In tough times, adjudication is increasingly seen as too costly. An escalation dispute procedure offers a quick, cheap alternative that preserves the business relationship

Pre-recession, if a dispute arose, a party would almost invariably press the adjudication button. The economic climate has changed this. Adjudication is often seen to be too expensive and the outcome variable. It can also affect relationships. This has led to the increasing use of contract processes that avoid this - known as a multi-tiered or escalation dispute procedure.

PFI contracts and many, if not all, infrastructure contracts, contain such a detailed escalation procedure as part of the dispute process. Interestingly, it is the building (as opposed to engineering) contract that has not yet embraced such a procedure. While everyone knows that, legally, the construction contract (with a few exceptions) must provide for adjudication at any time, there is an increasing use of this procedure as another means to resolve disputes.

Here are some things to consider in a typical escalation dispute procedure:

  • When a dispute arises, a meeting is first held; the parties should try to resolve it party representative to party representative
  • If that meeting does not resolve matters, parties are required to involve those higher up the management chain - often chief executive (or equivalent) to chief executive. In the run-up to such a meeting, there may be an exchange of position papers or some written submission that sets out the respective parties’ positions
  • If neither of these steps resolves matters, the next step may still be mediation or adjudication.

So what should you provide for if including such a provision within your contract? Remember you still need to provide for adjudication at any time, but don’t let that put you off including these other options. Some might say it’s empowerment without the prejudice.

First, it is important that the procedure is very clearly set down. For example, how is the first stage in the procedure to be initiated? Is it written notification by either party and on what period of notice? The clause should sensibly deal with that. What should be the identity of those trying to resolve the dispute? Acceleration of the dispute to someone unconnected with the project and without the “entrenched” view, often unlocks a settlement of the dispute.

How quickly, following each stage of the process, should parties be notified as to whether they have succeeded or settlement been achieved? Here, a specific period of business days expressed within the clause may be useful.

There has been a change in the industry’s approach to formal dispute resolution in the past two years and this is likely to continue

It is advisable to state within such a procedure that all discussions and negotiations are conducted in confidence and without prejudice. This saves any uncertainty or argument later.

If there is a hierarchy of contracts - subcontracts and sub-subcontracts - give some thought to how those down the chain with an interest should be involved.

As far as mediation is concerned, it is helpful for the clause to state who will appoint the mediator and the procedure that will be followed. More and more contracts also state when resolution of a dispute through mediation will be put into writing and the fact that once it’s signed by representatives of both parties, it is binding.

If there is a concern that mediation may be used as a process for dragging out the matter, such a clause can also provide that any dispute referred to mediation is required to be resolved within a specified number of business days. If not, parties are entitled to treat it as terminated or abandoned and proceed to the next stage.
Experience shows that a certain amount of formality in following this process is more likely to achieve a result. So a contractor seeking to commence this process should follow the procedure to the letter and set out its position very clearly in writing rather than rely simply on verbal communication.

There has been a change in the industry’s approach to formal dispute resolution in the past two years and this is likely to continue. Perhaps it’s only now, 20 years after adjudication first appeared on the scene, that parties can genuinely see that adjudication is only one of a number of options. Self-help in the use and application of these procedures is likely to increase as are the numbers of contracts in which these provisions appear. They can sit alongside adjudication without compromise and give a flexibility and maturity to dispute resolution that the industry must welcome.

Lindy Patterson is a partner in Dundas & Wilson