Claims & Construction Dispute Resolution Procedures

Recourse to law can be a costly trap for the unwary.  Resolving construction disputes through legal proceedings can take more time and money than correcting the defects from which they arise.  At the outset, the full costs of pursuing and defending claims cannot be forecast with any certainty.  Litigation and arbitration rarely favour the impecuniary.  There is no point in fighting a legal action unless to win, but expert advocacy is not cheap.  If one side buys expert help, the other parties to the dispute will want equal representation and advice to avoid being disadvantaged.  Keeping up in the face of escalating legal costs may become unmanageable, forcing the poorer parties to withdraw.

Confronting inexorably growing legal costs, litigants can find themselves in a dilemma – facing, on the one hand, having to risk still more money and, on the other, losing all by backing down first.  Withdrawing a claim, like losing in court, carries with it not only the loss of money already spent on the dispute but also the risk of having to compensate the other side for their legal costs.  These combined costs can grow rapidly to exceed the sums originally in dispute.

When facing legal action over building defects, always weigh the cost of proceedings against the value of the issues in dispute.  It is rare to recover the full cost of a dispute. 

Say there is a dispute between a developer and a builder over defective work which would cost £100,000 to correct.   Assume that it is a simple dispute, which goes to trial and that the developer spends £30,000 on legal costs while the builder spends £10,000.

After 9 months of dispute, the judge finds entirely in the developer’s favour and awards him costs.  The builder will not agree the costs as he, having spent only £10,000 himself, thinks a claim for £30,000 by the developer is extravagant and unjustifiable. 

In such circumstances, the court’s taxing master assesses the awarded costs.  The ‘taxed’ costs may, from experience, lie between 40 and 80 per cent of the actual costs.  (In this context the word ‘tax’ has nothing to do with sources of government revenue.  It is the process whereby the court reviews the parties’ legal costs and decides which parts are recoverable from the losing parties and which parts are not.)  In this example, 60 per cent of the developer’s legal costs are awarded.  That is, the builder is required to pay £18,000 toward the developer’s legal costs.

The builder therefore has to pay to the developer £100,000 for the rectification of the defects and £18,000 in recoverable legal costs.  The net result is that the developer had to spend £130,000 but recovered only £118,000, a net loss of £12,000.  The builder, on the other hand, is out of pocket by: £100,000 for the cost of rectifying the defects; £10,000 for his legal costs and £18,000 for the developer’s taxed legal costs – making £128,000 in total.  The lawyers are, of course, some £40,000 better off.  That is the overall additional cost to the builder and developer of failing to reach an agreement without recourse to law.

The developer would have saved delay and effort if he could, at the outset, have negotiated a compromise settlement for about four fifths of his claim, and the builder stood to save something in the order of £40,000-£50,000 by accepting such a compromise.

The watchword is ‘proportionality’.  The more disproportionate the cost of a dispute to the value of the matter in dispute, the more desirable it is to avoid full-blown litigation or arbitration.  Disputes rarely get to a final hearing; the parties usually settle out of court, often regrettably after the costs have grown alarmingly. 

To minimise the waste of time and money when conflict is unavoidable – and to preserve working relationships – it is important to understand the different ways of resolving disputes. 

At one end of the scale there are procedures that are imposed by law, externally regulated and binding.  At the opposite end there are procedures which are intended to help disputants resolve their differences but which are voluntary, flexible, and which do not lead to legally enforceable findings.  Although there are many shades in between these extremes it is conventional to subdivide procedures for resolving disputes into those which provide outcomes that are – largely – final and binding on the disputants and those that do not.  Non-binding procedures are often referred to as ‘alternative dispute resolution’, or ADR.

In England and Wales, for disputes arising from building work, the available final and binding dispute resolution procedures include: litigation, arbitration and – within limits – adjudication.  Non-binding dispute resolution can involve anything from direct negotiation between the disputing parties to more formal procedures.  These are often conducted by disinterested third parties and include, for example, mediation, expert determination and mini-trial.[1] 

Adjudication may now be imposed by statute and may be both mandatory and binding.  For this reason, in this book, it is dealt with as part of the formal legal system alongside litigation and arbitration.  Traditionally, it has been treated as an alternative dispute resolution procedure and is included in many books and articles on ADR.

 

An illustration of the range of dispute resolution procedures

 [1] Variants of alternative dispute resolution procedures are incorporated in some contracts in terms which bind the contracting parties to them allowing disputes to be determined with similar finality to arbitration. Used in this way they may be considered to be a kind of arbitration.