Shovel-ready: dispute risk strategies for major projects

David Outerbridge (00:09): Welcome to the inaugural episode of Torys’ new webinar series on mitigating litigation risk in major infrastructure projects. I'm David Outerbridge, head of our projects litigation practice. And today's episode is going to focus on three dispute resolution processes commonly seen on major projects. Specifically, the use of an independent certifier or independent engineer to resolve disputes. Secondly, the adjudication process, whether that's the statutory or contractual adjudication process, and third, arbitration.

And in the course of discussion today, we're also going to touch on the integrated project delivery model and some other ways of approaching disputes that are more focused on aligning the disputant’s economic interests and how that translates into different methods of resolving things.

As I mentioned, this is the inaugural episode of a new webinar series. It's presented by a cross-section of Torys project lawyers from across our various offices. And I ask you to keep an eye out for further episodes. Our next one that's coming up in September, dealing specifically with litigation risk in the permitting process.

Today's session is designed to be interactive, so there is a chat function. If you have a question or a comment, feel free to plop it into the chat and I will be moderating the chat here and happy to pose your question to the panelists. So, feel free to chime in.

So, before we launch in, let me introduce our panel. Here with me in the studio on my right is Alex Shelley, a projects litigator in our Toronto office, who has extensive experience in all three types of dispute resolution processes we're talking about today with, I might add, a perfect record on behalf of her clients.

Coming to us from Calgary is Amy Maginley, who's a corporate law partner in our projects practice there and has a substantial background advising clients on how to mitigate project risks through effective contract drafting.

And on my left in studio is Shalom Cumbo-Steinmetz, a projects litigator in our Toronto office who, like Alex, has an extensive experience with these various types of dispute resolution, with a particular spike in the statutory adjudication process under the Construction Act.

So without further ado, let's launch into the first of our three main topics for today, which is the use of an independent certifier or an independent engineer to resolve project disputes. Now Shalom, now that I've told viewers how wonderful you are, tell us about this type of dispute resolution process: when we talk about having an IC or an IE, the independent certifier or an independent engineer serving in a dispute resolution capacity, what do we mean by that, and if you can describe it for us?

Shalom Cumbo-Steinmetz (02:49): Sure. So, there's the old saying goes “where there's a crane, there's a claim”. But all—not all claims have to go the full mile. And the IE/IC, independent certifier/independent engineer, expert dispute resolution is intended to be a faster process to deal with disputes in real time. And that's its core function. It's designed to deal with them as quickly as possible and to deal with them by people who are closer to the substantive issues.

So, issues that will be substantive to the project, such as engineering issues, and less dealt with by a decision maker who's going to look at it from a legal perspective, as a lawyer or former judge might. So, the goal of these types of dispute resolution processes is to keep the project on track to resolve disputes real time and how do they do that?

They usually do it through some simple mechanisms. Short deadlines are the critical piece here. And the other thing that is what you typically see for these processes is that the decision maker—the engineer or the certifier—is embedded in the project. So they are somebody who's aware of what's going on the project. They will have witnessed it in real time, and when the dispute comes up, it's not a large learning curve for them to get up to speed on what happened and what's going on, and to be able to assess what the go-forward path should be.

Typically, these people are not legally trained. That's the purpose of this type of dispute resolution. Rather, they are subject matter experts. So they could be a quantity surveyor or a design professional, like an engineer or an architect. And their focus is what makes sense from an industry perspective and in the context of the project.

David Outerbridge (04:48): Great. So, Amy, you're a contracting lawyer. You advise clients on different dispute resolution options for including in their project agreements or construction contracts and the like. What would you say are the pros and cons of using the IC or the IE model to resolve disputes?

Amy Maginley (05:04): Right. So, pros of the IC/IE or expert determination model, or as Shalom mentioned, really the speed of the dispute resolution procedure. Because you are using subject matter experts to resolve these technical issues, arguably they should be able to make a determination potentially much, much faster than other dispute resolution procedures, such as, for example, arbitration, where you might need to rely on expert witnesses to resolve some of these technical issues.

Relating to that, speed is the flexibility in this model. For example, compared, again, compared to arbitration, where you might most likely will be following a set of rules and procedures, there's kind of a complete contractual flexibility to build in the process and procedure of these expert determination procedures within the contract itself. So as Shalom mentioned, you can set really short timelines and make sure that the process is efficient from, from that perspective.

Another pro would be in terms of maintaining and preserving the relationships between the parties, and I think this goes back to the speed of the procedure. Instead of having disputes dragged out between the parties to really have a quick way to resolve the dispute and preserve the ongoing commercial relationship between the parties as the project advances and continues.

And then related to the flexibility point is the ability to really determine whether this procedure is going to be final and binding or whether there's going to be an appeal right to the procedure. And as we'll talk about later with some of the adjudication procedure, similar to that in the expert determination procedure, oftentimes you'll see parties have these determinations as binding at least for an interim period to ensure that the project can advance and the parties can preserve their rights to later appeal the decision. Or in other cases, you might see the parties choose to have this procedure as final and binding without a right of appeal particularly for matters that might be less material for the project just to increase certainty, in terms of costs of the, of the overall dispute resolution process and the project proceeding.

On the flip side, the cons of this procedure would include, you know, as I mentioned, even though the parties—the parties do have that flexibility to draft the process as they want. Because of that, there's not necessarily going to be the kind of due process and fairness that you might see in other dispute resolution procedures. And particularly, you know, experts aren't bound to follow rules of procedural fairness, so, unless you've specifically drafted in these procedures in your contract, the expectation of what parties might think the process may be versus the reality could be negative for the parties to the extent they want to present further facts to support their arguments.

Secondly, parties often run into trouble if the scope of what the expert can determine is not properly defined in the contract. As Shalom mentioned, it's really—the intent is for these to be resolved by subject matter experts as opposed to legal experts. So, while these are very good for disputes about technical issues where facts are not in dispute, they're not really appropriate where the technical issues might overlap with questions of fact or law, in which case you would want someone with legal experience to be deciding those disputes.

And similarly, relating to the point I made about determining whether it's final and binding, it might not also be appropriate for disputes that are high value or very material to the project to have the expert determination be final and binding with respect to, to those decisions. So, there's—those are some of the factors you need to consider when using expert determination.

David Outerbridge (09:12): Great. Thanks, Amy. So, you've talked a bit about the interim binding or the fact that sometimes an IC or an IE determination can be interim binding. And by that, you know, what, what is envisaged there, as you were explaining, was that it's binding unless and until somebody decides to challenge it. Often that might be done at the end of the project with a court or arbitral proceeding.

But unless and until that happens, it's binding. And so, Alex, you're, you've been around a few IC and IE determinations. In your experience, as a practical matter, when there's an IC determination or an IE determination that's interim binding, does it end up being the final time, the final time that the matter gets decided? Or do you typically see these things get, go around one more time?

Alexandra Shelley (09:57): So, I'm going to give you a lawyer answer, which is: it depends. But I would say the overwhelming majority is that those are the final decisions. And I think it ends up being that way for a few reasons. First of all, sometimes there are, as Amy mentioned, thresholds in the project agreement. So, they're binding by contract because it says, you know, this, a nature—sorry, a dispute of this nature is final and binding, and there is no actual opportunity to go and have that adjudicated again.

But for the majority of contracts where it's interim binding and then you have an ability to have it reconsidered on a fuller scale, that typically, as you mentioned Dave, happens at the end of the project. And by the end of the project, you know, people have the benefit of hindsight. They have the benefit of perspective of, you know, what was the impact of that decision on the overall theme of this multi-year project?

And so, you can look at it holistically. Typically, you know, Shalom said, “where there's a crane, there's a claim”. Typically, we don't just see one of these IC or IE determinations. In the course of a project, we see several, and so you get to look at it holistically at the end and say, “well, I won them all, so I'm not going to go and look for another adjudication”.

Or “I had a mixed success, and I don't want to reopen it because I'm happy with, you know, in the wash where it balanced out”, or “I lost them all”. And maybe that says to you, you should go and have somebody look at them on a fuller record or it says to you, “maybe I was wrong [laughter] and it was strategically not wise to bring those disputes forward or that I, you know, hadn't properly considered, that from all angles”.

And so, we find that people tend to, as the passage of time and the magnitude of that dispute—maybe it seemed really critical at the moment that it was being adjudicated, and it was, but now the project’s moved so far beyond that, that you're not really willing to reopen old wounds at the end of the project.

We do see people use it as a negotiating tool so they know that the party that was successful knows that the party that was unsuccessful has the ability to have it adjudicated again, and that party may use it as negotiating leverage. You know, “we have this decision and it's in our favour, but we know it's not final and binding, and we may be able to come to some sort of resolution in the middle because we know that it's likely to go our way again, but we can't guarantee it, and we don't want to engage in that long, drawn out process to find that out. So why don't we find some sort of commercial solution that works for both of us, knowing what we think someone might do, but not 100% certain”.

David Outerbridge (12:23): So, Shalom. One of the cons of the IC/IE determination process is that, as was discussed, some disputes are not necessarily well suited to being decided by a technical person or a person who's not legally trained, etc. Talk to us about that. What types of disputes would you say are better off not going through the IC or IE process?

Shalom Cumbo-Steinmetz (12:44): Well, for starters, big disputes. And by that, I mean disputes, like Amy said, of a big dollar value, are not generally well-suited to this. And also disputes of big complexity. So, an example might be a delay issue that requires the entire project to basically be completed before you can quantify the effect of that delay issue.

So complex disputes, they often involve complex evidence and voluminous evidence, and those are not well suited to the timelines of an expert determination. And they're often not well suited to the expertise of an expert decision maker. Some examples are technical issues that go beyond a singular issue on the project, but rather involve complex engineering where there's disputed solutions to the engineering solution and you've got a variety of engineering firms giving different views. And as Amy said, you need to make some factual determinations to figure out, because the engineers are not all in agreement about core assumptions that are going into these designs. That's the type of complexity that may just move beyond what an independent engineer or independent certifier can resolve.

Another one, of course, is delay. And delay disputes are often quite fact-intensive, where the downstream impact of the delay may not be possible. In terms of determining that, at the stage when it arises, and it may also be that you don't want to go down that path because perhaps the impact is actually quite small and so, early determination may be just—it may be not a ripe issue.

The last example, of course, is where you've got a contractual interpretation issue where the, the core dispute is not really over the facts or the technical solution, but rather what does the contract actually require? And then in those scenarios, you need somebody with legal expertise to decide that issue. And so, expert determination by an engineer or independent certifier is typically not the right process.

David Outerbridge (15:01): So, Amy, turning to you, you’re a projects contracting guru, when you're drafting your dispute resolution provisions in agreements on projects, what are some considerations to keep in mind when drafting the IC or IE dispute resolution process?

Amy Maginley (15:17): So I think, I mean, I think we've already touched on a number of these key considerations. I think firstly, as comes, has come up a couple of times. It's really important to ensure that the scope of what the expert is able to determine is clearly set out in the agreement. And particularly, as Shalom mentioned, that there's carve-outs or at least a mechanic such that if these technical disputes do start to spill over into areas where there's questions of law or questions of fact, the parties can effectively move that dispute out of expert determination to another dispute resolution forum.

Similarly, wanting—you know, as was already mentioned, wanting to think, think about if there are going to be particular material disputes or disputes that the parties would prefer to just have resolved by another forum, that you specifically carve those out from the expert determination process.

The other thing I would think about in drafting would be the method of appointing the expert. You know, purpose again, of this dispute resolution mechanism is so that it's a fast and efficient process, but if you haven't clearly spelled out how the expert's going to be appointed at the time of the dispute, there could be a mini dispute over that, which doesn't help with a fast and expedient process.

The other thing to think about is the expert's qualifications. You know, I think oftentimes you see in contracts, with expert determination, generally, the parties just generically set out, you know, the expert just needs to be qualified in terms of their knowledge and experience. But sometimes you do see people actually identify the expert they want to use or the shortlist of experts. The one thing I would say with that is you would want some sort of fallback mechanic in the event when the dispute arises, if that expert or shortlist is not available to assist with that dispute.

And then, similarly on the procedure, as I mentioned, it's really kind of a contractual agreement as to how you want the process to be run. So I think you want to think through the process of that expert determination. As I mentioned before, if you want to build in some aspects to make the expert determination a bit more procedurally, procedurally fair than it would otherwise be if you're just deferring to the expert to determine the resolution process.

And then as we touched on, thinking about whether the, the expert determination is going to be binding or if it's going to be an interim mechanism to have a temporary binding determination that can be later appealed at the end of the project and, as we'll touch on in a bit, thinking through, because that starts to look a bit like adjudication, how that intersects with if you're in a jurisdiction where there is a statutory adjudication regime and how those provisions might need to work together.

David Outerbridge (18:22): So, Alex, last word to you on the IC/IE determination process. Does the fact that a project has this type of dispute resolution procedure tend to encourage parties to try and avoid dispute resolution and negotiate the solutions themselves, or would you say the experience is the opposite: that the consequences of losing before the IC or IE are sufficiently modest that people are prepared to roll the dice?

Alexandra Shelley (18:45): I find it to be the opposite, so I find it to be the latter: that because the decision is often non-binding and because the resources or legal costs required to bring the dispute forward and have it adjudicated are relatively minimal compared to what a full-blown adjudication would cost, the parties are more likely to seek out interim decisions that support their point of view.

It also helps sort of guide the project on a go-forward basis if you have some certainty in real time. So the relatively low lift allows people to get that certainty. And frankly, people like to be right and they like to be validated [laughter] and also, if you're certain that you're right about how something is supposed to be done, then you can get that answer, you know, in—close, close to real time.

And then it provides certainty going forward on the project or it clarifies your point of view, and at least you know that you were wrong about that and so, there are knock on effects you'll understand of that. And so, I do find that it tends to motivate people to roll the dice on those interim decisions, which is interesting because, as we spoke about earlier, they tend to be the decision that stands because they're ultimately not adjudicated again at the end of the project.

So the sort of “rough justice” that Amy described that doesn't have a lot of procedural fairness necessarily, or a lot of bells and whistles when it comes to how evidence goes in and how the decision is made, ends up being the decision that ultimately rules the day because you've rolled your dice on something, you've submitted to this simplified process, and then you live with that decision as your ultimate decision.

David Outerbridge (20:16): Alright. Well, let's move on then, to discuss the second type of dispute resolution process and infrastructure projects that is our focus today, which is adjudication. Now Shalom, we'll start with you. You are well known as Mr. Construction Act. What is adjudication? And, what's the difference between statutory adjudication and contractual adjudication?

Shalom Cumbo-Steinmetz (20:37): So, I often say adjudication is arbitration-lite. It is in the world of dispute processes on a project, it lives somewhere between expert determination and full-blown court or arbitration. So, it has a piece of the procedural protections that we've been speaking about generally don't exist in the expert determination realm. There are more formal evidence processes, and there is a more formal process for delivering evidence and having some form of challenging that evidence and having some form of hearing.

But it is still an interim, generally interim process, and it is one that is still focused on getting it—an answer to a dispute fairly quickly, and with an overarching sort of rough justice type of framework. So, it lives on that spectrum closer to the full blown, but still generally quite tight. And as a result, it's not, you know, the gold standard of going to a trial in court.

Where, you know, we—you spoke a little bit about contractual versus statutory adjudication and that, that's a core feature, Amy mentioned this as well.

The main difference between those two types of adjudication are whether they exist. So statutory adjudication is a popular concept elsewhere in the world. It's one that's beginning to take hold in Canada. But it's not something that's uniformly available for projects across this country. So currently, statutory regimes exist in Alberta, Saskatchewan, Manitoba and Ontario, and they exist for projects that are under federal jurisdiction. And that's all subject to when the project started, when the project agreement was signed, but those, those pieces of legislation exist and are there. The Atlantic provinces, New Brunswick and Nova Scotia, have legislation in place, but it's not yet in force. And then Québec has a voluntary regime. So, there's a bit of a patchwork across the country.

The trend over the last five years has been towards having these processes available under statute. But it's important to know where your project is and whether you actually have, or are subject to the risk of having, exposure to this type of dispute process.

Where the statutory regime provides for adjudication, it's always available, and generally as a matter of statute, you can't contract out of that. So, the interesting thing becomes the interaction between contractual adjudication and statutory adjudication. If you don't have the option for statutory adjudication, then the parties can of course create an adjudication mechanism within the contract that will look very similar to the types of adjudication the statutes provide. So that's, that's a scenario in which there is no statutory adjudication.

And then there is the middle ground where a statutory adjudication exists, cannot be modified by contract, but the parties themselves, nonetheless, choose to construct an adjudication mechanism within the contract. And you might ask, why would people do such a thing if a statutory adjudication mechanism exists? And the reason, of course, is they might want to build a process that's more advantageous, generally, for everybody. They may want to build a process that has protections in place or processes in place that both parties would prefer over the statutory mechanism, or they may want to build a process that's, you know, arbitration-lite, but not so light as the statute.

So that would allow a party to go through the statutory process, but in parallel have a contractual adjudication process that's a little bit more involved, a little bit lengthier. So, you get that first decision through the statutory process, and then you get another decision that's still not a full arbitration decision, but it's a little bit more in-depth, through the contractual process. And that allows the project to continue on pace, while still getting increasing, incremental levels of certainty through those processes.

David Outerbridge (24:52): So, Alex, while Shalom may have the catchy name “Mr. Construction Act”, you're known around the office as “Ms. Dispute Resolution Board”. You've conducted a number of contractual adjudications before a dispute resolution board on infrastructure projects. Tell us about that process. Who are the adjudicators and how does the DRB process work?

Alexandra Shelley (25:14): So it's really a “choose your own adventure” process in terms of being bespoke: the parties, because it's contractual, obviously negotiate what that's going to look like at the time of the project agreement, which is great because that's when everyone is hopeful and optimistic and trying to be in agreement, and you're not trying to design a process while you're in the middle of a dispute.

It could look a lot of different ways. You could have a single adjudicator that the parties might, as Amy mentioned on the IC/IE side, might predetermine who that is and have that set out in the agreement. Of course there should be, as Amy mentioned, a backup process, if that person is unable or unwilling to act. There can also be a panel, so I've seen where you have three individuals and perhaps one of them has legal training, because now we're, you know, in the background of where there's going to be more evidentiary issues and perhaps there's some legal interpretation to be done, and then maybe the others have different technical expertise. And so if you're having a panel, try to think about having people that bring different perspectives to that panel.

And again, the panel, you can decide ahead of time if you actually know who those individuals are, or if you know the type of individual they are, or you can develop a roster of individuals that you might pick from. So you might say, “here's a list of folks”. And if there's three of them, each party gets to select one, and then the two nominees that have been selected get to, between the two of them, pick a chair from the roster, and that's how we come up with our three. So there's lots of ways to design who the decision makers actually are.

In terms of designing the process, you can have it be full-scale. You can have sort of live witnesses. They don't have to be evidence under oath. They can just come and share their evidence or their observations. You can have experts come and provide information. You can do that with counsel submissions. You can also do it mostly on a paper record, so, where you've made a submission and then perhaps there are some counsel submissions. So it's really, up to you to decide how much time and energy you want to invest in this process, understanding that the decision is likely still to be interim binding.

So, you're going to get a decision that’s pretty well reasoned and it's going to be based on more information, perhaps in the IC/IE process, but still not full-blown arbitration, where, somewhere in the middle of the spectrum that Shalom was describing. And so, you're balancing how much to expend on that process, given that, you know, it might not ultimately be the decision that prevails at the end of the day.

Again, our experience has been, when you go to a DRB and you have, sort of, one of these more full-blown adjudications, that that is ultimately the decision that maintains at the end, that people don't seek to re-adjudicate: that at the end of the project, because they actually do have a sense that it was well considered that the evidence that was needed was brought forward, the experts that needed to be heard from were there, and counsel had an opportunity to make submissions. So they feel pretty satisfied with the procedural aspects of it if they've designed it in that way, that they don't feel that an additional adjudication would change the outcome of it.

David Outerbridge (28:16): Now, Amy, as a corporate lawyer developing a contractual adjudication process for a project, what would you say are some drafting considerations to keep in mind? And, as part of that, is it helpful to involve a litigator in the process? And the people in this room are whispering, “say yes to the last question”.

Amy Maginley (28:35): [Laughter]. Well, yeah, I would say the short answer is: yes. Very helpful to involve a litigator. And I would say that generally for all of the dispute resolution mechanisms we're talking about today, I think as a corporate commercial lawyer, at least in my experience, because we're involved at the beginning when these contracts are being drafted, and everyone is optimistic that things will proceed without problems, unfortunately, a lot of times these procedures, in the contracts are looked at as a bitter afterthought. And not much focus is turned to them, and then unfortunately, when a dispute arises, the focus, instead of focusing on the dispute on its merits, it turns into a dispute about the process itself.

But when speaking about contractual adjudication specifically, I think the kind of value-add that litigators can add to the process and, and the things to think about in drafting these—you know, as Shalom mentioned, if you're in a jurisdiction where there is that statutory regime, you can't contract out of it. So you want to make sure that your contractual adjudication works with that statutory regime and there isn't a conflict. That said, as Shalom also mentioned, with a dual regime where you have contractual adjudication on top of the statutory regime, you can really build out the contractual regime in the way that you want the process to proceed, as long as it isn't conflicting with the statutory regime.

So things you might be thinking about would include, you know, scope of matters adjudicated under the statutory regime. I think it's pretty focused on the payment disputes, in particular, to make sure that cash is flowing to the projects. And the projects can continue. But as mentioned, you know, when we've looked at the expert determination process, you can effectively turn that into a quasi-adjudication procedure where you have these decisions that are interim binding until the end of the project, again, to make sure the project is proceeding.

So, you’ll want to turn your mind to the types of disputes that might potentially stall or delay a project, and whether contractual adjudication might be an efficient way to resolve those disputes and ensure the work on the project continues.

The other thing I think to think about is just in terms of the process that you're setting out for adjudication. You know, as was mentioned, part of the benefit of adjudication is it is supposed to be arbitration-lite, and therefore it should be a faster procedure than a full-blown arbitration. That said, often the timelines are quite tight, and therefore it's useful to talk to your litigator colleagues to make sure there might be ways that you can alleviate some of the administrative burden of those timelines.

For example, if a party gives notice that they want to adjudicate, they—there might be a requirement that they need to consent to a reasonable extension of time from the other party with respect to the timelines. Or for any documents being submitted, parties might want to implement, you know, a page limit in terms of, if documents have to be submitted within a certain amount of time, they can only be—effectively, there's a page limit on those submissions. I think the other value that litigators can add in drafting these provisions is thinking about the intersection of some of these disputes, and particularly payment disputes with insurance coverage, limitations of liability. And then also bonding in terms of guarantees of how these adjudicated amounts are going to be paid under the agreement. So. Yeah.

David Outerbridge (32:17): So, Alex, let me turn back to you. We've heard about adjudication happening in real time. It's a process that's embedded typically within the project. So if you have a multi-year project, you can get an adjudication on in a matter of months. Some of these things get done, you know, in two or three months while the project continues around it.

So, from your perspective, why would a party want real-time adjudication during the project rather than waiting till the end? And does the answer, is the answer to that question different depending on who you are? Like, is it better for an owner to wait till the end or get it done in real time or better for a contractor? What are your thoughts on that?

Alexandra Shelley (32:55): So before I answer that question, I want to key off on the months—the word you used—months in Amy's discussion of timelines. I will say that, um, these things, sometimes the timelines provided for in the project agreement are impossible from a litigation standpoint. And then you're in the middle of a dispute and you have to go ask the other side if they agree to an extension.

So I will just add that it can be months and it should be months: not days, not weeks, but hopefully some reasonable amount of time to get this heard. But in terms of answering your question, Dave, about the parties’ perspectives, beginning first from both parties’ perspectives as to why they would want to have this adjudicated in real time, it allows parties to know their risks sooner and to be operating on the right assumptions as to how the project is going to proceed, and to be able to change course and mitigate those risks. So, if you find out that you have misapprehended what is required under the contract, that perhaps, you know, you thought something was out of scope, but it's actually in scope, then you need to change course to mitigate that.

It may have knock-on effects, it allows you to do that in real time so that it doesn't become a bigger problem down the road. And so it also allows you, in that same regard, to sort of adjust your schedule if there's things that are going to be impacted, as a domino effect and mitigate significant delay.

It also allows people to just adjust their perspectives about—and misconceptions about—responsibility, which might, you know, clear a—it's a business relationship. It's an ongoing relationship. You... parties are in this for years. And so, if you have some clarity around something, sometimes that helps with the relationship side of things as well. So that you’re not stewing over something that you are certain you're right about, without a determination and you're certain the other side is wrong about.

But from the individual perspective, so from the perspective of the contractor, real-time resolution can help funds flow faster. So using the same sort of scope change example, if you find out something is not a scope change and it's not—something needs to be acquired, it's actually part of the contract, then you know that additional funds are not going to flow for that particular portion of the project.

Whereas if you're right and it is a scope change, then the funds will flow to you. And that doesn't hold up that process. If you know that funds are coming, then maybe you don't have as many construction-leaning problems as you might have where you're uncertain about those things.

From the perspective of an owner, I mean, they want this thing built, whatever it is, and they want to keep the project on time. And so, if you have interim adjudication, then that allows you to not be stalled, not people using leverage, no “I'm not going to do this until we know what the knock-on effects are”. You sort of extinguish that leverage: you have a decision, and then you can at least move forward one way or another. And so that makes an owner happy in terms of being able to try to keep as close to the schedule as possible.

From both perspectives, it is a bit of a draw on resources. So, you do need people, subject matter experts, you know, people that are on the front line sometimes at these projects to come and tell you what's been happening and to provide evidence. So in that way, for both parties, it can be a little bit of a distraction from advancing the project.

But overall, having people that, in real time—fresh memories, they know exactly what's been going on and happened two weeks ago, or it happened two months ago. They're still engaged on the project. They haven't moved on to a different project. So we have the right folks there. That can be worth a lot to have fresh memories, the right people, and be able to adjudicate it now instead of years down the road when those people have moved on, when memories have faded.

And so, balancing the sort of draw on individuals’ resources while the project is underway against, you know, not using their resources until the end of the project, but then they have much less to offer you at that point, because their memories and their information is not as good. And so I think overwhelmingly, people find that it's better to do it in real-time when everyone knows, you know, is very familiar with the facts on the ground and not try to recreate something after the fact.

David Outerbridge (36:45): Well before we move on to our third topic, which is arbitration, as we were preparing for today, I was sort of pulling together my thoughts on, you know, have we learned—as we, the litigation team, doing the project’s litigation in front of an IC and an IE or a dispute resolution board or a Construction Act adjudicator—have we learned any lessons about, you know, how, how this translates from a strategy perspective for clients and what, what are the pros and cons of the different approaches?

And we've done quite a few of these in different areas of the infrastructure and energy world. And I think if I was going to distill the lessons learned down, that there's really three: one is that it is possible to litigate a reasonably complicated matter in a relatively short period of time. And even though it's rough justice, it can be done reasonably effectively.

I won't say it's particularly fun for the lawyers who have to burn a lot of midnight oil to get it done in time. But, you know, people will do what needs to get done in the time allowed. So I mean we've had, you know, Alex and I have had quite a few of these either IC determinations or DRB determinations where we get the notice from the other side, we collect evidence from our client and rush the calls, we immediately retain an expert, get them going and they're actually able to generate a report of a, you know, basic nature within a couple of weeks, even though typically it would take them six months or what have you. It is possible to pull all this together and advance the case and get it in reasonable shape in a matter of two to three months, with results that aren't, you know, inappropriately rushed in terms of how the adjudication unfolds.

And so, you know, if people are concerned that for matters with the six- or seven-digit value that these processes will be too rough justice, that's not our experience. I think our experience is that you can get it done and you can get it done with a reasonably good quality of decision making. So that would be the second lesson that the... I wouldn't say the quality of decision making from, the IC or IEs that I've dealt with or the DRBs that I've dealt with, is materially different in quality from a court or an arbitrator.

Obviously, you don't want to take your absolutely most complicated contractual interpretation issue to a payment certifier or what have you, but, in the grand scheme of things, the quality of analysis is reasonably good as long as you're picking your adjudicators well at the front end. And as Alex said, you know, in the DRB context, you could have the luxury or the advantage of being able to have a well-trained construction lawyer as well as engineers who might be on your DRB panel to give you that full scope of, of analysis that you might need.

The third lesson, I guess I would say, is that even though there—many of these processes are interim binding, and even though there's an element of rough justice, and even though you're doing five years of litigation in three months or what have you, most of the time in our experience, the things don't get litigated again, which is an interesting commentary on the “five years of litigation” approach.

But, you know, as a practical matter, the effect of an adjudication or, you know, a DRB finding or an IC finding is to create a new commercial playing field with parties having different levels of leverage than they had before. And they either negotiate an outcome or they just let the chips fall where they may and move on with their relationship and move on to the next dispute, particularly when we're dealing with change orders, that sort of thing.

I mean, as Shalom said, you're talking about complicated delay matters that may not be the same situation, but if it's, if it's just one piece of a larger commercial puzzle, it often is the last word.

So, my overall conclusion is that parties can save quite a lot of time, aggravation, and money and admin time for, for the client, by using these processes. It is vastly cheaper than full blown arbitration, which is what we're about to talk about.

Lawyers like full blown arbitration, but clients might not. So let's, let's talk about that. Shalom, describe for us the arbitration option. And if you could tell us a bit about how it's different from a court proceeding, on the one hand, and different from adjudication on the other.

Shalom Cumbo-Steinmetz (41:15): Sure. So arbitration—full-blown arbitration—is, of course, at the far end of the spectrum. And as compared with expert resolution, DRB or adjudication, the robustness of the process is there. An arbitration is something that will much more closely resemble a court, and it will have a longer timeline, likely not the length of timeline you'd see in court, but a much longer timeline than the 30 days or three months that an adjudication might have.

And as a result, it will build in the procedural steps that you would see in a court process. So, it will have document production, typically of some form. There'll usually be evidence adduced through witnesses who will typically be cross-examined in front of the decision makers. There may be several of those, it might be a single arbitrator, or it might be a panel of three arbitrators.

Those are the usual ways that you see that go. And it will have a full hearing in front of that either sole arbitrator or panel. So the... when you think about it, as compared with those more rough justice processes, the things that make arbitration different are that it gives the parties the time to develop the case, and there's more time and so, they can bring in witnesses. You can go out and find third party witnesses, experts, fact witnesses who were involved in key aspects of the project from an early phase. You can find those people, interview them, fully brief them, get witness statements from them. And you can develop factual issues that—typically arbitration happens, so we'll speak about this a little bit, but typically it happens at the end of the project. And so, you can develop the factual issues that span the full life cycle of the project and aren't sort of in a snapshot at an early phase.

As compared with a court, an arbitration is different. The main difference is the parties’ control.

So, the parties are able to control what the process looks like. And they do that typically at the front end when they're negotiating it. But they can also negotiate aspects of what the arbitration will look like once the arbitration has been commenced. And the types of things that are commonly selected by the parties are, of course, decision makers. So I spoke a little bit, you could you can have a single, sole arbitrator or you might select a panel of arbitrators and that's a negotiated point for the parties.

Timelines, of course, are also again negotiated. And they may be set at a broad level in the project agreement and then refined when an arbitration is commenced, based on what the subject matter of the arbitration actually looks like and what it demands in terms of timelines.

Confidentiality is often a key one for arbitration, and that will typically be decided at the front end in the project agreement.

But one of the benefits of arbitration, and one of its main differences from court, is that it is typically being held in a private process. Now, that's not a requirement. There can be public arbitrations, but generally they're confidential. Generally, they're private, and that can be a reason that parties select them.

And then the sort of last common thing that gets negotiated and that's a little bit different from court, of course, is the appeal rights of an arbitration. So the parties can decide, are you going to have any appeals or if you do, are you going to limit those to factual issues and legal issues or just legal issues? Or are you going to have no appeals, in which case there is only ever that sort of catchall set aside, right, that exists under arbitration statutes in case of an unfair process, in an arbitration.

David Outerbridge (45:07): So one of the things I've experienced with clients when arbitration is mentioned or when it goes down, the arbitration, the dispute goes down the arbitration path is the... the clients sometimes think, “well, that means we're going to a hearing” and they don't really think about the intervening period between starting an arbitration and actually going to a hearing, which may be two, three years or more, depending on your situation.

So Alex, in practice, do you see complex infrastructure disputes go to a full-blown arbitration with a hearing on the merits? Or do these disputes typically resolve beforehand?

Alexandra Shelley (45:42): So I would say that the arbitration is a lever. And it sometimes is the case that something will go to full blown arbitration. But that is the exception. Often these parties, even after they've achieved substantial completion, they still have to work together, these particular parties or some version of these parties, for years to come, during the operation phase of the project.

And so, they're in an ongoing relationship, an arbitration on the spectrum of being sort of most involved, I would say, is also most adversarial, can be. And so, people want to avoid, you know, cross-examinations, and adversarial issues like that when they're in an ongoing business relationship or could be in a future business relationship with these folks. It's not as if once the arbitration is over, you can dust off your hands and walk away and never have to deal with the counterparty again.

And so, for that reason, I think people use it more as a negotiating tool. So you can start: serve a notice of arbitration. You can start the process of exchanging documents. You can refer to the fact that an arbitration is available to you, and you can use that to try to guide the parties towards a resolution, with the looming fact that if they don't reach one, then there will be this arbitration that will be a resource draw on folks, it will be, you know—generally people, litigators love to litigate. But generally, the parties don't want to be in litigation with each other. And so, they use that sort of as an avoidance tool. But it sort of also depends on the complexity of the dispute. So it depends on the parties and the issues and the economics.

And as you get sort of on the more complex end of that, we've seen high-value, complicated disputes that spend years in the negotiation phase and doing a lot of work in the negotiation phase, always with the, you know, overlay that there could be an arbitration and the work you're doing in the negotiation phase, which includes retaining experts, getting expert reports, you know, lining up factual evidence, all that could be used if you ultimately go to an arbitration. But the goal is to still try to avoid that arbitration, while advancing the case forward so you're not wasting time hoping for some resolution.

We've also seen complex disputes go to a hearing, even though there's a really high monetary risk there. But you've been unable to resolve. That sometimes happens. The parties are so entrenched in their positions, it doesn't matter how much time you have or how much exchange of information you have, you've been on a without prejudice basis. You aren't able to bridge the gap. And so, you do need an adjudication.

And then you have the classic example where you prep everything, prep everything, and you get to the, you know, depths of the courthouse or in this case, the doors to the arbitration venue. And you decide that you would rather have certainty and you're still able to resolve it, because at least now you have a full picture of the case.

And so, all of those things happen. We don't see a lot of full-blown arbitration. Also, because sometimes there are non-monetary considerations, you know, you may have particular stakeholders. You might have, a lot of infrastructure projects are obviously public, people know about them. So there could be a publicity angle to it. And so, you want to avoid any fodder there.

And so, you try to really get to a resolution. But it does depend, I would say the overwhelming majority don't end up being fully adjudicated. They get some part of the way there.

David Outerbridge (48:50): So, Amy, one of the features of arbitration, that it's commonly thought of is that it's basically a zero-sum game where one side wins, one side loses. And, you know, if the money is in one person's pocket, it's not in the other person's pocket. But one of the developments we've seen in the projects space in recent years is an attempt commercially to align the financial interests of the parties—the owner side or the developer project side and the construction side so that the financial interests of one are not opposed, or completely opposite to the financial interests or the other trying to get an equity interest on the constructor side, etc. I wondered if you could tell us a bit about that and, and how having that type of contracting model affects the use of arbitration as a dispute resolution mechanism.

Amy Maginley (49:42): Yeah. So I think what you're referring to is a trend that we're seeing, particularly in the P3 space, with developers offering to contractors essentially equity in the project co. The thought being that if they are equity owners, they will be aligned to want to see the project completed and therefore generating revenue for the project co and therefore, if disputes arise, people will be incentivized to settle those disputes, and not have disputes that are going to delay or otherwise stall the project.

So even though this is a trend that's relatively recent in the P3 space, I think really it's kind of adopting the dispute resolution mechanisms that you often see in joint venture transactions, where there's typically kind of a multi-tiered approach to dispute resolution. And in terms of the impact on arbitration, I think it's generally trying to shift away from arbitration as being the dispute resolution mechanism that parties rely on or ultimately limit the scope of disputes that might ultimately end up in arbitration.

You know, typically when drafting these type of contractual JV arrangements, you provide for some type of waterfall dispute resolution mechanism where first the parties would be trying to resolve these disputes through just negotiation, whether that's, you know, initially starts with management level. And then if they can't resolve it, it gets kicked up to the board level. And then ultimately the shareholder level.

And then perhaps at that point, if it's still not resolved, you would then refer to arbitration. But I think, generally the trend again, as you mentioned, is if, if everyone is aligned to see the project through to completion, because everyone has an economic interest in the outcome of that project being completed, then there likely will be less of an incentive to take disputes down the arbitration path because the parties will be more incentivized to settle those disputes before it gets to that level of, of resolution.

David Outerbridge (51:55): Yeah. And on that note, one of the things we've been seeing, particularly recently, is parties experimenting with the integrated project delivery model, which is a variation on the theme that you're talking about. But, you know, some of the examples we've seen involve not only, you know, incentivizing through equity, but actually creating a modified version of a dispute resolution structure where you eliminate the option to have full-blown dispute resolution on certain types of issues.

So, you know, we've seen IPM arrangements where, you know, you'd have, certain disputes go to certain levels of decision making. And then ultimately, if it can't get resolved there, it goes to a board vote. And the people on the board are representatives of the designers and the constructors and the, and the full equity owners or the product developers or what have you.

And parties know that ultimately it's going to be a mix of people with these different incentives making the decision at that board level, or the executive committee level or what have you, and they'll know that they don't actually have a right to go to an arbitration afterwards. There'll be a laundry list—not a laundry list—there'll be a short list of things that are eligible for arbitration, but everything else has to be resolved commercially.

And so, it, it quite significantly changes the dynamic of how people behave when they know, first of all, if they're trying to get more money for themselves on the design side or the construction side, it's going to reduce their equity, the amount that comes to them on the equity side. And, you know, likewise, they'll know that their options for dispute resolution are constrained by the, by the structure of the agreement itself.

And so, that has a, quite a—people have a hard time wrapping their mind around that. That's an evolving model that people are just getting into in, in our experience. But it is a different way of looking at disputes. So, Shalom, getting back to, sort of, standard or traditional arbitration if, if an infrastructure project is going to use arbitration as its final dispute resolution process, what are some strategic considerations that parties should be thinking about when they're negotiating their arbitration provisions?

Shalom Cumbo-Steinmetz (54:03): So everything that David and Amy just said illustrates one point, which is that where arbitration is present in a contract, for a project, it, it's likely to actually get used. So in general, commercial agreements and arbitration clauses can exist sort of as an escape valve. If an issue arises, you want a process to solve it. You don't want to go to court. So you've agreed to arbitration.

In a project agreement that provides for arbitration, it's likely that that arbitration clause will be triggered for some issue. And so, as a result of that, these clauses get a lot of attention. There's a detailed review at the negotiation phase. And rightly so.

Because you're looking at setting up a contractual mechanism to solve some fairly, you know, significant disputes, likely. And that's not a bad news thing. I mean, for people who operate in this industry, it's well known that disputes come up through the course of the project and the result, you know, the reasons for that are the fact-specific nature: change orders need to be issued because of changes in scope, and the parties may not be able to agree on the change in scope, but they know that a change in scope is a likely thing over the lifetime of a project to arise.

So you need a mechanism to, to solve a dispute over that, or there may be changes needed to a project schedule because of, you know, simple things that can come up over the life of a project like labour disputes, weather issues—lots of these things, when you're building a project are likely to arise. You cannot negotiate them all at the front end.

And so, the dispute mechanisms in place are there to create a process to solve them when they invariably do arise. So because they are likely to arise, and because they are likely to be needed, the arbitration clause is—should be and is, in our experience, generally given quite a lot of detailed thought.

The types of things the parties tend to think about is: when should the arbitration happen? Because a project is a long, has a long lifespan, unlike commercial transactions, which can be quite short. You would, you know, the parties will think about should the arbitration happen in real time or should it be deferred to the end? If it's going to be deferred to the end, should it consolidate all the disputes that arise, and get elevated to the arbitration level over the course of the project?

Or do you have multiple arbitrations going on, on various, of the different disputes? Appeals, I mentioned earlier, that’s something that parties think about. Should there be appeals from the arbitration decision or not? And if there are, should they be limited? Again, should the arbitration look like a full-blown court proceeding, or should it be somewhat tailored and a little bit narrower? Notwithstanding it's not an adjudication, do you still want to keep it a little bit more confined?

Other things to consider that we see parties thinking about is whether you have a med-arb structure. So a mediation that then turns into an arbitration, if it can't produce a negotiated solution.

Baseball arbitration is something, particularly in the change order context, that can sometimes be considered by parties, that's where the two parties each put forward their proposed solution, then an adjudicator, an arbitrator in this case, decides between the two. And that's a process that we see considered. And then, of course, as Amy mentioned, the role of mediation or the role of senior-level executive decision making, before things get triggered and escalated to the arbitration level, whether you include that, how much of you, how much of that do you stipulate, in the arbitration clause.

David Outerbridge (57:45): Well, we've got just a couple of minutes left. Alex, any parting thoughts on, on our topic today?

Alexandra Shelley (57:52): So we've talked a lot today about sort of interim when we were talking before the arbitration phase, but in the earlier dispute resolution process, as we were talking about interim and we were talking about sort of the IC and the IE in the interim context, but there's also an availability to have something that's not full blown arbitration at the end, you know, post-substantial completion, where you still have a process that's a bit narrow.

So you could have an expert determination process, which you can set out sort of in your dispute resolution protocols that's available to you, not just during the life of the project, but also at the end of the project, which is not the med-arb necessarily that Shalom was just describing, but it is still another stepping stone before you go to full blown arbitration. Because you have so much optionality, we find during the life of the project, and then once the project's over, if all that's available to you is arbitration, maybe you've limited yourself. So something to also consider is whether there are other, you know, post-substantial completion options that are arbitration-like that you could still engage in.

David Outerbridge (58:50): Thanks, Alex. Well, that brings us to the end of our program for today. Just a reminder, the second episode in our webinar series is happening in September on litigation risk as part of the permitting process on major projects. Thanks so much for joining us today. And we'll see you next time.