Construction disputes originate from a wide range of problems that can be encountered during the entire life cycle of a construction process. Disputes can become apparent any time throughout the formation, medial-part, breach or termination of the construction project. Some of the most known and most general claims that occur in construction are collection claims, cost overruns, claims due to delays, disputes over defective work (Patterson: 2016. online).
Alternative Dispute Resolution (ADR) offers the parties to the dispute the option to get assistance from an unbiased third party to work through the issues that arise. As arbitration form part of ADR methods, it allows the parties to be in control (instead of lawyers or the court) and the parties get an opportunity to have a final say in the decision of the arbitrator. Other ADR methods include conciliation, mediation, adjudication, and negotiation, etc.
Litigation is a process that is avoided most of the time in construction disputes due to the procedure being expensive and generally stretched out; therefore interfering with the building works. Litigation guarantees that a dispute between the parties will have a final judgement when resolved by a judge in court. Litigation also brings the risk of the case going public, which can lead to a negative image for either both or one of the parties.
Conflicts are part of the construction industry and how we govern or direct the disputes that occur in the construction process are extremely important. If disputes aren’t addressed as early as possible, a minor dispute can develop into a severe dispute with damaging consequences for the project participants.
1.1 Description of Problem
A dispute surfaced between the client of the project and the contractor during one of their many developments.
1.2 Contract Clause and Principal Agent Involvement
An arbitration clause exist within the contract between the client and contractor. The architect, whom acts as the principal agent, advised the parties that the dispute should rather be resolved by litigation.
1.3 Reasons for Disputes to Arise in Construction
The construction process is most of the time not such a smooth course. Even a well planned construction project can have a few problems suddenly making their appearance. With so many parties involved in the project life cycle, from the property owner(s) to contractors and subcontractors, there are quite a few opportunities for disagreements to arise (Cakmak: 2014. 183). Construction disputes can be theorized as having three main components, namely contract provisions, triggering events, and conflict. These events are mostly the main reasons for disputes to come to light.
Some of the most general causes that contribute to the existence of disputes in construction projects are namely: a lack of communication, contract documentation which is inadequate/insufficient, suspended work, failing to comprehend and properly tender/price the work, unpleasant weather, slow distribution of information, i.e. site instruction, spreading of drawings etc., unfinished track mechanism for the request of information and suspension in extra time (Fenn: 2016. 513).
The identified implications of disputes can be summarised as follow: project interruptions, alteration in contract cost giving rise to cost overruns, disintegration of relationships or establishing bad relationships which leads to annoyance, parties do not receive information on time and disregarding clients’ requirements (Lowe: 2013. online).
The most common reasons for disputes to arise:
i. Unfinished and/or unsubstantiated claims (claim errors)
When claims are not well drafted or sometimes even unsupported, it can make an immense difference if a disagreement will come to light or not.
ii. Contract errors or omissions
This is frequently the prime reason for disputes to occur and also the one that can possibly be most easily circumvented.
iii. Failure to comprehend or to act in accordance with contractual obligations
One would think that the more thoroughly a contract is compiled, less disagreements would occur; which is not always the case. When the client, the contractor, or the sub-contractor(s) fails to comply with their contractual obligation, the other parties to the contract will generally try to find recourse (Klinger: 2015. online).
iv. Failure to make short-term awards on extensions of time and compensation
When a dispute arise and neither the client nor the contractor is open to short-term awards regarding the extension of time or compensation for damages, this can lead to immense disagreements between the parties.
v. Differing site conditions
Usually a construction tender is grounded on the supposition that the site conditions are revealed within the preliminary package, most of the time that is not the case. Subsurface condition differences and other unforeseen alterations can be a big reason for disagreements on construction projects.
vi. Inadequacy to properly/correctly administer the contract documentation
Contract issues is most of the time the midpoint of disputes arising, for that reason emphasizing the importance of drafting a resilient, agreed upon and esteemed contract (Sedgwick: 2018. online).
1.4 Analysis of Potential Dispute Resolution Methods
Arbitration, which is well known for being an alternative method for litigation, is an approach where the parties to the dispute will agree to refer the dispute to a third party (Schoeman: 2017.online). The third party is recognized as the arbitrator. It is important that the process of arbitration is governed to guarantee that the procedure is fair towards all involved, cost-effective, quick in time, as well as ensuring that the law is followed everywhere possible and that the chosen language is open and accessible to all involved.
The parties to the dispute can select the arbitrator conjointly, or can request from an organisations such as the Arbitration Foundation of Southern Africa (AFSA) or the Association of Arbitrators (South Africa) (AASA), to assign an appropriate and experienced person to their specific case. The arrangement typically regulates the process for employing an arbitrator (Truter: 2017. online). An arbitrator is usually chosen from a group of professionals, typically someone who has experience and knowledge of the construction industry, which is advantageous to all the parties involved.
Disputes resolved through arbitration are done on the basis of collecting material facts, official papers, and applicable principles of law. It is permissible that there may be one or more arbitrators who will hear both sides of the dispute and who will also make a decision afterwards. Arbitration is more flexible than litigation as the arbitrator can consider any evidence he/she believe is relevant and can base an award upon insights of impartiality or justice and not generally on the Rules of Law and Evidence.
The benefits of Arbitration:
? The process is confidential.
? The decision of the arbitrator at the end of the procedure is final.
? Arbitration is a consensual process, and for that reason, it can only take place if both parties agree to it.
? It is best for the parties to agree on an arbitrator who has the relevant and required experience with regards to the type of dispute currently the matter.
? Compared to court proceeding, it is a relatively quicker process.
? The parties can decide on important essentials such as relevant law, language, and venue (Taitz: 2016. online).
? Arbitration is highly flexible when matched to court proceedings.
? Parties have the safety of a controlled structure with judiciously drafted Rules for Arbitration.
Disadvantages of Arbitration:
? The parties are responsible for all costs regarding the selected arbitrator as well as the chosen venue where the arbitration process will take place.
? There is restricted authority of sanction or coercion accessible to the arbitrator if one of the parties fails to act in accordance with the instructions set by the arbitrator (Lindsay: 2016. online).
? Limited appeal rights are made available to the parties during arbitration.
? The costs arising from arbitration can sometimes be similar to litigation at court.
? The finality of arbitration can have a negative impact – there are limited grounds in which a court will overturn an arbitrator’s decision.
? Parties will most likely see evidence for the first time when the hearing takes place.
The primary legislation which is applicable to arbitrations in South Africa is the Arbitration Act 42 of 1965, which is enforceable to global and native arbitration proceedings directed in the country. While the Arbitration Act does not abolish the common law, it does take preference over the common law if there is a dispute (Harris: 2013. 13). A party may be obliged to participate in the arbitration proceedings by agreement.
It is of the essence that arbitration, as an ADR method, be used in a way that is suitable and probable to lead to the best results for all the involved parties. Arbitration is not appropriate for every dispute, for example where a matter involves public interest it would be better to go to court. Certain agreements made through arbitration may not be as easy to execute as a court order, but this can be controlled if specified terms of the agreement are made into orders by consent (Steen: 2012. 4).
The arbitration procedure has a very high success rate and is therefore a method to strongly consider before going directly to court to resolve a dispute. It is important for the parties to a contract to include an “Arbitration Agreement”, only if both of the parties agree, that if a dispute occur that it must be resolved through arbitration.
Arbitration is mostly preferred over litigation for several reasons. The fact that the parties to arbitration can select their own set of arbitration rules is also a benefit of the process. The parties are allowed to modify the regulations of arbitration to ensure that it agrees with their detailed requirements. As the final decision by the arbitrator is binding, one party will definitely be disappointed with the outcome.
With the amendment to the arbitration Act of 1996, arbitration has become more effective as the time period for rendering/executing an award now prevents the parties from delaying the proceedings. When the arbitration agreement included in the contract is well drafted, it will remarkably speed up the process and refine the prospects of the parties (Halket: 2017. online).
Litigation, as a growing dispute resolution option, is the procedure of partaking in or opposing a judicial proceeding in court as a method of resolving a dispute. The court is equipped to implement or regulate one of the parties’ rights or responsibilities.
Court proceedings, by way of litigation, are still one of the most favourable methods of resolving disputes coming to light within the construction industry (Nortje: 2016. online).
Advantages of litigation:
? Litigation can be regarded as a high quality method for resolving disputes.
? The claim procedure will be conducted and regulated by a judge during the course of the whole process.
? There is a full discovery process which parties can use to evaluate the strong point or flaw of the opposing party’s case.
? The judge(s) have the authority to make commands to provide temporary relief to protect the position of a party, awaiting the final judgement.
? There are very strict rules regarding the presentation of evidence to prevent prejudicial or deceptive information.
? Multifaceted issues can be attended to (Garcia: 2018. online).
? The parties to the dispute will attain a binding and enforceable decision.
? A subpoena, in order to force a witness to participate in a hearing, can be easily enforced by the judge.
Disadvantages of litigation:
? It is time and again a slow course of resolving a disagreement.
? It is possibly the most expensive method of resolving a dispute.
? The proceedings will be open to the public and are therefore not private, except in certain very limited situations.
? Increased costs will occur if the dispute is not managed successfully or the other party is looking to delay the process and prolong the given time schedule – it can sometimes last between 12 – 18 months.
? The judgement made will be subject to appeal (Ellison: 2014. online).
? The litigator doesn’t always have expert knowledge regarding construction disputes.
Litigation is not unusual in the construction industry as disputes have a propensity to arise due to its confrontational nature. A large variation of remedies are available to the court process, where in most cases, it is in the form of a payment by the defendant for damages to reimburse the plaintiff for their losses.
Reliant on the characteristics and difficulty of the dispute, litigation is in general more costly and time-consuming than other methods of dispute resolution. Litigation isn’t always provocative and a procedure that will result in a drastic decision rather than a reasonable result (Acret: 2017. 248). Sometimes litigation can have an acceptable outcome before resulting in an expensive and stretched-out case.
For parties, to any type of dispute, choosing to resolve a dispute through litigation is an indirect way of showing that either one of them just wants to be compensated or treated rightfully with regards to the problem. If a client, or a contractor, or sub-contractor becomes known for always immediately going to court to resolve a dispute, other parties will most likely avoid doing business with such a person (Perrochet: 2017. 83). Litigation is therefore a procedure that should only be taken into consideration if no other ADR method can resolve the dispute adequately.
1.5 The differences between Arbitration and Litigation
a. Public / Private Formality – The arbitration procedure is more private and informal whereas litigation is a more formal process conducted in a public courtroom.
b. Speed of Process – The process of arbitration is fairly quick. As soon as an arbitrator(s) is chosen, the case can be heard immediately. In litigation, a case must wait until the court has time to attend to it; this can lead to a waiting period of many months, sometime even years before the case is heard (Ramsden: 2016. 128).
c. The Cost of the Process – Costs subject to arbitration are limited to the fee of the arbitrator; depending on the scope of the claim, expertise of the arbitrator, and expenses, and attorney fees. Where the cost of litigation only include court costs and attorney fees, which can be extremely high.
d. The Selection of an Arbitrator or Judge – The parties involved in the arbitration process decide mutually on the arbitrator; whereas in litigation, the judge is appointed and the parties have little or no say at all in the selection.
e. Expertise of Arbitrator / Judge – In arbitration the parties have an input to select an experienced arbitrator to give a final decision; whereas with litigation a judge is appointed to the case and the parties have no say to whom is appointed.
f. The Use of Attorneys – Attorneys may represent the parties in arbitration, but their role is restricted. In litigation, the attorney’s gather evidence, make motions, and present their cases; which lead too much higher costs.
g. Location where chosen method takes place – The process of litigation will always occur in a courtroom. With arbitration the parties to the dispute decide on the venue/location where arbitration will happen, usually an informal venue.
h. Evidence Allowed – The process of arbitration has a limited evidence process as the arbitrator controls what evidence is allowed and what not. However, in the process of litigation full disclosure of the evidence is required to both parties. The rules of evidence do not apply in arbitration and for that reason there are no subpoena, no interrogatories, and no discovery process (Allan: 2017. 68).
i. The Availability of Appeal – As arbitration is a binding procedure, the parties generally do not have the opportunity to appeal unless an appeal has been incorporated in the arbitration clause. In certain circumstances the arbitration decisions may be reviewed by a judge and can be removed if proven that the arbitrator was impartial. Litigation allows for numerous appeals at various levels.
j. Flexibility of Process – Arbitration is much more bendable than litigation, as court proceedings have more strict rules and regulations to follow.
k. Co-operation to Process – For arbitration to take place, both parties have to agree to the process for dispute resolution to occur. In litigation one party can take another to court, without the other party’s consent, to resolve the problem between the parties.
1.6 A Comparison Chart: Arbitration vs. Litigation
Private-/Public Process Private – only between the two parties Public – takes place in a courtroom
Type of proceeding Civil – private process Civil and criminal proceedings
Is Evidence allowed Restricted evidential process Applicable rules of evidence allowed
How an arbitrator/a judge is nominated and/or selected Parties select the arbitrator(s) to the process The court appoint a judge – parties have limited input in the decision
Formality of Method Informal procedure in an informal setting Formal procedure that takes place in court
Appeal available Decision is typically binding and therefore no appeal is possible An appeal is possible if a party doesn’t agree with the judgement
Use of attorneys At the discretion of the parties to the dispute Comprehensive use of attorneys by the parties throughout the process
Waiting time for the case to be heard As soon as the arbitrator is selected, therefore a relatively short waiting period A long period in waiting for the case to be scheduled in court
Costs Involved Fee for arbitrator(s) and attorney(s) (if made use of); not as expensive as litigation Court costs, attorney fees; can be very expensive
(Brown: 2012. 184)
1.7 Recommendation to Resolve Dispute
The first thing to consider before deciding on litigation or arbitration is whether an “arbitration clause” has been included in the contract concluded between the parties involved in the dispute. If such a clause is incorporated I would recommend that the parties make use of arbitration rather than litigation through the courts.
When an “arbitration clause” exist and one of the parties choose to issue in court (by way of litigation) rather than recourse to arbitration, the other party can make a request to stay the claim so that arbitration can be followed. Under Section 9 of the Arbitration Act of 1996, the court must rather halt the process if it is contented that there is such an “arbitration clause”, if definite conditions do not exist that avert the situation or conflict being stayed (Merkin: 2014. 24).
Secondly, as there are many forms of arbitration, the circumstances relevant will therefore change the comparative advantages and disadvantages of both arbitration and litigation. With arbitration the parties have an opportunity to create rules and restrictions to apply in the arbitration hearing which will be conducted.
Several contracts, especially for large and multifaceted projects, now have additional listed dispute resolution procedures with requirements for the involved parties to negotiate in good faith. If the contract sets out procedures for dispute resolution, then the parties must follow the procedure included in the contract, unless they decide and agree otherwise for a particular reason. For that reason I would recommend to the parties to follow arbitration, as they still have to work together on many developments.
My reason to not agree with the principal agent, whom is also the architect on the project, is that litigation will be costly to both parties and will also most likely ruin their relationship if the case is taken to court. If arbitration is followed, the building works on site can still continue and the resolution method also won’t be as costly to the parties. Even though the lawyer friend of the principal agent reassured the client that a favourable hearing could be expected, that is not sufficient ground for taking a dispute to litigation. It is better for the client and contractor to resolve the dispute through arbitration, as a clause already exists in the entered contract to support it.
In the present-day, there are a number of methods or processes available for resolving disputes in the construction sector, for that reason making the choice of method very important. It is of essence that both the employer(s) and contractor(s) understand the options available to them.
When advice is given from a party, such as the architect, whom are uninformed about the details of the dispute as well as the relationship of the parties, it will only confuse the parties when making a decision of the method to follow. Therefore, it is best to follow the agreement made in the contract, as this will guarantee that both parties are satisfied with the decision on which method to follow to resolve the dispute.
Also, it is very important for the parties to ensure that before they sign the contract, that the compiled contract comprises of applicable dispute resolution clauses. By doing that, it assists in preventing situations where the parties can’t agree which dispute resolution method to follow. It is important for all parties to a contract to sustain a good relationship with the other party/parties, this will ensure that a good working relationship can continue throughout a project.
Disputes will always be part of the construction industry. It is all the parties to the different contracts responsibility to incorporate ways to prevent disputes from occurring. This will safeguard that unnecessary delays and interruptions arise during the course of a project. The will furthermore ensure that the parties to a project or development are working in good faith throughout the whole project.