A Paper Contributed by HMG Mediator Mr Yong Eng Wah
The Construction industry is one of the key economic driving forces in most nations. In Singapore, 6 to 8% of the GDP is generated by the construction and construction-related industries. Due to the laborious nature of the Construction industry, construction companies hire many workers which make it one of the major job providing industries in most nations.
However, the Construction industry is also one of the most litigious sectors in the economy for most nations. Due to the litigious nature of this industry, and due to the other factors that will be detailed below, the overall efficiency of the industry is low as compared to the other major sectors of the economy.
In this paper, we will attempt to analyze the root cause of the conflict prone nature of the Construction industry. We will propose the use of Mediation as an effective and alternative dispute resolution method for resolving disputes in the Construction industry.
B. CAUSES OF CONFLICTS
Construction activities can range from a few hundred dollars repair jobs, to multi-billion dollar infrastructure building projects. From such a wide spectrum, understandably, the root cause for any conflicts within the Construction industry must be diverse and complex.
The major causes of the conflicts within the Construction industries are detailed below.
B.1 Expectation Issues
When we purchase any consumer products, in most cases, we will be able to see the product, maybe even have a chance to feel and to test the product before we buy them. In addition, we can also look at the price range, check the reputation of the product, and make our decision based on the budget and our expectations. Having decided on the purchase, we would usually know what to expect when we own the product. Most people will not expect a Hyundai to perform like a Lamborghini, as they are aware of the price difference between the two products.
Yet, in the case of construction projects, especially in the house renovation projects, the end products will not be there when the contracts are signed. The house owners could only imagine and hope for the completed house to come up to his expectation. Furthermore, the economics reality will propel house owners to use the cheapest contractor for the job. Somehow, the axiom of paying peanuts will get monkey will be forgotten. Having secured the job, the other coin of the same economics reality will propel the contractor to use the cheapest method possible for the execution of the job. After all, the contractor needs to make monies to survive.
With the mismatched high expectation of owners and the possible low cost execution of the contractors, the high chances of having dissatisfaction from the execution of most house renovation projects should be expected. A study in the United Kingdom conducted by academia in 2001 reported that more than half of the construction projects ended up in disputes in one form or another. One should not be surprised to find similar situations in Singapore.
B.2 Low Barrier of Entry
A few years back there was a popular television comedy in Singapore called Phua Chu Kang. In the show, the main character was an elementarily educated, loud mouth, crude but street smart contractor. In real life, many contractors seemingly came from the same mold. Due to the nature of the trade, physical skills are important assets of construction process. There is no requirement for purchasing of large capital intensive machineries. With sufficient skills, other than projects that run into the millions or billions of dollars, contractors do not need much financial strength before they could start a small construction firm.
Therefore, there are many construction firms started by hard-working construction entrepreneurs, armed with construction skills but not much else. Due to the general lack of other business skills, chances of having disputes generated from misunderstandings and from personality conflicts are very high. The general weak financial situation of these construction firms would also contribute to the likelihood of contractors cutting corners during the construction which will lead to conflicts at the end of the day.
B.3 Cash Flow Issues
Most construction projects are based on progress claims basis. Under progress claims, the contractors will be paid in stages, in accordance with the progress of the works. Take a 100 million dollar projects as an example, the contractor does not need to have a capital of about 100 million dollars to execute the work. Rather, the contractor needs only a capital of about 10 to 20% of the total cost of the projects to execute the project. The rest of the monies will come from the progress payments.
Due to the lack of sufficient capital for the projects, the progress payments, which in turn are the cash flows for the contractors, are vital for the smooth execution of the works. Once there is any hindrance in the cash flows, be it in the form of late payment or withholding payment by the paymasters, the contractors will face financial difficulties, which in turn will affect the sub-contractors, sub-sub-contractors, so on and so forth.
Like it or not, money makes the world goes round. Without payments, the contractors or sub-contractors will have to take measures to recover the payments. If reasoning or pleadings fail, the last route would be to seeking formal dispute resolutions.
C. DISPUTE RESOLUTIONS
In the unfortunate event of disputes, in all civil societies, there are ways to resolve the disputes. Some major dispute resolution methods are as followings:
For all modern societies, bring the disputes to courts will be the first most common route of resolving any disputes. With the popularity of legal television shows such as Law and Order and a whole host of others, legal processes, to most general public, are seemingly manageable and relatively simple.
Yet, in real life, litigating processes are a lot more complex and difficult. The general public tends to idealize the legal process and think that the courts will always provide justice. Yet, those in the profession will know that even courts are bound by legal rules. Due to the possibilities of lack of evidence and various factors, the judgment issued at the end of the day might go contrary to the fairness standard held by people on the street.
Arbitration, a relatively new form of dispute resolution, is a formal dispute resolution process. The only major difference between arbitration process and court process is the replacing of the judge with an arbitrator. The other procedures and documentation are similar if not identical.
The use of arbitration as an alternative dispute resolution is that the chosen arbitrators could be someone who is, on top of the necessary legal knowledge, familiar with the detailed operation of the industry in question. Furthermore, arbitration, unlike open court hearings, is confidential in nature, which suits the commercial requirement of some commercial entities.
Mediation, an ancient form of dispute resolution method, is getting more and more important in the commercial world. Recently, many nations have come to appreciate the advantages of having mediation as a formal form of dispute resolutions; such nations have made it a law that all cases must go through mediation first before the court will hear the cases. Singapore, with the recent emphasis on mediation by the Chief Justice, could be joining the group in the not too distant future.
We shall highlight the advantages of mediation as a formal dispute resolution method in the following section.
D. ADVANTAGES OF MEDIATION
There are many advantages for adopting mediation to resolve disputes. The followings are but a few of the advantages:
For formal litigation, such as law suits in court or in arbitration, due to the requirement of evidence and documentation, the lawyers involved have to do much work to gather and to compile the necessary paper-work. In the case of the construction industry, due to the complexity of the construction activities, many parties and many authorities are usually involved in a single project. One can easily imagine the amount of paper-work that a construction project could generate.
In a conflict situation, the large amount of documentation will generate much work for the legal counsel involved. Though most of the documents in a construction project might seem trivial and unrelated to the case in nature, under the principle of full disclosure for a law suit, the voluminous seemingly unrelated documents would vastly increase the cost of a law suit in the construction industry as compared to conflicts in other industries.
If mediation is the chosen dispute resolution method, due to the nature of mediation, documentation and evidence are not all that important. What is more crucial is the willingness of both parties to resolve the dispute. With a well-trained mediator, parties usually will be able to bridge their differences and reach an amicable solution without having to resort to any of the legal arguments necessary for formal litigation. As such, the cost of a mediation process is usually very much lower as compared to a full-blown litigation process. It is not uncommon for a successful mediation process to cost less than 5% of the total possible legal costs in law suit.
Unlike formal court proceedings, mediated solutions can at times be imaginative. The solutions could be a combination of the claims and anything else. Mediators are trained to expand the pie of the solutions, so that the disputing parties could choose to have solutions totally out of the scope of the claims and counter-claims.
One major advantage of having the possibility of an imaginative solution is that parties will no longer be bound by the written pleadings. At times, the real interests of the parties might be totally different from the pleadings. Yet, in the formal litigation process, the counsels have to plead formally in accordance with the evidence at hand. No deviations are allowed.
In mediation, parties are free to ‘think out of the box’, and suggest ways that might help parties to reach a settlement. As the needs of individuals or business entities are vastly diverse, some creative thoughts contributed by the parties could help to entice parties toward a solution to the disputes. The ability to divert from the claim in order to reach a settlement is one of the major advantages of mediation.
In addition, due to the complexity of the Construction industry, disputing parties will be the best people to understand the nature of the dispute. Counsel, experts, or any third parties, will at best have second-hand knowledge of the root causes of the conflicts. If parties are willing to talk to each other directly through mediation, chances of having more appropriate outcomes for the disputes would be much greater.
D.3 Win-Win Solutions
In most litigation processes, the judgments will rule for one party over the other. There is always a winner and a loser. With such outcomes, there will be little chance that parties with a long established relationship could salvage the goodwill established throughout the years.
Using mediation as a form of dispute resolution, the parties involved have to come up with the solutions themselves. The mediator will not play the role of a judge or adjudicator. Rather, the mediator will facilitate, encourage, question, challenge, and use many other techniques in order to help parties reach a settlement acceptable to both parties.
For the formal litigation process, disputing parties will only communicate through their counsel. As for mediation, the process will compel parties to speak to each other directly. Such human touch could serve as a chance for parties to resolve any misunderstandings generated and start on the road of repairing damage relationship.
Since the parties both contributed to the final solutions, chances are that both will gain certain degree of satisfaction from the negotiated outcome. In such ways, chances are that parties will be able to maintain the relationships and goodwill established from years of dealings. Such goodwill could be invaluable in the Construction industry.
In the modern society, disputes are but a reality of life. Having efficient and reliable dispute resolution methods is important for the society as a whole. Due to the nature of the operations, the Construction industry is litigation prone. Large amount of resources could be wasted for resolving disputes through formal litigation.
Mediation, a cost effective way of dispute resolution method, should be promoted for the Construction industry. It might be difficult to eradicate conflicts in the Construction industry due to its unique nature. However, having an effective dispute resolution method such as mediation will certainly help to lessen the negative impacts of conflicts in the industry.