Assignment and management of risk is vital to the successful completion of construction projects.
Two views on how to deal with risk and the disputes that can result from risk assignment have recently been brought forward by two legal experts. One approach focuses on avoidance and the other on resolution. Both are complementary to a great degree.
While risk is assigned to parties under contract, early discussions are vital if those assignments are to lead to an overall atmosphere of good will and common purpose regarding the project.
At its spring construction law forum, Gowling WLG partner Sahil Shoor put forward his thoughts regarding the processes needed to successfully deal with risk assignment and management.
Shoor stressed the importance of dealing with risk early, not during the project’s construction. For example, discussions should take place as the design documents are developed and go out in the market, as sustainability issues are being brought forward, and as considerations are given to all other requirements being placed on the project, whether public or private.
This early discussion must be purposeful. Shoor said there needs to be clear understanding between the project parties as to what is required in the contract.
He gave the example of discussions that should take place at the procurement stage to not only determine who is best suited for the risk but who is best prepared to take on that risk.
“If you don’t understand your obligations correctly, you are not going to be able to have a discussion that allows for that spirit of compromise leading to the successful execution of the project.”
The answer, in Shoor’s opinion, is the appointment of a contract administrator who understands the obligations of the parties under the contract. There must be an expectation that this individual will be strong enough to deal with what Shoor called “bad behaviour” at an early stage.
Otherwise issues can escalate, impact the project and lead to serious disagreements.
Nevertheless, disputes do occur. Contracts often call for mediation as a first step towards resolution before matters get too heated.
Dispute resolution expert and lawyer Duncan Glaholt recently proposed a recast approach when matters arise as a result of “misaligned contractual risk distribution schemes.” Glaholt calls this approach “backstopped mediation.”
“Backstopped mediation is scalable and at the same time ideally suited to long-term construction contracts. Backstopped mediation differs from adjudication in that it melds mediation and arbitration into a single process and produces a final and binding result one way or another.”
Glaholt writes one of the goals of construction dispute mediation is to create repeated, high-value interactions in a focused, efficient and economical manner. If achieved, he believes co-operation will be prioritized, with “opportunism and self-interest” recognized as a failing strategy.
He outlines this approach as a progressive course of action.
At project inception, the parties nominate and appoint a sole project mediator (SPM) and a sole project arbitrator (SPA) for the life of the project.
“The SPM functions essentially as a one-person dispute review board, staying abreast of the project monthly and working actively to build credibility with the parties, their senior decision-makers, and internal and external legal counsel. The SPA, on the other hand, stays away from the process until a matter is referred to arbitration by the SPM following an inconclusive mediation.”
A dispute moves through what he calls “interests-based mediation” via the SPM. If matters cannot be resolved at that stage, it goes to the SPA where a “final arbitration” process begins. After a final award is sealed and delivered to the SPM for delivery to the parties, the SPM conducts one final day of mediation, usually within 30 business days.
“This procedure captures all the advantages of med/arb, or co-med/arb, without the many worrying disadvantages of those procedures,” Glaholt concludes. “The backstopped mediation process engages the parties in repeat high-value interactions, without limiting counsel’s role in advancing a rights-based case.”
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.
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