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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
This article discusses the place of amicable settlement in construction disputes and the room for amicable settlements in multi-tiered dispute resolution clauses, in particular in the FIDIC and NEC contracts. The author stresses that the key to achieving amicable settlements is adequate involvement of the parties and that all laudable efforts by their advisors, lawyers or third parties (participation of an impartial engineer, mediator, dispute board, expert or arbitration tribunal) will be fruitless if the parties are not engaged.
Twice a year, the ICC Institute of World Business Law (‘ICC Institute’) invites its members to submit articles for publication in the ICC Dispute Resolution Bulletin. Articles to be published in the section ‘From the ICC Institute’ are selected by a committee composed of ICC Institute Council members Horacio Grigera Naón, Julian Lew and Pierre Mayer. More information at http://www.iccwbo.org/icc-institute.
Introduction
End users of dispute resolution mechanisms are asking for help to settle their disputes in a more efficient manner; and, in particular, by being offered improved opportunities to reach amicable settlements.1 The growing preference for alternative mechanisms in conflict resolution can be seen in various surveys of users’ practices and expectations.2 This trend is especially relevant in disputes related to construction projects.3 For instance, there has been some intense discussion regarding the role of arbitrators as facilitators of amicable settlements between the parties and Ugo Draetta has stressed as follows:
True, the primary objective of the arbitral process is to issue an award. Throughout that process, however, everyone concerned should be ready to seek out, facilitate and grab any opportunity for settlement. The failure of the arbitral process to do so is undoubtedly another of the dark sides of arbitration.4
Arbitration institutions’ regulations and guidelines also acknowledge this concern.5 The recent ICC Report on ‘Construction Industry Arbitrations’ for instance specifically states:
Settlement in arbitration
The tribunal should consider reminding the parties that they are, of course, free to settle all or part of their dispute at any time, either through direct negotiations or through any form of ADR proceedings. The arbitral tribunal should also consider consulting the parties at an early stage (for instance at the first case management conference pursuant to Article 24 of the ICC Rules) and inviting them to agree on a procedure for the possible use of sealed offer(s) in the arbitration (para. 21.1).6
Given the demand from end-users to facilitate amicable settlement towards an increased efficiency in dispute resolution, this article seeks to examine the relevance of amicable settlement, its current use in construction contracts, if – and how – the amicable settlement step is included in multi-tiered dispute resolution clauses, and why it is worth considering a systematic inclusion of settlement attempts in these clauses.
Essentially, a multi-tiered clause mixes various mechanisms for the prevention and resolution of disputes. It is a tool allowing the parties to establish a procedure of two or more ‘steps’ so that these can be managed and resolved either (i) by the parties directly, (ii) with the assistance of a third party (i.e. a mediator, expert, adjudicator,7 dispute board (‘DB’)8 or arbitrator), or (iii) entirely delegating it to a third party. Some clauses are alternative, i.e. they can offer the parties various options such as appointing an expert (prior to arbitration) or proceeding directly to arbitration. Others can set requisites before proceeding to the following step, such as obtaining a decision from a DB before commencing arbitration or waiting for a cooling-off period to elapse.
There can be a wide variety of ‘steps’,9 but some of the most common options used to structure a multi-tiered clause are negotiation or amicable settlement, mediation, conciliation or facilitation, decisions or recommendations of experts or DBs, and arbitration.
The steps within a multi-tiered clause are believed to prevent or resolve disputes efficiently and quickly, avoiding excessive costs or distracting the parties’ attention from the contractual objective. Therefore, multi-tiered clauses are beneficial because they allow procedures to be designed in a bespoke manner.
It is already widespread practice in construction contracts to include multi-tiered dispute resolution clauses, as can be seen in bespoke contracts and the various standard contracts used in the industry, such as FIDIC (International Federation of Consulting Engineers) or NEC (New Engineering Contract) model contracts.10
Conflicts are natural in every human interaction, as D. Richbell notes:
Conflict can be – should be – good. It is a catalyst. It can create dialogue, promote creative thinking, inspire people to sustainable solutions. Handled badly, though, it can create division, polarise positions, fracture relationships, harm business and send people off onto the inevitable spiral of dispute and litigation (or arbitration). And once on that spiral it is immensely difficult to get off.11
Disputes arise when dialogue between the parties reaches an impasse that they themselves cannot immediately resolve. In principle, each party will be convinced of its position in good faith, although it is also possible and often seen that one party may have a hidden agenda, such as not wanting to recognize an error by fear of personal liability or consequences for the party they are representing.12
In my experience in project management, I have found that commercial (not legal) good faith, which is understood as the general rule of acting honestly and reasonably, is the standard in commercial relationships, without which business could not be maintained in the long term. It is only human to remember bad experiences more vividly than good ones, which may give the impression that commercial collaboration is not the rule.13
Generally, parties seek to act in good faith considering (i) their own commercial interests, (ii) the other party’s commercial interests, and (iii) requesting only what they are reasonably entitled to, from their perspective, under the contract. In this context, there would only be legitimate disputes about what is ‘fair’, sometimes even leaving the contract aside. To litigation lawyers, this view may seem counterintuitive and naïve; this might not be so for a projects lawyer.14
In contrast to ‘good faith’ conflicts, an individual or a team may have, in exceptional circumstances, taken a decision that does not comply with the contract or creates a loss for the other party (e.g. a miscalculation of costs when submitting an offer, non-approved extra work, a late purchase order that delays the project activities, or improper storage of material and deterioration due to climate conditions). Such individual or team may also have an incentive to not act in a collaborative manner in order to cover up the ‘mistake’.15 An individual or a party responsible for a design or calculation error (which can be obvious) may seek to avoid assuming the consequences and will not be motivated by collaboration, but rather by a strategic behaviour to avoid blame. In addition, a mistake may have been made in relation to another contract, generating pressure to seek to mitigate the loss elsewhere.
Mistakes are frequent in the construction industry. In fact, E. Morrow’s review of more than 300 global megaprojects shows that, in 2010, 65% of industrial projects with budgets larger than US$ 1 billion failed to meet business objectives. The author indicates that in some industrial sectors the failure rate was as high as 75%; most – but not all – of the failed projects were unprofitable. The author summarizes seven key mistakes he has seen frequently in megaprojects,16 and makes the following statement:
This book is mostly about mistakes, often masked with the bravado of "taking daring risks," but in the end just plain mistakes. So I thought it appropriate to start our discussion of megaprojects with seven whopper mistakes that doomed too many of these projects from the start. For the most part, the engineers on these projects tend to make little mistakes, although some of them occasionally cascade into disaster. Most big mistakes are made by senior business managers in the sponsoring firms. The reason they make most of the big mistakes is because they have control of the things that matter most: strategy, money, and people. In most megaproject developments, the most important single relationship among the many thousands of relationships involved is the one between the business director for the project and the project manager, often called the project director.17
On hidden agendas in relation to project cost and time estimates, S. Fister and Z. Abubeker have recently noted:
Such big ambitions can make it difficult for teams to maintain a firm grip on scope and budget –particularly for government-sponsored projects that notoriously face massive cost overruns and delays. In many cases, there is a culture of key stakeholders pushing public projects or public-private partnerships intentionally underestimating cost or timeline projections in an effort to gain the public’s blessing and swift rubber-stamp approval – only to have the project stretch years longer than anticipated and grow wildly over budget, says Chris Sainsbury, senior manager, global infrastructure advisory, PMI Global Executive Council member KPMG, Vancouver, British Columbia, Canada. "They know a realistic estimate will often exceed available funding and might never get approved, so instead they optimistically reduce risk contingency levels to focus on the immediate hurdle in front of them," he says.18
Furthermore, in some contexts corruption might also create hidden agendas.19
Finally, employee disengagement may also contribute to the careless handling of a dispute.20 This is extremely relevant as employees are required to be highly engaged and invest considerable time and efforts to overcome the difficulties encountered in a project. If the teams, or even if a key employee in a given position, is not adequately engaged, this can lead an issue to escalate and become a dispute. The risk of having a disengaged employee in a decision-making position is usually underestimated and should be considered as a true project risk, just as the ground conditions risk, delay risk or any other.
In this context, for contractual disputes in general and construction disputes in particular, it is difficult not to stress the importance of amicable settlement. It allows the parties to maintain control of the dispute, placing it within the general context of their commercial relationship and allowing negotiation on the basis of interests that go beyond the specific dispute or the law. Amicable settlement, as N. Bunni states, is ‘the simplest and cheapest method to resolve the conflict’,21 and disputes can also provide an opportunity to strengthen commercial relationships. Furthermore, the early involvement of the parties can help to narrow the dispute contributing to its efficient management, if such dispute escalates.
Therefore, considering the importance of amicable settlement, the lack of scholarly and contractual discussions on direct negotiation as the initial dispute resolution stage is surprising.
When a controversy is delegated to a third party, that third party’s mandate is to focus on the specific matter without considering the wider interests of the parties. The same could be said for parties’ advisors, whose mandate is to win the case, unless the client has been specific enough to indicate that there are other interests in play. Having a dispute resolved by a third party may generate some unfavourable results, even for the winning party, such as direct costs (third parties’ and advisors’ fees) and indirect costs, including delays in reaching a commercial objective (e.g. the conclusion of a project or procurement of goods or services), deterioration of the commercial relationship, establishment of a negative commercial reputation, and the time spent by the parties’ representatives on the dispute, distracted from their core business.
Although amicable settlement can be facilitated by third parties (an arbitrator, mediator or a DB), any real possibility of reaching an amicable settlement depends on the involvement of the parties (not the lawyers or advisors),22 so far as the representatives have sufficient decision-making power and are adequately informed of the details of the dispute as well as the strengths and weaknesses of each position.
The acid test to determine if a dispute is being resolved or managed appropriately is to ask how the owner/shareholder or the highest rank government official would act if they had all the information necessary to reach a decision, including both parties’ positions and a clear recollection of the facts. In my experience, a dispute should be referred to a third party for resolution only if it is strictly necessary and after having made every possible effort to attempt to resolve the dispute directly. In the private sector, it is obvious that resources should be employed efficiently and that the commercial relationships that support the business should not be damaged unnecessarily. In the public sector, I would say that it is even more obvious that public resources must be employed efficiently, and that the public objective should be reached as a matter of general interest.
If one considers the substantial quantity of disputes and disagreements that occur daily in construction projects, clearly, only a small number is referred to an expert, DB or arbitration. As the Arcadis Global Construction Dispute Resolution Report 2019 states, party-to-party negotiation remains the most common method for resolving disputes.23
In some contexts, amicable settlement is less common due to conflict of interests of agents managing the contract or fear of sanctions, for example in government contracts.24 Nonetheless, even in these cases, many situations of conflict are resolved directly by the parties. In the U.S., over 4,000 companies have signed the CPR Corporate Policy Statement whereby they state that:
[F]or many disputes there is a less expensive, more effective method of resolution than the traditional lawsuit. Alternative dispute resolution (ADR) procedures involve collaborative techniques which can often spare businesses the high costs of litigation ...
In the event of a business dispute between our company and another company which has made or will then make a similar statement, we are prepared to explore with that other party resolution of the dispute through negotiation or ADR techniques before pursuing full-scale litigation.25
Multi-tier dispute resolution clauses frequently contemplate DBs or adjudication.26 The question is whether, and to what extent, direct amicable settlement should be contemplated.
The FIDIC approach
The 1999 edition of the FIDIC Red Book (sub-clause 20.4) established that any dispute should be subject to a binding, albeit not final, DB decision. There was also a very brief reference to the subsequent possibility of amicable settlement and final resolution through arbitration. The latest edition of the FIDIC suite of contracts (2017) emphasizes early notification of situations that can give rise to disputes, as well as reinforcing the work of the engineer and the role of the DB in the prevention of disputes. In fact, the denomination of the DB, previously Dispute Adjudication Board, has changed to Dispute Avoidance/Adjudication Board (DAAB).27
Another novelty of the 2017 version is the distinction between ‘claims’ and ‘disputes’:
In addition, the DB’s role in preventing disputes is reflected in its work to resolve them in ‘real time’ in order to ensure the success of the project. This is expressly indicated both in the ‘Guidance for the Preparation of Particular Conditions’ and in the Appendix to the FIDIC suite of contracts (2017) on the DB procedural rules. The Appendix sets out the DB’s objectives and rules for prevention of conflicts in order to reach an expedited, efficient and economical resolution to the conflict. All DB rules and activity must be construed and executed with a view to reaching these objectives. Thus, unlike the 1999 edition, the DB in the 2017 edition proactively prevents disputes. Now, for example, DB members can assist the parties without too many formalities, either in person, by telephone or videoconference, through meetings, site visits or in writing.
Thus, FIDIC has developed a wider range of tools in order to avoid disputes between the parties going as far as arbitration, as one of the variables of project success is avoiding disputes. If disputes do arise, they must be resolved in an appropriate manner.28
The FIDIC standard dispute resolution clause has not always included a reference to amicable settlement:
Where a NOD [Notice of Dissatisfaction] has been given under Sub-Clause 21.4 [Obtaining DAAB’s Decision], both Parties shall attempt to settle the Dispute amicably before the commencement of arbitration. However, unless both Parties agree otherwise, arbitration may be commenced on or after the twenty-eighth (28th) day after the day on which this NOD was given, even if no attempt at amicable settlement has been made.
As can be seen, the period for amicable settlement has been reduced from 56 to 28 days. In my opinion, N. Bunni’s commentary to the 1999 edition is equally applicable to the 2017 edition. The framework of the FIDIC contract pays limited attention to amicable settlement and instead focuses on mechanisms where third parties control the dispute resolution process. Nonetheless, FIDIC is aware of the relevance of amicable settlement as shown by the commentary to Clause 21.5 in the ‘Guidance for the Preparation of Particular Conditions of the Red Book’ (2017), in which general aspects of amicable settlement are discussed and encouraged. The Guidance ‘recommends that the parties avail themselves of this opportunity to actively engage with each other with a view to settling their Dispute’ and as a first example, it refers to ‘direct negotiation by senior executives from each of the Parties’.33 FIDIC has probably preferred not to further regulate this matter, and only encourages parties to negotiate.
Following the DB’s decision, the parties may reach an amicable agreement (sub-clause 21.5). Otherwise, the parties can proceed to arbitration to definitively resolve their dispute (sub-clause 21.6). Nonetheless, as D. Brackin notes (quoting N. Bunni), it is in practice difficult for the parties to reach an agreement on a procedure for their negotiations after the dispute has arisen. Therefore, such procedure should be specified within the contract.34
The new FIDIC contracts include references to consultations between the parties and the engineer or the DB. Nonetheless the amicable settlement stage considered prior to arbitration is in practice a hold-point, which does not include wording to orient or induce the parties to take any concrete action. Thus, it does not include the required guidance for an amicable settlement stage to be effective.
It is laudable that FIDIC 2017 expands the role of the DB. Unfortunately, this means that the emphasis has been put on a mechanism in which a third party controls the resolution of the dispute. In my opinion, this still leaves room to further explore the full potential of actively engaging the parties in resolving their dispute, either before, during, or after a third party takes an active role.
Of course, the DB’s dispute prevention role is effective because (i) project teams acknowledge the authority of their members, which promotes spontaneous collaboration, and (ii) DB members help the teams to identify blind spots in order to facilitate project progress. Nonetheless, I believe that the involvement of senior executives of the parties can have a similar effect. It is good practice and healthy to the contractual relationship that senior executives actively play an authority role and regularly receive internal reports from each of the parties. With the commitment of senior executives alone, or with the assistance of a DB, the teams of each party would have an incentive to have everything in order and behave in a manner that does not prejudice the project or the parties’ commercial relationship.
FIDIC’s intention to promote active engagement of the parties from the outset is clear, and reflected in the parties’ consultation with the engineer and later with the DB. The current approach is consistent with the view that the amicable settlement stage should only be expressly regulated after the DB decision, considering that in that way the DB can proceed issuing a binding decision without waiting for any possible amicable settlement that might actually never occur. Nevertheless, this approach does not consider the fact that delegating the binding (although not final) decision to a third party (i) runs the risk of losing the benefits that might result from the parties maintaining control over the dispute,35 and (ii) creates procedural costs associated with submitting a dispute before the DB.
The objective is to maximize the chances for the amicable solution of a dispute that has reached a deadlock. If the procedures indicated are implemented, it is highly probable that the risk of continuing a dispute with weak foundations will be considerably reduced. The errors that a specific team refuses to acknowledge will be exposed or it will be possible to understand the interests underlying the dispute and find commercial, rather than strictly legal solutions, for the benefit of the project and the parties. If one truly seeks to promote amicable settlement, the procedure adopted must adequately involve the parties from the earliest stage and not just after the DB has issued its decision.
The NEC approach
The fourth version of the NEC Construction and Engineering Contract (NEC 4) provides three alternative dispute resolution clauses for users to choose. Those options are included in the section of optional clauses and are classified as Options W1, W2 and W3.
Option W1 provides a more structured approach, in contrast with FIDIC, and reads as follows:
W1.1.(1) A dispute arising under or in connection with the contract is referred to the Senior Representatives in accordance with the Dispute Reference Table. If the dispute is not resolved by the Senior Representatives, it is referred to and decided by the Adjudicator. A Party may replace a Senior Representative after notifying the other Party of the name of the replacement.
(2) The Party referring a dispute notifies the Senior Representatives, the other Party and the Project Manager of the nature of the dispute it wishes to resolve. Each Party submits to the other their statement of case within one week of the notification. Each statement of case is limited to no more than ten slides of A4 paper together with supporting evidence, unless otherwise agreed by the Parties.
(3) The Senior Representatives attend as many meetings and use any procedure they consider necessary to try to resolve the dispute over a period of no more than three weeks. At the end of this period the Senior Representatives produce a list of the issues agreed and issues not agreed. The Project Manager and the Contractor put into effect the issues agreed.
(4) No evidence of the statement of case or discussions is disclosed, used or referred to in any subsequent proceedings before the Adjudicator or the tribunal.
Option W1 provides a detailed guidance to the parties to conduct the negotiations and addresses the convenience of including more procedural detail in the contract. Nevertheless, as noted in the introduction to Option W1, such option is contemplated to be used when adjudication is the method of dispute resolution (prior to arbitration) and the United Kingdom’s statutory adjudication regime does not apply.36
In Option W2, this amicable settlement procedure is optional and subject to the agreement by the parties and starts as follows:
[I]f the Parties agree, a dispute arising under or in connection with the contract is referred to the Senior Representatives.37
Option W2 is contemplated to be used when adjudication is the method of dispute resolution and the United Kingdom’s statutory adjudication regime applies.
Option W3 does not include at all the amicable settlement procedure and is contemplated to be used when a DB is the method of dispute resolution and the United Kingdom’s statutory adjudication regime does not apply.
The NEC 4 seems to assume that when a DB is in place, it will do most of the dispute avoidance work and try to get the parties to resolve any potential dispute; there would thus be no need for an amicable settlement step. As indicated in the User’s Guide:
W3 The role of the Dispute Avoidance Board is different to that of the Senior Representatives or the Adjudicator in W1 and W2. Its members visit the site regularly and their role is to try to identify any potential areas of dispute as early as possible and help and guide the Parties towards an early resolution of the issues before positions become entrenched and considerable sums of money are spent. This resolution can be within or outside the contract. If it leads the Parties to agree to change the contract, that change should be recorded in accordance with clause 12.3.
In addition, either Party may refer any potential dispute it has to the Dispute Avoidance Board. Again, the Dispute Avoidance Board will meet with the Parties and try to get them to resolve the potential dispute. If they fail to do so the Dispute Avoidance Board provides the Parties with a recommendation as to how the potential dispute should be resolved. This could be by suggesting what the answer is, or it could be by merely suggesting a way that the Parties may use to try to reach agreement. This recommendation is not binding on either Party.38
While the comments exposed in relation to the FIDIC clauses would also apply to Options W2 and W3, Option W1 seems to be in line with the suggestions in this article.
The terms of an amicable settlement clause should ideally respond to the specificities of the parties and the project at hand, but it is a challenge to draft such standard clause that can fit a wide range of projects and parties.
The discussion about whether to include amicable settlement as a contractually mandated and regulated dispute resolution step is part of the broader discussion about multi-tiered dispute resolution clauses.
Although it is agreed that amicable settlement should be encouraged, dispute resolution clauses do not usually refer to amicable settlement or, if they do, it is usually in a short and vague manner (see e.g. the analysis of the FIDIC and NEC contracts at (IV)).
In general, dispute resolution clauses provide for a dispute resolution scheme where the parties are assisted by a third party, such as a mediator, experts, a DBs or an adjudicator. Thus, the discussion around multi-tiered clauses centres on how such third parties can facilitate an amicable agreement. As previously mentioned, little is said about the involvement of the parties themselves.
One reason why contract drafters usually avoid or pay lip service to amicable settlement is to keep the language simple and minimize complications that deficient drafting may create, including admissibility or jurisdictional objections in a potential arbitration. Nevertheless, these risks are not exclusive to amicable settlement; they exist for any step agreed, even the DB step.39 We must therefore not lose sight of the advantages of a well-regulated direct negotiations step. If that step is properly drafted, its advantages outweigh its disadvantages.
Amicable settlement is often included in multi-tiered dispute resolution clauses at the request of commercial managers or clients who value commercial relationships. Nonetheless, lawyers must always anticipate the worst-case scenario, in which the amicable settlement step can be seen as an obstacle or simply be ignored. Additionally, including this step makes the clause more complex. If not drafted correctly, it can give rise to issues affecting the subsequent steps. As a result, most lawyers prefer to keep the clause simple and avoid contemplating this step, claiming that if parties wish to negotiate, they can do it at any time without regulation.40
Some might say that sophisticated companies know perfectly well that direct negotiation with the other party is the best and most efficient way of resolving a dispute and thus they need no instruction from a contract. Moreover, it is undeniable that sophisticated large corporations have checks and balances in place that generally work well to prevent disputes escalating unnecessarily to arbitration, thus they don’t generally need any contractual guidance to avoid disputes escalating unnecessarily.
Nevertheless, there are various advantages in incorporating amicable settlement regulation in the contract, and a systematic inclusion of a specific amicable step in dispute resolution clauses could be considered.41 This provides a ground for parties to enter into negotiation without the risk of perceived weakness.42 It also justifies the representatives’ negotiations, reducing the likelihood of being questioned internally within their organizations.43 Likewise, it offers a structure designed in advance in order to progress in the negotiation.44 It may encourage management and in-house counsel to be involved in the dispute before it is assigned to external counsel, which is when the attention by the management and the in-house team tend to decrease.45 Finally, it may also help prevent careless handling of a dispute by disengaged employees.
The principle is to make every effort to avoid throwing good money after bad. In order to reach this objective, the following good practices could be followed:
The greatest expression of what can be obtained with structured amicable settlement could be what is known as a ‘mini-trial’, i.e. a mechanism not formally widely used in international construction disputes although parties informally follow similar schemes.47 J. Uff identifies this mechanism as follows:
[A] form of aided settlement in which each side presents a summary of its case, in a trial mode and using advocates and experts, before a tribunal composed a senior representative of each side and a neutral chaiman. The objective is to demonstrate directly the strengths and weaknesses of the respective cases to those in a position of responsibility so that they may seek to negotiate an informed settlement, with the aid of a neutral chairman. The process is not inexpensive and necessarily involves preparation and the employment of professional advocates in order that the case of each side is seen in its best light.48
Even though the ‘mini-trial’ scheme may be the greatest expression of an amicable settlement procedure where parties retain full control of the dispute, it would not be inexpensive, as noted by J. Uff above. Thus, an intermediate good option could be in line with NEC 4’s Option W1 (see ‘the NEC approach’ at (IV)).
Concluding remarks
Lawyers and dispute resolution consultants tend to be very sceptical regarding regulated amicable settlement. Nonetheless, parties and in-house legal departments need to be guided by the contract in order to realize that (i) amicable process is relevant, (ii) know how to conduct an effective and efficient amicable settlement process, (iii) have an internal justification to negotiate without a position of perceived weakness, and (iv) reduce the risk of careless handling of the dispute by disengaged employees. This is even more relevant in public contracts.
As mentioned throughout the article, the key to achieving amicable settlement is adequate involvement of the parties. All laudable efforts by their advisors, lawyers or third parties (such as DBs, mediators, experts, or arbitrators) will be fruitless if the parties are not engaged.
Amicable settlement between the parties is neither obvious nor intuitive. The natural reaction when a dispute arises is to avoid the problem and try to delegate it to a neutral third party. Dispute resolution end-users should therefore consider a clear wording in their multi-tiered dispute resolution clause in favour of the amicable settlement step and provide for the participation of representatives or senior executives in the process in order to maximise its efficiency.
1 This has gained special relevance within the arbitration field: ‘The arbitration community has recognized that changes are needed to meet the needs of users. It is time that this recognition is extended to the need to encourage settlement.’ J. Williams, J. Glaysher, ‘https://globalarbitrationreview.com/article/1174006/the-settlement-deficit-in-arbitration’ (GAR, 17 Sept. 2018).
2 In the international arbitration study undertaken by Queen Mary University and White & Case in 2018, we observe that almost half of those questioned indicated that their preferred method for resolution of international disputes is a mix of alternative methods and arbitration. Those questioned were: 60% in-house counsel (end users), 46% external lawyers and 43% arbitrators. This indicates that end users do not consider arbitration alone to be sufficiently efficient as a dispute resolution mechanism. https://www.whitecase.com/publications/insight/2018-international-arbitration-survey-evolution-international-arbitration. Likewise, the Global Pound Conference Series ‘https://www.imimediation.org/research/gpc/series-data-and-reports/’ (2017) from the International Mediation Institute indicated that the combination of adjudicative and non-adjudicative mechanisms, either in parallel or in prior stages, is perceived as the most efficient combination to resolve commercial disputes, see pp. 13-14.
3 R. Shorter, ‘https://www.whitecase.com/publications/article/trends-construction-disputes’, Construction Law Review, 2018-2019.
4 U. Draetta, The Dark Side of Arbitration, New York (JurisNet, LLC, 2018) p. 125. For a broader discussion, see U. Draetta, id. pp. 124-136: K.P. Berger, O.Jensen, ‘The Arbitrator’s Mandate to Facilitate Settlement’, Fordham International Law Journal, Vol. 40, No. 3, 2017; K.P. Berger, ‘The Direct Involvement of the Arbitrator in the Amicable Settlement of the Dispute: Offering Preliminary Views, Discussing Settlement Options, Suggesting Solutions, Caucusing’, Journal of International Arbitration 35, No. 5, 2018, pp. 501–516; G. Kaufmann-Kohler, V. Bonnin, ‘Arbitrators as Conciliators: A Statistical Study of the Relation Between an Arbitrator’s Role and Legal Background’, ICC Dispute Resolution Bulletin, Vol. 18 (2007) 79, 85; Glaysher, Williams, supra note 1.
5 See e.g. Appendix IV, points b) and h) to the ICC Arbitration Rules; Sect. 47 of the UNCITRAL Notes on Organizing Arbitral Proceedings (1996 version) and Sect. 72 (2016 version); Art. 26 of the DIS (German Arbitration Institute) Arbitration Rules; Art. 5 of the Centre for Effective Dispute Resolution (CEDR) Rules for Facilitating Settlement in International Arbitration; Art. 47 of the China International Economic and Trade Arbitration Commission (CIETAC) Arbitration Rules; Art. 2(3) of the IBA Rules on the Taking of Evidence in International Commercial Arbitration; Art. 9 of the Prague Rules on the Efficient Conduct of Proceedings in International Arbitration.
6 See Summary of Main Recommendations and Suggestions, ‘https://iccwbo.org/publication/construction-industry-arbitrations-report-icc-commission-arbitration-adr/’ (ICC Commission on Arbitration and ADR, Jan. 2019).
7 Adjudication could be referred to as a quick process where a third party issues a decision that is generally binding but not final. This process can be agreed by the parties or mandated by the law, as in some jurisdictions, such as England and Wales, Australia, Singapore or Malaysia. J. Uff in Construction Law (12th ed., Sweet & Maxwell, 2017), at pp. 69-70, states: ‘Statutory adjudication is presently the most widely used form of dispute resolution in the UK construction industry. The decision of an adjudicator is binding only until the dispute is finally resolved by other available means, but it appears that well over 90 per cent of decisions are either accepted or result in settlement and, in either event, do not lead on to further proceedings. Adjudication was recommended for all construction contracts in the Latham Report and the right to refer a dispute to adjudication is now available [in the UK] under construction contracts falling within the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) as recently amended by the Local Democracy, Economic Development and Construction Act 2009’. Bibliography on statutory adjudication is abundant. See, e.g., L.J. Coulson, Coulson on Construction Adjudication (4th ed, Oxford, 2018); A. Burr, International Contractual and Statutory Adjudication (Informa Law, 2017) or Tolley’s Guide to Construction Contracts (Vol. 1, Lexis Nexis), Sect. E4.
8 The general aspects of DBs are discussed at length in various texts. See e.g. C. Chern, Chern on Dispute Boards Practice and Procedure (4th ed, Informa Law, 2020); G. Owen, B. Totterdill, Dispute boards: procedures and practice (Thomas Telford, 2008).
9 The topic has an extensive bibliography. In addition to the bibliographical references quoted in this article’s footnotes, see also, e.g. E. Kajkowska, Enforceability of Multi-Tiered Dispute Resolution Clauses (Hart Publishing, 2017), p. 272.
10 For more information on the FIDIC suite of contracts see: https://fidic.org/. For more information on the NEC suite of contracts see: https://www.neccontract.com/
11 D. Richbell, Mediation of Construction Disputes (Blackwell, 2008), p. 113.
12 U. Draetta, supra note 4, at p. 309: ‘Starting with the initiative to commence arbitration, I am sure many arbitrators share the view that some arbitration proceedings should never have been started. They are nevertheless set in motion for reasons that are emotional, irrational or divorced from any objective assessment of the merits of the actual claim’.
13 Several economists relate the degree of trust within a society to economic and social development. This is because trust reduces transaction costs. See e.g. A. Sen, Development as Freedom (Oxford University Press, 1999) p. 262-265; F. Fukuyama, Trust (Simon & Schuster, 1995). In relation to the construction industry, the current trend towards a more collaborative approach shows that the industry recognizes that the traditional adversarial approach has fuelled inefficiencies. See the McKinsey Global Institute 2017 Report https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/reinventing-construction-through-a-productivity-revolution: ‘There is a need to move away from the hostile contracting environment that characterizes many construction projects to a system focused on collaboration and problem solving’ (p. 8). The discussion on the benefits of collaboration in construction contracts is summarized and developed further in the recent book D. Mosey, Collaborative Construction Procurement and Improved Value (Wiley Blackwell, 2019).
14 D. Brackin, ‘Sub-clause 20.5 of the FIDIC Contracts and Amicable Dispute Resolution (‘ADR’)’, International Construction Law Review, 2006, p. 449: ‘While those who are inexperienced in alternative dispute resolution techniques often express scepticism about the extent to which disputes can be resolved, experience shows that negotiated resolutions can in fact be reached, even in relation to disputes that seem, at first blush, to be incapable of settlement’.
15 In addition to mistakes, uncooperative attitudes can also arise due to short term views of commercial relationships, lack of experience or abuse of a strong bargaining position.
16 Merrow, Edward W. Industrial Megaprojects. (Wiley, 2011). pp. 2-8. Kindle Edition: While each of these mistakes amount to a wide discussion, the seven key mistakes pointed out by the author can be summarized as follows: 1) allocating the project’s potential value in a way that does not provide a stable foundation on which the project can be executed; 2) putting pressure to move a project along quickly from the outset creating dangerous shortcuts and an opportunistic attitude; 3) implementing a project even though there is a lack of definition of the underlying business; 4) skimping on the front-end engineering definition of the project; 5) unreasonably trying to reduce costs; 6) unreasonably allocating risk to a party that is not in a position to handle it; 7) firing project managers for overruns, what creates an incentive to hide overruns. As the author says, the previous seven mistakes are not mutually exclusive; they can and do show up together in many combinations. However, any one is usually sufficient to doom a project to failure.
17 Ibid, pp. 1-2.
18 S. Fister and Z. Abubeker, ‘Rebuilding Confidence’, PM Network Magazine, July 2019, Vol. 33, Num. 7, p. 58.
19 The construction industry is particularly exposed to corruption risk. There are multiple assessments of the risk of corruption in the different countries around the world, see, e.g., ‘https://www.maplecroft.com/risk-indices/corruption-index/’. See also ‘https://www.baselgovernance.org/publications/corruption-and-money-laundering-international-arbitration-toolkit-arbitrators’ (Basel Institute on Governance, 2019); C. Albanesi and E. Jolivet, Dealing with Corruption in Arbitration: A Review of ICC Experience, ICC International Court Bulletin, Vol 24/Special Supplement (2013); https://iccwbo.org/publication/icc-rules-on-combating-corruption/ (ICC Commission on Corporate Responsibility and Anti-corruption, 2011); United Nations Convention Against Corruption (United Nations Office on Drugs and Crime, 2004). See also https://iccwbo.org/publication/icc-business-integrity-compendium-2017/ (2017). Moreover, ICC has recently launched a https://iccwbo.org/leadership/#leadershipadr.
20 There are several reports that measure employees’ engagement levels, e.g. according to AON’s https://www.kincentric.com/-/media/kincentric/pdfs/kincentric_2019_trends_global_employee_engagement.pdf, only 65% of employees worldwide are considered engaged. AON defines ‘employee engagement’ as ‘the level of an employee’s psychological investment in their organization’. A.M. Saks, ‘https://www.sciencedirect.com/science/article/abs/pii/S0090261617300827?via%3Dihub’, Organizational Dynamics, 2017, 46, p. 76): ‘Globally it has been reported that only 21 percent of employees are engaged’. Regardless of the exact percentage of ‘engaged’ employees, it is a fact that some employees are not engaged enough to make the extra effort required to avoid a dispute snowballing.
21 See N. Bunni, The FIDIC Forms of Contract (3rd ed., Blackwell Publishing, 2005), p. 441.
22 See e.g. the discussion in U. Draetta, supra note 4, at pp. 315-329.
23 Available at https://www.arcadis.com/en/united-states/our-perspectives/2019/global-construction-disputes-report-2019/.
24 See, e.g., U. Draetta, supra note 4, at pp. 315-329. Distortions may exist in the public sector due to fear of incurring personal liability, be it administrative, civil, criminal or political. Nonetheless, the State should establish protection mechanisms, allowing its most senior representatives to make decisions based on the efficient use of public resources and achieving the public objectives sought. This may be difficult to achieve. In any case, it is useful to be aware of the importance of amicable settlement and the costs and inefficiencies generated if not used to its full potential.
25 Available at https://www.cpradr.org/resource-center/adr-pledges.
26 On adjudication, see supra note 7.
27 In the 2017 edition of the FIDIC contracts, the name of the DBs has varied in order to emphasize its role in dispute prevention. Nevertheless, for purposes of simplicity, in this article when I refer to this mechanism under FIDIC 2017 I shall use the acronym DB, as in all references to dispute boards.
28 The commentary to sub-clause 21.1 in the FIDIC Guidance for the Preparation of Particular Conditions in the Red Book (2017) provides: ‘It is generally accepted that construction projects depend for their success on the avoidance of Disputes between the Employer and the Contractor and, if Disputes do arise, the timely resolution of such Disputes’. Guidance for the Preparation of Particular Conditions in the Red Book (2017), p. 47.
29 See Bunni, supra note 21, at p. 439. The author mentions that the introduction of the amicable negotiation stage by FIDIC in 1987 was a new development, later followed in various other standard contracts that included regulation of alternative dispute resolution mechanisms. This movement towards alternative dispute resolution mechanisms likely generated the favourable atmosphere for the subsequent introduction of DBs in the FIDIC contracts.
30 Nonetheless, Brackin comments that this period was likely subject to severe criticism, as it was considered a hold point, which is to say a waste of time if the parties did not demonstrate a real intention to negotiate (supra note 14, at pp. 444-445).
31 Before the introduction of the DB, the utility of the amicable settlement step was questioned, as it came after the engineer’s decision, who was not really seen as neutral; this starting point did not establish a favourable atmosphere for negotiation. However, this perception does not exist regarding the DB’s decision. See Brackin, supra note 14, at p. 445.
32 See Bunni, supra note 21, at p. 408.
33 See commentary to sub-clause 21.5 in Guidance for the Preparation of Particular Conditions (2017), Red Book, pp. 49-51, Yellow Book, pp. 52-54, Silver Book, pp. 52-54.
34 See Brackin, supra note 14, p. 445. Specifically, the author questions that FIDIC does not provide guidelines for conducting the amicable settlement efforts or for engaging in a mediation process for example by making reference to the ICC Mediation Rules. This is now addressed in the Guidance for the Preparation of Particular Conditions (2017), but the clause itself remains silent on this point.
35 The parties would retain more control of the dispute in case a Dispute Review Board issues a recommendation as opposed to a Dispute Adjudication Board that issues a decision. There are pros and cons of having one or the other and the discussion exceeds the purpose of this article.
36 On adjudication, see supra note 7.
37 NEC 4 User’s Guide – Managing an Engineering and Construction Contract (Vol. 4, Thomas Telford, 2017), p. 81.
38 Ibid. p. 84.
39 Specifically, this risk has generated an important number of articles which analyse the validity, obligatory nature, and consequences of skipping any step. On the discussion whether skipping a step generates issues of jurisdiction or admissibility, I note that the most current trend in civil law seems to be that it does generate a problem of admissibility, which can generally be repaired within the same arbitration, thereby allowing a reduced risk of using multi-tiered clauses. See, e.g. G. Vlavianos, V. Pappas, ‘Multi-Tier Dispute Resolution Clauses as Jurisdictional Conditions Precedent to Arbitration’, The Guide to Energy Arbitrations (2nd ed., GAR, 2017); D. Kayali, ‘Enforceability of Multi-Tiered Dispute Resolution Clauses’ in Journal of International Arbitration, 2010, Vol. 27, No. 6, pp. 551-577; D. Jiménez Figueres, ‘Multi-Tiered Dispute Resolution Clauses in ICC Arbitration: Introduction and Commentary’, ICC International Court of Arbitration Bulletin, Vol. 14, No. 1; R. Caivano, ‘Las cláusulas ‘Escalonadas’ de resolución de conflictos (Negociación, mediación o conciliación previas al arbitraje)’ in Tratado de Derecho Arbitral, Vol. I, Pontificia University Javeriana, Grupo Editorial Ibáñez and Instituto Peruano de Arbitraje, pp. 76-78; A.C. Cremades ‘¿Qué sanción en caso de incumplimiento de una cláusula escalonada de resolución de controversias?’, Spain Arbitration Review Vol. 2016, Issue 26, at pp. 57-58. Finally, admissibility and jurisdictional risks may also be mitigated by including specific regulation in the multi-tiered clause itself or in the respective arbitration rules.
40 Regarding this concept, D. Brackin states that there would be scepticism regarding the necessity of the amicable settlement step if FIDIC were to incorporate it before arbitration in order to promote settlement between the parties, because if parties wish to negotiate, they can do so at any time, without a clause being required (supra note 14, p. 443).
41 Having made specific reference to public officials, quoting the FIDIC Red Book Guide 1987, D. Brackin indicates that one benefit of express incorporation of an amicable settlement clause is the fact that it offers an internal justification for each party to encourage negotiation, especially when there is a public party involved (supra note 14, p. 443). Likewise, N. Bunni makes an express reference to amicable settlement as a justification for negotiation without the respective representatives being reproached (supra note 21, p. 408).
42 As C. Seppälä (quoted by D. Brackin) rightly indicates, one regular benefit of an amicable settlement clause is that it allows the parties to enter negotiation without this being perceived as a sign of weakness, see D. Brackin, supra note 14, p. 444. Also note that the perception of weakness may be different if there is a recommendation by a Dispute Review Board.
43 See supra note 41.
44 See D. Brackin. supra note 14, p. 445.
45 See, e.g. the discussion about the engagement of the management and in-house teams throughout the dispute in U. Draetta, supra note 4, pp. 309-329, 331-338, 350-351.
46 According to Brackin, negotiations must be confidential in order to create a favourable atmosphere and parties must be able to make concessions without fear of compromising their position in a future arbitration. This is recognized in common law by the ‘without prejudice’ principle, but it is not a universal rule (supra note 14, pp. 446-447). Basically, there may be regulations in civil law countries that protect the confidentiality of negotiations, but they are not generally applied.
47 See e.g. the https://www.cpradr.org/resource-center/rules/international-other/mediation/cpr-minitrial-procedure.
48 J. Uff, supra note 7, pp. 67-68.