MODULE IX: DISPUTES – HOW TO MANAGE THEM, BUT BETTER STILL, HOW TO

PREVENT THEM

Presentation of Claim by Contractor

Well conceived, well presented realistic submissions, based on a clear understanding of

the Contract forwarded as soon as possible after the circumstances giving rise to the
claim will speed the resolution including any consideration of interim payments. The
converse will, of course, apply.

The Contractor should be prepared to provide all written evidence and records that the
engineer may reasonably require to establish the validity of the claim. If the claim has
ultimately to be referred to arbitration the respondent will have the right to demand such
evidence. This applies in particular to the contractor's pricing notes, which are often
considered by the contractor to be confidential but which would nevertheless have to be
produced at the discovery stage of an arbitration or legal action. The contractor may,
not unreasonably, require that any confidential information submitted in support of a
claim is used only for that purpose and is not disclosed to third parties.

Claim Calculations

The "Heads of Claim" should be firstly stated.........Typical items for which the
Contractor may seek reimbursement are .....

(i) Prolongation of Preliminaries Costs

This may include Site Management, Site Accommodation, Plant & Scaffolding, which
may be chargeable on a Monthly or Weekly basis.

(ii) Disruption

This may include additional labour costs to carry out the work in a different sequence or
under different conditions to those tendered for. A delay may also extend the contract
into a winter period with its associated disruption, etc, for example groundwork
externally, without the delay, may have been completed before the winter. In order to
prove these costs, the Contractor will need to show how his Original Tender was
calculated, and relate this to his actual work sequence and associated costs. It should
be noted that many Contractors might seek to recover additional costs due to their own
failings via this section which they are clearly not entitled to do!

(iii) Fluctuations in Cost of Labour, Materials or Plant.

The Contractor will have made assessments of likely increases over the Contract
Period, but if this period is extended he is entitled to recover any additional costs he has
incurred.

N.B. Particularly during a recession there may also have been decreases!

(iv) Increased Insurances, Bond, etc.

If the Contract Period is extended the Insurance risk and cover period will also be
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extended. Bonds normally apply for a block period such as a year or six months, so
care must be taken in calculating and checking this element.

(v) Prolonged Head Office Costs.

In addition to the Direct Site Costs incurred in Item (i) there may also be Head Office
Costs such as Project Managers, Quantity Surveyors, Secretarial Staff, etc. including a
proportion of Rent, Heating, and Lighting Costs. This is a very difficult cost to assess,
particularly when the Head Office supports a number of Projects, so normally a
theoretical calculation such as the Hudson Formula is used.......

Percentage Head Office Overheads/Profit x Contract Sum x Delay in Weeks

100 Contract Period

or more rarely the Emden Formula......

Total Overheads/Profit x Contract Sum x Delay in Weeks

Total Turnover Contract Period

or even more rarely the Eichleay Formula......

Contract Invoices x Total Overheads/Profit x Contract Sum x Delay in Weeks

Total Invoices Contract Period

(vi) Finance Charges

The Contractor may also be involved with financing elements of the Project, such as
later release of retention due to delays, etc.

(vii) Cost of Claim Preparation

The cost of preparing a claim is not a legitimate head of claim and must be covered by
the Contractor's Overheads. The reason is that under the JCT Forms of Contract the
Contractor is not required to make a detailed Loss and Expense Claim, merely to
furnish such information as the Architect may require to assess loss and expense. In
practice however, a well prepared and well documented claim will repay the Contractor
in terms of recovered amount and will also speed up the settlement of claims.

Notice of Submission of Claim by Contractor.

• Detail circumstances and events giving rise to claim.

• Explain why it is considered to be the Employer's liability.

• State Clauses of Contract under which the claim is being made.

Documentation :-

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 • Records to substantiate additional costs.

• Details of original plans,

• Extracts from tender, contract and/or actual programmes.

• Detailed calculation of entitlement with relevant substantiating information and

documentation.

Consideration of Claim by Contract Administrator

• If the claim is acceptable in principle notify the Contractor accordingly.

• If the claim is unacceptable notify accordingly.

• If further information and/or elucidation required say so promptly.

• Arrange for the keeping of agreed records. These are not necessarily
admissible but an agreed statement of fact taken at the time.

• If acceptable in principle certify promptly such monies as can be

properly substantiated.

• If not certifying in full state so with reasons and add what further
information would justify reconsideration if this is appropriate.

• Ensure that all information required for verification is obtained from the
Contractor and dealt with promptly to ensure that the Final Certificate can be
issued.

Problem Avoidance

(a) Tender Documents.

It is generally found that an appropriate contract strategy together with a competent,

robust, and unambiguous tender document is the key to avoiding or minimising
contractual problems. The tender documents should clearly set out the respective
responsibilities of the parties to the contract in clear and unambiguous terms with a
clear definition of risks and which party is carrying which risk and how. Any physical,
financial or time constraints should also be set down with any required parameters.

(b) Administration of Claims.

During construction it is understandable that the Contractor has to register the

possibility of a claim (if he is not to prejudice his rights or prejudice its consideration)
though he may subsequently not pursue it.

Claims should not be put aside to be dealt with later, in the hope that they may go away,
the facts tend to be come obscured (particularly with the dispersal of staff) and attitudes
tend to harden. In short claims do not improve with keeping.
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(c) Changes during construction

The cause of claims generally lies in the effects of change. This may be due to
unforeseen conditions or unexpected events or imposed change such as change in the
works to be carried out i.e. variations.

The Conditions of Contract recognise that unforeseen conditions can arise and have a
contractual mechanism to deal with the effects of that situation. Imposed changes are
generated by the issue of variations, but too often only the direct cost issues are
considered and little attention is given to the delay and disruption effects of the changed
work. This can often be mitigated by discussion with the Contractor prior to the issue of
the variation.

It is important that when a Contractor notifies a claim that he is required to state the
clause in the Contract under which he considers he has an entitlement. If the Architect
agrees then this establishes the procedures for the evaluation of that claim. If this
cannot be established then it is possibly a claim that is founded in a breach of contract,
is outside the Contract and therefore cannot be administered by the Engineer.

(d) Communication.

Communication and poor claims administration are still seen as significant problems in
most disputes. It is important that the procedures and spirit required by the contract are
followed and that the parties demonstrate that they are actively seeking resolution of the
matters in dispute.

(e) The Keeping of Records.

A prerequisite to problem avoidance is for the parties to understand the contract and be
clear as to their respective obligations and responsibilities. It has also been said that
every dispute should be considered at the time as though it were going to arbitration or
litigation.

Probably the most usual reason why many potentially valid claims are abandoned is the
claimant’s failure to maintain adequate records of events or costs. Without proper
relevant and contemporaneous records, the evidence needed to establish the claim is
not available, the claim is doomed and the proceedings become fractious.

It is vital that comprehensive records are kept so that the Contractor can substantiate
claims and also that the Architect/Employer can defend them in the event that they
arise.

These can include:

1. Correspondence
2. Instructions
3. Programmes (Planned versus Actual)
4. Site Diaries
5. Site Meeting Minutes
6. Photographic Evidence
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7. Meteorological Records

In the event that the claim proceeds to adjudication, arbitration and/or litigation, then
proper records are absolutely vital to prove a case.

Good records are fundamental to the resolution of claims. As soon as the Contractor
becomes aware that he has, or may have, a claim under the contract, he must ensure
that full and detailed records relating to the history of the claim are prepared and
maintained throughout the period during which conditions giving rise to the claims
remain in existence. These records should be submitted to the Architect for his
agreement. Where the Architect refuses or fails to check the Contractor's records (can
happen) that fact should be recorded by the Contractor.

An Architect's refusal to agree records, usually where he does not admit the existence
of the claim does not help his client if there is a valid claim. If the claim is ultimately
referred to arbitration, the arbitrator can only consider the evidence before him. Where a
Contractor has maintained accurate and contemporaneous records, which the Architect
has refused to check or agree, it may be difficult for the Architect to produce convincing
evidence to refute the claim. Where, as is often the case, the Architect maintains a
separate set of records a problem will arise, if and to the extent that, they are different to
the Contractor's.

In such a situation, the arbitrator can only weigh the evidence before him and decide
which is the more convincing. The fact that the Architect refused to consider the
Contractor's records would, in all probability, weigh in the Contractor's favour.

There is no logical reason not to agree a set of contemporaneous records of events or

any contentious issue. These records can be qualified if the claim at that point in time is
not admitted or for any relevant reason.

(f) Agreeing Cost and Price.

The issue of agreeing cost is quite clear in that the Contractor must provide whatever
information and records are necessary to reach that agreement. What is more
problematical is contractors are often reluctant to provide proof of overhead and profit
levels included in the contract. There is no reason for the pricing notes not to be made
available and their confidentiality recognised. If the dispute goes to arbitration the
pricing notes would be subject to discovery anyway.

In establishing rates for changes or additional works the contract requires contract
rates, or rates based on contract rates, should be used wherever possible. It is
insufficient, however, to use rates where the item description is the same without taking
into account the circumstances under which the changed work was carried out.

All too often the disruptive effects of changed or altered works is not recognised. It is
appropriate to analyse the constituent elements of the relevant rates and adjust those
elements to reflect the new requirements (including differences in location, timing,
sequence etc. and both quantity-related and time-related costs).

Cost information is a matter of record in most cases particularly in relation to labour and
materials. Plant costs can cause difficulty particularly with contractor-owned plant or
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plant on internal company hire. The Contractor may seek to charge daywork rates or
internal hire rates, both of which may be inappropriate.

Summary

Claims

Claims are often seen as an inevitable consequence of working in the construction

industry. They are not inevitable and can be avoided by some simple rules :

(i) Clearly state in all tender and contract documentation what is required of all
parties.

Claims often arise because the parties are not aware of their
responsibilities.

(ii) Communicate effectively with all parties.

Claims usually escalate when the parties do not speak to each other!

(iii) Put everything in writing, in the event that a claim arises you have documentary
evidence to support or dismiss it. Every claim submitted deserves some time
spent in analysing and constructively responding to it. Rarely is a claim totally
fictitious or unwarranted, but the onus is upon the claimant to prove a loss, not
for the recipient to disprove it.

Claims usually fail because the claimant does not have factual evidence of
his claims or did not give proper written notification at the time of the
problem.

Dispute Resolution Procedures

Settlement of Disputes

It remains to be considered what action can be taken should the normal negotiation fail.
Currently four courses are open, mediation, adjudication, arbitration or litigation. It is a
term of the contract that disputes be referred to mediation, adjudication or arbitration, so
recourse to litigation will not usually arise in relation to a contractors claim although if
there were matters outside the terms of the contract then litigation may be appropriate.

Pre – Proceeding Considerations

If every endeavour has been made to settle a dispute by negotiation the reasons for
recourse to further proceedings should be closely examined. Considerable costs can be
involved by both parties in the preparation for the proceedings and these should be
taken into account when making the decision to proceed particularly, if there is a limited
chance of success and the costs of both parties are borne by the loser. Generally it is
more appropriate to proceed to arbitration or litigation only where a large sum is at stake
or there are legal principles involved.

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Mediation

• Written submissions are made to the appointed mediator and other parties.

• The mediator may, by giving notice to both parties, visit the site to inform
himself in any way he thinks fit to inform himself of the nature and facts of
the dispute.

• Similarly the mediator may call a meeting.

• The mediator will prepare his recommendations, render his fee account to
both parties, when paid in full he will deliver his recommendation to both
parties.

• The mediator shall not be appointed arbitrator on this or any matter

connected with this contract unless agreed by both parties.

Arbitration

Any dispute between two or more parties can be resolved through the Courts, a process
known as litigation. However, litigation has many disadvantages, not least the cost of a
full court hearing and in many cases a number of years waiting time before the matter
actually reaches the Courts, so in recent times arbitration has been increasingly used as
a simpler, more convenient method of dispute resolution.

Arbitration is a procedure for the settlement of disputes, under which the parties agree
to be bound by the decision of an arbitrator whose decision is, in general, final and
legally binding on both parties. It is governed by both statute law and the common law.
The Arbitration Act 1996 forms the principal legislation governing arbitration in England
and Wales. Different provisions apply in Scotland and Northern Ireland. The arbitrator
may be a lawyer, or may be an expert in the field of the dispute. He will make a decision
according to the law. The arbitrator’s decision, known as an “award”, is legally binding
and can be enforced through the courts.

Arbitration is not a new concept, in fact it has been in existence for almost as long as
the law itself, the first official recognition being the Arbitration Act 1697, which largely
governed disputes about the sale of livestock.

One does not issue writs in arbitration as one would with litigation, BOTH parties merely
agree to enter into Arbitration and thus be bound by the decision of the Arbitrator.
Arbitrators are appointed by one of THREE methods :

(i) As a result of a pre-agreed decision between the parties to go to arbitration in

the event of a dispute.

(ii) In this case the Arbitrator himself may be named or subject to nomination by,
say The Chartered Institute of Arbitrators.

(iii) By Statute e.g. under the Agricultural Holdings Act (1984) disputes about
tenancy agreements are settled by arbitration.
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 (iv) By Order of a Court.

There are THREE primary arbitration bodies in the UK :-

(i) The Chartered Institute of Arbitrators.

(ii) The London Court of International Arbitration.
(iii) The London Maritime Arbitrators Association.

The Arbitration Acts are fairly brief and set out procedures in the absence of any
agreement to the contrary between the parties. As arbitration is a more flexible
arrangement than litigation, whatever procedure both parties agree on, then that is
sufficient in an arbitration case.

It may be surprising to hear that arbitration is common as a settlement procedure for

disputes under trade agreements, maritime and insurance, consumer matters such as
package holidays, construction industry disputes and property valuations.

The contracting party that initiated that the dispute be referred to arbitration is always
referred to as the "Claimant", whilst the other party is referred to as the "Respondent".
Should there be a Joint Agreement to go to arbitration, the arbitrator will decide who is
the Claimant, and who is the Respondent. It is important that these titles are clarified as
the arbitration rules repeatedly refer to them.

There are several advantages in using Arbitration rather than Litigation :-

(i) Privacy

In litigation, private and personal matters are debated in full view of the public in open
court, and often published in the press and technical magazines, whereas arbitration is
carried out in private sessions, usually at the arbitrator's office or home.

(ii) Convenience

Arbitration is carried out at a time and place to suit the parties, for example evenings
and weekends, not when the court is available for session.

(iii) Speed

The dispute is settled efficiently without the normal delays and procedural matters
involved in litigation, not least the waiting time before actually getting into court.

(iv) Simplicity

There are fewer technical procedures than in the courts, the parties set their own
procedures within a set of ground rules.

(v) Expertness

The arbitrator will be an expert on the matter in dispute, for example an Architect where
the dispute is about building design, whereas judges and other legal professional are
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experts only on principles of law. The dispute will often not hinge on a legal problem, for
example in matters of design who better than a designer to resolve it?

(vi) Thoroughness

Because the arbitrator is a skilled technical person, the dispute can often be dealt with
more thoroughly and matters more rigorously aired than in a confined and formal
courtroom atmosphere.

(vii) Expense

It can readily be seen that arbitration is generally a less expensive option than litigation,
though it must not be seen as a cheap way to resolve a dispute. In some complex cases
where experienced arbitrators demand £350+ per hour, arbitration can be even more
expensive than litigation.

It is worth mentioning at this point that legal aid, which can be available for litigation is
not available for arbitration.

The main disadvantages of using arbitration rather than litigation are :-

(i) Lack of Legal Knowledge

A dispute may hinge on a difficult point of law, which the Arbitrator has insufficient legal
knowledge to resolve, as he is an expert in the field relating to the dispute, not in the law
itself. He is, however entitled to seek legal advice on a point of law, but not on the
dispute itself, and also the disputing parties can refer a question of law to the High
Court.

NB The arbitration award itself cannot be referred to the Courts unless BOTH parties
consent, or the Courts are referred to on a point of law, the resolution of which could
substantially overturn an arbitrator's decision.

Further, arbitrators cannot be sued for negligence as they do not hold themselves up as
"experts" in the sense of being advisory bodies and therefore liable for giving wrongful
advice.

(ii) Precedents

Arbitration is not subject to rulings in previous cases as with the courts, each case being
judged on its own merits on the day, and also to some extent subject to the personality
of the arbitrator, therefore you have no guide as to how successful you may be with
your action. It is prudent to always seek professional advice before resorting to
arbitration as whilst it is simpler than Court action, the Arbitrator's decision is final and
binding therefore you must be confident that you have a strong case.

(iii) Decision Making

There is a criticism that whilst Arbitrators, being technical people tend to be fairer than
lawyers, they also tend to sympathise with both parties and split the difference between
the parties when making their awards as they have possibly been in a similar position
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themselves, but judges are inclined to take colder decisions and award wholly in favour
of one of the parties. This can be bad in that very few parties are entirely guilty or
innocent, but also parties may "try it on" knowing that they are likely to emerge with
something if not the full amount they had originally claimed!

Notice of Reference to Arbitration

Proceedings may begin by either party sending a written notice to the other stating that
they wish to refer the dispute to arbitration, and if they cannot jointly agree on a person
to act as arbitrator, the Appointer named in the contract, usually a professional body will
appoint the Arbitrator. Any correspondence flowing between the two parties as from the
date of appointment must then also be copied to the Arbitrator.

Within 21 days of the Notification Date i.e. the date the Arbitrator writes to the parties
accepting the appointment, a Preliminary Meeting is held between the parties at a time
and venue to be directed by the Arbitrator to decide the Form of the Hearing which may
be on a documents only basis or an oral hearing. Documents only tends to be cleaner
and quicker as there is less opportunity for the parties to debate the issue.

The Role of the Arbitrator

The role of the arbitrator is only to examine the evidence before him enabling him to
resolve the dispute, and nothing more, he cannot look into other matters not in dispute.
He can conduct the Arbitration as he wishes, though he must gear the procedures in a
way that is not detrimental to either party.

He must also have a regard for the rules of evidence....

For example..........

(i) Hearsay evidence is not permissible

(ii) He is not permitted to use evidence from someone not qualified to give such
evidence

(iii) The Arbitrator is not allowed to take into account any evidence he has
discovered himself, which was not provided by either party

(iv) He is not allowed to use any privileged evidence, for example that which is
marked "Without Prejudice"

(v) The rules of discovery apply where either party is entitled to have access to
the file or documents of the other provided that it relates to matters at issue.

The Hearing

At the Hearing, the parties are entitled to legal representation should they wish, though
they should be made aware that the Arbitrator has the power equivalent to a judge in
litigation. The Arbitrator commences by introducing the parties and summarising the
dispute itself. Then the Claimant or his legal representative is invited to outline his
version of the dispute and his party's involvement, emphasising any matters which he
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feels may be important. The Arbitrator may also invite the Claimant to call witnesses,
though they must firstly be sworn in under oath, and both the Claimant and the
Respondent must have the opportunity to cross examine them, in addition to the
Arbitrator should he so wish.

The Respondent or his legal representative is then invited to outline his version of the
dispute and his party's involvement, emphasising any matters which he feels may be
important. Again, witnesses may appear, with the same provisos as before.

Finally, the Respondent makes his closing speech, followed by the Claimant, following
which the Arbitrator closes proceedings and advises the parties as to when he will make
his award.

Inspection by the Arbitrator

The Arbitrator is entitled to inspect any property, work or material at any premises, and
may invite the Claimant and/or the Respondent to accompany him purely for the
purpose of identifying the work or materials. No-one else is allowed to accompany the
Arbitrator unless he specifically invites him.

The Award

The Award is binding upon both parties and must be served in the appropriate manner
with full headings, summary of issues in dispute, outline of events leading to the
dispute, his decision based on the hearing and finally the monetary award.

Arbitrator's Fees and Expenses

In all of the above cases both parties will normally incur costs, though it is the
Arbitrator's decision as to how the costs are apportioned. Both parties are initially liable
to the Arbitrator for payment of his Fees and Expenses, but the Arbitrator will direct the
parties as to the proportion they are liable for once the decision is reached. Should the
parties agree on a settlement of the dispute at any time during the Arbitration, they will
jointly be liable for the Arbitrator's Costs.

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