July 9, 2009

Alternative dispute resolution saves both time and budgets

DAN O’REILLY

correspondent

A recent legal seminar in Toronto provided owners and contractors, as well as the legal profession with some practical alternatives to costly, time-consuming and possibly business relationship-destroying litigation in construction project disputes.

With more complex construction and the compilation of claims and counterclaims a project can be completed and several years elapsed before the issue goes to court, said Harvey Kirsh, partner with Osler, Hoskin & Harcourt LLP.

“I often hear my contractor and owner clients tell me their ideal for a successful construction project is the one that comes in within budget and on time.

“But does litigation generally come within budget and on time?” asked Kirsh, who answered his own question by pointing out that litigation is unpredictable, expensive and filled with delays.

Instead, where possible, parties in a construction dispute should consider Alternative Dispute Resolutions, which can range from casual get-togethers to more formal measures such as mediation and arbitration.

“The success rate for ADR is very high and is very important when parties work together (on other projects).”

Of course, the mechanisms available under the ADR model also have their strengths and weaknesses, he explained.

One of the most used construction contracts in Canada is the Canadian Construction Documents Committee’s CCDC 2. Under that form of contract, the project consultant has the traditional role of “Arbiter of First Instance.”

While the law says this person’s decisions must be neutral, unbiased and evenhanded, “neither owners nor contractors really want the project consultant to be the arbiter of their disputes.”

For those reasons CCDC2 also calls for the early appointment of a neutral, project mediator to supplement the dispute-resolution function.

If the preliminary determination of construction disputes is handled by the project consultant, the CCDC contract obliges the parties to become involved in a three-step process: negotiation, followed by mediation, followed by arbitration.

Under the negotiated model, the most immediate representatives at the project or site level will first try to settle their differences. But if that doesn’t work, the matter moves up the corporate ladder to senior management and, ultimately, if need be, to the chief executive officers of the disputing companies, said Kirsh.

If negotiation doesn’t work, the next step is mediation. Rather than make a decision, the mediator uses his or her skills to try to reach an agreement. Often this requires moving from room to room to meet with the opposing groups who may spend one or two days in the process without ever seeing each other. “The success of mediation really depends on the quality of the mediator.”

Under a CCDC2 clause there is a requirement to appoint a project mediator within 20 days of the original contract award to help parties reach agreement on any unresolved disputes, said Kirsh. “Unfortunately, people are not taking advantage of this, even though it has excellent potential.”

If mediation doesn’t work, the third step is arbitration. It involves the making of a decision or award which is usually final and binding on the parties.

“So there is some finality to the process,” said Kirsh, who cautioned the selection of a neutral arbitrator is critical to its success.

There was some surprise among the audience when it was pointed out that — under separate document called CCDC 40 — that there is a clause that requires three arbitrators when the project being disputed has a project value of $250,000 or more. Many people in the industry are either unaware of the provision or are just ignoring it, said Kirsh, who described the requirement for three arbitrators as “cumbersome and expensive.”

Another method to settle conflicts without going to court are dispute-review boards.

Formed at the beginning of a project, they consist of impartial professionals who follow the construction progress and assist in resolving disputes.

While not widely used in Canada, dispute review boards have been common in the United States for the last 40 years, used on projects such as the Eisenhower Tunnel in Colorado and the Boston Central Artery Tunnel, said Kirsh. “We don’t see many DRBs in Canada — but they are taking a foothold here.”

The seminar was sponsored to mark the 25th anniversary of the Construction Law Letter which Kirsh helped establish and who serves as its consulting editor. It was co-sponsored by Osler, Hoskin & Harcourt LLP and LexisNexis Canada Inc., the newsletter publisher.

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