Protecting project value: using dispute resolution mechanisms to keep projects on track and manage cost risk

Where there’s a crane, there’s a claim—but not all claims are equal in size and scope. In this article, we outline three key dispute resolution mechanisms that can be written into project agreements to ensure parties are equipped with the right tools to tackle disputes, no matter the degree of complexity.

Expert determination

Expert determination—also known as the independent certifier/independent engineer model—is a process whereby subject-matter expert are embedded into the daily operation of the project to efficiently resolve on-the-ground disputes. These experts are not typically legally trained; rather, they are construction professionals, such as engineers or architects, who can provide an objective, technical perspective for speedy resolution.

Expert determination is best suited to resolving construction disputes that require quick solutions, enabling parties to move past disagreements without the need for costly, drawn-out dispute procedures. As opposed to high-value, complex disputes that require the testimony of multiple specialists in diverse fields, expert determination provides for “rough justice” decision-making that keeps projects on time and on budget.

Contractual considerations

It’s important to determine the parameters of the disputes an expert determination will resolve from the outset. Project agreements should allow for escalation to another dispute resolution forum if the scope of the dispute shifts.

The method of expert appointment is key. Parties should develop a shortlist of experts from the outset of contract negotiations and establish contractual parameters around procedure so that when expert determination is needed, parties can hit the ground running.

Expert decisions are typically “interim binding”, meaning that parties may agree to abide by the decision for the duration of the project, and then revisit it after the project is complete. Ensure project agreements lay out the kinds of disputes that can be resolved through expert determination and also the degree of finality of those resolutions.

Adjudication

As a middle ground between expert determination and arbitration, adjudication imposes greater procedural protections on the dispute resolution process while stopping short of the formality of full-blown arbitration. Although it is a popular concept in many jurisdictions, statutory adjudication is unevenly applied across Canada: statutory regimes exist in Alberta, Saskatchewan, Manitoba and Ontario. Other provinces, including Nova Scotia and New Brunswick, have introduced legislation pertaining to adjudication; Québec, meanwhile, has a voluntary adjudication regime.

Parties without recourse to statutory adjudication can create tailored contractual mechanisms in project agreements that offer the same protections that statutes provide for—including, in some cases, tailored contractual mechanisms in jurisdictions where statutory adjudication exists.

Contractual considerations

When drafting a contractual adjudication mechanism, it’s critical to consider whether and how your contractual process might intersect—or conflict with—the region’s statutory adjudication regime. Consider the scope of matters that might best benefit from adjudication: payment disputes, for example, are particularly well suited to adjudication, because it allows parties to address critical funding issues faster than is otherwise possible through arbitration. Similarly, disputes that might stall or delay projects, but which go beyond straightforward technical disputes, may benefit from the efficiency of adjudication. If providing for contractual adjudication in a jurisdiction where statutory adjudication applies, parties should turn their minds to procedures they might prefer over the statutory process. Parties generally cannot contract out of statutory adjudication but they can craft bespoke terms that are more project-specific to be available, if they wish.

Arbitration

Arbitration should generally be reserved for the most complex disputes on a construction project. Arbitration builds in procedural steps that would typically be seen in a court process, including document production, evidence adduced through witnesses, and cross-examination. In contrast to the processes described above, arbitration offers parties time to build their case, enabling them to develop a more complete picture of the factors leading to—and damages resulting from—the dispute.

A major factor that distinguishes arbitration from other forms of construction dispute resolution is the degree of control over the process. Parties can set broad parameters around choosing the arbitrator (or panel of arbitrators), establishing timelines and stipulating the degree of confidentiality required during contract negotiations, then later refine those terms when arbitration begins. Likewise, appeals rights may be negotiated at the outset: parties can determine whether appeals may be limited to factual or legal issues—or they may choose to abide by the outcome without a right to appeal.

Given the stakes and degree of scrutiny, arbitration can be more adversarial in nature, so it’s important to consider long-term business relationships with counterparties. For this reason, many arbitrations are commenced in order to allow the parties to explore the underlying issues through document production and examination, in order to facilitate continued negotiation over a settlement resolution.

While parties may seek to use the arbitral process to advance negotiations, it’s important to go into arbitration with eyes open—if a settlement is not reached, the process will lead to a judgment. Having trial tested counsel is critical. The Torys Project team has seen numerous arbitrations through to judgment and enforcement.

Contractual considerations

While arbitration is often viewed as a “winner take all” proposition, some projects are trending towards aligning financial interests between parties so each has a vested interest in settling disputes. For instance, developers may offer equity to contractors to incentivize the parties to focus on finishing projects and generating revenue for all involved rather than disputing construction costs.

Another recent trend involves “integrated project delivery” models (IPMs), which allow parties to create a modified version of a dispute resolution structure that eliminates the need for full-blown arbitration on certain kinds of issues: for example, parties may agree that certain decisions could be resolved by a board vote.