ affairs more generally; and
- other third parties, where formal requests might be required for them to cooperate with any requests for assistance.
Resolving a dispute requires both parties to find an outcome they are both prepared to accept. Sometimes the solution will be endorsed enthusiastically. However, in most cases some pressure must be applied, taking account of the:
- project delivery, and whether this might be improved or deteriorate given the difficulties that have already been encountered and the parties’ working relationship;
- cash position, and the level of financial exposure they are willing to accept, and the amount of credit that they are willing to extend to the other party; and
- goodwill and pressure, and the extent to which parties want to be seen to be achieving a compromise and can be persuaded to do so.
Parties ultimately only obtain the “answer” on their case once their dispute has been determined by a third party and all rights of appeal have been exhausted. Until that stage, all disputes involve an element of risk and uncertainty that will be better understood and narrowed as the case proceeds. Parties therefore need to look at:
- legal positions, and the extent to which the parties are fulfilling their obligations under the contract, in particular in relation to payment and performance;
- contractual options, and the self-help opportunities these might provide ranging from making payment deductions through to terminating the contract; and
- procedural routes, as ultimately the value of any legal right largely depends upon having the means to effectively enforce it through a formal process, which involves understanding the ways in which those processes can be effective and their potential downsides.
Making your decisions following the dispute
Parties to disputes have to make a number of short, medium and long term decisions that will affect the conduct of their dispute. A major factor for the parties is their appetite for risk and how they want to balance their commercial and legal positions and objectives. This will then influence how assertive a position they want to take and the extent to which they are willing to pursue and/or face any claims.
Where a claim follows, the parties’ decisions are likely to be analysed and scrutinised in hindsight, with each party seeking to justify their own actions and criticise those of the other. It is therefore important to have an overall strategy in mind based on how matters might proceed.
It takes time to resolve disputes. Parties therefore usually need to take action in response to the underlying dispute before knowing how matters will play out. This means that decisions need to be made in the short term to try and prevent the situation worsening, including by trying to achieve:
- damage limitation, by taking steps to try and ensure that the project is completed as quickly and cost-effectively as possible, and so reduce the value of the dispute between the parties and improve the prospects of settlement;
- holding positions, where the parties reach an interim compromise or arrangement to allow them to prioritise the delivery of the project and leave the core dispute to be resolved at a later date; and
- tactical positioning, which may include trying to set up arguments or claims that the parties might later pursue or simply reserving their position whilst they assess the damage that they suffer.
Approach towards the dispute
Parties to disputes essentially have three options. They must ultimately either decide to have their dispute:
- left unresolved, which is a decision that the other party will need to accept until the limitation period for bringing any claims has expired;
- settled on the terms available, as parties in most disputes can generally achieve a settlement if they are willing to accept a large enough loss against the outcome they believe they should achieve; or
- escalated towards resolution, where their cost-benefit analysis leads them to conclude that the potential improvement in their current position justifies the expense and risk in taking the matter forward
Disputes resolution can be approach in two ways. Either it can be a facilitative process, where the parties are expected and helped towards resolve their dispute themselves, or alternatively it can be a directive one where the parties have an outcome imposed upon them. This will usually be based on the sequence of:
- dialogue, where the parties should explore both resolving the dispute themselves, or alternatively the process that best suits them achieving a resolution in a way that is proportionate to the issues involved;
- negotiation, where each party is trying to persuade the other of the advantages of settling on the terms they are proposing, whether directly or through formal alternative dispute resolution processes such as mediation; and
- third party determination, where the court or other independent third party reviews the parties’ evidence and submissions and decide each issue in dispute based upon which of the parties’ case they prefer.
Unless and until the dispute is finally resolved, parties should be continually reviewing their options and strategy to decide whether and how they would like their matter to proceed.
A pdf version of the article can be found here.