Resolving Building and Construction Disputes – Why in the Coronavirus Paradigm Negotiation is the Imperative

Resolving Building and Construction Disputes – Why in the Coronavirus Paradigm Negotiation is the Imperative

24 Aug 2020

By Adjunct Professor Kim Lovegrove MSE RML FAIB, Chair of the IBQC, Ethiopian Honorary Consul to Victoria, Senior Lawyer, Lovegrove & Cotton – Construction and Planning Lawyers

Paper delivered at the Thomson Reuters Building and Construction Law Online Conference.

Many months ago an old friend of the writer, owner of some well-known Melbourne restaurants and retail outlets quipped that the coronavirus would have more legs than a tarantula. He said this prior to lockdown when we were having a coffee at one of Melbourne’s better-known eating establishments on a balmy late summer’s day. He, like the writer, had been battle-hardened by the early nineties recession and the GFC, which had savaged many sectors of the economy; in particular, the building industry.

Fast forward: the US economy’s GDP has contracted 32.9 percent (an annualised figure) in the recent figures, by far the greatest decline since records were established.[1] Unemployment has surged and Macquarie Bank has stated that it is difficult to get a handle on the depth of the economic malaise in Australia because the Commonwealth Government’s Job Keeper scheme is keeping a great many employed.[2] It is acting somewhat like a life-support system and we will not really know the depth of the malaise until the plugs are pulled out.

But what has this got to do with dispute resolution?

In speaking to a number of practitioners in our field, we have been apprised of a new and clear correlation between the announcement of lockdowns and an immediate diminution in new client enquiries. When the level 3 lockdowns were lifted, cohorts reported that the phones started ringing and organic file openings surged. We were also told that within 24 hours of the reintroduction of the level 3 lockdowns, the phones went dead, and organic client leads, particularly those generated online, disappeared. Practitioners were forced to survive on work in progress, their longstanding clients and referrals.

So, what has happened?

New building permits in the building industry are plummeting. The writer spoke to a building surveyor from a large certification company the other day and he said that new building permits are 60 percent down.  Yet people chime “look at all the cranes, look at all the projects.” What one refers to there is work in progress, so caution ought to be had in utilising cranes in the sky as an indicator of the state of the industry; once the pipeline dries up, the building industry in the commercial and residential sectors is facing extraordinary challenges. Building surveyors are the bell weather of the construction industry, a drop in building permit activity leads to a drop in new projects, and once the work in progress dries up, layoffs and insolvencies escalate.

This is primarily because money supply is drying up, discretional spend is going south and a great many are now operating on a “needs to” rather than a “wants to” basis.

When the money dries up, people are less likely to litigate and their ability to fund cases is severely impeded. Many legal practices will be forced to ‘short’ the dispute resolution critical path for client appetite for ‘long’ litigation will not be that which it was.

Over the last 2 decades litigation has become the default method of dispute resolution. This is all about to change

Over the last two decades prolonged litigation has been the default method of dispute resolution and where matters have not gone to trial, the post-1980s institutionalisation of mediation has meant that early bilateral negotiation no longer features so prominently in the dispute resolution process as negotiation is largely left to the mandatory mediation stages. So, to shed light on what the new paradigm of dispute resolution may look like, one would be well served by looking back at the pre-mediation era.

The Pre-Mediation Paradigm

The writer commenced practice in 1986 in Victoria, Australia; initially as a workers’ compensation lawyer and then at the Master Builders Association of Victoria as a Legal and Contracts Officer prior to joining private practice as a construction lawyer. At that time, the overwhelming majority of building disputes were residential, the majority of which were resolved by arbitration.

Ninety percent of the building contracts that parties executed (whether residential, commercial or civil) contained arbitration clauses. In the event of a dispute, the parties were compelled pursuant to the contracts to refer the matter to arbitration. The arbitration nominating bodies appointed an arbitrator who would then organise a directions hearing whereupon an interlocutory set of procedures and a timetable reminiscent of the Court system would be set down.

In the case of workers compensation claims, most matters were settled prior to trial often ‘at the Eve of Court’. A preliminary conference was held where the registrar provided a couple of rooms for legal representatives to negotiate and attempt to cut a deal. In most instances, the solicitors and/or their barristers successfully negotiated settlement through bilateral negotiations, absent the involvement of any third party conciliator.

In the arbitration setting, the arbitrators neither participated in, nor facilitated mediations as this was not part of their remit. Furthermore, participation in mediation may have conflicted them from ultimately arbitrating the matter.

The net effect was that without the imposition of any mandated mediation, for parties that were intent on settling their affairs, it behoved their legal representatives to negotiate and settle the client’s disputes independently and bilaterally and failing same the matters went to hearing.

It followed that without the court or tribunal augmented compulsory resort to mediation, a culture existed where lawyers had no option but to negotiate with one another to avoid trial if the resolve to take a matter to trial waned. The writer also recalls a time where a larger percentage of cases settled at the very early gestation of a dispute than was the case over the last decade or so. The writer, to reiterate, surmises that this ‘old normal’ may enjoy a renaissance of sorts where cases are settled at a much earlier stage of the dispute resolution critical path than has been the case for a good many years – but for different reasons.

The Mediation Era – Alternative Dispute Resolution

By the mid-90s, there was a momentous shift to ensure that mediation became a paramount element of the antipodean dispute resolution fabric. Courts and tribunals incrementally yet deliberately fashioned a new dispute resolution apparatus where those who presided over the dispute resolution theatres insisted that the disputants attend compulsory mediation; so one was forced to mediate.

By way of example, for many years now, the Building and Property list of the Victorian Civil and Administrative Tribunal (‘VCAT’) has had mechanisms to ensure that all disputants attend a compulsory mediation where the tribunal provides a mediator to spend typically the better part of a day assisting the parties to resolve their disputes and different points of view. The VCAT does not visit the costs of the deployment of the mediator upon the parties. Many of the Courts on the other hand likewise compel the parties to attend mediation but typically the disputants must bear the costs of the mediator’s deployment on a 50/50 basis.

Another development in the residential building dispute resolution setting in Victoria occurred in the 90s with the promulgation of the Domestic Building Contracts Act 1995 that ‘expelled’ arbitration clauses in residential building contracts. This resulted in a migration of residential dispute resolution from arbitration to the apposite jurisdiction, being the VCAT. Commercial disputants however had no legislated arbitration embargo visited upon them, so the parties were and are at liberty to execute contracts that rely upon arbitration as the dispute resolution mechanism.

By the beginning of the third millennium, a dispute resolution ecology had thus emerged where mediation become a far more powerful dispute resolution mechanism, particularly in the theatre of residential dispute resolution.

Coinciding with this paradigm shift was the demise of bilateral advocacy negotiation. Whereas in the 80s, solicitors tended to be more prone to resolving a dispute before it gained momentum, with the introduction of mandatory mediation, negotiations generally occurred many months down the track at the mediation juncture. Typically by the time a case went to mediation, the statement of claim, statement of defence and counterclaim had been filed and the interlocutory process was at a fairly mature stage. But also coinciding with this was the emergence of a culture where many solicitors did not engage in bilateral negotiations knowing full well that the opportunity to negotiate would invariably present itself at the mediation juncture. So the mediator became a very prominent actor in the dispute resolution context and much greater reliance was placed upon this actor to effectively facilitate a settlement and ‘close out’ the dispute.’

Late Juncture Mediation and Prolonged Litigation will be Incompatible with the New Paradigm

It follows that over the last two decades, protracted and costly litigation has become the institutionalised form of dispute resolution. With diminished money supply, the adversarial modus operandi will more than ever be incompatible with the COVID-19 inspired new normal because disputes will have to be resolved:-

  • More cost-effectively
  • Much faster

Over the last 4 months, many of our cohorts can attest to the fact that clients from all sectors are incredibly cost-conscious. They are very cautious about the initiation of legal proceedings and they only litigate, in my view, if they really have to. The new normal is no longer discretional; litigation is an absolute last resort.

A senior lawyer was reporting to me the other day that an insolvency practice was predicting a surge in insolvency practices. I would not be so confident. The appointment of administrators and liquidators is only worthwhile if there something left, but if there only remains an “emaciated carcass” of a business, as it were, where will the money be? It will be slim pickings.

Negotiation revival

Over the last 20 years the prevailing dispute resolution model goes something like this

  • Letter of demand
  • Rebuttal in reply
  • The initiation of legal proceedings in a Tribunal or a Court
  • The filing of the statement of claim
  • Mediation where a good many cases settle
  • Absent settlement the matter meanders towards trial but 90 per cent of cases conclude before the trial runs.

As noted earlier, when the writer commenced legal practice in the late eighties, the mediation industry had not been hatched. The convention was for lawyers to negotiate and settle their cases at pre-trial conferences absent the involvement of any third party.

Lawyer negotiation skills in the writer’s view were better honed then and there was more camaraderie when it came to dispute resolution. As soon as mediation took hold, a new paradigm emerged where lawyers were loath to negotiate until mediation was convened by the dispute resolution theatre, be it a court or a tribunal. The problem with this modus operandi is that in a cash-strapped new normal many litigants will not have the financial resources to wait until the mediation is convened.

If regard is had to the above dispute resolution critical path, mediation tends to occur a fair way down the critical path (i.e. 6 months or so), which is problematic. The timelines are further exacerbated by COVID-19 court disruption. Little wonder that our general counsel has observed that many clients are saying they do not want to wait for mediation, requesting their lawyers do their level best to settle by phone negotiation with the lawyer on the other side. And *surprise, surprise* when one parleys with their opponent that is precisely the instructions that have been visited upon the adversary.

One solution might be for dispute resolution theatres to adjust their interlocutory timetables and enshrine mediation as the first step post initiation of legal proceedings. This would mean that disputants would be compelled to file mediation position papers immediately after a notice of appearance is lodged. This way the defendant would be able to preserve their legal standing prior to both parties being afforded the opportunity to participate in a front-end mediation. This innovation would have compelling merit as it would save the litigants costs and they would be able to avail themselves of a conciliatory/circuit breaker within weeks of the filing of initiating process. This innovation is also in keeping with one of the International Building Quality Centre’s dispute resolution maxims being to augment mandatory conciliation at the earliest stages of a dispute.

Insurer migration

Another factor that will impact upon the viability of litigation is the fact that insurers are migrating out of the professional indemnity construction underwriting sector at an unprecedented rate. Grenfell was the primary catalyst for this but it was abetted by some high-profile building failures in the antipodes that have culminated in large insurer pay puts. Insurers are now charging very high premiums and increasing excesses.

Now, when insurers provide indemnity, there are frequently a number of telling exclusions, cladding being one such. Anecdotally, this is culminating in a small business market failure in the building surveyor sector as the smaller concerns can no longer deal with the perfect storm of higher premiums, higher excesses and the likes of cladding exclusions. We know of a number of building surveyors that have closed their practices in recent months.

So plaintiffs, in particular, body corporates, have to be very careful about instructing their lawyers to initiate legal proceedings against the likes of building surveyors, architects and engineers for compromised cladding outcomes. They should be asking their lawyers: is the defendant indemnified for the particular risk?

Admittedly, the plaintiff’s advocate might not know that until legal proceedings are issued, but would be well advised to secure that knowledge at the earliest possible opportunity. There is every chance that many defendants will be running bare. If this proves to be the case, victory will be pyric, large sums of money may be spent seeking judgment against ‘men of straw’. That tends not to culminate in happy client relationships for it is rare for a plaintiff to get joy out of spending tens of thousands of dollars pursuing someone to bankruptcy; to what end?

People want to get out of litigation fast

With ebbing money supply, and diminished insurability, litigation the traditional polarised dispute resolution paradigm does not readily gel with the coronavirus new normal because money is tight and time is short. Further the delays that have become a feature in the jurisprudential apparatus are making the process of dispute resolution even more challenging

The front end negotiation imperative

The experience of all of the practitioners in our firm is that front-end negotiation is becoming more of an imperative; that is save for institutional actors that have the financial resolve to brass it out. But it is the writer’s contention that as the coronavirus continues to bludgeon economies, even the institutions will not be able to go ‘long’ on litigation in light of the need to cut costs. If new starts plummet across the board along the lines of the numbers volunteered by a building surveyor friend of mine, the bean counters will be forcing management to justify every dollar spent and if the spend is discretional then the money will not be spent. Further, an increase in insolvency complemented by a bevy of uninsured actors will deter institutional litigants.

“He who has learnt to disagree without being disagreeable has discovered the most valuable secret of the diplomat” – Robert Estabrook

It follows that a cultural change in the dispute resolution profession will need to unfold and the lawyer of the now will need to develop front end negotiation skills.

The new dispute resolution patois will be something like this:

  • The lawyer takes instructions
  • A letter of demand will be forthcoming but there will in many instances be a conciliatory note to it. An olive branch perhaps. Instead of “old normal’ narrative:

“We are instructed that you owe our client $250,000 recompense for defective building work carried out at ……Unless you retire this debt within 10 calendar days we will issue legal proceedings without further notice.”

There will be the new normal narrative:-

“We are instructed that you owe our client $250,000 for recompense for defective building work carried out at…… Please within ten days revert back with your client instructions and advise whether we can explore ways to avoid the initiation of legal proceedings to avoid the incurring of unnecessary legal costs. The writer looks forward to hearing from you within 10 calendar days.

The old normal narrative is an adversarial narrative the new normal narrative should be a conciliatory narrative with the view to building a negotiation bridge whereas the old narrative will make it harder for lawyer to engage in constructive dialogue in light of its polarising attack tenor.

If the first written salvo is effective, this will pave the way towards negotiation rapport between adversaries. Possibly, the word adversary itself in this new paradigm is inappropriate as is blunt-instrument vernacular. The better term would be dispute resolution facilitators i.e. legal artisans that are intent on the generation of a convergent rather than divergent position. If the lawyers are not able to engineer a settlement by way of bilateral negotiation, they may be well advised to agree to the deployment of a mediator on a 50/50 cost sharing basis as a last ditch effort to avoid the initiation of legal proceedings.

Speaking from experience, as a practitioner with over 30 years of background as a litigator and dispute resolution lawyer, the writer has experienced the metamorphosis in the theatres of conflict dispute resolution and at a more youthful stage of the journey had instinctive resort to adversarial and combative techniques. Gunboat diplomacy was often very effective but by the same token ran the risk of alienating and cementing intransient positions so that if the blunt instrument approach did not work, it was much harder to facilitate negotiated outcomes at a later stage.

Having, in later years, been retained by international NGOs and, more recently, as a quasi-diplomat that is Ethiopian Honorary Consul to Victoria, it has become necessary to learn and apply the arts of diplomacy to facilitate a convergence of positions without giving too much away. It is considered that the diplomatic approach to the resolution of building disputes should, in this new normal, assume a far greater level of currency.

The addition of the more conciliatory style however will not guarantee that the opponent’s response will not be belligerent. That which will worry some practitioners is the prospect of litigation work in progress vaporising so one can expect reluctance on the part of some actors; having said that, there will be many legal practitioners who will do their level best to open up the negotiation channels.

It is my strongest recommendation that corporate counsels and clients seek out legal practitioners that are disposed to a new normal in dispute resolution modus operandi.

[1] Paul Davidson, US economy contracted record 32.9% in Q2 amid state shutdowns, COVID-19 contagion fears, USA Today, 30 July 2020, accessed at <https://www.usatoday.com/story/money/2020/07/30/economy-gdp-fell-annual-rate-32-9-q-2-amid-covid-19-crisis/5536647002/>

[2] Michael Rodman, “JobKeeper masking higher unemployment, Macquarie warns”, AFR, 30 July 2020, accessed at <https://www.afr.com/companies/financial-services/macquarie-warns-of-uncertain-economic-recovery-20200730-p55gtu>