PROACTIVE MEDIATION IN HONG KONG'S CONSTRUCTION INDUSTRY
- THE DISPUTE RESOLUTION ADVISOR (OR “DRA”)

Disputes in Construction

During the past 20 years or so in the Hong Kong Special Administrative Region of China, disputes have unfortunately become a normal part of construction.  In fact the attempted resolution of disputes has developed into an industry all of its own.

Disputes in Hong Kong's construction industry are caused by problems which are typical of many construction industries around the world such as

• increased competition resulting in declining profit margins;
  
  
• onerous contract terms;
  
  
• erosion of contract administrators' independence and impartiality; and
  
  
• decline in professional standards.

The enormous interest of quantity surveyors and engineers in obtaining membership of the Chartered Institute of Arbitrators in quite amazing when one considers the sharp decline in the standards of professionalism in those professions when it comes to valuing variations, assessing claims and granting extensions of time.

Is it just a coincidence that the growth of the dispute resolution industry has happened during a period when professional standards have declined? I think not. I believe the two are very much related.

Many years ago, the administration of building and engineering contracts was in the hands of independent Architects, Quantity Surveyors and Engineers in whom contractors had trust and confidence. Times have changed and very few (if any) contractors have confidence in the independence of contract administrators who, after all, are paid by employers, not contractors. In these days of commercial pressure it is very much the case that "he who pays the piper calls the tune".

The construction industry is probably the most complex of all major industries. Every project has its own individual characteristics. Contracts, even as detailed as most construction contracts are, cannot (and never do) cover every eventuality by express terms and this inevitably leads to differences of opinion.

Most arguments are often left until the end of a project to resolve. Since memories (often conveniently!) fade, disagreements, which might otherwise have been resolved if dealt with at the time, often produce disputes in which both parties (or several parties, where sub-contractors become embroiled) become firmly entrenched in their views, particularly where budget expectations are not compatible with one another or reality.

Traditional solutions

Traditionally construction disputes have been resolved by litigation or, as is more often the case, by arbitration.

As many parties have found to their cost, particularly those who have been all the way to the old Privy Council, litigation can be a nightmare.

Arbitration is even worse. One might say a gamble! How many judges of first instance make a wrong judgement only to see it overturned in the Court of Appeal? There must be a significant risk that an arbitrator, particularly one without sufficient legal training, is going to make a wrong award. Even if this happens there is normally no right of appeal.

New solutions

More recently, mediation has been introduced into Hong Kong Government contracts with a great deal of success. However, it is probably the case that most disputes which are settled by mediation could have been avoided in the first place. Also, those disputes which are not settled by mediation might have settled had they been subjected to the skills of a mediator at an early stage before the parties became entrenched in their views.

Adjudication, which appears to be the preferred method of dispute resolution in the UK, is rarely practiced in Hong Kong.

The first organization in Hong Kong that appeared to have recognized the problems in the construction industry sufficient seriously to actually take proactive action in an attempt to avoid such problems the Architectural Services Department  ("ASD") of the Government of the Hong Kong SAR who launched the first pilot scheme involving the appointment (jointly by the contractor and employer) of a Dispute Resolution Advisor.

Dispute Resolution Advisor ("DRA")

The term "Dispute Resolution Advisor" or "DRA", as used by the ArchSD is perhaps misleading. Advising on dispute resolution processes is in fact not the prime role of a DRA and would, if required, represent a failure of the principal objective of the DRA system which is dispute avoidance.

Where it is to be adopted, the requirement for a DRA is actually written into the dispute resolution clause in the Contract as follows:

“In order to foster co-operation between the Employer and the Contractor and among Specialist Sub-contractors who will be engaged for the execution of any part of the Works, to minimize the volume of claims, disputes and disruptions to the Works, and to ensure the cost-effective and expeditious resolution of those disputes that do arise, the Dispute Resolution Advisor (DRAd) system, as set forth in this Clause, shall be implemented."

Background to the DRA system

In view of the increase in claims from Contractors and disputes in the 1980s and costly arbitration proceedings, the DRA system was introduced into ASD (as it was then called) as a pilot scheme in 1991 with procedures being formalised in 1995.

The system was developed as a combined dispute avoidance and dispute resolution process embodying partnering techniques to encourage joint problem solving, party control through mediation, dispute review board type evaluation and short form arbitration.

The objectives of the DRA system are:

• to encourage cooperation and joint problem solving to prevent disputes arising;
  
  
• to resolve disputes, which do arise, at site level;
  
  
• to resolve any disputes, which are not settled at site level, quickly and cost effectively; and
  
  
• to ensure that all disputes are resolved during the life of the project.

DRA appointment

Since the DRA is expected to take an active role in dispute avoidance and dispute resolution, candidates for appointment as DRA should possess detailed knowledge and experience in dispute resolution, particularly mediation or conciliation. It is also essential that they should have suitable professional qualifications and experience in construction.

The DRA is appointed jointly by Government and Contractor. ArchSD has a list of approved persons many of whom were originally drawn from the Hong Kong International Arbitration Centre's list of construction mediators.

The Contractor selects 5 potential DRAs from ArchSD's approved list and includes these names in its tender. Often, contractors will seek quotes from potential candidates to assist them with their estimate of the likely cost of a DRA to be included in their tender.

Following contract award, the 5 candidates for appointment as DRA are asked to submit:

• a Technical Proposal setting out ·

          -  the intended scope of the candidate's appointment;

          - details of the services he intends to provide;

          - what additional staff he might need to assist him;

          - the facilities and staffing to be provided by his Employers (i.e. Government and the Contractor); and

          - any special conditions of appointment.

together with :

• a Financial Proposal setting out details of his fees.

The DRA is then jointly selected by agreement between Government and Contractor through a ranking system whereby each party ranks the list of candidates whose technical submissions are satisfactory in order of preference with the preferred candidate receiving the lowest number. The lowest combined number is then chosen.

Upon appointment the DRA is normally expected to call a meeting of the respective project teams so that he can introduce himself, meet the members of the project teams and explain the DRA system and the role of the DRA. This is important as it is crucial that all members of the project team understand the purpose of the DRA system.

Scope of DRA Appointment

The role of the DRA is governed by the terms of a tripartite Agreement between the DRA and the Employer and Contractor. The services to be provided by the DRA are set out in that Agreement and the Contract between the Employer and Contractor, in particular the dispute resolution clause of the Contract, which is also incorporated in the DRA Agreement.

Unless the Employer or Contractor decide to terminate the Agreement beforehand the tenure of the DRA's office lasts until the issue of the Completion Certificate unless :

• both parties agree to extend the duration; and/or
  
  
• there is a dispute that is in the process of being resolved.

The DRA has an obligation to act fairly and impartially as between the Employer and Contractor.

The DRA is not appointed to act for either party against the other and such appointment makes no difference to the parties' respective obligations to act in accordance with the Contract.

The DRA's fees are shared equally between the parties. The fees are in consideration of the DRA being in a position, by familiarising himself of all relevant information, to advise each of the parties on how to avoid disputes and to facilitate the smooth exchange of views to avoid and resolve problems by mutual cooperation. For example, if the DRA notices that the Architect is late in providing information or giving approvals which the Contractor requires then he would advise the Architect of the potential consequences of any continuing delay and discuss with him how the potential problem might be avoided. As a further example, if the DRA notices that the Contractor is falling behind programme with his submissions then he would advise the Contractor of the potential consequences and encourage him to mitigate or avoid any delay to progress. Where such potential problems require the cooperation of both parties to resolve them, the DRA should act as a conduit for the exchange of ideas and joint problem solving.

The DRA would become familiar with what was happening by attending progress meetings, reading correspondence, minutes of meetings, talking to members of the project teams and so on.

Nothing that is said to the DRA and no information which is given to him are intended to or should in any way prejudice the positions of either Employer or Contractor. Insofar as the Contract allows, everything said to the DRA in confidence should remain confidential. Whilst he will act as Mediator in any dispute, he cannot act as Arbitrator. Furthermore he cannot be compelled to divulge any information or documentation obtained during the DRA process in any subsequent litigation or arbitration between the Employer and the Contractor relating to the Contract.

Under the DRA Agreement, both the Employer and Contractor are required to participate fully in the DRA process.

Both parties are required to ensure that the DRA is provided with the information he needs to carry out his duties properly. Such information is to be provided promptly.

The Contractor is also required to ensure that all Specialist Sub-Contractors participate in the DRA process.

Whilst neither party is under any obligation to accept any opinion which the DRA might express or any proposal which he might make to resolve a particular problem, both parties are obliged to comply with any reasonable requests or decisions which he makes with regard to procedural matters. For example, if the DRA calls a meeting or series of meetings for the purpose of resolving a particular problem then the format and order of the discussions shall follow his directions.

The technical proposal which the DRA was asked to make prior to his appointment regarding his approach and how the DRA process would be implemented subsequently forms part of the DRA Agreement. It is therefore essential that this is explained to the parties at the outset. It is of particular importance that they are aware of the DRA's objectives.

Following the initial stage of his familiarisation process the DRA should endeavour to keep fully up to date with all developments in the design, procurement and construction processes throughout the duration of the project so that if events occur which appear likely to develop into disagreements, these can be quickly identified and brought to the attention of those concerned so that they can be addressed and disputes avoided.

It would probably be necessary for the DRA to visit the site at least once a week in order to review correspondence, minutes of meetings etc. within a few days of their issue. He would probably not require all paperwork to be copied to him but might indicate those documents of which he required copies. The DRA need only spend sufficient time on site to bring himself up to date each time. He should also use this opportunity to keep in (informal) contact with the site representatives of the Employer and Contractor so that they become used to him being involved and feel comfortable in the event that they need to approach him with a problem. This regular contact will also enable the DRA to learn more about the activities on site.

The DRA should attend progress meetings, not to interfere, but to just sit quietly and listen.

The DRA should encourage the parties to highlight any problems or potential problems in regular monthly meetings which he should arrange by mutual agreement. The meetings might be in three parts so that the DRA can meet the Employer' and the Contractor, separately and together. The order will be varied to suit the convenience and preference of the attendees as far as possible. These meetings will also be the forum where further actions can be agreed. Often such meetings are tacked on to the end of the monthly progress meeting.

I should stress that it is important that the DRA is proactive, if he identifies potential problems.  He must get involved and bring the parties to face up to the problems and seek solutions.

In the unfortunate event of a dispute which cannot be avoided during the regular site consultations or resolved during meetings following a Notice of Dispute, the DRA will be well equipped through his familiarity of the events giving rise to the dispute to provide a written report as required by the Dispute Resolution Clause. Such a report will comprise a concise analysis of the dispute and identify the key issues in dispute and the DRA's perceptions as to the obstacles to settlement. It is likely that he will obtain comments from the project staff of both parties to ensure that he understands their positions before submission to their Senior management. The analysis of the dispute will be carefully framed so that the senior management can fully understand the obstacles that prevent settlement. The DRA will only provide a recommendation of his own if requested to do so by both the Employer and Contractor.

If senior management cannot resolve the issues in dispute and arbitration is necessary, the DRA would be involved in the selection of an arbitrator and/or the adoption of an alternative dispute resolution process given appropriate circumstances. This is what could be said to be dispute resolution advice whereas all procedures up to then are really dispute avoidance and mediation.

Does the DRA system work?

It is generally accepted that the DRA system is very effective. It seems that just the presence of an independent third party encourages the parties to the Contract to work together in problem solving.

For some time now, members of ArchSD and contractors have expressed favourable views on the DRA system. Its costs are negligible when compared with the benefits achieved. Disputes are few, projects are completed more quickly and final accounts are settled more quickly than on projects without a DRA.

It is therefore perhaps not surprising that other organizations have followed suit, such as The Hong Kong Housing Authority, the Hong Kong Science Park Corporation and some of the civil engineering Works Departments of the Government of the Hong Kong SAR.  Although some of the procedures adopted by each organization are a little different from the procedures first set up by the old ASD, the main objective is still the same; that is, to avoid disputes arising through cooperation and joint problem solving.

However, a word of warning; the need for arbitration and even mediation in construction would disappear. We could see the whole of the dispute resolution industry disappear overnight!  What a good idea!