Construction procurement guide: contract dispute resolution

Disagreements and differences of opinion are common in contracts, but they don't need to escalate to disputes. Addressing them promptly can prevent future problems. Obtaining advice at this early stage can assist.

Negotiations are driven by the project manager.

A dispute is defined as when one party formally notifies the other that it wishes to pursue a disagreement. Then the principal's and contractor's senior executives confer and try to resolve the issue. Many disputes are resolved at this level.

Negotiations are driven by senior executives.

The contract allows for disputes that are not settled at level 2 to proceed to expert determination.

In preparing for this, new information may come to light, providing an opportunity for fresh and intensive negotiations, run in parallel with the expert determination process.

Negotiations are driven by the dispute manager.

Litigation is an expensive and time-consuming process. Careful consideration is required before initiating litigation. It is generally an option of last resort.

New negotiations are directed by the project director with advice from the litigation overview team. The litigation overview team monitors progress and cost and provides advice to the project director regarding instructions that are required to be given to the legal team.

Negotiations are driven by the litigation overview team.

Investment in resolution should be aimed at achieving value for money. It is rarely appropriate to incur substantial resolution costs over relatively minor matters.

The time, money and resources invested in defending a position should be relative to the magnitude of the amount in dispute.

In particular, agencies must avoid investing heavily in legal services when alternative dispute resolution processes would be more cost effective and suitable.

Speedy action can resolve issues before they become formalised into disputes. The resolution process must be deliberately driven and not allowed to stall.

Protracted disputes may compromise project objectives, cause ongoing undue financial hardship to the contractor, affect productivity, interfere with the day-to-day relationship between the project manager and the contractor and lead to further disputes.

Probity includes adhering to public sector standards of behaviour, such as fairness, impartiality, consistency and accountability.

Probity is not only about outcome but is also about process: probity is doing things the right way and being seen to do things the right way.

Probity in intrusive and non-intrusive processes

Intrusive processes are where an independent third party imposes a decision on the parties to the dispute and the parties participate at arm’s length, such as expert determination and litigation. By their nature, intrusive processes promote probity as they are transparent and decisions are well documented and able to be audited.

However, the majority of contractual disputes are resolved by non-intrusive processes such as negotiation. Care needs to be taken to ensure that probity is maintained in a negotiated settlement.

In the negotiation process project managers, senior executives, project directors and dispute managers must take all necessary steps to ensure probity is maintained, including:

• producing a documented assessment of the claim and a risk analysis of the dispute to the agency to be reviewed and approved before dispute negotiations begin
• having at least 2 persons (one a government employee) present to represent the principal during dispute negotiations
• when a negotiated resolution has been achieved in principle, submitting a written recommendation to the agency for approval that addresses terms and amount of the proposed settlement
• having the agency approve the formal settlement document, that the deed of release or variation

Conflicts of interest

The project manager, senior executive, project director or dispute manager involved in the assessment of the claim should be aware of any potential conflicts of interest that they may have and declare them.

For example, if the project manager prepared the documentation and the particular dispute concerns the interpretation of the documents or allegations of negligence in the preparation of the documents then a second written assessment should be sought from an appropriate party independent of the conflict of interest (for example, from a senior executive).

Private sector consultants undertaking dispute resolution roles on behalf of the principal must not have an existing financial relationship with the contractor. The parties must also protect against potential conflicts of interest that may arise from past or proposed future relationships between private sector consultants and the contractor.

Where conflict of interest is identified as an issue, the matter is to be eliminated or managed to the satisfaction of the next higher level of authority on the project. If the conflict exists at project director level then the matter needs to be resolved to the satisfaction of the agency program director.

Operating within assigned delegation

Project managers, dispute managers, project directors and senior executives must understand and act in accordance with the Public Finance and Audit Act 1983. Failure to adhere to the Act is breaking the law and penalties may apply.

The Act addresses accountability and efficient use of public money. In particular, the Act requires that expenditure only be committed or incurred by a person within the limits of a delegation conferred in writing by a person entitled to make the delegation.

Anyone involved in dispute resolution must not commit the agency to a financial settlement, additional costs, or to a change in contract entitlements without prior written approval from the agency, or an authorised representative of the principal.

Obtaining this approval from the agency will require a submission that explains the circumstances of the dispute in detail and demonstrates that the proposed course of action is the best value for money option given the risk and costs associated with alternative courses of action.

If a contractor is not achieving its financial return on its contract or if the principal’s project is suffering from budget overruns, the pressure increases to pursue or resist respectively an increase in the contract sum.

A contract is central in the relationship between the principal and its contractor. The contract primarily describes the works or services to be supplied by the contractor, the conditions under which the supply is to be effected, and the price that the principal will pay.

If this description is not specific or precise it may be interpreted differently by the parties and disputes may arise.

A contract will normally make provision for unexpected events and apportion risk between the contractor and the principal.

Although addressed in the contract, sometimes the agency or the contractor has not been aware that they are carrying a particular risk until it eventuates and the affected party may not have made sufficient allowance for the risk in their price or budget.

As a result, when unanticipated events occur, there is often a dispute about liability. For example, unfavourable site conditions may not be apparent at the time of tender and may not be anticipated or allowed for.

The contract will place explicit or implicit performance obligations (for example, time and quality) on both parties. Each party will have an expectation about how the performance obligations will be met.

Unrealised expectations about issues such as time and quality give rise to disputes.

The principal, when requesting a variation to the contract, may expect that the impact on time and cost will be minor. The contractor may view the requested variation differently.

The project manager is generally the first person to become aware of any disagreement with the contractor and is in an ideal position to resolve the matter before it escalates into a dispute.

If the dispute proceeds to expert determination, the project manager will continue to provide information and advice but the responsibility for resolution transfers to the dispute manager.

See the dispute resolution process description in section 4 for specific tasks performed by the project manager at the various dispute resolution levels.

A number of standard forms of contract require a person at a senior level from both parties to confer to try to resolve the dispute. In the GC21 contracts these persons are referred to as senior executives.

The senior executives have a key contractual role when a disagreement becomes a formal dispute to try to resolve the dispute. Experienced and respected senior executives have proven to be very successful at resolving disputes through negotiation.

The senior executive must be an experienced negotiator, familiar with the form and terms of the contract and be perceived to have authority.

Senior executives can also take a proactive role, promoting a good working relationship between the parties and heading off contract disputes before they arise. They may attend progress meetings and provide informal advice to the project manager. Such a role can be effective at minimising disputes, and is to be encouraged.

The project director may appoint the senior executive as the dispute manager if the resolution process reaches level 3.

See the dispute resolution process description in section 4 for specific tasks performed by the senior executive at the various levels.

A person other than the project manager must be assigned the role of dispute manager for disputes with a value greater than $250,000.

For disputes less than $250,000 the project manager may take on the role of dispute manager unless:

• there is an actual or perceived conflict of interest in relation to the particular dispute
• the unresolved dispute is affecting the day to day running of the contract (for example, due to acrimony between parties)
• the dispute becomes excessively protracted.

A separate dispute manager allows the project manager to concentrate on the core activities of managing the contract.

For major construction projects, agencies may wish to engage a dispute manager at the commencement of the project to ensure that communication between the project manager and the dispute manager is effective and prompt.

A dispute manager would generally be appointed after the senior executive has completed its contractual role to confer to try to resolve the dispute. However, if the senior executive is still involved in the resolution process the dispute manager is required to work cooperatively with the senior executive.

See the dispute resolution process description in section 4 for specific tasks performed by the dispute manager at the various levels.

The agency procuring the project delegates to the project director the responsibility to ensure that disputes arising on the project are resolved in accordance with this guide.

The project director is responsible for monitoring the progress of projects and being aware of potential and realised disputes. The ‘What’s the risk of dispute on your contract?’ checklist can assist in assessing the risk of dispute. It is recommended that this checklist be completed at least quarterly for each project.

See the dispute resolution process description in section 4 for specific tasks performed by the project director at the various levels.

Clearly state what this assessment is covering. Also identify any other related, unrelated or potential disagreements or other matters of relevance on this project.

Generally, related matters should be covered by this assessment and resolved with this dispute. However, negotiations are also an opportunity to resolve unrelated matters on the project. This can increase the goodwill between parties and assist.

The position paper should discuss:

• What is the issue in dispute?
• What is the amount claimed by the contractor?
• What justification is the contractor providing for this claim?
• Is the amount claimed by the contractor likely to increase with time?
• With regard to this contractor on this project, are there other related disputes, related claims, or related potential claims?
• With regard to this contractor on this project, are there other unrelated disputes,
  unrelated claims, or unrelated potential claims?

The contract documentation and supporting information must be considered as a whole. Relying on one particular clause to deny principal liability is generally unwise.

Consider the possibility of principal liability arising from either a clause in the contract or from a breach of contract. It is recommended that advice be sought from peers and the senior executive to obtain a range of views on possible principal liability.

Generally, external legal opinion is not required at this stage. The question of whether a liability exists or not should be addressed before any discussion of its extinction is entered into.

The position paper should discuss:

• What clauses of the contract is the contractor relying on to support its claim?
• What is the likelihood of the claimed basis of liability being accepted by an expert?
• Does the contract entitle the contractor to extra payment, or extra time, in relation to this matter?
• If, in your opinion, the contract does not entitle the contractor to extra payment, or extra time, what is the possibility that an expert would disagree?
• Has there been a breach of the contract, by the principal, that could give rise to payment for an additional amount?
• If, in your opinion, there has not been a breach of the contract, by the principal, that could give rise to payment for an additional amount, what is the possibility that an expert would disagree?

The possibilities of time bars, set-offs or cross-claims or the like that might extinguish or reduce the amount payable should be explored.

The position paper should discuss:

• Is the right to extra payment or time extinguished, barred or reduced by any provision of the contract, set-offs or cross-claims or the like?
• If, in your opinion, the right to extra payment or time is extinguished, barred or reduced by a provision of the contract, a set-off or a cross-claims or the like, what evidence do you have to support your position. What is the possibility that an expert would disagree?

A variation claim may be rejected on the basis that insufficient supporting material has been provided by the contractor. However, a position paper requires a more thorough exploration of this issue.

The position paper should discuss:

• Has the contractor supported the claim with sufficient information that allows you to evaluate it reasonably?
• If so, are the contractor’s rates and prices reasonable? (obtain quantity surveyor’s advice)
• If you do not have sufficient information to evaluate the claim, use first principles and site records to estimate the value of the claim. Discuss the degree of uncertainty in your estimate.
• Has the contractor supported its claim by sufficient evidence, facts and specific detail, rather than anecdotes? Would an expert be in a reasonable position to award the contractor compensation, if due?
• If not, what is the likelihood that the contractor will be able to support its claim by sufficient evidence, facts and specific detail should the matter proceed to expert determination?

There may be a range of estimates of the potential amount payable that can be considered depending on how the estimate is calculated.

A matrix showing the potential amounts payable against various liability possibilities may be helpful. An example follows of a matrix prepared for a hypothetical dispute on a Minor Works contract, involving principal-caused delay, where there is uncertainty over:

• the number of weeks of delay for which the principal is liable, and
• the cost of that delay.

The position paper should discuss:

• optimistic estimate of amount payable
• most likely scenario of amount payable
• pessimistic (worst-case scenario) estimate of amount payable
• the assumptions used when calculating these amounts.

A range of estimates is essential in informing the principal’s negotiation team. When considering a worst-case scenario, consider:

• the possibility that an expert does find that the principal has a liability, even if, in your opinion, a liability does not exist
• the costs the contractor has been able to substantiate to date, as well as other costs the contractor may be able to substantiate reasonably in the future
• the amounts that have been claimed to date by the contractor as well as amounts the contractor may be able to claim reasonably under additional or alternative heads of claim related to the circumstances of this dispute
• the potential cost involved in related disputes and related potential disputes
• the possibility that the amount associated with this dispute may increase over time.

Estimates of the amount payable should, wherever possible, be based on evidence, for example site records and resource records. It must be established that rates and prices used are reasonable (obtain quantity surveyor’s advice).

Where evidence is not available, estimate the amount payable starting from first principles (rather than from the contractor’s assumptions). Do not use standard formulas from construction publications, such as Hudson’s formula, to determine delay costs.

The cost of a dispute is not limited to the settlement amount to be paid by the principal to the contractor, but includes the cost, to both parties, of the dispute resolution process itself.

Once a dispute has been referred to expert determination, the updated position paper should discuss:

• What further costs are likely to be incurred by the principal in the expert determination process? Consider the following potential costs associated with expert determination:
  • costs of a building/construction industry professional with experience in expert determinations, to manage the process and prepare submissions (this will usually be the dispute manager)
  • costs of legal advisers with experience in construction contract disputes to assist in preparation of submissions and to prepare sections of the submissions
  • costs of technical experts such as quantity surveyors and programmers to prepare expert reports to support submissions
  • costs of project personnel and others representing the principal who may have to prepare statements, assist in preparing submissions or review submissions, and
  • the proportion of the expert’s cost that will be borne by the principal.
• Also estimate the costs that the contractor is likely to incur in the expert determination process?

Position papers should include an assessment of any other risk factors that may be relevant to the dispute and to the agency, for example risk of delay to the project or following contracts, risk of the contractor going into liquidation or terminating.

Such risk factors are not directly relevant to the assessment of possible contractor entitlement, but may impact on project strategy and budget and therefore need to be communicated to the agency.

Disagreements and differences of opinion are common in contracts – but they do not need to escalate to disputes.

Typical initial trigger

The contractor verbally or in writing expresses dissatisfaction with an unresolved variation or other matter.

Key actions at this level

Re-examine the issues

Disagreements and differences of opinion can often be resolved by reasonable discussion. Consider the viewpoint of the other party – being objective is vital to resolving disagreements.

Get advice

It is always worthwhile for the project manager to get another person’s opinion about the claim – they can provide a fresh perspective. The project manager should discuss the matter with his or her peers, managers or the senior executive. Often discussing the matter with someone not close to the problem can prevent a potential dispute from developing into a dispute.

Misunderstandings or procedural matters, such as site access difficulties, are often resolved by the early involvement of the senior executive outside the formal dispute resolution process. Potential disputes may be averted by the proactive vigilance of senior executives.

Consider the contract as a whole

Consider the matter in the context of the overall contract and how it has been administered. Beware of focusing only on selective phrases from the contract. Always seek an outcome based on the contract.

Work cooperatively

Make every effort to help the contractor meet their contractual obligations. Compromise on matters that will not adversely impact the project outcome while maintaining control over the contract, cost, quality and timing.

Project managers are not adequately fulfilling their duties (and possibly acting negligently) if they accept a contractor’s demands in order to avoid a dispute where adequate justification for a settlement has not been made.

Specific tasks by role

Project manager

• Seeks advice from others in their own organisation and the senior executive under the contract.
• Re-examines the issue.
• Attempts to resolve the disagreement with the contractor.
• Advises the senior executive and project director if a dispute is expected or if it is likely the impasse will become protracted.
• Formalises resolution if achieved.

Senior executive

• May takes a proactive role in preventing disputes.
• Provides advice to project manager.
• May speak informally with people at an equivalent level in the contractor organisation.
• May attend some or all key site meetings.

Project director

• Monitors the dispute risk factors (including the number and duration of unresolved claims) and intervenes as required. The project director completes the questionnaire in Appendix A at regular intervals, typically quarterly, to help monitor dispute risk.
• Finds out whether site relations are becoming adversely affected by disagreement. If so, addresses the issues.

A dispute occurs when a disagreement between the contractor and the project manager is not resolved, and one party gives formal notice to the other party that it wishes to pursue the matter. When a difference of opinion is elevated to a formal dispute, the senior executives are required by the contract to confer.

The majority of disputes are resolved by the intervention of the senior executives. The senior executive can provide a fresh view and more diverse experience. Having a well-respected, knowledgeable and experienced principal’s senior executive can save considerable cost and time in the dispute resolution process.

Typical initial trigger

Contractor or principal formally advises the other party that the matter is a dispute under the contract.

Each contract type defines the procedure for notifying a dispute (or issue).

For example, in GC21 contract clause 73, the contractor notifies the principal of an issue and provides a copy of the notice to the senior executive.

The Minor Works contract, at clause 16, requires only that the contractor notify the principal’s agent.

The persons notified of the dispute must as soon as practicable notify the project manager, the senior executive and the project director.

Key actions at this level

Prepare initial position paper

This documents the background and current status of the dispute and provides an assessment of the dispute. See Position papers in section 3.

Senior executives confer

GC21 contracts typically require the contractor to wait for at least 21 days after notifying a dispute before referring the issue to expert determination. During this time the principal’s and contractor’s senior executive must promptly confer to resolve the dispute.

‘Conferring’ typically involves making contact with the contractor, understanding their position, presenting the principal’s opinion and reasons for it, and seeking to resolve the issue.

Formalise agreement if issue is resolved

Successful negotiations should result in full and final settlement of all issues. Writing down a list of agreed matters, jointly prepared at the time of the discussion, creates a shared understanding and reduces the opportunity for future is agreement. The agreement must then be formalised by:

• a variation approval form (suitable if a disagreement has been resolved early)
• an exchange of letters (suitable if a dispute has been notified but resolved quickly), or
• a deed of release (suitable for negotiated resolution of more complex matters).

Specific tasks by role

Project manager

• Familiarises themselves with the contract dispute resolution clauses and timeframes.
• Liaises with, and provides relevant documents to, the senior executive.
• Prepares the initial position paper (typically within 14 days of dispute notification) and promptly advises the project director of the potential value of the dispute.
• Participates in negotiations if required.
• Formalises resolution if achieved.

Senior executive

• Receives a copy of dispute notification.
• Provides support to the project manager and reviews initial position paper.
• Promptly confers with the contractor’s senior executive to resolve the dispute.
• Advises the project director of any information relevant to the management of the contract or project.
• Discusses a negotiation strategy with the project director and who should be involved.
• May assist to formalise the resolution.

Project director

• Reviews issues and cost estimates presented in the initial position paper.
• Provides support to the senior executive, including obtaining agency approval and funding to settle if required.
• Monitors resolution progress and intervenes as required.
• Prepares to engage dispute manager, should dispute not be resolved at this level.
• Engages a different person as dispute manager, if the process stalls at level 2, or if the project manager has a conflict of interest.

The majority of contract disputes are resolved by negotiation. Whilst negotiations continue throughout levels 1 to 5 (and may indeed be intense at any level), negotiations at level 3 require a documented and well-thought-through negotiation strategy.

It is recommended that these level 3 negotiations be implemented in parallel with the expert determination process (level 4) prescribed in the contract.

Negotiations at this level can resolve the dispute and the expert determination process need not be completed, saving time and costs and allowing the parties to have some control of the outcome, rather than having a decision imposed on them.

A dispute manager is required to manage the substantial workload associated with levels 3 and 4 in the dispute resolution process.

Typical initial trigger

The contractor or principal formally refers the dispute to expert determination.

Key actions at this level

Select a dispute manager

The project manager manages the dispute resolution process at levels 1 and 2 as part of the contract administration brief. Once the matter is referred to expert determination, the project director engages a dispute manager who may be:

• the project manager (if the dispute is less than $250,000)
• the senior executive
• selected from the prequalification panel.

It is considered reasonable for a project manager also to be engaged as the dispute manager for disputes valued at $250,000 or less, as these are likely to be less complex and easier to resolve due to the smaller amount involved. Smaller disputes do not generally warrant the employment of additional and specialist resources.

However, for disputes over $250,000 it is essential to appoint a dedicated dispute manager to ensure a prompt, cost-effective resolution because:

• the set of skills and the role of a dispute manager are different to those of a project manager for this scale of dispute
• a project manager is primarily concerned with the day-to-day management of the project or contract and should not be distracted by managing a potentially contentious, complex and time-consuming dispute.

Irrespective of who undertakes the dispute manager role, the costs associated with the management and settlement of the dispute are a project cost to be funded by the agency.

A dispute manager must have:

• considerable experience in the construction industry, familiarity with, and respect for, government processes, and a working knowledge of contract law
• excellent negotiation skills and experience in negotiating contract disputes
• no conflict of interest – the dispute manager must have no financial involvement with the other parties in dispute or have a direct or indirect interest in the outcome of the dispute
• the ability to remain objective and impartial throughout the process
• the necessary time available to undertake the role while not compromising other project roles.

A sample brief for the fee-for-service engagement of a dispute manager, a sample letter of engagement, and industry consultant engagement guidelines are available through the NSW Government procurement system for construction.

The brief must require the consultant not to accept the engagement if they have a conflict of interest or is not suitably experienced. The brief must set out what is required of the dispute manager.

The dispute manager is responsible for managing the dispute resolution process, but has no authority to commit the principal to a settlement, or suggest a settlement offer to the contractor, without obtaining prior authorisation from the agency via the project director.

Prepare thoroughly

Effective negotiation requires thorough preparation and an in-depth understanding of the contractual and factual issues surrounding the dispute.

Negotiation is unlikely to succeed if the parties have fixed views and are reluctant to compromise their positions, or if the negotiation is entered into without sufficient preparation and commitment. However, entrenched positions are frequently relinquished in a successfully managed negotiation forum.

An updated position paper is essential before commencing level 3 negotiations. This position paper will include a fresh negotiation strategy and an expert determination strategy. The negotiation strategy as set out in the position paper should be approved by the agency, prior to the commencement of this negotiation phase.

Engage and manage additional resources

The dispute manager identifies the additional specialists required during a dispute management process. These may include:

• legal consultants
• programming consultants
• quantity surveyors
• consultants with industry-specific expertise relevant to the dispute.

Specialists may help prompt resolution of a dispute, particularly when the dispute involves one main issue: such as the effect on the program of numerous variations, or the impact on the foundations of the geotechnical conditions, or the legal interpretation of a particular clause. Such resources may well be required anyway for contribution to the preparation of expert determination submissions.

However, use of additional specialist resources needs to be judicious. Sometimes the more time, money and resources invested in defending a position, the harder it is to bring about a cost-effective negotiated settlement. Effort can be diverted into pursuing peripheral issues and marginal defences, taking the focus from the primary matters.

This is particularly true if attempting to pursue a tenuous defence through heavy investment in legal services when more pragmatic alternative dispute resolution processes are advisable. In extreme cases, the outcome could be more driven by the accrued resolution costs than the basic claim.

The cost incurred and the outcome of additional resources will depend on the brief given. A brief aimed at a cost-effective, prompt resolution of the dispute will have a very different consequence than a brief requiring the consultant to defend rigorously the principal’s position.

The dispute manager writes the brief and manages the engagements of additional specialist resources.

The dispute manager may have specialist skills in an area relevant to the particular dispute, for example legal expertise or programming expertise. Indeed, a dispute manager may have been particularly chosen because of the match between their specialist skills and the needs of the particular dispute.

It is expected that there would be an increase in efficiency when a dispute manager is able to undertake other specialist tasks and provide advice to the principal accordingly.

Differentiation between an industry expert’s role and an advocacy role need to be considered should the dispute progress to levels 4 and 5.

Expert submissions would need to be independent and technical submissions by a dispute manager may be seen in the advocacy role.

Select the negotiating team

To obtain a successful outcome for the agency, negotiations must be undertaken by appropriately experienced and well-informed personnel. The project director considers who can best contribute to the negotiation process.

For disputes above $250,000 the project manager may attend the level 3 negotiations but must not be responsible for conducting them. However, if the relationship between the project manager and the contractor has been adversely affected by the dispute, it may be prudent not to have the project manager present during the negotiations.

For disputes up to and including $250,000, the project manager will most often be the dispute manager and therefore would be expected to attend the negotiation. The senior executive or other representative of the principal usually conducts the negotiation to prevent contamination of the project manager’s day-to-day contract management relationship with the contractor.

The principal’s senior executive may be asked to attend level 3 negotiations, but this does not diminish the responsibility of the project director to see that the dispute is resolved, or of the dispute manager to manage the dispute resolution process at this level.

Negotiate

Negotiations need to be carried out in a spirit of respect for each party’s point of view. The principal’s representatives should be receptive to argument by the contractor but rigorous in expecting validation of that argument and vice versa. It is through the exploration and discussion of the facts that arguments are usually won or lost.

Negotiation involves each party working to convince the other of their position. Typically each party moves towards a compromise position both can accept.

Typically, a successful negotiation process usually results in the contractor offering to settle the dispute for an amount that the principal’s negotiators consider to be fair and reasonable and able to be justified to the agency but are always subject to final approval by the agency.

To avoid misunderstandings, a list of matters agreed, including payment and related issues, should be prepared at the time of negotiation and then formalised. For example, does the settlement amount include GST? Does the settlement amount cover all outstanding disputes or only one?

Negotiations should be seen as an opportunity to close off possible related claims and perhaps all issues to the date of the negotiation, not just the issue in dispute.

If agreed, obtain approval to settle

If negotiations result in agreement in principle to a settlement amount, a recommendation for the approval of funds can be put to the agency for its decision. The recommendation should be supported by an assessment of principal’s liability and details of the negotiation process, which together provide an auditable trail justifying the settlement figure.

The deed of release

Once approved by the agency, the settlement is usually formalised with a legal contract referred to as a deed of release or supplementary agreement (see Formalise agreement if issue is resolved). This is signed by both parties to the initial contract. The deed will likely supersede sections of the initial contract.

Drafting the deed of release is a specialist activity requiring the input of experienced personnel – the deed may expose the principal to considerable risk. Minor incorrect wording or phrasing can have major financial consequences and can extinguish the contractual rights of the principal.

The contractor’s obligations under the contract, especially in relation to liability for faults in the works or services that may become apparent in the future, must be retained.

A standard deed of release is not provided since each agreement is unique to the individual contract, the contract status at the time of the settlement and the settlement itself.

The dispute manager arranges engagement of a legal adviser, with appropriate experience, to draft the deed of release. The deed of release must include all matters agreed to during the negotiations, that is, the list of matters agreed to by both parties in negotiation becomes the reference document for drafting the deed of release.

The project manager, project director and the agency must review the deed of release to ensure that all matters agreed to during the negotiations have been incorporated into the document and that the deed properly reflects the contract status.

Specific tasks by role

Project manager

• Provides information to the dispute manager, including copies of the contract documents, relevant communications and details of other related disputes or disagreements.
• Reviews updated position paper and provides input.
• Provides information to the negotiation team.
• Assists to formalise resolution if achieved.

Senior executive

• Continues to take part in the negotiation process if requested by the project director.
• Reviews updated position paper and provides input.
• May assist to formalise the resolution.

Dispute manager

• Responsible for managing the resolution process and resolving the dispute in a manner that achieves the 3 objectives of the dispute resolution process.
• Becomes familiar with the dispute resolution procedures set out in the contract, and ensures adherence to the contract processes and timeframes unless prior approval from the project director has been obtained in writing.
• Becomes familiar with all aspects of the dispute, any related disputes and any potential disputes. This involves reviewing all other relevant documents, including the contract documents and relevant communications and site meeting minutes, and interviewing the project manager and senior executive.
• Discusses the dispute with the contractor and gathers information from the contractor, when authorised to do so by the project director.
• Identifies additional specialist resources required during for the negotiation and expert determination strategies.
• Prepares updated position paper (as per Content of a position paper), including a negotiation strategy and an expert determination strategy.
• Forwards copies of the position papers to the CDRU for review if the criteria when developing a position paper are met
• Considers and responds appropriately to feedback on position papers from the project manager, the senior executive and the project director.
• Writes the briefs for additional specialist resources, reviews the fee proposals, makes recommendations for engagement of those resources to the project director, drafts letters of engagement and manages the engagements of those resources.
• Undertakes specialist tasks, such as programming reviews or legal reviews, if appropriately skilled, in the service of providing the principal with advice.
• Keeps the project director informed of any developments and updates the position paper if required: for example, in light of new information provided by additional specialist resources.
• Implements negotiation and expert determination strategies: the negotiation strategy may include the dispute manager conducting or assisting negotiations with the contractor.
• Recommends a form of assisted negotiation if appropriate and, if approved by the agency and agreed by the contractor, undertake all necessary tasks required to drive the selected process (see Forms of assisted negotiation).
• Drafts agency briefing notes as required.
• Reports on outcome of negotiation to project director.
• Formalises resolution if achieved (see Formalise agreement if issue is resolved): this may include managing the preparation of a deed of release (see Deed of release).

Project director

• Engages dispute manager.
• Reviews updated position paper, if requested.
• Selects the people to be involved in negotiation.
• Liaises with agency and obtains approval of strategies. Seeks approval for additional resources if required and engages resources.
• Monitors negotiation process and intervenes, if required.
• If negotiation is successful in principle, seeks agency approval of specific funds to settle dispute and of formalised settlement agreement.

Forms of assisted negotiation

The parties to the dispute may agree to choose to vary the dispute resolution path specified in the contract. However, this should be the exception, and caution is recommended when considering such a course. Even minor variations could have the effect of negating time bars within the contract, thereby reducing the principal’s defence options.

Two alternative dispute resolution paths are mediation and obtaining an expert opinion.

Mediation

Mediation is a process where an independent and neutral third party assists both of the parties to the dispute to reach a settlement.

None of the standard forms of contract for construction requires mediation. There is some debate within the dispute resolution industry as to whether mediation is well suited to resolving contract disputes.

However, when both parties consider mediation to be the most suitable dispute resolution process for their particular situation, the parties may agree to use a mediation process or some other form of assisted negotiation process to resolve their dispute. Such processes are usually jointly funded by the parties in dispute.

Agreement on the mediator and the mediation process

Before commencing mediation, the parties to the dispute must agree on the mediator and on how the process will operate, that is, the terms of reference and the limits of the role of the mediator. There are no universally agreed terms of reference for a mediation process.

By definition, mediation involves a neutral party to the dispute that does not give opinions. However, parties to a dispute may extend the concept and elect to engage an industry expert for this process to offer non-binding decisions during or at the conclusion of the process. This extension of the mediation concept is sometimes referred to as conciliation.

Advantages of mediation

The objective of the mediator is to ensure that each party’s point of view, concerns and grievances are heard and acknowledged. This enables each party to acquire a detailed understanding of the other party’s position.

The mediator assists the parties to focus on the needs, desires and interests of the other party rather than on their own demands or final offers. The mediator can assist the parties to develop options to resolve the dispute and then assist the parties to evaluate the options from each other’s and their own point of view.

Throughout the process, the mediator sets the standard of behaviour for the process and directs the parties away from obstructive behaviour such as placing blame or the continual interruption of the other party. In this way, the process is recognised as fair by each party. Mediation may allow the parties to the dispute to see more easily possible settlement options.

When to use mediation

Mediation may be appropriate when resolution by direct negotiation is considered unlikely due one or more of the following factors:

• there has been a souring of the relationship between the parties
• the parties have difficulty communicating with each other
• at least one of the parties holds an extremely entrenched position.

Mediation will most likely work if both parties are committed to a bipartite resolution and strongly wish to avoid a more expensive and time-consuming process, such as expert determination or litigation. However, if a party is committed to proceeding to expert determination, then mediation is an unnecessary expense and is unlikely to add value beyond a committed direct negotiation.

Obtaining expert opinion

Another dispute resolution option is to supplement negotiations with binding or nonbinding expert opinion. Some of the standard forms of contract for construction contain clauses to refer a disagreement over a valuation of a variation to an independent, jointly funded and usually jointly selected valuer.

This principle can be extended to engaging an independent programmer to determine the impact of numerous events on the overall program. Likewise, an industry expert with legal training could be engaged to provide an opinion as to whether there is an entitlement to a variation claim.

Obtaining expert advice is particularly useful where negotiations have become fixed on a single issue.

In expert determination, an independent industry expert makes a decision about the dispute. The contract prescribes the expert determination process, however it is recommended that fresh negotiations (level 3 negotiations) be implemented in parallel with expert determination.

A dispute manager is required to manage the substantial workload associated with levels 3 and 4 (see Select a dispute manager). Project directors must manage the costs associated with expert determination.

Expert determination was introduced into NSW Government contracts in the early 1990s. The NSW Government has found that expert determination generally results in satisfactory outcomes and is significantly cheaper and quicker than litigation.

The standard forms of contract for construction require the parties to refer unresolved disputes to expert determination. In other contracts, parties to the dispute can, at any stage, agree to have their dispute resolved through expert determination.

Experience has shown that experts focus on common sense, logic and facts, and do not require voluminous legal submissions (which do not necessarily correlate to improved outcomes and are frequently expensive).

Whilst expert determination is generally far less expensive than litigation, the costs can still be significant and include:

• costs of an industry professional with experience in preparing expert determinations, to manage the process and prepare submissions (this will usually be the dispute manager)
• costs of legal advisers with experience in construction contract disputes to assist in preparation of submissions and possibly to prepare sections of the submissions
• costs of technical experts such as quantity surveyors and programmers to prepare expert reports to support submissions
• costs of project personnel who may have to prepare statements, assist in preparing submissions or review submissions
• costs of the expert.

Given the unrecoverable costs involved in expert determination, well-informed, serious attempts at negotiation generally should be undertaken in parallel with the beginning stages of the expert determination process.

Typical initial trigger

The contractor or principal formally refers the dispute to expert determination.

Key actions at this level

Prepare thoroughly

The expert determination process requires a coordinated and managed strategy. Additional resources may be required: programmers, engineering or building consultants, and solicitors (see Engage and manage additional resources).

Engage an expert

Refer to the contract for specific details on the expert determination process. General information is presented here.

The parties agree on an expert within a specified timeframe. If they cannot agree, a specified independent body nominates one. The principal engages the expert, and both parties share equally the fees of the expert and bear their own costs.

Make submissions

The usual process is:

• The party, which referred the matter to expert determination, is required to make a written submission to the expert within, typically, 15 business days after the date of the expert’s engagement.
• Following receipt of the first party’s submission, the other party has a similar period to make its written submission to the expert, which may include cross claims.
• The first party then has, typically, 10 business days to submit a response.
• Then the second party has the same time to submit a final response.
• The expert considers the submissions and makes a determination, typically within 12 weeks of being engaged.

The expert’s determination is final and binding if the value is under a specified amount (often $500,000). Payment must be made, typically within 28 days.

If the determination is over the specified amount the decision is not binding and either party can choose to commence litigation.

Specific tasks by role

Project manager

• Contributes to the expert determination process as required.
• Reviews summary of determination and makes comment senior executive.
• Contributes to the expert determination process if required.
• Reviews summary of determination and makes comment, if required.

Dispute manager

• Undertakes all tasks specified outlined in level 3, plus the following additional tasks.
• Manages the expert determination process, including helping to select the expert, in consultation with the project director and the other party.
• Writes the expert’s letter of engagement and summary of dispute.
• Obtains the other party’s concurrence to the letter and summary. Submits the letter and summary to the project director for approval.
• Manages and usually prepares the principal’s submissions.
• Reviews and summarises determination and, if it is not binding, recommends whether it should be accepted or not and why.

Project director

• Provides input to the expert selection process.
• Obtains agency approval of proposed expert and additional specialist resources and engages resources, if required.
• Engages the expert.
• Monitors expert determination process and associated costs.
• Reviews summary of determination.
• Assists agency to make a decision to accept or reject the determination.

Litigation is an expensive and time-consuming process. Careful consideration is required before initiating litigation. When litigation is contemplated or appears likely, the dispute manager is to provide an updated position paper to the project director.

New negotiations, directed by the project director with advice from the litigation overview team, should commence as soon as practicable to attempt to resolve the dispute and curb accruing costs associated with the litigation process.

Whenever possible, settlement of disputes relating to construction should be achieved by using approved alternative methods of dispute resolution rather than resorting to the court system. Alternative methods of dispute resolution are often a quicker, more cost-effective way of satisfactorily resolving disputes.

However, litigation is preferred over arbitration – arbitration incurs similar costs to litigation. Potential litigation between government authorities is subject to the Premiers’ Memorandum 97-26.

Whilst generally seen as a last resort option by both parties, litigation is occasionally initiated by the contractor, and, more infrequently, initiated by the principal. For the principal it may well still be the most effective method of dispute resolution if:

• there is a very substantial sum in dispute
• there are substantial legal questions in dispute
• the dispute is a multi-party dispute, or
• there are substantial allegations of dishonesty.

The project director is ultimately responsible for engaging, briefing and giving instructions to the legal team as directed by the Agency, after input from the litigation overview team. Monthly, or quarterly reports as appropriate, are to be prepared on behalf of the agency.

Typical initial trigger

Decision is made to reject expert determination (if allowed under the contract, that is, the value is under a specified amount).

Key actions at this level

Establish a litigation overview team

The litigation overview team must include the project director, the dispute manager and a representative of the agency.

The focus of the litigation overview team will be to monitor the progress and cost of the litigation phase of the dispute resolution process and to provide advice to the project director regarding instructions that are required to be given to the legal team – the outcome of litigation is only as good as the instruction given.

Engage a legal team

The legal team receives instruction, provides legal advice, prepares for court proceedings and represents the principal.

Specific tasks by role

Project manager

• Contributes to the litigation process as required.
• Reviews updated position papers and gives advice on the issues as required.

Senior executive

• Contributes to the litigation process if required.
• Reviews updated position papers and makes comment, if required.

Dispute manager

• Updates the previous position paper, including the litigation strategy and a new negotiation strategy (both strategies would be devised in consultation with the project director).
• Further updates the position paper as required, incorporating input from the litigation overview team and the legal team as appropriate.
• Supports the litigation overview team and the legal team, including preparing detailed estimates and taking part in negotiation as required.
• Drafts agency briefing notes and prepares monthly or quarterly reports for the agency, as required.

Project director

• Reviews position papers, briefing notes and reports prepared by the dispute manager.
• Regularly informs agency of progress, provides advice to and takes directions from agency.
• Appoints litigation overview team as approved by the agency, provides up-to-date information to the litigation overview team and considers its advice.
• Engages, briefs and gives instructions to the legal team as directed by the agency, and receives advice and opinion from the legal team.