Professional Negligence in Construction

Ben Patten KC and Hugh Saunders

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CHAPTER 9 Dispute resolution

Section A: informal dispute resolution 171
Section B: alternative dispute resolution 172
Section C: adjudication 174
Section D: the pre-action protocol 176
Section E: litigation 181
Section F: arbitration 184

Section A: informal dispute resolution

9.1 Subject to obtaining the agreement of its professional indemnity insurer where required, there is no reason why a construction professional should not resolve a modest dispute which may raise possible professional negligence informally. 9.2 During the course of any project it is common for clients and the construction professionals they engage to differ over events that have occurred or costs that have been incurred. Such differences are generally resolved on the project or shortly afterwards in discussions. It is not uncommon for construction professionals to enter into discussions about their fees and charges when unpaid and for the client to use actual or potential errors on the part of the construction professional as a tool in negotiations. Plainly commercial life would be very difficult for any construction professional which felt prevented from making sensible agreements on small matters in order to prevent the emergence of larger dispute. 9.3 Many professional organisations require their members to provide a means for resolving complaints. Thus for example the ARB Code of Conduct provides:

10.1 You are expected to have a written procedure for the handling of complaints which will be in accordance with the Code and published guidance.
10.2 Complaints should be handled courteously and promptly at every stage, and as far as practicable in accordance with the following time scales: a) an acknowledgement within 10 working days from the receipt of a complaint; and b) a response addressing the issues raised in the initial letter of complaint within 30 working days from its receipt.
10.3 If appropriate, you should encourage alternative methods of dispute resolution, such as mediation or conciliation.1

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9.4 Consequently there is no requirement for every dispute involving the possibility of an allegation of professional negligence to be treated as a potential claim requiring resolution by lawyers. However, particularly having regard to the usual requirements of professional indemnity policies, it is generally sensible for construction professionals to be cautious when seeking informal resolution of disputes. 9.5 In the first place, whilst the financial value of a dispute is a reasonably good guide to its importance, care must be taken to ensure that the construction professional knows precisely what is in issue. A problem may appear very minor but may in fact turn out to have substantial consequences. Insurers should always be informed of any potential claim which has the capacity to turn into something where the construction professional might have a need to look to its insurer. 9.6 Secondly, it will be a rare dispute where the construction professional will make a formal admission of liability. The better course is usually to offer some accommodation on fees as a commercial gesture in order to keep good relations. Thirdly, even the smallest accommodation should be adequately recorded in writing.

Section B: alternative dispute resolution

9.7 Alternative Dispute Resolution, or “ADR”, refers to a formal process by which two parties can resolve a dispute without involving litigation. For these purposes it is also used as an alternative to adjudication and arbitration, however it its wider coinage the term can apply to almost any system of compromising claims which exists outside of the courts. 9.8 There are a multiplicity of forms of ADR, but for the purposes of claims against construction professionals, mediation is almost universally the preferred route. 9.9 Mediation is a voluntary process under which parties engage a mediator to act as a facilitator of settlement. The mediator – a neutral person, often a lawyer or another construction professional – will spend a day or longer with the parties exploring the dispute and the options for settlement. 9.10 The entire process of mediation is protected by strict confidentiality so that nothing that transpires can be used in subsequent proceeding without the agreement of the parties. If the parties reach agreement the agreement itself can become a “public” document, although here too the parties have complete autonomy. As with all the other characteristics of the process, the way in which an agreement becomes binding and the use that may be made of it is regulated by the agreement which the parties have signed so such variation as they may agree. There is no limit on the number of parties to a mediation and indeed the process is particularly successful in comparison with other forms of dispute resolution when it comes to resolving multi-party disputes. 9.11 Some professional bodies expressly endorse mediation as a means of dealing with disputes against construction professionals,2 but it is very widespread as a tool by which

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claimants and construction professionals and their insurers can resolve claims. Almost every large claim which reaches trial will have first passed through the mediation process. 9.12 Whilst there is no set process for mediation, the vast bulk of mediations involving construction professionals will follow the same pattern. 9.13 The parties must agree to go to mediation. As set out below, the courts favour mediation and can penalise litigants who unreasonably refuse to attend mediation. Arbitrators may take a similar approach. It is therefore rare for parties involved in claims against construction professionals to refuse to mediate. 9.14 Rather, the usual difficulty over agreeing to mediate is not whether to do so, but when and in what circumstances. For mediation to succeed the parties often need to know quite a lot about each other’s cases. This may mean that a mediation at an early stage in the life of a dispute stands less chance of success than it would at a later stage. For example, one party may insist on seeing documents which will only become available on disclosure (see below). Often the involvement of third parties dictates the timing of mediations. A third party which is not part of legal proceedings, but against which a written claim has been made, may contend that it should not be part of a mediation between two parties who are in legal proceedings. One of the other parties may refuse to mediate until that third party is present. Because mediation is a voluntary process there is no effective mechanism for preventing one party putting obstacles in the way which, although they may not prevent mediation occurring at some stage, may well delay it. 9.15 Once the parties have agreed to mediate they must agree a mediator. Mediators for disputes involving construction professionals are normally drawn from a small group of persons regularly holding themselves out as mediators in construction and commercial litigation, and are usually lawyers or construction professionals. Generally they are accredited by one of the recognised providers of mediation services. Although they will usually be well-known to the lawyers who act this field, they will be independent of the parties. It is the mediator who usually provides the parties with the mediation agreement which sets out the terms under which they will conduct the mediation. 9.16 In advance of the mediation the parties will usually agree a bundle of essential documents for use in the mediation and will exchange position papers. Position papers are encouraged to be positive and constructive, although it is common for them merely to set out the parties’ cases. 9.17 The standard mediation will last a day and will take place at hired rooms in an institute, solicitors’ offices, hotel or other suitable space. The parties will be represented by lawyers, but it is usual for at least one person from the construction professional and one person from the professional indemnity insurer to attend.3 Each party and the mediator will have their own rooms. The mediation may well commence the day with a “plenary session” at which the parties are convened in the same room and have the opportunity to make short opening statements. 9.18 Thereafter, the mediator will shuttle between the parties, both taking representations made by each as to each other’s case and discussing areas of common ground. A skilled mediator will attempt to build consensus on such issues as can be agreed and to identify for all parties the risks which need to be taken into consideration if the matter is

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litigated or arbitrated. In this way the mediator hopes to encourage the parties to move from a process of dialogue to a process of bargaining, resulting eventually in settlement. 9.19 Whilst many mediations result in settlement being achieved on the day, a substantial proportion achieve constructive results short of settlement. Even if the parties do not come sufficiently close to resolve the dispute at the mediation, the process may enable them to reach that point in the weeks that follow. It is a rare mediation which results in the parties being in either the same or a worse position with regard to avoiding trial. For this reason it is important for parties to disputes involving construction professionals, whatever their views on the merits, to look positively upon the process rather than to treat it a step which must be complied with in order to avoid potential costs sanctions.

Section C: adjudication

9.20 Most construction professionals will be familiar with adjudication. In the United Kingdom it is a process of dispute resolution introduced by Parliament4 and intended to provide speedy interim decisions in relation to (mostly) disputes about payment. Parties to “construction contracts” must include provisions for adjudication in the contract and in default of compliant provisions a statutory scheme will be implied. 9.21 The legislative intent is to provide a means whereby disputes could be resolved by an impartial adjudicator, generally within 28 days, whose decision would be binding upon the parties until overturned (or confirmed) in court or arbitration. 9.22 The genesis of the scheme was concern that larger construction companies were exploiting smaller ones by delaying payments due (or in some cases simply not paying at all), taking advantage of the fact that there was no speedy and cheap means by which they could be made to meet their obligations. It seems unlikely that Parliament had disputes involving construction professionals uppermost in its mind when it passed the Act. However, its provisions are very broad and the definition of “construction contract” and “construction operations” are sufficiently widely drawn to encompass almost all contracts between construction professionals and their clients, including collateral warranties.5 9.23 Construction professionals who act at a remove from the works themselves may fall outside the Act (for example the provision of expert or other evidence)6 but the provision of services in relation to ongoing construction works will almost always fall within it. The only exception is contracts with the occupiers of residential dwellings (private houses or flats), which are excluded from the scheme.7

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9.24 A party to an adjudication agreement may seek to adjudicate a “dispute” at any time.8 This means that provided a dispute has arisen (and dispute is given a broad meaning to include any difference) a notice of adjudication may be served. Thus, if there is a disagreement between the engineer and the client as to the likely additional costs of further works which the engineer has advised the client does not have to wait until the end of the contract or even the incurrence of the costs. It can seek the decision of an adjudicator from the moment a dispute arises. There is no requirement for any kind of exchange of views or attempt to resolve the matter. This also means that a notice of adjudication can be served years after works have completed. 9.25 Adjudication does not remove the parties’ substantive rights and so a construction professional’s statutory and contractual limitation rights are preserved, but it does mean that a client can wait many years before commencing an adjudication. 9.26 Once a notice of adjudication is served the timetable for reaching a decision is extremely tight. Unless the parties agree the adjudicator must provide a decision within 28 days of the notice, although the adjudicator has power to extend time for a further 14 days with the agreement of the referring party.9 A tight timetable is put in place for a response and the submission of written evidence. There is no provision for any kind of disclosure and it is rare for the adjudicator to hear the parties in person. The issues are decided on paper. In practice this can mean that the responding party has little time to prepare and present its case and may often be ambushed. The more complex the dispute (and many professional negligence disputes are necessarily complex) the less appropriate adjudication appears as a means of resolving the parties differences.10 9.27 An adjudicator’s judgment is binding (between the parties) until the relevant dispute has been determined in court or in arbitration (or by agreement).11 Thus if an employer obtains an adjudication award against an architect for £500,000 that sum becomes a debt which the architect (or, realistically, its insurer) must pay to the employer. It then falls to the architect to commence proceedings to recover that sum, whether in litigation or arbitration.12 Plainly this can provide the adjudicating party with a considerable tactical advantage, even though the adjudicator’s decision carries no weight in any subsequent proceedings. 9.28 Of course, just as an employer may commence an adjudication against a construction professional, a construction professional may commence an adjudication against an employer seeking its unpaid fees and costs. If an employer unsuccessfully defends such a claim on the basis of alleged breaches of duty the employer will be indebted to the construction professional and will have to commence legal proceedings in order to recover its monies.13 9.29 Adjudication awards can seldom be challenged in the courts. The scheme is intended to provide for quick interim justice and its entire point would be undermined if

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decisions were capable of appeal or other challenge save on very limited grounds. A mistaken decision cannot be challenged merely because it is mistaken (even if the mistake is plain and obvious).14 9.30 Decisions have been successfully challenged where adjudicators have strayed outside their jurisdiction (for example if the decision fails to decide the dispute referred)15 and where the adjudicator has failed to comply with the rules of natural justice (for example failing to give one party a proper chance to address an important issue).16 In exceptional cases, where there is a real risk that the applicant may become insolvent, an unsuccessful respondent may be able to obtain a stay of execution.17 Reference should be made to the specialist works dealing with the law and practice of adjudication.18 9.31 Although employers do commence adjudications against construction professionals, the use of this tactic remains uncommon. Rightly or wrongly the advisers of employers often take the view that, save in very plain cases, adjudicators will be reluctant to rule on matters which are not only complex but often decided by reference to expert evidence. It is often thought that adjudication will merely add a further layer of cost and delay to proceedings19 and indeed may backfire as professional indemnity insurers have the deep pockets necessary to commence litigation or arbitration to claw back sums which (in their view) should not have been paid.20

Section D: the pre-action protocol

9.32 In the United Kingdom the courts encourage prospective parties to litigation to explore those claims in correspondence before proceedings are issued. The process aimed at facilitating settlement and narrowing areas of dispute so that if proceedings are issued costs and time are not wasted dealing with irrelevant or unnecessary issues. 9.33 Court encouragement of the process has led to the development of formal protocols to guide the pre-action process. Whilst there is a separate protocol for professional negligence claims, disputes involving construction professionals fall to be dealt with under the Pre-Action Protocol for Construction and Engineering Disputes.21 9.34 Failure to follow the Protocol without good reason may result in adverse award of costs in subsequent court proceedings. Whilst the use of this Protocol is not generally

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mandated by either arbitration agreements or the rules of procedure commonly adopted for arbitrations, arbitrators commonly have regard to whether parties have followed an appropriate pre-action process and, as a generality, it can be assumed that compliance with the Protocol is as much a condition precedent to arbitration as it is to litigation. 9.35 The Protocol requires that before commencing proceedings the claimant should send the proposed defendant stating, amongst other matters, a brief summary of the claim or claims including (a) a list of principal contractual or statutory provisions relied upon (b) a summary of the relief claimed including, where applicable, the monetary value of any claim or claims with a proportionate level of breakdown. The extent of the brief summary should be proportionate to the claim. Generally it is not expected or required that expert reports should be provided but, in cases where they are succinct and central to the claim they can form a helpful way of explaining the Claimant’s position. 9.36 Because the Protocol is applicable generally to construction disputes this wording is very broad. In the usual case involving a construction professional, the Pre-Action Protocol Letter of claim will be neither the first intimation of a claim,22 nor will it be a brief summary: save in the most straightforward cases professional negligence claims against construction professionals carry a degree of complexity and it is commonly expected that that the letter of claim will set out in some detail (1) the essential facts; (2) the duties alleged to have been owed by the construction professional; (3) a reasonably full explanation of how and in what ways the construction professional is said to have acted in breach of those duties; (4) a reasonably full account of how and in what ways it is said that those breaches of duty caused the claimant loss; and (5) a reasonably detailed breakdown of the loss which is said to have been caused. 9.37 The letter will commonly annex copies of essential documents (for example, the engagement) and, although it is not common for experts reports to be provided, the allegations of breach of duty are expected to be advanced with the support of an expert in the relevant field, who will be identified in the letter. 9.38 It follows that for the purpose of bringing claims against construction professionals the Pre-Action Protocol letter of claim will usually contain at least as much detail as will be included in the Particulars of Claim if proceedings are commenced. Plainly this means that Pre-Action Protocol letters of claim are generally expensive involving considerable lawyer and expert input. Whilst on its face this might seem to run contrary to the objectives of the Protocol (the resolution of disputes at minimal cost), in practice a detailed and well thought out Letter of Claim saves to save both costs and time in the long run. It enables the Claimant to set out its full case in a way which tells the construction professional precisely what it is that must be responded to and it requires a response of appropriately equivalent detail and care so that, at an early stage, the parties are able to adequately to evaluate their positions and consider compromise as an alternative to litigation. 9.39 The Protocol provides that the construction professional should provide an early acknowledgement of the Pre-Action Protocol Letter of Claim (within 14 days of receipt), providing the name of its insurer and (within 28 days) taking any jurisdictional objection (for example that the parties have agreed arbitration as the means of resolving their disputes or that the Claimant proposes to sue the wrong defendant).

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9.40 Absent such preliminary objection, the construction professional is required to provide the Claimant with a letter of response and to do so within 28 days. The letter of response should contain, amongst other information, “a brief and proportionate summary of the Defendant’s response to the claim or claims and, if the defendant intends to make a Counterclaim, a brief summary of the Counterclaim”. 9.41 In practice it is correspondingly rare for a construction professional to provide either a brief summary of its response or to do within 28 days. Just as the Letter of Claim will set out the Claimant’s case in some detail so the Letter of Response (prepared by the lawyers instructed by the construction professional’s indemnity insurers) will generally be expected to set out a full defence to the proposed claim, taking issue with the individual components of the claim and explaining why these are not accepted (where that is the case) in a way which allows the Claimant to understand the case that the construction professional is making. On its own this would invariably require more than 28 days. 9.42 However, the reality of claims against construction professionals is that whilst insurers may engage lawyers on receipt of an intimation of a claim, those lawyers are generally not asked to investigate the claim until the Pre-Action Protocol Letter arrives. It is probably at that point that the lawyers will begin gathering relevant documentation, interviewing the construction professional and engaging an expert. Whilst there is no rule of thumb for the time necessary for a proper Letter of Response it is not uncommon for the parties to agree that a construction professional should have 6 to 8 weeks to put together its response (8 weeks being the maximum period permissible). 9.43 Again, whilst on its face this appears to be a contravention of the Protocol, it is in fact a proper application of the guidance. Provided that the construction professional responds constructively, with a sufficiently full and detailed Letter of Response, the parties will be in a much better position to assess whether they can avoid the costs and uncertainties of litigation (and to assess which issues are really necessary for resolution by litigation) than they would be if the exercise had been rushed by sticking to the 28 day timetable and confining the content of the Letters to a brief summary. 9.44 The Protocol does not require a Claimant to respond to the Defendant’s Letter of Response unless the Defendant makes a Counterclaim. However, it is common and (it is suggested) good practice for some kind of response to be provided. The content of any such response will depend upon the precise nature of the issues in dispute and the positions taken by the parties. In a particular case it may be appropriate simply to note the Defendant’s position but explain (briefly) why the Claimant is unpersuaded by it. 9.45 A more detailed response is advisable where either (1) the Claimant accepts part of the Defendant’s arguments, but none the less maintains its claim (the Claimant needs to explain why so that the issues are narrowed) and (2) where the Claimant wishes to raise different facts and matters to those raised in the Letter of Claim as part of its explanation as to why the Defendant’s arguments are not correct. 9.46 The Protocol recommends a third stage which is a meeting between the parties. Paragraph 9.1 states:

Within 21 days after receipt by the Claimant of the Defendant’s letter of response, or (if the Claimant intends to respond to the Counterclaim) after receipt by the Defendant of the Claimant’s letter of response to the Counterclaim, the parties should normally meet.

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