The perils of having no dispute resolution

The perils of having no dispute resolution

Guan Yin claims fiasco offers lessons for contractors and clients

While the recent bust up over the Tsz Shan Monastery and its Guan Yin statue may have made the newspaper headlines especially on revelations on the dormitory requirements for Hong Kong’s richest man Li Ka-shing, the mishaps suffered by the project also offers a salutary lesson on the perils of ignoring advice on effective dispute resolution.

For the contractor Chun Wo Building Construction, a subsidiary of Chun Wo Development Holdings (0711), the decision to sue its employer for outstanding payments was forced upon it by the contract.

This was because the contract was entirely silent on the use of professional mediators or arbitrators to settle disputes arising from the contract.

Chun Wo’s High Court writ mentioned the relevant clause in the contract on “arbitration (dispute resolution)” which stipulated that disputes would “be settled amicably by negotiation” failing which the disputes would go straight to litigation, with no intermediate stage of mediation or arbitration.

According to the writ, a 1986 form of building contract form was used with amendments by special conditions of contract with one of the clauses amended being the original clause on arbitration.

Speaking to the press after the company AGM last week, when asked why the company would be willing to sign a contract with such a provision, Chun Wo’s director of construction Edward Yeung Ka-yin said the Chun Wo and developer Cheung Kong (Holdings) had negotiated successfully before on previous projects.

Chun Wo’s writ said a project management company of Cheung Kong’s, instead of the other signatory to the contract, was in fact running the whole show during construction of the project.

“Sometimes we would not seriously look at [the contract document],” Leung said.

“In this industry, if everybody can talk, this area would be easy to resolve,” he added.

The company is claiming outstanding payment totalling HK$334.95 million, much of it for additional work and costs incurred, from the employer Metta Resources.

The decision to go it alone on the contract with no dispute resolution process appears to fly in the face of conventional wisdom and best practice.

A report by the-then Executive Council member Henry Tang Ying-yen “Construct for Excellence” in 2001 called for early and effective settlement of disputes especially by use of alternative dispute resolution methods such as mediation, use of dispute resolution advisor and adjudication.

Indeed, the Construction Industry Council in its guidelines on dispute resolution issued in September 2010, recommended use of dispute avoidance and dispute resolution measures.

On dispute avoidance, that is avoiding disputes in the first place, the government has experimented with use of dispute resolution advisors (DRA) on public works contracts over the years.

In fact, the government first used a DRA on an Architectural Services Department project at the Queen Mary Hospital in 1991.

The Housing Authority has been using these advisors for its building and foundation contracts for over 10 years with an immediate short form arbitration being mostly adopted.

The Guan Yin statue and Tsz Shan Monastery complex in Tai Po district. The contract document made no provision for dispute resolution measures during the contract, permitting only negotiation and litigation   (Danny Chung)

The Guan Yin statue and Tsz Shan Monastery complex in Tai Po district. The contract document made no provision for dispute resolution measures during the contract, permitting only negotiation and litigation (Danny Chung)

Commenting on the case, a veteran industry cost consultant who had worked previously for a contractor said every standard form of main contract he has ever seen always included an arbitration provision.

The project owner however would call the shots on the form of main contract after advice from professional advisors.

“In my opinion, the inclusion of an arbitration clause is more beneficial to the project owner than the contractor. Litigation can be started at any time, which is more likely to be beneficial to the contractor,” he said.

While arbitration proceedings are held in private, they only commence after project completion so the owner gets the project first and have very limited grounds for appeal unlike for litigation where the lower court’s decision can be appealed.

The courts would however be unlikely to allow litigation to proceed if there was an effective arbitration clause.

“The absence of an arbitration clause in a private sector contract, whilst unusual, is not particularly risky for a contractor and could even be said to be beneficial for a contractor, in terms of being able to commence court action as soon as the contractor is ready,” the consultant said.

“Perhaps the question to ask is why did the project owner did not have an arbitration clause and did he increase his risk?”

Danny Chung

 

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