Resolving Construction Disputes Without Courts: Effectiveness of Alternative Dispute Resolution for Building Disputes

8 min read

Choosing between Alternative Dispute Resolution (ADR) and litigation in construction disputes is a critical decision that can significantly affect the outcome, duration, and cost of conflict resolution. This article explores why ADR, encompassing methods like mediation, arbitration, negotiation and expert determination, often serves as a preferable alternative to litigation, especially in the context of the construction industry. 

Table of Contents

Why Choose Alternative Dispute Resolution Over Litigation for Construction Disputes?

Choosing ADR over litigation can provide numerous strategic benefits, tailored to the specific needs of the parties involved. Here’s why ADR can be a more appealing option:

  • Flexibility: ADR allows parties to shape the process, choosing methods like mediation, arbitration, or conciliation to suit their specific dispute. Further, especially important in ongoing partnerships such as business ventures or construction projects, ADR fosters a collaborative environment that helps maintain and even strengthen business relationships.
  • Formality: ADR is generally less formal than court proceedings, making the dispute resolution process more accessible and less adversarial. The informal setting encourages honest dialogue and direct negotiation, paving the way for genuine understanding and comprehensive solutions.
  • Cost and Time Efficiency: ADR often involves lower legal fees and fewer incidental expenses compared to the costs accrued during litigation. The process is typically faster, avoiding the lengthy delays common in the court system.
  • Privacy: ADR sessions are private, keeping sensitive information out of the public domain and protecting the reputations of all involved parties.
  • Legal Encouragement: The legal system encourages the use of ADR, with pre-action protocols often requiring parties to explore these methods before initiating court proceedings.
  • Tailored Solutions: ADR can lead to more personalised outcomes such as apologies, changes in behaviour, and agreements tailored to the parties’ specific needs.

ADR presents a compelling alternative to litigation by offering a combination of flexibility, cost and time efficiency, privacy, and the potential for tailored outcomes that are not typically achievable through traditional court processes.

Types of ADR for Resolving Construction and Building Disputes

Negotiation

Negotiation is the most basic form of ADR and offers a flexible approach to resolving disputes. Negotiation can occur at any time, regardless of whether it is stipulated in a contract. 

Benefits

  • Informal and Flexible: This method can be informal, using communication tools such as emails, phone calls, or face-to-face meetings, or it can be formal with the involvement of legal representatives and other experts. Negotiation can involve just two parties or multiple stakeholders and can be initiated at any stage of a dispute, allowing for swift resolution as desired by the parties involved.
  • Confidential: It is typically a private and confidential process. The parties involved retain full control over the decision-making process, determining the acceptability of terms and approving any agreements reached.
  • Part of Standard Construction Contracts: Many standard construction contracts include clauses that mandate negotiation as a step in the dispute resolution process. These clauses often specify a structured escalation, starting from site representatives up to senior executives like directors or financial officers, facilitating higher-level attention and potentially more strategic resolutions. 
  • Helps Maintain Relationships: By elevating the dispute to senior management, there is a greater likelihood of an objective evaluation and an increased chance of settlement, which can be crucial in maintaining ongoing business relationships.

Potential Challenges

  • Risk of Stalling: While negotiation is a powerful tool for dispute resolution, it can sometimes be misused as a stalling tactic. Without a neutral third-party facilitator, negotiations may flounder, especially in complex cases or when multiple parties are involved.
  • Industry Suitability: In industries like construction and infrastructure, it is important to include participants who are typically knowledgeable about risk management. The familiarity with the intricacies of the sector enables parties to negotiate settlements efficiently. 

Mediation

Mediation leverages the principles of conflict resolution and open dialogue, offering a personalised alternative to the more rigid frameworks of litigation and arbitration.

Benefits

  • Constructive Dialogue: At the heart of mediation is the mediator, an impartial third party who facilitates the dispute resolution process. Unlike judges or arbitrators, mediators do not decide the outcome. Instead, they guide the parties through constructive dialogue to develop their own solutions.
  • Voluntary: Mediation is inherently voluntary. Parties choose to engage in the process and are free to withdraw at any time. This autonomy ensures that all involved are genuinely invested in negotiating a solution, enhancing the likelihood of a sustainable agreement.
  • Privacy: A major advantage of mediation is the confidentiality it offers. Discussions and admissions made during sessions are not part of the public record and typically cannot be used in subsequent legal proceedings. This privacy encourages frankness and honesty, which is critical for achieving a resolution that satisfies all parties.
  • Flexibility: One of mediation’s strongest features is its adaptability. The process allows parties to set their schedules, tailor the proceedings to the specific nature of the dispute, and collaboratively develop a resolution. This flexibility ensures that the solution is mutually agreed upon rather than imposed, respecting the unique aspects of each case.
  • Collaborative in Nature: The construction industry’s growing preference for mediation reflects its effectiveness in maintaining relationships and fostering mutually beneficial resolutions. As stakeholders recognise the value of mediation, it reaffirms the power of dialogue and collaborative problem-solving in resolving conflicts. This trend highlights mediation’s role not just as a dispute resolution mechanism but as a proactive tool for maintaining harmony and cooperation in complex project environments.

Potential Challenges

  • Technical Nature: Construction disputes often involve complex technical details that require specific industry knowledge. While a mediator facilitates discussions and negotiations, they may not have the technical expertise necessary to fully grasp or resolve specialised issues without input from expert advisors.
  • Multiple Parties: Construction projects typically involve various stakeholders, including owners, contractors, subcontractors, suppliers, and consultants. Mediating a dispute that involves multiple parties can be challenging due to differing interests, goals, and contractual relationships.
  • Enforceability of Agreements: While mediation can lead to settlements, these agreements may not always have the same legal enforceability as court judgments or arbitration awards, potentially leading to further disputes about compliance.
  • Non-Binding Nature: The non-binding nature of mediation outcomes can be a double-edged sword. While it allows flexibility and continued negotiation, it can also lead to a lack of finality, with the dispute potentially resurfacing if agreements are not honoured.

Arbitration

Arbitration has gained significant traction as a preferred method for resolving disputes, particularly in industries like real estate and construction where the complexities of contracts and the high stakes necessitate a swift and effective resolution. This ADR process offers a balanced mix of structured proceedings and specialised expertise.

Benefits

  • Party Autonomy: Central to the arbitration process is the arbitrator, who is typically selected by the parties involved due to their specific knowledge and experience in relevant fields such as construction law. This selection is critical because it ensures that the arbitrator is familiar with the nuances of the industry and can handle the technical aspects of the dispute.
  • Legislative Support: Arbitration is governed by pre-established rules contained within the arbitration agreement. These rules provide a clear framework for the process, detailing how evidence is presented and how the arbitration awards are delivered, thus ensuring a structured and predictable resolution pathway.
  • Binding Nature: One of the hallmark features of arbitration is the binding nature of the decision made by the arbitrator. This attribute provides a definite conclusion to the dispute, avoiding the prolonged uncertainty and timelines often associated with court litigation. For parties seeking flexibility, non-binding arbitration options are available, offering the benefits of arbitration with less finality.
  • Expert Arbitrator: The ability to choose an arbitrator with industry-specific expertise is particularly beneficial in complex sectors such as construction. An arbitrator with a deep understanding of construction contracts, engineering details, and industry standards can make more informed decisions that are grounded in the realities of the field.
  • Confidentiality: Unlike court proceedings, which are public, arbitration is conducted in private. This ensures that any sensitive information, trade secrets, or proprietary details discussed during the arbitration remain confidential. For high-profile projects or major companies, this level of privacy is essential for protecting business interests and maintaining a positive public image.

Potential Challenges

  • Questions of Neutrality: The perceived impartiality of arbitrators can be a concern, especially in industries like construction where arbitrators may have longstanding relationships with certain firms or industry players.
  • Selection of Arbitrators: The process of selecting arbitrators can be contentious, particularly if the parties have divergent views on who is suitable. This can delay the initiation of the arbitration process.
  • Enforceability Issues: Although arbitration decisions are binding and recognised internationally, enforcing arbitration awards in different jurisdictions can be problematic, especially if the losing party lacks assets in enforceable locations.
  • Limited Appeals: The ability to appeal an arbitration award is significantly limited compared to court judgments. This can be a disadvantage if the arbitration panel makes an erroneous decision based on the complex technicalities of the construction dispute.
  • Less Flexible Than Perceived: While arbitration offers more flexibility than court litigation, it can become rigid in practice. The procedures, once set by the agreement of the parties or determined by the arbitration institution, may offer limited room for adjustment as the case evolves.

Expert Determination

Expert determination is a distinct method of resolving disputes, particularly effective in addressing issues that require specialised knowledge or technical expertise. This process involves an independent expert whose decision is typically final and binding, offering a streamlined alternative to traditional legal avenues like litigation or arbitration.

Unlike judges or arbitrators, an expert in this process utilises their specialised knowledge to make determinations. They are not bound solely by the submissions and evidence presented by the parties but can apply their own expert insight to the matter at hand. This can be especially beneficial in technical fields where nuanced understanding is crucial.

The parties agree that the expert’s decision will generally be final, with few exceptions such as instances of fraud, bias, or significant deviation from given instructions. Interestingly, experts are not obligated to provide reasons for their decisions unless specifically requested by the parties involved.

Benefits

  • Confidentiality: The process is confidential, ensuring that the details of the dispute and the outcome remain private. This is particularly appealing in industries where sensitive information or trade secrets are involved.
  • Suitability for Technical Disputes: Expert determination is ideal for disputes revolving around technical issues or valuations, such as those frequently encountered in the engineering or technology sectors.
  • Controlled by Agreement: The entire process is governed by the agreement between the parties, without any statutory framework. This allows for significant flexibility in defining the process to suit the specific needs of the dispute.
  • Institutional Support: Various institutions, ranging from the International Chamber of Commerce (ICC) to regional bodies like the Resolution Institute in Australia and New Zealand, offer sets of rules that can be incorporated into contracts, providing structured frameworks for the expert determination process.

Potential Challenges

  • Limited Right to Appeal: The main drawback is the limited right of appeal against the expert’s decision, making it less suitable for disputes that are primarily factual in nature, as is often the case in construction disputes. If the expert’s conclusions are flawed, the parties have few options for recourse.

Which Alternative Dispute Resolution Method Should You Choose?

ADR is particularly valuable in managing risks associated with construction disputes, which are notorious for their potentially high costs and the extensive documentation involved. The choice of ADR can be critical in managing these disputes effectively, often considered at the project’s outset and integrated within the contractual agreements. When deciding whether to utilise ADR and determining the most suitable form, several key factors must be considered:

  • Public Interest & Precedent Setting: This parameter considers whether the dispute involves issues of public interest that might benefit from a court judgment to set a legal precedent. ADR methods are generally private and do not establish legal precedents.
  • Binding Nature: This relates to whether the resolution decided through the ADR method is legally binding and enforceable. Binding decisions provide finality to the dispute, while non-binding methods may allow further negotiations or legal actions.
  • Enforceability: This parameter assesses how easily an agreement or decision reached through an ADR method can be enforced legally. Court orders or arbitration awards are typically more enforceable than agreements from mediation or negotiation.
  • Cost: Considers the financial implications of using an ADR method. Some methods, like arbitration, may involve significant expenses compared to more informal methods like mediation or negotiation.
  • Complexity of Dispute: This involves the nature of the dispute itself—whether it is complex or straightforward. Complex disputes may require the structured environment of arbitration or the specialised knowledge of an expert determiner.
  • Need for Confidentiality: Evaluates the importance of keeping the details of the dispute and its resolution private. ADR methods generally offer more confidentiality than public court proceedings.
  • Flexibility and Control Over Process: This parameter looks at how much the disputing parties can control the proceedings and tailor the process to their needs. Negotiation and mediation offer more flexibility compared to the more structured processes of arbitration.
  • Suitability for Multi-party Disputes: Considers how well the ADR method handles disputes involving multiple parties, which may require more complex management and coordination.
  • Legal and Technical Expertise Required: Assesses whether the resolution process benefits from or requires legal or technical expertise. For instance, expert determination is particularly suited to technical disputes where specialised knowledge is crucial.
  • Speed of Resolution: Concerns the time it takes to reach a resolution. Some ADR methods like negotiation and mediation can potentially resolve disputes quicker than arbitration or litigation.
  • Industry Suitability: Considers whether specific industries or types of disputes are more suited to certain ADR methods due to the nature of the industry or the common types of conflicts within it.

Below is a table that outlines the suitability of different ADR methods based on various parameters relevant to choosing the right dispute resolution mechanism.

ParametersNegotiationMediationArbitrationExpert Determination
Public Interest & Precedent SettingLow suitabilityLow suitabilityModerate suitabilityLow suitability
Binding NatureVaries (typically non-binding)Non-bindingBinding (final and limited appeal)Binding (final and limited appeal)
EnforceabilityModerate (depends on formalisation)Moderate (depends on formalisation)HighHigh
CostLowLow to moderateModerate to highModerate
Complexity of DisputeLow to moderateLow to moderateHighHigh (technical/ specialised disputes)
Need for ConfidentialityHighHighHighHigh
Flexibility and Control Over ProcessHighHighModerateModerate
Suitability for Multi-party DisputesModerateHighModerate to highModerate
Legal and Technical Expertise RequiredLowLowHighVery high (specific expertise)
Speed of ResolutionHighHighModerateHigh
Industry SuitabilityGeneral, all industriesGeneral, especially relational industriesReal estate, construction, financeTechnical, real estate, construction

When is Going to Court the Right Choice?

When deciding whether to pursue litigation, understanding the scenarios where it might be more suitable than ADR is crucial. Here are some conditions under which litigation could be the appropriate choice:

  • Unwillingness to Negotiate: If the opposing party refuses to engage in any form of negotiation or compromise, litigation may be the only viable option. ADR methods such as negotiation, mediation, or arbitration rely on both parties’ willingness to come to an agreement. Without this willingness, achieving a resolution through ADR becomes impractical.
  • Existence of Non-Negotiable Issues: Cases with issues that neither party is willing to compromise on, or situations where legal principles need to be established or rights enforced, may necessitate litigation. Litigation ensures that a formal judgment is passed, which can then set a legal precedent or enforce rights, unlike ADR, which is more about finding a middle ground.
  • At-Fault Party and Damages: In situations where the opposing party is clearly at fault for damages, and this fault is significant and evident, pursuing litigation might result in a better compensation package than what might be negotiated in ADR. This is particularly relevant in cases involving substantial economic, medical, or personal damages where the extent of liability and the calculation of damages are clear-cut.

The choice between litigation and ADR should be made after careful consideration of the nature of the dispute, the relationship between the parties, the desired outcomes, and the potential costs and benefits of each approach. In cases where negotiation is feasible and the stakes allow for compromise, ADR might offer a more efficient and less adversarial path to resolution. However, in more contentious scenarios where the opposing party is uncooperative or the legal stakes are high, litigation could be the necessary course of action to achieve justice and appropriate recompense.

Contact us to explore how ADR can be tailored to meet your specific needs, ensuring the best possible outcome for your dispute resolution process.

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Picture of Authored By<br>Raea Khan

Authored By
Raea Khan

Director Lawyer, PBL Law Group

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PBL handled my late mothers estate, they were very obliging and patient with any and all questions that we had, thank you to David , Sharon and the other staff that we dealt with, everyone was so easy to talk to and friendly .David came to the home where my Mother was living and helped her to get her will in order, Sharon helped us through the process of executing her wishes when the time came even doing a house call which was so much easier, thank you all so much
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I have experienced an excellent service from PBL (especially from Anita) during the sale of my recent property on Central Coast, and during the purchase of our current property in Sydney. Throughout many challengers, especially with the sale, Anita presented her very professional and knowledgeable conveyancer, positively solving all obstacles. "Above and Beyond" Award going to Anita!!! :-)
Amanda Reitzin
The five-star reviews are well-deserved. I needed a motion and a bylaw drawn up for urgent repairs of my strata unit and the AGM was in two weeks' time. My solicitor was friendly, efficient, knew what documents to ask for, and had all the paperwork prepared well within the timeframe. She also took the time to run through all the legalese and the different possible scenarios with me to make sure I understood. I am so glad to have found this firm and I will not hesitate to use their services again in future if the need arises.
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For almost 18 months I have been a client of Alex Ilkin. Alex is very knowledgeable and professional and has consistently provided me with thorough, honest and well set out advice, including steering my case through appeal proceedings. He always worked for my best interests with integrity and compassion. I recommend Alex and his team at PBL.