Construction industry development Act takes a U turn?

by Dr. Chandana Jayalath

Any construction project would encounter commercial, contractual, technical, interface or interpretative issues and in some instances, the parties are unable to resolve conflicts, may be because the contract is ambiguous or silent. As a result, disputes arise unless they are addressed at the earliest practicable opportunity.

Sizeable construction issues, claims and disputes make a considerable impact on the most needed harmonious relationship between the employer and the contractor. Claims once turned into disputes are expensive and time-consuming.

Employers suffer loss of income, problems with funding and delayed occupancy while contractors face financial instability due to delays in payments. There will be parallel claims against each other, such as time extension and liquidated damages, particularly when the parties are at extreme ends.

Disputes

The new Construction Industry Development Act has, in a couple of provisions, introduced a way of settling disputes related to construction activities by setting parameters in the form of a hierarchical gauntlet.

Accordingly, if the parties so desire any dispute relating to a contract for construction works, if it is not provided for in the contract, may be settled through conciliation or mediation.

However, there is 'ha-ho' among the stakeholders of the construction industry on the lack of care, misconduct and competency of the conciliators, whether in-house or external.

Among the allegations against them are the failure to attend to an agreed time frame and incompetence causing the parties to walk off at will.

Complaints also include incorrect advice, failure to prevent the parties making an unfair or unworkable agreement or failing to disclose to a party that they were threatened with harm in circumstances where it would be reasonable to expect disclosure.

Another complaint is that the conciliator made an unnecessary interference, applied duress or misled a party in some material way.

As with judges, conciliators have to act impartially and independently without fear and favour. Independence allows creativity and flexibility towards an amicable settlement. Lack of independence makes conciliating a given dispute an impossible task.

Hence, conciliators should be free to conduct conciliation as they think appropriate and should not have the fear of being sued for an error or future harassment. The Construction Industry Development Authority Act has failed to provide at least a quasi immunity status to conciliators, to enable them to avoid trial of a claim against them.

In England, and many other countries, judges retain absolute immunity for their independence in line with the policy to protect the citizen while extending the same to others engaged in the administration of justice such as witnesses, counsel, Court clerks, the jury and Court appointed mediators.

The Act also states that mediation is a free choice on the part of the disputants. It is the parties who choose whether to remain at the mediation proceedings and whether to enter into an agreement.

In theory, a mediator as a neutral, cannot influence the outcome of the mediation, exercises a non-determinative role and, therefore, there is no basis for mediator liability. The fact that the mediator is not responsible for the outcome of mediation is the very reason why they should not be liable for any actions based on the terms of any agreement entered into at the mediation.

Conflict

On this basis, it can be argued that mediators should also be immune from any civil action arising from the substantive outcome of the mediation for example unfavourable bargains or loss of opportunity.

Mediation with an evaluative orientation may be necessary whenever there is a monetary charge to the conflict and if the conversation becomes hostile or if the disputants are constantly repeating their positions, halting the progress of the mediation.

The evaluative style is also better suited for resolving disputes where one or more of the parties appear unreasonable or inflexible in its negotiating position.

It detects where the parties truly stand, drives the mediation forward and explores settlement possibilities from different angles and finally establishes a basis of amicable settlement, as exactly intended in construction mediation.

If mediation is to be a true form of dispute resolution, its underlying theory must also be distinguished from traditional Courts and other forms. Neutrality being a principle cannot however sacrifice fairness, in process and outcome.

'Neutrality' doesn't mean that the mediator does not have a point of view or even a solution which he feels would work.

Rather, neutrality in the mediation context means that the mediator is not supposed to impose his or her views on the parties.

Neutral is no good without subject matter expertise and construction clients do believe it is indispensable. The rationale is that the mediator brings industrial know-how and exposure that invariably benefits both parties.

As per the new Act, a party to any contract relating to an identified construction work, if unable to settle any dispute by conciliation or mediation by the Authority, that is CIDA, may refer such dispute for adjudication.

The Authority shall maintain a Register of Adjudicators competent to adjudicate disputes in the form and manner as may be determined by the rules made by the Authority. Two years ago, a pool of construction adjudicators was set up at the ICTAD.

Adjudication is a unique process for resolving construction disputes arising under construction contracts with the primary purpose of relatively straightforward fast tracked resolution.

In essence, adjudication is a process where a neutral third party gives a decision, which is binding on the parties in dispute unless or until revised in some other manner such as arbitration or litigation.

The binding effect of an adjudicator's decision is made clear in Standard Bidding Documents issued by the ICTAD.

An adjudicator's decision continues to be of effect even though a party has applied for arbitral review of the decision or any other proceeding has been launched.

While it can be seen that adjudication does not necessarily achieve a final settlement of any dispute because any of the parties has the right to have the same dispute heard afresh and determined in arbitration if the contract provides for it, the empirical evidence to date indicates that the majority of adjudication decisions have been accepted by the parties as the final result.

Adjudicators are allowed to conduct proceedings as he or she sees fit within a procedural and ethical framework. The role of an adjudicator is wholly different from that of a solicitor who prepares a client's case for trial.

The solicitor prepares a one-sided case for argument in Court. The adjudicator, on the other hand, has to read the files, interview the parties, visit sites and then arrive at his decisions. The adjudicator has to provide reasons for his decision, unless otherwise stated.

It does not, however, state that reasons should be part of the decision, but could be provided separately to the decision. The adjudicator shall adduce evidence or invite technical arguments from the parties by asking questions either at a hearing or in correspondence, giving both parties the opportunity to answer.

Hence, the adjudicator has an inquisitorial role by ascertaining the facts and the law. The adjudication process is relatively simple and robust. However, time constraints on all parties and the adjudicator and the consequences of any failure to comply with those constraints may be severe.

An Appeals Board has been introduced in the Act for those who are not satisfied with the adjudicator's decision. An Appeals Board consisting of not more than seven members will be appointed by the Minister upon the recommendation of the Authority.

All members of the Appeals Board shall be qualified persons as specified in this Act with not less than twenty years of experience in the field of construction.

Any person who is aggrieved by a decision of the Authority may appeal to the Appeals Board in the manner as shall be prescribed.

After the hearing of an appeal, the Appeals Board shall give its decision within two months from the date on which such appeal was received by the Appeals Board and may confirm, vary or reverse the decision appealed against.

The decision of the Appeals Board and the reasons, therefore, shall be notified in writing to the appellant and the Authority.

Any person aggrieved by the decision of the Appeals Board in respect of any appeal may appeal against such decision to the Court of Appeal within thirty days from the date on which the decision and the reasons, were notified to the appellant.

What is apparent with the foregoing is a way towards the Courts of Law away from conciliation, without a stopover at any arbitral tribunal that has been in practice over five decades.

The Arbitration Act of Sri Lanka No. 11 of 1995 provides for a legislative framework for the effective conduct of arbitration proceedings and the mechanism for the enforcement of arbitral awards thereby making arbitration a viable and expeditious alternative to litigation for the resolution of commercial disputes.

As stated in the preamble to the Act, one of its objects is to make legal provision to give effect to the principles of the convention on the recognition and enforcement of foreign award of 1958 (The New York Convention), following to a great extent, the UNCITRAL Model Law.

The Sri Lankan Arbitration Act states that by an agreement any dispute can be determined by arbitration unless the matter in respect of which the arbitration agreement is entered into is contrary to public policy or is not contrary of determination of Arbitration.

The dispute resolution clauses given by ICTAD specify periods within which certain acts such as appointment of arbitrator have to be made. The Arbitration Act does not specify time limits to carry out such acts.

DAB

FIDIC Condition 1999, that has been acclaimed internationally, has introduced the Dispute Adjudication Board (DAB) system as a pre-arbitration need.

Accordingly, disputes between employer and contractor should be referred to the Dispute Adjudication Board as a pre-arbitral step before reference to arbitration clause 20 of FIDIC 1999.

When there is no settlement before the DAB, the dispute can be referred for arbitration. Due to the nature of some contracts, the involvement of more than two parties in a single dispute can be seen, e.g. involvement of employer, contractor and number of sub-contractors in construction contracts and disputes relevant to them.

Arbitrators may keep away from giving written reasons for the award and the final decision of the arbitrators will be a valid award.

However, if the parties do not agree, the arbitrators will give reasons for the award under Section 25 (2) of the Arbitration Act of Sri Lanka No. 11 of 1995.

One of the serious criticisms levelled against arbitrations in Sri Lanka is the time factor. The arbitration agreement incorporated in the ICTAD contract under clause No. 67 stipulates that the period within which the award should be made is four months.

Although the Arbitration Ordinance of 1948 stipulated three months, the present Arbitration Act does not specify a time limit. Parties are free to fix a desired period for proceedings.

According to the arbitration agreement recommended by ICTAD, the period for commencement of arbitration may take a maximum of 90 days and in accordance with the FIDIC documentation, the maximum period to appoint an arbitrator is 154 days.

Hence, the time factor remains a major drawback in the arbitration process. However, there is no clear reason as to why the new Act did not pursue arbitration although Sri Lanka is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The Act of CIDA provides that any person aggrieved by the decision of the Appeals Board in respect of any appeal, may appeal against such decision to the Court of Appeal within thirty days from the date on which the decision and the reasons, therefore, were notified to the appellant.

Inter-alia the Courts' primary role is to make, interpret and define law and safeguard the public interest and social values.

Courts interpret what the documents depict in terms of true intent the parties had in their minds at the time they entered into the contract. Courts may eventually rely on court-appointed experts in the context of highly technical issues, ultimately generating a vicious circle of dispute resolution.

For any alternative method to be truly voluntary, Courts should use discretion only when the will-power of the parties remain.

The outcome would still vary on the Court's persuasiveness such as any sanction that makes participation and conduct of the process obligatory which will restrict the choice of the disputants.

Methods

On the other hand, Courts should be sensitive when power imbalances exist, not necessarily to protect the parties' rights but to leave enough room for self-determination.

When tapping the potential of these techniques, Courts should first test the appropriateness, resistance and willingness before encouraging and facilitating dispute resolution.

It will help secure key characteristics of alternative methods such as participation in good faith, autonomy, choice and self-determination.

On the contrary, mandating alternative means without consent of the disputed parties or court connected means with imposed rules such as strict deadlines may dictate the outcome and prejudice the aim of laissez-faire amicable settlement.

What the parties need is, therefore, something that works well, indeed works faster, cheaper and in a much less contentious manner than traditional tribunals.

Parties strongly believe in a process in which the parties retain the right to decide the outcome of the dispute rather than a Court order or an Appeal Board decision.

Under such circumstances, the Act would have allowed an extracontractual opportunity for the parties to revisit their concerns at any point of the settlement gauntlet, for example a third intervention, a neutral approach where the lay employer refers the matter to a third neutral who will first evaluate the case independently and recommend a solution or option that best fits the party's needs, yet within a contractual framework.

Fair assessment

For example, in Qatar, today, the parties seek a nominee to review the disputed issues and consider it an extra 'contractual' opportunity to get their disputes settled at the employer's level. Such an arrangement in fact avoids the formalities in arbitration or litigation in toto.

Almost all the cases have been successfully handled within a contractual framework as mentioned, taking all the circumstances into detailed consideration, resulting in fair assessment acceptable to all the parties.

Accuracy, accountability, short response time, cost and time savings, increased awareness of the issues and increased dependency could be a reflection of success, as a dispute mechanism.

Parties who act in good faith are likely to comply with a recommendation just as they would accept a decision anyway.

At present the District Courts in Sri Lanka and the two Commercial High Courts in Colombo are unable to cope with the large volume of cases.

The result is that Courts are not in a position to dispense justice expeditiously to litigants who have sought recourse to the Courts.

Construction claims tend to be of the most technical nature - intensive and multifaceted than most other commercial disputes.

The construction industry needs a fast and cost effective means for dispute resolution.

The Act should have given enough emphasis on the concept of 'internalising' disputes via mediation instead of focusing on traditional, highly formal and rigid procedural techniques.