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An Opportunity For The Construction Industry To Help Itself

Last year I was invited to give the Winnie Whittaker Memorial Lecture to the East Asia Branch of the Chartered Institute of Arbitrators in Hong Kong, and this I duly did on 30 June 2015.

Winnie Whittaker was a chartered quantity surveyor who spent most of her professional career in Hong Kong. She became very interested and involved in dispute resolution and was an active and well respected arbitrator. She was particularly keen on education and worked for the Institute's committee in HongKongfor many years. Unfortunately she died some 10 years ago at the relatively young age of 57 and such was her reputation that the East Asia Branch felt it appropriate to recognize her achievements with an annual lecture.

I consider my lecture to be an appropriate subject for this article as it offers a theme which has been much on my mind in recent times and which I consider may be of relevance in the region, including Malaysia.

This is further prompted by recent moves in Hong Kong to introduce legislation dealing with Security of Payments (SOPL). This has of course already been addressed in other areas, including Singapore and Malaysia in this region. They followed the decision to legislate in UK in 1995, and then in Australia, Ireland, Tasmania and New Zealand.

I am aware that Christopher To has already written two informative articles on the proposals to introduce SOPL into Hong Kong and I do not wish to repeat what he has already dealt with so admirably. Rather I wish to focus on one aspect of the SOPL, which is adjudication and its relevance both in HK and in the region.

If I may return to my lecture for a moment, Winnie was typical of the type of arbitrator appointed in Hong Kong when she (and I) arrived here in the 1980s through to the 2000s. Frequently they were technical and not legally qualified. They were often quantity surveyors or engineers, and occasionally architects. They were individuals who were experienced in the industry and knew what to expect from contractors, subcontractors, and employers. I think it fair to say that they were seldom legally qualified, but had in all probability engaged in further study, possibly via the Fellowship examinations offered by the ClArb.

They were enthusiastic and confident in their handling of disputes and whilst they may have had shortcomings on legal administrative issues, it is doubtful whether this made much difference to the awards they published, and the industry "knew where they were coming from", their awards resonated with those working in the industry, and made sense to them.

The scene in Hong Kong and I believe in the region generally has changed. With the exception of a few lawyers who happen to be technically qualified, there are now very few technical arbitrators appointed. Appointments are dominated by lawyers and barristers. The theme of my lecture was to deal with this matter. I believe there has been a sea change, such that arbitration now follows court room procedure, with technical arbitrators becoming the exception rather than the rule.

The reasons for arbitration have traditionally been to offer an alternative to the courts, and in particular to provide the merits of privacy, speed, flexibility, and economy. The main reason however was to use appropriate technical expertise on technical problems.

Few of the reasons to arbitrate now survive, certainly arbitration does not offer the merits listed, and since most arbitrators now appointed are lawyers, they inevitably follow court procedures. The process is hardly an alternative to the courts, at least in the sense of providing any merits which the court does not offer.

I acknowledge that lawyers are very good at procedure, and in managing documents. Given that many arbitrations do not in fact reach a hearing, this may be thought to be an important reason to appoint lawyers. Indeed the question as to whether the shift from technical arbitrators matters is worthy of debate. Perhaps it is what the industry wants and needs. Without doubt the move to a courtroom style of procedure is more expensive and time consuming but perhaps the results are justified.

I think it fair to say that from 1970 to 1985 (at least within my working experience in the industry), relatively few disputes were arbitrated. That is true in Hong Kong and I suggest also the case in the region. That being said, there were always some arbitrations, which were generally dealt with by senior architects, quantity surveyors, or engineers.

Claims proliferated from 1973, basically following the oil crisis. This prompted construction claims in the UK and I believe the trend spread overseas. Claims became a specialist business, and we started to see more arbitrations. In particular, we saw the Privy Council in the UK dealing with appeals against awards.

As stated above, the traditional arbitrator was a senior technical person. It was essentially judgment by one's peers - a technical person who understood the issues and could form a view which would be respected by the parties, and this was considered important. The process avoided the difficulties of explaining technical matters to a judge who was in fact a layman in technical terms. Parties and the arbitrator would know what technical documents meant and had good working knowledge of the contract. The award would be something the parties anticipated and understood and which resonated with their experience and expectations - it offered a measure of predictability.

It is not necessary for technical arbitrators to rely upon experts to any great extent. Experts may help in providing opinions on detailed valuations or assessments of EOT, or exceptionally explanations on highly technical topics. Solicitors use experts to provide opinion evidence, giving them flexibility in presenting the case, but that is a different point.

If the arbitrator got the law wrong, there was a proper procedure to have the award dealt with: a special case stated for the decision of the courts.

 

Was there any reason to find this process unsatisfactory?

Construction disputes are dominated by delay, disruption, costs related to changes, and quality of work. Technical documents are the province of experts, i.e., professional men and women. Lawyers and judges may have difficulty in understanding fully (say) the SMM or specification without the aid of such experts. The meaning of words is taken to mean what those who normally use them understand and take them to mean, the construction profession has its own understanding of documents and procedures which may be a problem for judges and lawyers.

 

So where lies the advantage in the use of lawyers as arbitrators who merely follow court procedures?

It may be thought that they have a better grasp of what the contracts actually mean from a legal point of view and that this is what matters. Assuming that the question of the meaning of the contract is paramount (and as said above, it probably is not the major cause of dispute in construction), then would a lawyer or judge have a better understanding?

In recent times there has been considerable change in the courts' approach to the matter of interpretation. This is epitomized by several judgments of Lord Hoffman. The law has changed in respect of the rules adopted in interpreting documents, such that there is now much less certainty. Lord Hoffman addressed these matters in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28, and more locally, Jumbo King v Faithful Properties Ltd [1999] 3HKLRD 757 CA.

Lord Hoffman provided the following guidelines from the Investor's case:-

A document will be interpreted having regard to:

  • What a reasonable person having all the background knowledge would have understood
  • Where the background includes anything in the "matrix of fact" that could affect the language's meaning
  • But excluding prior negotiations, for policy reasons of reducing litigation
  • Where the meaning of words is not to be deduced literally, but contextually
  • On the presumption that people do not easily make linguistic mistakes

This approach is now more subjective and less predictable than the old rules of interpretation (basically words mean what they say). It may also be seen to be more amenable to the knowledge and experience of a technical professional.

In Jumbo King, Lord Hoffman provided the following guidelines on interpretation, it is "an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve".

Again this would seem to be as amenable to the understanding of a technical arbitrator as to a lawyer. Indeed a technical person would very probably understand more clearly what was intended by an ambiguous technical document based upon his or her background and experience. Leaving aside evidential problems in using one's own experience in interpreting a document, it is at least likely that a technical person would have a ready appreciation as to what was going on and what was the real intention.

At least on the Hoffman rules, it seems that the law on interpretation is less important and that subjective interpretation is likely to prevail.

 

If this is the case, where lies the advantage in using a legal arbitrator rather than the technical person?

Additionally the technical arbitrator would not need to rely upon the experts. There has been much criticism of experts by the courts and it is suggested that this arises to some extent from the total reliance of the courts in technical disputes upon such persons.

In conclusion as to the choice of arbitrator, given that the major advantage of a lawyer as opposed to a technical person may be his or her understanding of the law in terms of interpretation, it seems that this advantage may be diminished.

 

Should we therefore move back to the appointment of technical arbitrators?

At this point, we must take cognizance of the advent of the Security of Payments Legislation (SOPL) which has been introduced in the areas listed above, and in the region, with Hong Kong bringing up the rear in introducing it in the (hopefully) near future.

Adjudication is the means of temporary dispute resolution offered by the SOPL. It has been in use in the UK since 1995. It has been controversial with the legal fraternity for various reasons. The timescale is one they have difficulty in accepting, and certainly this is an important issue. The prospect of ambush by claimants is always present. The difficulty of providing relevant documents and evidence and the almost impossibly short timescale preventing the use of experts is daunting to a lawyer.

 

Does it daunt the technical man or woman?

My expectation is that it does not. Technical people can handle large and complex technical issues quickly and arrive at a solution which may not be perfect but would be near enough to satisfy the industry.

The reality is that the construction industry does not need a Rolls Royce system. It wants a speedy, reliable and predictable resolution to its disputes, which make sense to those involved. With all due respect to the legal fraternity, they bring nothing extra to a decision by entering into massive detail in terms of evidence, analyses of time and cost, and even the meaning of documents, now that we have seen the advent of the Hoffman rules of interpretation.

The experience in the UK has shown that there is little appetite for going beyond the decision of an adjudicator, (usually a technical person in the UK) in order to get a more refined decision at arbitration. What the industry wants is contemporaneous decisions made during the course of the contract so that the parties can move on and deal with what remains, with cash having been moved on at the same time.

Perhaps the most important point to come out of this speedy adjudication procedure is that it has introduced a measure of certainty of cash flow and in dealing promptly with disputes. This is vital and goes beyond the simple issue of cash flow and the desirability of obtaining money more quickly. It has a profound effect on the quality of the subcontract level of the industry. This is the foundation for the introduction of SOPL. The vital and dominant importance of the subcontracting level in the industry cannot be overstated. The problems which poor and unpredictable cash flow cause at this level go beyond merely financial management. Without a sound and effective means of dealing with disputes by those who understand the issues in a timely manner, we cannot hope to attract quality companies which will provide the necessary capital investment which the industry needs.

It is this point which determines the strength of the industry.

One of the strengths and weaknesses of the construction industry is that anyone can enter it if they wish to given the low capital investment and working capital required. However it is the underinvestment which attracts those who are willing to offer poor quality work and who will simply abandon their companies when the going gets tough. Those less willing to take such risks require proper cash flow and resolution of disputes, i.e., they need the SOPL and they need adjudication.

Where does this then leave us with my initial theme of the use of technical arbitrators? The advent of adjudication places us in the position to revert to the original intention of arbitration, i.e., a quick, economic, private, flexible means of resolving disputes by experienced construction professionals.

Does it matter that adjudication is a temporary solution? Experience elsewhere seems to suggest not.

 

Will the challenge be taken up by technical people to take up appointments as adjudicator?

It is here that I wish to co-opt support and training from the industry.

Experience in the UK suggests that adjudicators are indeed drawn from the construction professions. However this may not be the case in this region. Hong Kong remains to enact the legislation, but in Malaysia there seems to be a comparatively small uptake in the appointment of adjudicators by construction professionals since legislation was introduced.

I refer to the article by my business partner, Rodney Martin, published in the Malaysian Society of Adjudicator's Newsletter of January - June 2015 (Happy Birthday CIPAA!) pages 17 - 23, where he indicates that as at that time the appointment of adjudicators to the panel of adjudicators was as follows:-

Profession

No. of Panellists

Lawyer

152

Engineer

37

Architect

8

Quantity Surveyor

30

Others

92

 

This panel constitution is surprising. Here is the opportunity for the industry to get involved once more in the dispute resolution process, to play a vital part in the improvement and strengthening of the industry, and in particular to improve its cash flow, and yet only 75 engineers, architects and quantity surveyors out of a total of 319 panelists are seemingly interested in taking on the role. Only 9% are quantity surveyors; yet this is prime territory for that profession.

Solicitors are dominant at 57%, and yet with all due respect they may have difficulty readily dealing with the disputes which will arise in the timescale allowed, particularly without experts. It is inevitable that the concept of speedy and effective resolution of disputes contemporaneously with the work progress, even on a temporary basis will be eroded and time scales extended with the reintroduction of experts, and the imposition of hearings with demands for discovery and evidential problems delaying matters.

It is predictable that there will be an attempt to avoid the difficult and experience driven matters of claims for loss and expense, and extension of time, such that they may even be excluded from the process of adjudication on the grounds that they demand too much evidence and time to be properly addressed. This is not so, provided an experienced professional deals with them.

Whether this will also be the experience in Hong Kong remains to be seen.

Certainly there has been some dismay expressed by the surveying profession at the introduction of SOPL because it is now contemplated that the quantity surveyor will have to address all matters in a short timescale or be faced with referrals to adjudication - yet this is surely one of the reasons for introducing the process!

My title of this paper is thus "An Opportunity for the Construction Industry to Help Itself". By that, I mean that the professions should fully engage in supporting the legislation and in particular they should train for and take on the role as adjudicators.

If the adjudication result is considered unsatisfactory, then there remains the opportunity to arbitrate - experience shows that this is seldom taken up, and much wasted time and money is thus avoided. 

(This article was first published in the Malaysia Adjudicator Magazine - Issue #4 July – December 2015. Download the PDF HERE)

 

About the author
Michael Charlton
Author: Michael Charlton

Michael has specialised in providing contractual advice for 34 years in the Asia Pacific region. He first came to Hong Kong in 1985 when he established the business for a major contracts consultancy group and from there developed their businesses throughout Asia and Australia. He became Joint CEO with the group which was listed in the UK, before leaving in 2004 to establish his own company. Michael Charlton & Company Limited was established in 2005 and subsequently the Charlton Martin Group formed in 2007. Michael is Chairman of the Charlton Martin Group, which also has offices in Malaysia and Singapore. He has acted as lay advocate, representing parties in mediation and arbitration, he has been appointed as arbitrator, and provided contractual advice to the industry. Michael has been appointed as quantum expert and has given evidence at numerous arbitrations and litigations. Michael has been a regular lecturer at seminars and has organised and presented in excess of 500 seminars in the region.


“Logo IconThe Charlton Martin Group provides construction contract consultancy services to the construction, engineering, power, process, petrochemical, oil and gas industries worldwide, dealing specifically with the many disputes and varied problems, which frequently arise.

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