Don’t be left in tiers – practical advice on using multi-tiered dispute resolution clauses

I recently attended a panel discussion at the Society of Construction Law Astra International Conference in Paris about the use of multi-tiered dispute resolution clauses in construction contracts.

The discussion highlighted some key practical points for parties considering using such clauses in their contracts to bear in mind. In this article I touch on some points relating to two widely-used initial/intermediate stages, mediation and dispute avoidance/adjudication boards (DAAB), before concluding with some general practical advice.

Mediation

Mediation is a common intermediate dispute resolution stage in multi-tiered dispute resolution clauses. 

In some contracts this is included as a mandatory stage, while in others it is voluntary. The general consensus, which reflects our experience, is that making mediation a mandatory stage before final resolution has more drawbacks than benefits. That is because mediations usually work best when all the parties voluntarily agree to attend one.

The timing of a mediation is important.

• In our experience, mediations that happen early in the dispute resolution process tend to make less progress, as the internal decision makers do not have enough information about the case to make informed choices about settlement.
• Later in the process, the strengths and weaknesses of parties’ cases have usually crystallised.  As a result, internal decision makers can approach the mediation with more objectivity. That increases the chance of a successful settlement. However, it is important not to mediate too late in the process, when costs may become a bar to settlement.

DAAB

In International Federation of Consulting Engineers (FIDIC) contracts, it is common to have a DAAB as an initial or intermediate dispute resolution stage. This is also increasingly being adopted in non-FIDIC contracts.

The use of DAABs leads to best results when its members are appointed at the start of the project and kept up to date in "real-time" on its progress (for example, through regular site visits). This ensures that if a dispute is referred to the DAAB, it already has a good working knowledge of the project and the potential causes of any issues.

DAABs normally have relatively short timetables in which to reach their decisions (the default in FIDIC contracts is 84 days from the date of referral of the dispute).

• As a result, DAABs are generally best placed to decide individual disputes on discrete issues that are referred as each issue arises. That allows the DAAB to make best use of its contemporaneous knowledge of the project, in the limited time available.
• By contrast, DAABs are less well placed to deal with large, complex disputes involving multiple different issues, that are referred long after the project is complete. The procedural timetable makes it difficult for the DAAB to effectively deal with such referrals, and by that point, the benefit of the DAAB’s contemporaneous knowledge is lost. However, parties may not have any choice if referral to the DAAB is a mandatory stage prior to final resolution (even after the project is complete).

In addition, some jurisdictions do not have clear mechanisms for directly enforcing adjudication decisions. In those circumstances, a DAAB may not be appropriate.

General

Dispute resolution clauses are easily overlooked when the parties are agreeing the terms of their contract: a dispute is, naturally, the last thing on parties’ minds at the start of their relationship. That can create nasty surprises later on if a dispute does arise, and parties find themselves stuck in a process that they do not like, or worse, is unworkable. Therefore it is always worth giving dispute resolution clauses some thought at the start of negotiations, at the very least to ensure there is nothing obviously unacceptable.

Finally, it is important to remember that the more complex a multi-tiered dispute resolution clause is (particularly regarding any relevant notice requirements), the greater the chance of misstep. Therefore it is important to consider its terms carefully and, where appropriate, take legal advice.