Construction disputes: online ADR methods growing in popularity

As we saw in the first article in this series, construction disputes are increasing in both number and value. As we have also seen in this series, the construction industry has a unique ‘toolkit’ at its disposal for resolving those disputes expeditiously and cost effectively – from specialist construction courts, to arbitration, dispute boards and adjudication. Whilst those formal, adversarial processes can be the most appropriate tool for the job, construction clients globally appreciate the value of expeditious and cost-effective ADR to maintain relationships and allow businesses to focus on the day job.

ADR has innovated in the pandemic to function ‘on-line’ in the new virtual world and, in many jurisdictions, has become the first step in a tiered dispute resolution process.  That said, there is sometimes no replacement for the all-important human connection, particularly in respect of the trickiest disputes.

In this article we explain more about the ADR process – especially mediation – and the developments since the pandemic in ADR in key jurisdictions around the globe in resolving construction disputes.

What is alternative dispute resolution?

Typically, ADR is used to refer to any dispute resolution process outside of the formal routes of court or arbitration. However, there is also a narrower view that it extends only to a situation where an independent third party takes a non-adjudicative role in assisting parties to resolve their dispute.

Taking the broader interpretation, examples of some common forms of ADR applied in construction disputes include expert determination, dispute boards, ombudsmen and adjudication.

When is ADR used?

ADR is rarely a standalone method of dispute resolution. Construction contracts increasingly provide for a multi-tiered resolution process including some form of ADR. Similarly, even where there is no express contractual provision for ADR, parties may opt for ADR at any time or may even be encouraged or even directed to do so by courts in certain jurisdictions. This is particularly important in international projects, where parties may be more reticent to use the court systems in countries which are not their home state.

Studies have shown a marked increase in ADR over the last few years, and we anticipate this trend will continue in the future.

In developing markets, supply chains are often made up of a much smaller number of key contractors, subcontractors, suppliers and developers. Arbitration and even adjudication proceedings can become extremely contentious, thereby risking damage to those key relationships and potentially destroying value in the infrastructure sector in that market. There is significant commercial sense in trying to avoid that by using ‘pre-dispute’ mechanisms such as mediation.

What are the benefits of ADR?

Speed and cost are some of the biggest benefits of choosing ADR. Court delays and the increased pressure on company finances and operations as a result of the pandemic, especially in construction projects where the margins are already extremely tight, have undoubtedly contributed to the growing trend for ADR, as more companies seek to settle disputes at an earlier stage and for lower cost than under normal circumstances. Reducing dispute costs through ADR can make all the difference between making a profit or a loss on a project.

The move to fully online ADR through necessity during the pandemic has made it far more accessible, particularly for cross-border disputes. The relative ease of scheduling a single day via Zoom, Skype or MS Teams into senior executive diaries, especially in multi-party international joint ventures (JVs) working on ‘megaprojects’. alongside the avoidance of travel time and the costs of a venue and travel, means online ADR is certain to be the new norm going forward.

Another important factor is the global incentive to reduce carbon footprints as businesses become more environmentally aware. The Mediators Green Pledge provides a framework of measures which mediators can adopt to conducting mediations in a more environmentally friendly way including accepting electronic communications and using e-bundles; conducting conferences virtually; and using recycled paper. The pledge has already received significant uptake, and some businesses are now actively choosing only mediators signed up to the framework.

According to a survey by Ernst & Young, 44% of respondents working for large companies in the UK are now more likely to use ADR to resolve disagreements following the pandemic due to the greater flexibility, time and cost savings compared with formal legal avenues – and our experience reflects this trend.

However, technology is not a complete substitute for that all important human element. While online ADR has been hugely beneficial over the last few years and has worked extremely well in most situations, there are undoubtedly exceptions to this, and situations better suited to in person attendance such as multi-party disputes involving complex issues.

At the same time parties themselves must be careful not to view a mediation or other form of pre-hearing engagement as nothing more than something to get past before the main event. There is real value, whether it be virtual or in person, in litigating parties attempting to understand their counter-parties’ positions as soon as possible before rolling out long and costly hearings before judges or arbitrators. Even a mediation which ultimately is unsuccessful can help to educate the parties about their own position, where the other side is coming from and possibly even help to clarify important misunderstandings that help to streamline the balance of the dispute process. This is even more important in cross-border projects where differences in culture and construction practices may cause tensions.

ADR around the world

ADR is becoming an expected procedural step in many legal systems internationally.

England and Wales

Court pre-action protocols in England and Wales already provide for and encourage parties to engage in ADR, but it appears likely that further reforms will be made compelling parties to engage in ADR. A very recent unreported case suggests judges are already putting this into practice.

The Technology and Construction Court (TCC) strongly embraces ADR and the TCC Guide sets out the court’s role to encourage parties to engage in ADR and to specifically discuss this option with parties at the first case management conference.

A recent review by the Civil Justice Council of the legality of compulsory ADR concluded that, in principle, parties can be compelled under law to participate in ADR without convening article 6 of the European Convention on Human Rights and that, in certain circumstances, it would be a positive development to introduce ADR in civil disputes.

Sir Geoffrey Vos, master of the rolls, has gone even further and set out his vision for a move to online dispute resolution where claimants can firstly apply to a “single front door” that will direct them to the appropriate online dispute resolution process, “whether that is mediation, arbitration, an ombudsman or the courts”. He said that the system should have “processes of continuous alternative dispute resolution” built in, using artificial intelligence to best recognise the point at which a particular type of case may be most suited to negotiated settlement.

Australia

Australian courts already have the power to refer parties to mediation. The courts in some states can go further and order parties to mediate. According to the Federal Circuit Court’s annual report for 2020-21, the number of matters referred to mediation increased from 755 in 2019-20 to 1,004 in 2020-21.

As strains continue to be felt on the Australian legal system as a result of the pandemic, the number of referrals to mediation are expected to continue to increase to alleviate the workload on the courts.

Hong Kong SAR

On 29 June 2020, the Hong Kong Special Administrative Region (SAR) introduced the Covid-19 Online Dispute Resolution Scheme through eBRAM exclusively to deal with disputes related to the pandemic, using an expedited three-phase process of negotiation, mediation and arbitration. During her 2021 policy address, the HKSAR chief executive announced plans to introduce initiatives to attract more dispute resolution institutions to set up centres in Hong Kong. Consequently, Hong Kong looks set to boost and solidify its position in international dispute resolution.

Singapore

The Singapore Convention on Mediation came into force on 12 September 2020, and is designed to enable parties in cross-border disputes to directly enforce the mediated settlement agreement in any signatory country and without the need to launch substantive proceedings. Although 55 countries have signed up to the convention, only eight have ratified it, so is not yet formally binding on those countries.

This convention has the potential to be an extremely powerful tool in encouraging and enabling cross-border mediations in construction disputes, so practitioners will be keeping an eye on further ratifications and whether other jurisdictions introduce similar conventions.

South Africa

Rule 41A of the Uniform Rules of the High Court was introduced in March 2020, allowing for a multi-tiered dispute resolution mechanism. When initiating an action or application, parties are required to serve a notice indicating whether they agree or oppose referral of the dispute to mediation prior to being heard before the High Court. In addition, at any point before judgment, a judge or case management judge may direct that the parties consider mediation to resolve the dispute between them.

Although mediation is currently not mandatory, the new rule may help to alleviate the heavy case load experienced by the High Courts in South Africa as well as allowing for a speedier and more cost-effective method of resolving certain disputes. Any written and oral communications and disclosures made during this type of mediation will remain confidential and inadmissible in any possible later litigation.

Nigeria

Section 24 of the High Court Laws of Lagos State allows the court to refer parties engaged in a dispute before it to mediation in order to settle that dispute.

Mauritius

Mediation plays an important role in dispute resolution in Mauritius under the 2010 Supreme Court (Mediation) Rules. A ‘mediation judge’, who is a judge of the Supreme Court, is appointed by the chief justice to lead and oversee mediation proceedings. Although private and confidential, any settlement agreement reached will have the same validity as a judgment of the Supreme Court.

Co-written by Joanna Lang of Pinsent Masons