A Fine Mess

Rosemary Jackson

General Information

Belletown, the capital city of Bellevania, is to be World Capital of Culture (“WCC”) for one year, starting on 1 January next year. The Mayor and the Council of Belletown are very proud of this achievement.

The Council wished to regenerate the centre of Belletown and entered into a contract with Urban Contractors (“Urban”) on 1 April last year for Urban to design and build a new plaza and a tram system with a Grand Terminus at the plaza. It is a very high-profile project, and it will be the centrepiece of the city but is very disruptive as part of the city centre has to be dug up to lay the tramlines. The date for completion is 1 April next year. The agreed price is €100 million.

Urban is the biggest construction company in neighbouring Uraniana. Its Managing Director has been at the head of an advertising campaign in Bellevania aimed at obtaining new work in Bellevania. The plaza is to be on some derelict land, and the tramline will mainly follow the route of a disused railway line currently used as a popular cycle route by the city’s many cyclists. The tramline will end at the Grand Terminus, which is directly in front of Urban’s new state-of-the-art office in Belletown.

Urban has completed approximately 60% of the design work and has so far been paid €20 million. Apart from preparatory works to clear some areas of vegetation, no physical progress has been made.

Urban blames the Council for not making all areas of the city centre available. The contract said that Urban was to be given access to all areas on 1 April last year “to enable the works to be carried out”. The Council contends that this means that Urban is entitled only to sufficient access to any specific area at any time as is necessary to enable the works to be carried out in that area, and that this should be in accordance with an agreed timetable. In this way the temporary closure of the cycle route (which will reopen after the work is completed) can be limited to the shortest time possible, and it can be kept open while work proceeds on the plaza.

The Council refuses to close the cycle route until all design work is complete. Because it was necessary to obtain a court order to evict demonstrators, the Council was unable to provide any access to the site of the new plaza until September last year.

Urban argues that all areas should have been handed over on 1 April last year so that it could work on any area it wished at any time.

The Council argues that Urban did not need any access prior to September last year because the whole of the works had not been designed by that date, so no delay was caused even if there was a breach of the contract by the Council. The Council says that Urban has failed to carry out the necessary design work to enable any work to begin. The contract is unclear but the Council contends that all design work had to be completed before any physical works began. Urban disagrees and contends that this would have been unnecessary as long as each part of the work was designed before being started. In any event Urban argues that even if the designs had been completed earlier, no start on site could have been made because of the lack of access to the plaza site. Urban has programmed to complete the plaza before commencing the tramway.

Urban refuses to do any more work and has demanded that the price be increased by €50 million to cover the cost of the delay and the work needed to catch up lost time. No breakdown of this figure has been provided.

The parties have been unable to agree terms on which to continue the project or on which to abandon it. The media report daily on the lack of progress and are very critical of both parties. The dispute is acrimonious.

The Council has requested mediation in accordance with the ICC Mediation Rules. The Council will be represented by the Mayor and the Head of Legal Services. The Managing Director of Urban will attend the mediation with Urban’s in-house counsel. Both parties have full settlement authority.

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A Fine Mess

Rosemary Jackson

Confidential Information for Belletown Council

Requesting Party

This is a public relations disaster.

The Council cannot afford the additional €50 million demanded by Urban and the claim must be resisted. Urban must understand that the Council is not going to pay for Urban to rectify its own failure to design the works in time. Although the Council has taken a very firm stand in denying any liability for delays, it fears that it may have caused some delay in not giving access to the plaza and that Urban is entitled to increase the price to at least €110 million.

The Council can afford to pay at most an extra €10 million from its own funds so could, if necessary, pay a total of €110 million. However, the Council needs to pay as little extra as possible from its own funding. Any money that can be saved will go towards building a badly needed €8 million children’s hospice in Belletown. The successful tenderer for the hospice project has just become insolvent so the Council is looking urgently to appoint a replacement contractor and is not required to seek further competitive tenders.

It will be a disaster if the new plaza and tram system works are not finished when the year of culture begins. It is simply unacceptable for the city centre to be a building site on 1 January next year. Embarrassingly, there was a breakdown in communications between the Council’s building works department and its development department, which was negotiating for WCC status. As a result, the building works department did not realize the problem it caused by agreeing the contract with a completion date of 1 April next year. Urban is not aware that agreeing a completion date later than 1 January next year was due to a mistake rather than a deliberate decision and the Council has so far said nothing about it.

In confidential discussions the WCC Commission has offered the Council a €20 million grant towards preparing the city for its big year but the Council can only use it if the work will be completed before 1 January next year. If that can happen, the WCC year can be launched with maximum publicity and a programme of events in the new plaza. The Council has been looking for suitable prestigious premises nearby at which to base the celebrations and host its events and celebrations. Unfortunately, because of its financial situation, the Council cannot afford to rent premises in which to hold the lavish opening ceremony and celebrations that would help put Bellevania, and Belletown in particular, on the map.

The Council members are due for re-election towards the end of next year and the Mayor is keen to explore any opportunities that will not cost the Council a lot of money but will create good publicity and turn a potential disaster into a triumph.

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A Fine Mess

Rosemary Jackson

Confidential Information for Urban

Responding Party

Urban disastrously under-priced its tender. The work was always going to cost Urban €110 million to complete even without making a profit. Urban had hoped to make a €10 million profit so the tender should have been €120 million.

Agreeing a contract price of €100 million means that a loss of €10 million was bound to be suffered even if nothing went wrong. The estimator responsible has now been dismissed. This is very embarrassing for the Managing Director, who has been very keen for Urban to expand into Bellevania as there is a lot of future building work to be done there. This is Urban’s first project in Bellevania and failure will be a public relations disaster. The pricing error has not been disclosed to the Council.

While there have been problems with the Council providing access, and Urban has been pushing very hard its claim for additional money, the truth is that most of the delay has been caused by Urban cutting corners in the design office to try to save money. No part of the design work was complete before September last year. Urban does not want this to be known publicly.

It will now cost an additional €15 million to accelerate the work in order to catch up and complete on time on 1 April next year. Urban’s shareholders are pressing the Managing Director to achieve a settlement that allows Urban to recover the cost of the works (€110 million + €15 million acceleration = €125 million) and the intended profit margin of €10 million, a total of €135 million, if at all possible. Although legally it is difficult to see how the Council could be persuaded to pay for Urban’s pricing error or Urban’s own delays, the claim for an additional €50 million is a respectable claim. Privately Urban knows that the whole €50 million probably cannot be justified but feels that the Council ought to accept that it has some chance of succeeding.

The breakdown of the claimed additional sum is as follows:

Cost of delays €10 million

• Cost of delays to date €10 million

• Cost of working on plaza and tramway simultaneously €20 million

• Acceleration costs €20 million

Urban does not know why the Council agreed to a completion date of 1 April next year, when the WCC year begins on 1 January next year.

For a further €5 million the works could be completed three months earlier but the Council has not asked whether this is a possibility and Urban has not mentioned it either.

Pulling out or having the contract terminated would be a disaster, but continuing without any price increase will create such a large loss that shareholders will be unwilling to allow any further expansion into Bellevania. There is no other realistic way to grow the company.

Urban aims to minimize its inevitable loss, while protecting its valuable reputation. If there was some way of associating itself with Belletown’s year as WCC, the positive publicity would be worth €10 million to Urban in opening up the market for future work possibilities. Urban is prepared to consider any opportunities to sponsor, publicize or assist with the WCC year (or any other project in Belletown) if that will save the project and safeguard Urban’s reputation in Bellevania.

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A Fine Mess

Colin J Wall

Case Analysis

This role-play typifies a common theme in construction disputes: the problem of entering into contracts with the lowest bidder and on unclear documentation, which will enviably lead to disputes, as is the case here.

In this specific case, it is unclear if all of the design work needs to be completed before Urban can commence construction and whether the Council should make all areas of the city centre available for access or just sufficient areas to allow the construction works to be carried out in that location. There is the added complexity here that this is in part a refurbishment contract, which leads to the Council wishing to minimize disruption to existing facilities and to keep them open as long as possible.

Each of the parties understands the necessity of completing the project on time, the press is already reporting on lack of progress and this naturally affects the reputation of each party. Any mediated solution therefore needs to in some way restore those reputations and to some extent this is the driving force in making the parties put to one side their respective legal arguments and concentrate on a mediated settlement that meets their respective interests. Each party naturally has wider objectives than just the satisfactory completion of this contract. In Urban’s case this is to expand its construction activities in Bellevania and in the Council’s case to complete the project at an earlier date, find a contractor to construct the badly needed children’s hospice and find a suitable prestigious venue to host the opening ceremony and celebrations.

Each party has also made an embarrassing mistake. Urban under-priced the contract by €10 million, while the Council fixed the completion date of the contract three months later than it should have done. These errors are probably best handled by discussing the matter with the mediator in caucus since to reveal them directly in a plenary session might be difficult.

Any mediated settlement would also need to deal with the financial situation. There is sufficient overlap in the parties’ positions and financial needs and resources for this to work, even if some of the financial compensation is to be in a future contract.

Finally, as often happens in real mediations, the principal individuals in this mediation, being the Council’s Mayor and the Managing Director of Urban, both have their “jobs on the line” if they are unsuccessful in resolving this matter.

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A Fine Mess

Greg Bond

Commentary for Training

Interests and Stakeholders

This case provides trainers, trainee mediators and role-playing parties a good opportunity to take a comprehensive approach to interests-based mediation. There is no no-agreement alternative that makes sense to anyone. This public building project has to be completed, even if it means increased costs. There are plenty of real examples of public infrastructure or prestigious public building projects being delayed while costs escalate and the ensuing detriment is always to the whole community rather than just the commissioners and builders of the projects. In this case, the responsibility that the parties bear can be the driver towards solution-focused mediation.

The Council and Urban have their interests to protect, and these are inexorably linked to the interests of a very large number of stakeholders. Perhaps it would be sensible at some time in this mediation to take stock of who these stakeholders are and what their interests might be. This could be helpful in reinforcing the need for a solution, and in knowing that a good solution for the Council and Urban can be better if that solution is also acceptable to other stakeholders, and involves them where appropriate. Looking at other stakeholders can also lead to “expanding the pie” and new options.

These stakeholders include: the WCC Commission; the people and taxpayers of Belletown and Bellevania, including special interest groups such as the demonstrating cyclists and all those citizens involved in any way with the proposed children’s hospice; the politicians in the Belletown Council soon to be up for re-election; other Council departments not wanting to lose face; national and international visitors to Belletown during the World Capital of Culture year; sponsors for that year; local businesses that will profit from a successful World Capital of Culture year; employees and management at Urban; Urban’s shareholders; and, in a broader sense, any public or private entities in Uraniana that rely on the work of Urban being successful — the beneficiaries of taxation, other businesses that work with Urban, and more.

Greater awareness of interests and responsibilities will not relieve the parties of the necessity to do some tough negotiation, making sure that whatever they agree is affordable and manageable in a tight timeframe. The mediator can assist here, and the case offers plenty of scope for some option creation before any decision-making is undertaken. In other words, a trainer can encourage the mediator in this case to try to stick closely to the mediation steps from issues to a broad assessment of interests to options to decisions. Explaining this at the outset of the mediation and framing it as a sensible decision-making process will help the parties accept the mediator’s process control.

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