Some Arbitration Issues in relation to the New GCCC Forms of Construction Contracts

"…..Of course, some of the risks under this category are un-insurable and this remains the ultimate liability of the Employer. In the case of the flawed concepts in a contract……, to say a good example of this is the GCCC form of Contract".
Dr.Nael Bunni, 25th June 2008 (quotation from lecture on risk management in construction contracts in Trinity College, Dublin).


Conciliation:
“The process of adjusting or settling disputes in a friendly manner through extra judicial means. Conciliation means bringing two opposing sides together to reach a compromise in an attempt to avoid taking a case to trial. Arbitration, in contrast, is a contractual remedy used to settle disputes out of court. In arbitration the two parties in controversy agree in advance to abide by the decision made by a third party called in as a mediator, whereas conciliation is less structured”.
http://legal-dictionary.thefreedictionary.com/Conciliation


It is clear from the two quotations above that this topic will again focus in on the New Public Works forms of Contracts or the GCCC suites of Contract. Many discussion points could be dealt with in relation to this New Form of Contract, however for this article I have chosen three particular issues relating to this Form of Contract, the knowledge of which is relevant to arbitrators.

· The Disputes Clause
· Possible Statutory Implication arising out of the Competition Act
· The “calculable” nature of risk


The ‘Disputes’ Clause:


The relevant clause is the ‘Disputes’ clause, clause 13 and its sub-clauses 13.1 & 13.2. Copy as follows:

PUBLIC WORKS CONTRACT
FOR
CIVIL ENGINEERING WORKS DESIGNED BY THE EMPLOYER

13. DISPUTES
13.1. Conciliation
13.1.1. If a dispute arises under the Contract, either party may, by notice to the other, refer the dispute for conciliation under this sub-clause 13.1. The notice shall state that it is given under subclause 13.1 of the Contract.
13.1.2. Within 10 working days of the referral of a dispute to conciliation, the parties shall jointly appoint a conciliator who is competent to adjudicate upon the dispute and independent of the parties. If the parties fail to appoint a conciliator within 10 working days of the referral, or if a person appointed refuses to act or becomes unable to act, the conciliator shall be appointed by the appointing body or person named in the Schedule, part 1N, on the application of either party. If there is a fee for making the appointment, the parties shall share it equally. If one party pays the entire fee, it shall be entitled to reimbursement of the other party’s share from the other party on demand.
13.1.3. Each party shall, within the period set by the conciliator, send to the conciliator and the other party brief details of the dispute stating its contentions as to the facts and the parties’ rights and obligations concerning the dispute. The conciliator may, for this purpose, suggest further actions or investigations that may be of assistance.
13.1.4. The parties shall promptly make available to the conciliator all information, documents, access to the Site and appropriate facilities that the conciliator requires to resolve the dispute.
13.1.5. The conciliator shall consult with the parties in an attempt to resolve the dispute by agreement. The conciliator may do any of the following, or any combination of them:
(1) meet the parties separately from each other or together and consider documents from one party not sent or shown to the other
(2) conduct investigations in the absence of the parties
(3) make use of specialist knowledge
(4) obtain technical or legal advice
(5) establish the procedures to be followed in the conciliation.
13.1.6. The conciliator shall not be an arbitrator and the Arbitration Acts 1954 to1998 and the law relating to arbitration shall not apply to the conciliation.
13.1.7. The conciliator’s terms of appointment shall be those in the Works Requirements or, if there are none, those agreed by the Employer and the Contractor with the conciliator.
13.1.8. If the dispute is not resolved by agreement within 42 days after the conciliator was appointed, or a longer period proposed by the conciliator and agreed by the parties, the conciliator shall give both parties a written recommendation. The conciliator shall base the recommendation on the parties’ rights and obligations under the Contract.
13.1.9. If either party is dissatisfied with the conciliator’s recommendation, it may, within 45 days after receiving the conciliator’s recommendation, so notify the other party. The notice shall state that it is given under sub-clause 13.1 of the Contract, and shall state the matters in dispute and the reasons for dissatisfaction. If the conciliator has failed to give a recommendation within 45 days after appointment, either party may give a notice of dissatisfaction. If notice of dissatisfaction has been given in accordance with this clause, either party may refer the dispute to arbitration under sub-clause 13.2.
13.1.10. If neither party gives notice of dissatisfaction within 45 days after receiving the conciliator’s recommendation, the recommendation shall be conclusive and binding on the parties, and the parties agree to comply with it. If, in such circumstances, a party fails to comply with the conciliator’s recommendation, the other party may [without limiting its other rights] refer the failure itself to arbitration under sub-clause 13.2, and need not invoke this sub-clause 13.1 for this reference.
13.1.11. If the conciliator has recommended the payment of money, even if a notice of dissatisfaction is given, the following shall apply:
(1) The party concerned shall make the payment recommended by the conciliator, provided that the other party first
(a) gave a notice, complying with the arbitration rules referred to in sub-clause 13.2, referring the same dispute to arbitration and
(b) gave the paying party a bond executed by a surety approved by the paying party, acting reasonably, in the form included in the Works Requirements, or if there is none, a form approved by the paying party, acting reasonably, for the amount of the payment.
(2) If, when the dispute is finally resolved, it is found that the party receiving payment on the conciliator’s recommendation was not entitled to some or all of the amount paid, then that party shall repay the amount it was paid and found not to be entitled to, together with interest.
(3) When the dispute is finally resolved, interest will be deducted from final payment under the award or judgment.
(4) Interest under this sub-clause is calculated at the reference rate referred to in the European Communities (Late Payment in Commercial Transactions) Regulations 2002 plus 2% per year and runs from the date of the original payment to the date of the repayment or final payment.
(5) [This provision for interest is confidential under sub-clause 13.1.12, and in particular shall not be taken into account or referred to in arbitration until all other matters are resolved.]
13.1.12. The conciliation shall be confidential, and the parties shall respect its confidentiality, except when any of the exceptions in sub-clause 4.16 apply, or to the extent necessary to enforce a recommendation that has become conclusive and binding. All documents provided by a party in connection with a conciliation shall be returned when the conciliation is concluded.
13.2. Arbitration
Any dispute that, under sub-clause 13.1, may be referred to conciliation shall, subject to sub-clause 13.1 be finally settled by arbitration in accordance with the arbitration rules identified in the Schedule, part 1N. For purposes of those rules, the person or body to appoint the arbitrator, if not agreed by the parties, is named in the Schedule, part 1N.

One of the positive aspects of this new form of contract in comparison with the old IEI, RIAI & GDLA forms is that it is written in plain English and therefore easily understood.

A feature in the drafting of this contract (and similar in context to other standard forms of contract) is that the first clause contains a schedule of definitions. In addition to this is a further clause, clause 1.2, which contains a schedule of Interpretations. The drafters however decided not to define Conciliation.

The reason why the Conciliation definition is omitted is perhaps evident from the Conciliation part of the ‘Disputes’ clause which states as follows:

Ø “the conciliator shall not be an Arbitrator and the Arbitration Acts 1954 to 1998 and the law relating to Arbitration shall not apply”
Ø “if the dispute is not resolved by agreement within 42 days after the conciliator was appointed, or a longer period proposed by the conciliator and agreed by the parties, the conciliator shall give both parties a written recommendation. The conciliator shall base the recommendation on the parties’ rights and obligations under the Contract”

Taking these points in order, the first one appears somewhat confusing and the interpretation probably relates to the Conciliator’s role and function in the process rather than excluding any Conciliators who have carried out Arbitration's previously in their professional careers.

The second point and the highlighted font section is one which will cause real confusion in the future, and in particular the last line, “the conciliator shall base the recommendation on the parties’ rights and obligations under the Contract”. This arguably goes against the very spirit of Conciliation and also goes against the tried and tested role of a Conciliator, i.e. “bringing two opposing sides together to reach a compromise in an attempt to avoid taking a case to trial”. It also goes against the provisions of the IEI Conciliation procedure which provides that a conciliators opinion need not be based on any principles of common law or equity. (I believe that a new set of conciliation procedures to tally with the new contracts are possibly in place and these will be studied and explored on another day.)

Howver, this effectively this will turn Conciliation's into mini-arbitration's. Where, on the one hand, a sub-clause states that “the conciliator shall not be an arbitrator”, on the other hand, the following sub-clause states “the conciliator shall base the recommendation on the parties’ rights and obligations under the Contract”. This is an anomaly and placing such an obligation on a conciliator may distract him from his role as a facilitator to a settlement.

How would a contractor therefore address this clause? Would he issue queries at tender stage requesting the definition of ‘conciliator’ and get this definition included as part of the Contract when signing the Contract? It is likely if a tender query to that effect was issued it is likely that the response would be a muted one.

Sub-clause 13.1.9 of the Contract Conditions allows either party to express their dissatisfaction with the conciliator’s recommendation within 45 days of its receipt. This is similar to the old traditional forms of Contract but in a further step the clause states that the dissatisfied party shall state the reasons for dissatisfaction. This is a very unusual provision as the conciliation process is supposed to be on a ‘without prejudice basis’ and ‘confidential’. The reasoning behind this is perhaps to have a mechanism to enable a settlement at a future stage prior to arbitration, however it could also serve to weaken the Claimants position vis a vis a Calderbank Offer.

The new contracts also make a conciliators recommendation conclusive and binding if no party expresses dissatisfaction within the time frame.

Another new provision relates to a recommendation based on the payment of money, even if a notice of dissatisfaction is given (referring to Arbitration). The losing party must pay the money recommended provided that the Claimant party firstly provides a bond executed by a surety approved by the paying party for the amount of the payment.

This on-demand bond is only required to be maintained for 500 days and a demand can be made more than 500 days after the date of the bond. When one considers the time frames for Arbitration this time frame appears short putting the receiving party to the expense of the on-demand bond.

Where do these implications leave Contractors?
Contractors are supposed to be concentrating on building things and not getting involved in the legal wrangling and the Bunni version of “flawed concepts in a contract”. Many Contractors in Ireland rely on over half of their turnover on public sector works, such as schools, social housing, hospitals, roads, rail, bridges etc. These new forms of Contract were forced through by the Government on a non-consensual basis. It is possible that in this current climate where competition is even more stringent that the larger Contractors in Ireland, who can afford the legal expense, will put these Conditions to the test.

The drafters of this Contract perhaps where conciliation fails or instead of the conciliation clause may have been best served to opt for perhaps some kind of expert determination as is favoured by learned people in the dispute resolution sector and none more so than Hew R.Dundas who stated;
“Expert Determination offers a far faster, lower cost alternative to arbitration, offering a legally binding decision almost impervious to challenge; while lawyers may relish the availability of a right of challenge, users/clients do not”.


Possible Statutory Implication arising out of the Competition Act:

Section 5 of the Competition Act 2002 is worded as follows:
Competition Act, 2002

Abuse of dominant position.
5.—(1) Any abuse by one or more undertakings of a dominant position in trade for any goods or services in the State or in any part of the State is prohibited.

(2) Without prejudice to the generality of subsection (1), such abuse may, in particular, consist in—

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions,

(b) limiting production, markets or technical development to the prejudice of consumers,

(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage,

(d) making the conclusion of contracts subject to the acceptance by other parties of supplementary obligations which by their nature or according to commercial usage have no connection with the subject of such contracts.

(3) The putting into effect of a merger or acquisition in accordance with the provisions of Part 3 of this Act, together with any arrangements constituting restrictions which are directly related and necessary to the implementation of the merger or acquisition and are referred to in the notification of the merger or acquisition under subsection (1) or (3) of section 18 , shall not be prohibited under subsection (1).

I have put in bold font the section which is worthwhile discussing. Although the Act does not prohibit a dominant position, only its abuse, it could be presumed that where terms and conditions in a contract are so much in favour of the dominant party that this could be viewed as abuse of a dominant position? Of course it is only a judge that can decide on this, but it may be an argument that could be pleaded by an aggrieved contractor in the future and may trigger the case stated mechanism in some future Arbitration.

Arbitration's under the new forms are governed by a new set of Arbitration rules, January 2008. One of the welcome rules is a requirement to use a ‘short procedure’ but obviously this is governed by the consent of the parties. These rules also allow for Interim Awards and the Awards must give reasons unless all parties agree that no reasons are to be given.

In conclusion, it will take 4 to 5 years before these new contracts and the dispute resolution mechanisms and procedures are put to the test. It is my belief that somewhere in the future on a large scale complex infrastructure project that this form of contract will be very much put to the test.


Risk must be Calculable?

Perhaps the Government rushed into placing some draconian provisions and unfair risk apportionment over to Contractors without realising that all risk must be calculable.

The common formula for risk calculation is R = P x C, Risk = Probability (of occurrence) x Consequences (of occurrence). The various risks involved in Construction Contracts therefore can be calculable based on statistics available. A perfect example of this is the risk Contractors take for inclement weather (which is common in the old traditional IEI, GDLA & RIAI forms of Contract), whereby a contractor has the benefit of historic weather data for a particular area in the Country.

One example of an incalculable risk is the clause in relation to trespassers, “the Contractor shall be responsible for activities of trespassers, protesters and others, that are not Employer’s personnel, on the Site, and the Employer shall have no responsibility to the Contractor for their activities and presence” - this is an impossible risk to foresee and therefore impossible to price at tender stage and is incalculable as no statistical evidence is available to formulate the probability of protesters occupying the site and to calculate the consequences of this occurrence would be just a ‘shot in the dark’ so to speak.

Interim Conclusion:
This new form of Contract with the new risk provisions and new Arbitration agreement serves up a new challenge for future Domestic Arbitration's and greater challenges for Domestic Arbitrators.

Many disputes will differ depending on the circumstances. From my perspective and experience as a Civil Engineering Quantity Surveyor the following possible disputes will rear their heads over the next 4 to 5 years and will pose challenges to both Arbitrators and Conciliators alike:
Ø Disputes over design and its completion
Ø The Employer directs a Contractor to do something (which is part of the Contract) and the Contractor deems it an instruction (which may have additional cost implications)
Ø Unforeseeable risks and incalculable risks (per example above)
Ø Time-bars and notice provisions
Ø Conflicting data on geotechnical information, (most contracts in the Public realm are now passing the ground conditions risk onto Contractors
Ø Claims under Statute

It will therefore be necessary for an Arbitrator dealing with disputes under this Contract to have the following knowledge base in order to decide on cases of the form of contract itself, he/she will require at a minimum the following:
Ø A knowledge and understanding of the contract itself
Ø A knowledge of estimating and procurement
Ø Risk analysis
Ø Time bar provisions
Ø Condition precedents
Ø Programming
Ø Methods of Construction, some design knowledge and technical knowledge of construction
Ø The Law of Contract
Ø Arbitration Law
Ø The IEI Arbitration Procedures
Ø Implied Terms in a Contract (this item is perhaps one of the most important issues)

In relation to the technical disputes (where a sizable amount of claims will stem) it will be a prudent Arbitrator who utilizes expert witnesses to his/her advantage.

Perhaps it may also be a good idea to get the parties to the Arbitration to agree at the Preliminary meeting on the use of an independent expert witness and to try and get the parties to agree that his expert determination on a particular issue will be binding.

Finally the advent of this new form leaves us all facing a learning curve of 4 to 5 years. We will only get a real grasp of what some of the conditions truly mean when we receive the benefit of judicial interpretation, this judicial interpretation may not arrive for a long time as Government powers may settle cases rather than let this form of contract inside the walls of the courts.