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Insight into Resolving Construction Disputes

by Mediation/Adjudication in Hong Kong


K. W. Chau1

Abstract: Resolving construction disputes using an adversarial approach is considered to be in opposition of the maintenance of a
harmonious relationship between two parties. The modern arbitration process may emulate the litigation proceeding leading to delay and
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cost escalation. During the past decade, the Hong Kong Government has implemented a mediation clause as an alternative mode for
settlement of construction disputes. In this paper, the experience and insight into resolving construction disputes by integrating mediation
and then arbitration in Hong Kong are highlighted. The state-of-the-art modern mediation process and its philosophical origins are
reviewed. The shortcomings of the present system are pinpointed. The success of the adjudication now practiced in the United Kingdom
may suggest that there is a place for another process of dispute resolution, which may help improve the situation. The prospect of the
proposed mediation/adjudication and then arbitration mechanism is discussed with particular reference to the construction industry in
Hong Kong.
DOI: 10.1061/共ASCE兲1052-3928共2007兲133:2共143兲
CE Database subject headings: Arbitration; Dispute resolution; Hong Kong; Construction industry.

Introduction tionship for a long period, in particular if the dispute happens


during the early stages of the project. Attention is gradually fo-
Arbitration was conventionally employed as the means to resolve cused on various dispute resolution alternatives such as media-
disputes arising from civil engineering or building contracts in tion, which provides potential for both time and cost savings.
Hong Kong. As is customary in all construction contracts, there is Disadvantages of arbitration have prompted a return to more
often an arbitration provision 共Hong Kong Government 1985兲. rough and ready dispute resolution alternatives.
However, arbitration in construction disputes, which was promul- In 1984, the Hong Kong Government, being aware of the vari-
gated to be an informal, fair, and swift form of justice, has be- ous disadvantages of arbitration and urged by the industry, imple-
come a mirror of high court proceedings, with both parties often mented mediation on a trial and selected basis in some public
sector contracts in order to gauge its effectiveness 共Hong Kong
represented by senior legal experts. These attorneys, who are
Government 1984; Hong Kong Institution of Engineers 1985兲.
trained to be adversarial and to use every tactic to win during the
Trial mediations were carried out and the outcome of the pilot
proceedings, are often employed to represent the parties. They
scheme was extremely encouraging. In 1989, the government,
consider the maintenance of the relationship between the two par-
having acquired sufficient insight from the pilot mediation
ties to be of secondary importance. While arbitration was initially
scheme, implemented a mediation clause as a special condition of
not intended to be adversarial, in some cases, the modern arbitra-
contract in all large building and civil engineering contracts, and
tion process may emulate the litigation process, and lead to pro-
electrical, mechanical, and building services contracts, as an al-
crastination and cost escalation.
ternative mode for settlement of construction disputes 共Hong
Resolving construction disputes using an adversarial approach, Kong Government 1989兲. The customary arbitration provisions
such as modern arbitration, was considered to be in opposition to for construction disputes in the contracts were replaced by a two-
the maintenance of harmonious relationships between the parties tier mechanism, i.e., should mediation not succeed, then arbitra-
共Brooker and Lavers 1997; Harmon 2003兲. The parties often pre- tion would be used.
fer alternative dispute resolution to avoid ruining this business In this paper, the current setting in resolving construction dis-
relationship 共Treacy 1995; Cheeks 2003兲. Moreover, arbitration is putes by integrating mediation and then arbitration during the past
only available at practical completion of the whole of the works, decade in Hong Kong are presented. The state-of-the-art modern
which means that the two parties may have to bear a poor rela- mediation processes and philosophical origins are reviewed. The
shortcomings of the present two-tier system are pinpointed. The
1
Associate Professor, Dept. of Civil and Structural Engineering, Hong reported success of adjudication now practiced in the United
Kong Polytechnic University, Hunghom, Kowloon, Hong Kong. E-mail: Kingdom may suggest that there is a place for another process of
cekwchau@polyu.edu.hk dispute resolution in Hong Kong, which may help to improve the
Note. Discussion open until September 1, 2007. Separate discussions situation. The prospect of a proposed mediation/adjudication and
must be submitted for individual papers. To extend the closing date by
then arbitration mechanism is then discussed.
one month, a written request must be filed with the ASCE Managing
Editor. The manuscript for this paper was submitted for review and pos-
sible publication on December 21, 2005; approved on July 19, 2006. This Literature Review
paper is part of the Journal of Professional Issues in Engineering Edu-
cation and Practice, Vol. 133, No. 2, April 1, 2007. ©ASCE, ISSN During the past decade, studies have been undertaken to identify
1052-3928/2007/2-143–147/$25.00. problems of the construction industry 共Latham 1994; Egan 1998兲.

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J. Prof. Issues Eng. Educ. Pract., 2007, 133(2): 143-147


The proliferation of construction disputes is found to be one of would best be resolved by moral persuasion and compromise in-
the fundamental causes of project failure. It may be due to the stead of by sovereign coercion 共Tu 1985; Li 1986兲. Law, in Chi-
surge of an increasingly complex nature of recent construction nese custom, played a secondary role. The foundation of the
projects and intense competition among contractors. community is the code that prescribes human beings behave in all
While arbitration was initially thought to be an inexpensive, conditions in conformity with the natural order and the state of
efficient, prompt, private, and informal process with decisions natural harmony in human affairs should not be disrupted. It was
made by experienced industry professionals 共Stipanowich 1997兲, strongly believed that laws, being abstract, are not the appropriate
it evolved gradually over the years and now appears to emulate way to regulate daily life and other circumstances 共Johnston
conventional litigation, with regard to its speed, cost, procedural 1934; Creel 1960兲.
complexities, and frustration levels 共Cheeks 2003; Harmon 2003兲. In accordance with Chinese tradition, personal rights estab-
It involves a confrontational and adversarial process with a win– lished by laws are, a fortiori, against the natural order. Unilateral
lose premise 共Cronin-Harris 1996; Brooker and Lavers 1997兲, self-help and adversarial proceedings ruin harmonious relation-
while engineers prefer to use a problem-solving style to find mu- ships, and thus would be the antithesis of peace. The practice of
tual win–win resolutions to conflict 共Johnson and Singh 1998兲. devoting oneself to the duties due mankind and rightness in moral
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All these are also common features of the construction industry in life is of utmost significance. It is the obligation of every citizen,
Hong Kong 共Soo 2001; Molloy 2003兲. and in the common interest of the community, to avoid court
The perceived shortcomings of litigation and arbitration en- proceedings, which are considered to be detrimental to the natural
couraged the rapid growth of alternative dispute resolution pro- social order and ought to be the very last resort 共Creel 1960兲. This
cesses: conciliation, mediation, adjudication, etc. 共Battelle 1995; last step may be taken only after exhausting all other possibilities
Cronin-Harris 1996; Keil 1999兲. Alternative dispute resolution of dispute resolution. It would be unwise for a friend to resort to
methods have been used extensively around the world and are constant reproof, which inevitably render friendship remote. If
found to function well for many types of disputes. Particular suc- there exists a conflict of interest between two parties, it is essen-
cess has been recorded in such areas as purchasing, supply, bank- tial to acquire an accommodation or a compromise, with due con-
ing, insurance, personal injury disputes, partnership disputes, con- sideration to the interests of both parties without making one of
sumer disputes, maritime, divorce, and family matters 共Folberg them the winner and the other the loser. “Reciprocity” may serve
and Taylor 1984; Rouse 1988; Holland 1989兲. as a rule of life. The wise man recognizes that he should not do
unto others what he would not wish done unto himself.
All these are the prerequisites of Chinese philosophy, originat-
Mediation
ing from Confucius 共BC 551–479兲 and his successors 共Johnston
1934; Cheng 1947; Creel 1960; Lau 1983; Tu 1985; Li 1986兲.
Mediation is a voluntary, nonconfrontational, informal, private, This is, in essence, a philosophy of harmony, peace, and compro-
and nonbinding dispute resolution process in which an impartial
mise. Indeed, Confucian thought emphasized the supreme
and independent person, called a mediator, helps the parties to try
significance of the training and development of one’s character.
to reach a settlement by avoiding time-consuming and costly
Nowadays, many investigators, not just limited to Chinese, sub-
litigation/arbitration 共Chau 1992兲. Mediation can be considered as
scribe to the prevalent Confucian thought, which can be reflected
a half-way house between conciliation and arbitration in that a
in voluminous translations to other languages 共Louie 1980; Hall
mediator goes further than a conciliator in the degree of involve-
and Ames 1987; Strathern 2002兲. It comprises one of the most
ment in judgment decisions. Mediation attempts to resolve dis-
important components in current Chinese studies, not just a
agreement and focus on settlement by applying extra-legal
choice of convenience in itself.
principles rather than rigid legal rules, with due regard given to
the trade customs, previous business connections, and the prevail-
ing circumstances. Hong Kong Government Mediation Rules
Mediation avoids an adversarial arbitration or court proceed-
ing, which tend to polarize the parties and harden them in their Mediation is a contractual prerequisite to binding arbitration in
respective positions. Mediation seeks to ease hostilities by foster- government contract. The Hong Kong Government Mediation
ing cooperation in a structured way through dispute resolution. Rules 共Hong Kong Government 1991兲 are a set of 23 rules used
Besides, it provides significant potential savings in both time and extensively for mediations in the construction industry. The me-
cost in the settlement of disputes, provided that parties are deter- diation service is administered by the Hong Kong International
mined to resolve their disagreements by nonadversarial methods. Arbitration Center 共HKIAC兲, which is an independent and
Another advantage of mediation is the freedom to withdraw from nonprofit-making company limited by guarantee. The HKIAC
it when one party is dissatisfied with the attitudes adopted by or was established in 1985 by a group of leading business profes-
the style of the mediator. In such circumstances, the recommen- sionals in Hong Kong to provide advisory and support services
dations of the mediator can be disregarded. Its nonbinding nature for the resolution of local and international disputes by mediation,
can be an attraction since it allows the parties to objectively conciliation, and arbitration as well as to become the focus in
evaluate the personal qualities of the mediator and his recommen- Asia for dispute resolution. It has been generously funded by both
dations in determining whether or not to accept his opinion or the Hong Kong Government and the business community yet re-
proceed to arbitration. Thus, the appointment of a mediator in mains financially self-sufficient.
whom both parties have faith and respect is a prerequisite. The mediation process begins when a claimant serves a written
request, copied to the HKIAC, to the other party for mediation. A
Historical Origin of Philosophy of Mediation concise statement of the nature of the disagreement, the quantum
in dispute, any associated remedies, names and addresses of all
In ancient China, mediation was the primary method of settling parties, and nomination of a mediator are included. Within 28
disagreements. The Confucian view was that a disagreement days, the respondent should inform the serving party and the

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J. Prof. Issues Eng. Educ. Pract., 2007, 133(2): 143-147


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Fig. 1. Statistical data on number of construction disputes involving


HKIAC against year

HKIAC whether it is also his intention to proceed in this direc-


tion. The mediation is only initiated if all parties have expressed
their intention to do so.

Current Setting in Hong Kong


Since the implementation of pilot mediation by the Hong Kong
Government, arbitration proceedings have been significantly re-
duced, while an increase in the number of mediations has been
initiated 共Soo 2001兲. Fig. 1 shows the statistical data on the num-
ber of construction disputes involving the HKIAC against year.
Table 1 shows the statistics on the percentage of construction
disputes that were settled by different means. It has been noted
that a very large proportion, 82% of the mediation cases were Fig. 2. Framework of the enhanced two-tier structure in resolving
settled with agreements based on the mediators’ findings. construction disputes in Hong Kong
Disputes in construction are, by their very nature, usually com-
plex and can be very expensive with cost in the millions of dol-
lars. Apart from cost, the time involved in the arbitration process Core Program contracts in the 1990s introduced adjudication, in
in the construction field is also very long. Under the HKIAC addition to mediation, as a condition precedent to the parties com-
system, the mediator is expected to conclude the process within mencing arbitration proceedings. Fig. 2 shows the framework of
42 days for general disputes and, in no case, shall an appointment the enhanced two-tier structure, namely, mediation or adjudica-
be extended beyond a period of three months without the consent tion followed by arbitration, in resolving disputes.
of both parties. Hence, it is natural that the mediator’s own fees
run only to a fraction of that in a full-scale arbitration. In general,
Problems with Current Setting
it is found from the Hong Kong experience that mediation is far
less costly and less time consuming than arbitration by a factor of, Experience in Hong Kong construction disputes indicates that one
perhaps, 10. of the principal reasons for mediation failures concerns the atti-
Currently, arbitration is still prevalent in disputes on private tude of the parties rather than the issues in dispute. It is crucial to
developments and those between contractor and subcontractor. the success of mediation that the parties have thoroughly prepared
The majority of disputes that arise between large public sector and were informed of their own case in order to be in a position
employers 共such as the Hong Kong Government, Mass Transit to consider settlement of the dispute. They should be acquainted
Railway Corporation, and Kowloon–Canton Railway Corpora- with the nature and process of mediation. The parties should enter
tion兲 and contractors are first referred to mediation. Initially, the the mediation in good faith and be prepared to be directed by the
conditions of contract of the Hong Kong Government’s Airport mediator towards productive negotiation. The representatives of
the parties should be vested with real authority to settle and
should focus on presenting their case and acknowledge the feel-
Table 1. Statistics on the Percentage of Construction Disputes Settled by ings of the other side during the process. They should actively
Different Means participate in the process and possess a realistic view of the pros-
Construction disputes pects of success of the case. They should be willing to settle and
Means 共%兲 remain flexible throughout the mediation process.
Moreover, mediation is still not common in private develop-
Mediation 82
ment contracts or subcontracts. No mediation provisions are in-
Arbitration 13
corporated in these subcontracts and, hence, arbitration, which
Litigation 5
can be available at a substantial completion stage, is the only

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J. Prof. Issues Eng. Educ. Pract., 2007, 133(2): 143-147


Table 2. Trend on the Number of Appointment of Arbitrators and Table 3. Questionnaire Results on Principal Reason for Experimenting
Adjudicators per Month with Mediation or Adjudication in Construction Disputes
Average appointments per month Construction
disputes
Year Arbitrators Adjudicators Principal reason 共%兲
1997 3.5 0 Time and costs savings 33
1998 3.0 0.5 Cultural tradition 6
1999 3.0 4.0 Reliability of a negotiated accommodation 13
2000 2.0 10.0 Desirability to continue amicable business relationships 25
Willingness to settle without laying blame upon either party 20
Others 3
recourse. It can be imagined how poor their relationships will
become if a small subcontractor is withheld payment by a large
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main contractor in an early stage of the contract.


Furthermore, the nonbinding nature of mediation has both ad- the appointment, relying on his/her own specialist knowledge of
vantages and disadvantages. As a matter of fact, no single dispute the subject matter of the dispute.
resolution method will be suitable for all cases and the form of The decision is binding, unless and until the dispute is finally
dispute resolution should be amenable to the nature of the dispute. determined by legal proceedings or by arbitration. In Herschei
In some situations, a binding decision may be required. In such Engineering Ltd. versus Breen Property Ltd. 共2000兲, the judge
cases, adjudication may enter the scene following its reported expressly stated the right of a party to refer to adjudication at any
success in the United Kingdom 共Cottam et al. 2002兲, although the time prior to the commencement of court or arbitration proceed-
situation may not be exactly the same in Hong Kong since it has ings. He agreed that there could be inconsistent findings in adju-
no mediation provision there. dication and arbitration/litigation, but he believed that this was
Lewis 共1997, 1999兲 detailed the background information on inherent in the scheme. In Project Group versus Gray Trust
adjudication in the United Kingdom. Commissioned by the gov- 共1999兲, the judge formulated principles for enforcement of adju-
ernment of the United Kingdom, Latham 共1994兲 produced a re- dication decisions, which were later supported in Northern versus
port on identifying problems in the construction industry and then Nichol 共2000兲. The courts determine that they will only enforce
gave recommendations. He noted that arbitration had become a an adjudicator’s decision that addresses the referred matters, but
mirror of high court proceedings and that cash flow is the life- will not support a decision that is beyond his/her jurisdiction.
blood of the construction industry. He recommended a move Kennedy and Milligan 共2005兲 gathered an extensive amount of
away from arbitration to a speedy mechanism of dispute resolu- data on statutory adjudication in the United Kingdom between
tion, adjudication, with the key objective of freeing up cash flow 1998 and 2004, including the number of adjudicators, trends in
with the British construction industry. Mandatory adjudication en- adjudication, number of adjudication referrals, number of com-
ables an aggrieved party to get, within 28 days, a very quick plaints against adjudicators, subjects of the disputes, amount of
decision on whether or not payment is due. It was reported that money involved in dispute, etc. The data are able to support the
since its implementation in the United Kingdom in 1996, adjudi- proposition of the success of statutory adjudication in the United
cation has been successful in the sense that arbitration proceed- Kingdom.
ings have been reduced significantly 共Vaughan 2000a,b; Cottam et
al. 2002; Molloy 2003兲. Table 2 shows the trend on the number of
appointments of arbitrators and adjudicators per month made by Prospect of Mediation/Adjudication/Arbitration
the Institution of Civil Engineers from 1997 to 2000 共Cottam et in Hong Kong Construction Industry
al. 2002兲. It can be seen that the number of arbitrators decreased Since the Hong Kong Government has drawn up the rules and
gradually while its counterpart of adjudicators increased drasti- procedures for mediation and/or adjudication, the private sector is
cally. Moreover, the adjudication decisions had been supported by likely to follow suit, as evidenced by the trend shown in Table 2.
the courts. Moreover, the United Kingdom experience indicates that most
adjudication disputes involve a subcontractor and main contrac-
tor. The parties may experiment with mediation or adjudication
Adjudication for their disputes due to many grounds; for example, time and
cost savings, cultural tradition, reliability of a negotiated accom-
Adjudication is similar to mediation, except that it is binding and modation, desirability to continue amicable business relation-
all parties are given a statutory right to it through legislation ships, willingness to settle without laying blame upon either party,
without the consent of the other. In the United Kingdom, Part 2 of etc. Table 3 shows the questionnaire results of the involved par-
the United Kingdom’s Housing Grants, Construction, and Regen- ties on the principal reason for experimenting with mediation or
eration Act of 1996 gives the automatic right to a party to give adjudication in construction disputes. It can be noted that time
notice at any time for a 28-day adjudication to settle disputes over and cost savings and amicable business relationships are their
payment. It involves the resolution of disputes by an independent major considerations.
specialist nominated or agreed upon by the parties, who acts as an Mediation is worth considering as a form of assistance where
expert in the determination of disputes referred to him/her. Either the parties are unwilling to commit themselves to arbitration and
party may apply to an “adjudicator nominating body,” a body accept a binding award. Mediation is most suited to conflicts of a
holding itself out publicly as willing and able to appoint an adju- polycentric nature and between those with a continuing relation-
dicator. The adjudicator is required to focus on essential issues, ship, as in the construction industry, since it reduces interference,
hear evidence, and arrive at a prompt decision within 28 days of stresses cooperation, and encompasses self-determined criteria of

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J. Prof. Issues Eng. Educ. Pract., 2007, 133(2): 143-147


resolution. Adjudication will be appropriate in situations where a Cronin-Harris, C. 共1996兲. “Mainstreaming: Systematizing corporate use
binding decision may be required, particularly at an earlier stage of ADR.” Albany Law Rev., 59, 847–847.
of a construction project. Egan, J., Sir. 共1998兲. “Rethinking construction.” The Egan Rep., Con-
However, one must be reminded that no single dispute resolu- struction Task Force, Her Majesty’s Stationary Office, London.
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both parties, the nature of the dispute, the quantum in dispute, etc.
Harmon, K. M. J. 共2003兲. “Resolution of construction disputes: A review
There inevitably exist some disagreements that are unable to be
of current methodologies.” Leadership Manage. Eng., 3共4兲, 187–201.
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Circular No. 8/89, Hong Kong Government, Hong Kong.
Conclusions Hong Kong Government. 共1991兲. Hong Kong Government mediation
rules, Hong Kong Government, Hong Kong.
This paper presents the current setting in resolving construction Hong Kong Institution of Engineers. 共1985兲. Hong Kong Institution of
disputes by integrating mediation and then arbitration during the Engineers mediation services rules, Hong Kong Institution of Engi-
neers, Hong Kong.
past decade in Hong Kong. The state-of-the-art modern mediation
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