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The Revay Report

Volume 23 Published by Construction Consultants


Number 1 Revay and Associates and
March 2004 Limited Claim Specialists

FACILITATING THE CONSTRUCTION DISPUTE


RESOLUTION PROCESS
by Bill Gillan, P. Eng.,
Vice-President, Ontario Region,
Revay and Associates Limited, Toronto

and informed opinions on this matter, and of litigation, and in his judgement the
most can relate their own horror stories of judge was critical of Brunel’s manage-
projects gone bad, the resultant disputes, ment practices. As it was subsequently
W.R. Gillan, P. Eng. and the time, cost, energy and goodwill observed, this was of little consequence
expended in their resolution. to Brunel, since both he and the principal
contractor involved had died several
In 1997, in a paper entitled “Why Con- One Canadian case settled in the years before the decision was rendered.
struction Lawyers Must Change”, Geza Supreme Court of British Columbia in
Banfai wrote that there is “…a growing 1995 serves as a typical example. Founda- It is therefore evident that today’s prob-
disparity between what the construction tion Co. of Canada Ltd. v. United Grain lems have existed to some degree for as
industry needs and wants, on the one Growers Ltd. arose from a 1989 project to long as construction disputes have
hand, and what the legal profession is renovate UGG’s grain terminal in Vancou- occurred. Given the well-known and well-
prepared to deliver on the other. A further ver valued at $16M, including a $2.86M documented problems of cost and time
problem is the industry’s perception of the subcontract with Crosstown Metal Indus- associated with the litigation and arbitra-
legal system and of the lawyers who are tries Ltd. for metal spouting. After the pro- tion processes, what options are available
the gatekeepers to that system. What is ject had been completed four months late, to owners and contractors for more effi-
that perception? I suggest that it is that Crosstown claimed damages of approxi- cient resolution of construction disputes?
the legal system is inefficient, unpre- mately $1.7M from Foundation, Founda-
dictable, expensive and slow, and that too tion claimed against the owner for Most standard construction contracts
many of the lawyers who tend that sys- approximately $2.2M, and the owner including CCDC 2 - 1994 now make provi-
tem are unimaginative, self-interested, counterclaimed against Foundation for sion for some form of formal dispute res-
unresponsive and insensitive to business about $5M. In a decision that has been olution process. However, there exists a
realities.” well documented in legal journals, six wide range of techniques, and variations
years after the project had been complet- thereof, available to project participants
For the record, Geza is neither merely a ed, following ninety-nine days of discov- which can be employed to assist in the
casual observer of the construction ery and one hundred and thirty-two days achievement of timely and cost-effective
industry nor a disenchanted contractor of trial, the litigation process produced an resolution of construction disputes before
with an axe to grind because his legal outcome recorded in a three hundred and resorting to the commonly prescribed
counsel has just failed to win a thirty page decision whereby the settle- sequence of mediation — arbitration —
favourable judgement on his behalf in lit- ments awarded to each of the parties litigation. Some jurisdictions have experi-
igation. He is a partner in the Toronto law were far outstripped by the legal costs mented with the use of referees and Dis-
firm Blaney McMurtry LLP, and chair of which each incurred. The final result was pute Resolution Boards, with mixed
the firm’s Architecture / Construction / further protracted by an appeal which success. Neither approach appears to
Engineering Services group. In the same consumed an additional two years with- have gained wide acceptance in the Cana-
article, he quotes John W. Hinchey, one of out materially changing the outcome. dian industry.
the top construction lawyers in North
America and past-chairman of the Ameri- A much earlier case, McIntosh vs. the One of the fundamental obstacles to the
can Bar Association’s Forum on the Con- Great Western Railway, was settled in effective resolution of disputes at the pro-
struction Industry – “The construction Britain’s Court of Chancery in 1865. The ject level is that it is often the same indi-
industry is extremely frustrated with the disputed claim concerned difficult ground viduals who caused the problem in the
legal profession, the judicial system, and, conditions on two separate contracts first place who then attempt to resolve it.
of course, litigation. Nor are they particu- related to railroad construction, one for Positions harden, emotions frequently get
larly infatuated with arbitration, which embankments at a river crossing at Han- in the way, and the process quickly reach-
they think the lawyers have taken over well west of London, and the other for es a stalemate. For these reasons, the
and botched, just like the courts. To the work between Bath and Bristol. The engi- intervention of a third party, in some man-
extent possible, the construction industry neer for both contracts was I.K.Brunel, a ner and to some degree, is often the cata-
wants to march into the 21st century well-known railroad engineer of the day lyst required to break the impasse and
without lawyers in their lives.” with a reputation for good engineering move the parties towards a settlement.
practices, but with a track record of poor Following is a brief description of three
I am sure that all players in the construc- working relationships, time and cost over- alternative approaches with which Revay
tion industry, whether they be owners, runs, and the resulting disputes which and Associates Limited (Revay) has had
general contractors, subcontractors, or ensued. The matter was finally settled in some first-hand experience, and which
allied professionals can provide strong McIntosh’s favour after twenty-nine years may offer some positive benefits without
resorting to more expensive and time- the terms of their traditional contracts Ideally, the Third Party Neutral should
consuming options. rather than to follow the principles estab- maintain an ongoing involvement, at least
lished in the partnering agreement. Some on a periodic basis, throughout the
jurisdictions have attempted to rectify this course of the project, even when there are
PARTNERING situation by amending the terms of their no active disputes. This ensures that in the
While it is a fundamental principle of the standard contracts such as ICE or FIDIC to event that a dispute does arise, the Third
partnering process that disputes be dealt more closely align them with the princi- Party Neutral is aware of all current
with, in the first instance, by project partic- ples of the partnering agreement. issues, that the learning curve is mini-
ipants at the level directly involved in the mized, and that the objective of expedi-
A further step in the evolution of a true tious resolution of disputes is not
dispute before being escalated within the alliance environment for construction pro-
respective organizations, it is common to compromised. In order to minimize costs,
jects is the development of a multi-party this ongoing involvement may consist of
have an independent third party facilitate contract. Although at least two examples
the development of the project partnering periodic attendance at site meetings, or
of this form of contract have been devel- simply by being copied on minutes of
agreement, and sometimes to facilitate the oped since the year 2000, the legal com-
negotiation of major issues as well. meetings and other key correspondence.
plexities involved in such a document
In recent years, the partnering process have precluded its widespread adoption As in any other form of dispute resolution,
has achieved some measure of accep- until such time as it has been proven in it is incumbent upon the claimant to
tance by both owners and contractors in both the field and in the courts. demonstrate the cause and effect of any
Canada. There are those on both sides alleged impact, its contractual entitlement
who claim significant improvements in to recover any resulting damages, and an
THE THIRD-PARTY NEUTRAL accurate quantification of those damages.
the dispute resolution process on their
projects, and who have adopted it as stan- (OR PROJECT NEUTRAL) It is generally assumed that prior to acti-
dard practice for all projects. Others have A second approach, and one with which vating the services of the Third Party Neu-
tried and abandoned the process, claim- Revay has had some first-hand experi- tral on a particular dispute, the parties
ing it had made no significant difference. ence on major industrial projects in the have exhausted all reasonable attempts at
Indeed, one does not have to look too far Alberta oil-patch, is commonly referred to a negotiated settlement. Under these cir-
to discover examples of major and pro- as the Third Party Neutral, or alternatively, cumstances, each party presents its posi-
tracted disputes on partnered projects. the Project Neutral. tion, and provides access to all its project
Whatever its benefits, it obviously is not a records for the Third Party Neutral in the
panacea for all projects. In its purest form, the owner makes a event that additional fact-finding is
decision to adopt this technique prior to required. It is customary for the Third
The delivery of construction projects has tendering any contracts. The intention to Party Neutral to submit his/her opinion in
continued to evolve in recent years, dri- utilize this approach, the methodology, a report to all participating parties within a
ven in many cases by factors such as the and in most cases, the identity of the Third specified timeframe, subject to challenge
expectation of more rapid completion of Party Neutral is then specified in the con- by any of the parties. When a challenge is
facilities, technical complexity, or the tract documents. It is critical to the suc- deemed to have merit, the initial report
necessity to adopt innovative forms of cess of the technique that the individual may be regarded as an interim report, and
project financing. These factors have in (or firm) selected be both knowledgeable may subsequently be amended in a final
turn led to significant changes in the tra- and experienced, not only in the general report.
ditional allocation of risks between pro- construction environment, but also in the
ject participants, the evolution of particular type of work being undertaken. It has been our experience that although
innovative project delivery models In general, the methodology requires the the opinion expressed in the final report is
(Design/Build, Build/Own/Operate/Trans- sharing of all costs of the process not binding on the parties, provided that
fer, Public-Private Partnerships, etc.), and between the participants on an equal the individual’s experience and judge-
the development of related strategies basis. Presumably, prospective bidders ment are respected by the parties, the
such as partnering. have the opportunity to seek clarification report of the Third Party Neutral is often
of any related issues during the tendering enough to promote an amicable settle-
Typically, an owner who wishes to avail ment of the issue in lieu of the prospect of
process, or in the extreme, can elect not
itself of the potential benefits of partner- a protracted and expensive litigation. In
to participate in the project if they have an
ing will indicate its intention in the con- fact, on one memorable project the
aversion to the process. The process can
tract documents. After the tendering and prospect of the relatively minor cost
be applied to issues which arise between
award of the construction contract is com- involved in seeking an opinion from the
any of the project participants who agree
plete, a separate non-binding partnering Third Party Neutral on each issue which
to the terms, and not just exclusively to
charter or partnering agreement may be arose was sufficient to send the parties
disputes between the owner and the
executed by the parties independent of back to the negotiating table on each
prime contractor.
the construction contract. A fundamental occasion that a dispute arose. The out-
problem may exist because typically own- Revay has, however, been involved in the come was that the entire project was com-
ers and contractors have differing objec- capacity of Third Party Neutral on some pleted without the services of the Third
tives, and therefore construction projects where the owner elected to adopt Party Neutral being engaged. While this
contracts tend to be adversarial in nature, the process, and to bear all associated obviously did not contribute much to
with the rights and obligations of both costs, subsequent to the award of the con- Revay’s bottom line, the process itself
parties clearly identified, whereas partner- struction contract, and imposed that deci- could be considered a resounding suc-
ing agreements tend to stress coopera- sion on the contractor. cess, even without being formally activat-
tion and collaboration between the ed. By its very existence, the process
parties. Furthermore, other project partici- The objectives of this approach are to pro-
vide a voluntary, independent, consistent, fulfilled its objectives of providing a time-
pants such as designers, project man- ly, cost-effective and non-adversarial dis-
agers and major trade contractors, whose fair, expeditious and non-binding aid to
dispute resolution on a cost-effective pute resolution mechanism!
interests are governed by entirely sepa-
rate contracts with very different terms, basis. A secondary benefit is that, through
may be included within the scope of the the involvement of a third party, the THE INDEPENDENT CLAIMS
partnering agreement. process minimizes the adversarial atti- CONSULTANT
tudes which might otherwise develop
Under these circumstances, when a seri- between the parties, and allows the prin- Another variation of what could be con-
ous dispute arises, there is a tendency for cipals to focus their energies on the main sidered as a successful third party inter-
the parties to protect their individual inter- project delivery objectives rather than on vention in the resolution of construction
ests by reverting to the relative comfort of disputed issues. disputes has been applied during Revay’s
current experience on the $4.4 billion Air- The Airport Support and Utilities Program selected traditional fixed price contracts
port Development Program for the comprises a variety of projects required to for the airside and roads and bridges pro-
Greater Toronto Airports Authority (GTAA) accommodate existing facilities impacted jects, design-build for the infield develop-
at Lester B. Pearson International Airport by the Airport Development Program, as ment, and construction management for
(LBPIA) in Toronto. well as those required to service the new the new terminal building and parking
facilities. These projects include two new structure as well as for the new Central
Shortly after the GTAA assumed responsi- firehalls, a new Airfield Maintenance Utilities Plant.
bility for the management, operation and Complex, and several administration
maintenance of LBPIA on December 2, buildings for various agencies. In addi- A third factor was the establishment and
1996, work on the design and construction tion, a new Central Utilities Plant was con- application of a formal issue resolution
activities associated with the program structed, and redevelopment of utility process from the outset of the program.
was initiated. This comprehensive pro- infrastructure was undertaken consistent Each individual trade contract was based
gram is planned to provide facilities to with the Utilities Master Plan, including on the Standard Construction Document
accommodate growth in passenger traffic work on the electrical distribution net- CCA 17 - 1996, with the incorporation of
from the current level of just under 30 mil- work, storm and sanitary sewer systems, the standard Dispute Resolution clause
lion passengers per year to a forecast water supply system, hot and chilled from CCDC 2 - 1994 Stipulated Price Con-
level of 50 million enplaned/deplaned water supply systems, and the informa- tract, as well as other amendments spe-
passengers in the year 2020. It comprises tion technology and telecommunications cific to each project. This process was
four main components, each of which in systems. adopted with two objectives in mind.
turn comprises a number of discrete, but First, the process encourages a speedy
inter-related projects. In short, the Airport Development Program
represents an almost complete redevelop- and inexpensive resolution of disputes in
The most high profile component of the ment of LBPIA’s infrastructure. In addition an informal setting through negotiation,
program is the Terminal Development Pro- to the scale and technical complexities of and if necessary, through assisted negoti-
gram. The main element of this program is many of the projects, many other chal- ation with the assistance of a project
the new four-level terminal building which lenges had to be addressed. Historically, mediator. A second objective was that
will encompass over 390,000 square airport development projects have had a quick settlement of disputes would allow
metres of floor space in the central proces- high degree of exposure to the risk of the parties to complete their contractual
sor and five piers in its ultimate configura- changing user requirements, and this pro- obligations without continued animosity.
tion. Stage 1 of the building is scheduled gram was no exception. The constraints The GTAA also conferred a significant role
to open in the spring of 2004, followed by imposed by airport safety and security in the dispute resolution process on its
stages 2 and 3 which are currently forecast requirements, a fast-track design and con- construction manager for the new termi-
to be finished by the year 2008. Stage 4 is struction schedule, and the superimposing nal building project, PCL/Aecon. The Con-
presently planned for future development of new facilities on top of existing facilities struction Management Agreement
as demand warrants it. In addition to the which had to continue to process almost required that, with respect to claims and
new terminal building, an adjacent eight 30 million passengers per year presented disputes, the Construction Manager:
level parking structure with an ultimate significant obstacles to the successful
capacity of approximately 12,600 cars – implementation of the program. “…Take actions, make recommendations
the largest in North America, is being con- and provide advice to avoid, minimize,
structed in stages, with 9,000 spaces com- All-in-all, at the outset the situation and protect the Owner, against claims and
pleted in the first stage. The first stage of appeared to provide many of the ingredi- disputes by Trade Contractors and Suppli-
the Airport People Mover, a fully automat- ents typically associated with bitter, pro- ers … Notify the Owner, Consultant and
ed elevated train system, will link the new tracted and expensive construction Project Management Consultant of poten-
terminal and Terminal 3. Extensive road claims. However, almost seven years into tial claims or disputes. Provide advice,
and bridge construction has been under- the program, with construction valued at make recommendations and take actions
taken to provide access to and egress several billions of dollars successfully to mitigate claims or disputes … Collect,
from the new facilities, and the aircraft completed and the new terminal building document and submit to the Owner, Con-
apron, along with aircraft fuelling facilities, about to open, the program has estab- sultant and Project Management Consul-
will be expanded by about 650,000 square lished an impressive track record for reso- tant all relevant facts and cost data related
metres in Stages 1 and 2 to serve the new lution of construction disputes. To date, to claims or disputes … Negotiate resolu-
terminal. not one claim has proceeded to either liti- tion of claims or disputes in consultation
gation or arbitration. Although some with the Owner, the Consultant and the
The Airside Development Program was claims are still actively in the resolution Project Management Consultant. Make
planned to increase the airfield capacity process, and undoubtedly more will occur recommendations for settlement of
by about 30%, commensurate with the prior to completion of the program, there claims or disputes and, subject to the
new terminal facilities. To date, it has seen is no reason to believe that this record Owner’s prior approval, settle such claims
the successful completion of an extension cannot be maintained. or disputes … Assist the Owner with the
to existing Runway 05-23, a dual taxiway resolution of claims or disputes through
system adjacent to the terminal apron, a How has the GTAA achieved this impres-
sive record? mediation, arbitration, litigation or other
new Central Deicing Facility, and the new dispute resolution mechanisms.”
Runway 06R-24L. Another new runway, One contributing factor was the fact that
05R-23L and a new North Deicing Facility the GTAA embraced the philosophy articu- Many claims and disputes have been
are slated for future development. lated in its Value Statement – “Create a resolved through the negotiation process
problem solving environment that is prac- during the course of the project between
The recently completed Infield Develop- tical, flexible and creative through a can- individual trade contractors and the Con-
ment Program was implemented to did, clear communications process based struction Manager, with the input of the
address the relocation of cargo and other on the core values of mutual respect, trust, Consultant, without further recourse to
support facilities displaced by the new ter- honesty/integrity and individual account- other parties or other steps within the dis-
minal and other development programs. ability.” The application of partnering prin- pute resolution hierarchy. When required,
It comprised an access tunnel to the ciples reinforced this philosophy. the dispute resolution process estab-
infield, new cargo facilities, a new Air lished for the program incorporates the
Canada Equipment Maintenance Building, A second significant factor was the selec- usual steps of finding by the Consultant,
new aircraft hangars, a new Cara Flight tion by the GTAA of the most appropriate notification of dispute, reply to dispute,
Kitchen, a temporary Infield Terminal, site contracting strategy for each major com- amicable negotiation, mediation, arbitra-
access roads, and the relocation of the ponent of its program. Based on factors tion and litigation. Each step in the
Pearson International Fueling Facilities such as experience, available resources, process is subject to specified notification
Corporation. risk, timing and complexity, the GTAA requirements and time limitations.
A fourth factor which has contributed to review of entitlement considerations, and nificant departure from the normal adver-
the success of the dispute resolution the completion of cost, schedule and pro- sarial attitudes encountered in construc-
process, in the eyes of the participants, ductivity analyses. Frequently this role is tion claim situations, and coupled with
has been the involvement of an indepen- also expanded to include direct participa- the high degree of cooperation from all
dent claims consultant in the procedure. tion in negotiations between the construc- project participants working towards a
tion manager and the trade contractor. common objective of an equitable settle-
In mid-1997 the GTAA retained MGP Pro-
ment, has made a significant contribution
ject Managers, a joint venture comprising While the services of the independent
to the successful track record.
Marshall Macklin Monaghan, Giffels, and claims consultant are provided to the
Parsons, to act as the Project Manage- GTAA, the role requires the establishment Will these techniques, or other variations,
ment Consultant for the Airport Develop- of a close working relationship with the prevent construction disputes on all pro-
ment Program. MGP’s mandate included construction manager. Direction is often jects?
a comprehensive range of project man- taken from PCL/Aecon with respect to the
Absolutely not. Disputes will continue to
agement services, including several activ- scope of services required in each
arise on construction projects for all the
ities related to the dispute resolution instance, and the construction manager is
usual reasons, both those within and
process. These responsibilities included relied upon for the provision of essential
those beyond the control of the parties
the establishment of claims avoidance project documentation and records. More
concerned.
procedures, the preparation of defences specifically, the range of services may
against claims from trade contractors and include: Will they assist in the achievement of
suppliers, the provision of assistance to • Analyzing the justification for entitle- timely and cost-effective resolution of
the owner in mediation or arbitration pro- ment based on the terms and conditions those disputes which do arise on all pro-
ceedings, the provision of litigation sup- of the contract, jects, and help project participants to
port, and the provision of settlement • Analyzing critical delays and the respon- maintain a positive focus on the principal
recommendations to the owner. Initially, sibility for those delays, objective of constructing a quality project
Revay was retained by MGP as a subcon- • Evaluating the impact of concurrent on time and on budget?
sultant with specific responsibilities relat- delays,
ed to project controls, risk analysis, and • Determining appropriate methods of Maybe. There are absolutely no guaran-
claims avoidance. While these same func- damage quantification based on equi- tees.
tions continue today, as of December table adjustment principles, However, from our experience, there is lit-
2002 the responsibilities related to the • Determining the categories of costs tle or no risk involved in making the
claims and dispute resolution process which may be claimed, attempt, and the potential benefits to be
have been separated from the MGP man- • Calculating site overheads and head gained in terms of time and cost savings
date and are now provided by Revay, as office overheads, as well as maintaining healthy working
the independent claims consultant, under • Auditing the trade contractor’s records relationships on the site far outweigh any
direct contract to the GTAA. to determine actual costs incurred, risk which may exist.
• Applying empirical data or theoretical
In the event that an issue is not resolved For those parties for whom a win-lose
calculation of damages, where appropri-
directly between the construction manag- outcome is the only acceptable result,
ate,
er and the trade contractor, or when par- nothing short of their day in court may
• Evaluating the extent of damage mitiga-
ticularly complex claims or those suffice. In many cases, even a perceived
tion implemented by the trade contrac-
requiring specialized analytical tech- victory may result in a loss, as in the
tor,
niques arise, PCL/Aecon may request the Foundation Co. of Canada Ltd. v. United
• Establishing any potential counter-
involvement of the independent claims Grain Growers Ltd. case quoted earlier in
claims,
consultant through the GTAA’s Construc- this article. However, for those with a
• Developing settlement recommenda-
tion Manager. The independent claims broader perspective, who may appreciate
tions to the GTAA,
consultant, through interface with the the benefits to their project accruing from
• Participating in settlement negotiations
GTAA, the construction manager, the a win-win outcome, it is our opinion that
with the Construction Manager and the
trade contractor and the architect or engi- any technique which offers the potential
trade contractor, and
neering consultant, can provide a mea- of limiting the distraction from overall
• Providing support in the mediation, arbi-
sure of objectivity, clarity and project objectives associated with a pro-
tration and litigation processes, as
understanding which can assist in achiev- tracted dispute is worth consideration. In
required.
ing an equitable and expedient resolution many cases the involvement of a third
of issues. In this role, the independent It is of major significance in the success of party, independent or otherwise, who is
claims consultant undertakes an impartial this process that, although these services knowledgeable with respect to the project
evaluation of the issues, with the goal of have been retained directly by the owner, and has the requisite technical expertise,
resolving the dispute in an objective man- in all cases where it has been required can provide objective opinions, minimize
ner as expeditiously as possible. General- trade contractors have provided full and the impact of emotions, and assist the
ly, this evaluation may include the open access to their project records in parties to move off entrenched positions
establishment of factual information, the order to facilitate the review. This is a sig- and towards a settlement.

The Revay Report is published by Revay and Associates RAL offices:INFORMATION


CONTACT
Limited, a national firm of Construction Consultants and
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