This article considers the history, application and benefits of mediation in the construction industry. By ALA Senior Quantity Surveyor Dan Cooper

Mediation has long acquired judicial approval. This was evidenced in the Court of Appeal through PGF II SA v OMFS. The judgement highlighted the research conducted by the Centre for Effective Dispute Resolution (CEDR) in 2010 and 2012. It was stated:

“The 2012 reported success rates can be summarised as 70% on the day, with 20% more settling shortly thereafter. In 2010 comparable figures were 75%:14%”.[1]

Comparably, CEDR in the proceeding years of 2016, 2018, and 2020 have reported settlement rates of 86%, 89% and 93% respectively.

The Court of Appeal acknowledged the potential bias with such results. Namely, the data received could be skewed due to greater enthusiasm for mediators to report successes. Despite that, the Court of Appeal recognised:

“Nonetheless, results even approaching that level of success are powerful testimony supportive of the value of the [mediation] process”.[2]

As with resolving all disputes cost proportionality should be the primary objective. Mediation helps to achieve that aim. Unfortunately, when that advice is not heeded, the consequences can be catastrophic.

Burchell v Bullard concerned a dispute between a small builder who had been contracted to carry out two large extensions to the property of Mr and Mrs Bullard. The parties fell out and positions became entrenched. Numerous claims and counterclaims were sought. The outcome from the perspective of attaining cost proportionality was a disaster.

The Court of Appeal highlighted “a judgement of £5,000 will have been procured at a cost to the parties of about £185,000. Is that not horrific?”.

Equally, it was recommended that “a small building dispute is par excellence the kind of dispute which, as the recorder found, lends itself to ADR” from which “the merits of the case favoured mediation”.

In Sky’s the Limit v Dr Mirza, JH Davies described the party’s failure to resolve the matters of a building dispute using ADR as being fated to end as a likely “financial disaster for both”.

Similarly, Rolf v De Guerin was a dispute between a small building contractor and property owner which the Court of Appeal judgment noted as “very distressing”, embodying “a sad case about lost opportunities for mediation”.

Egan v Motor Services was not a construction case, but it illustrates the dangers of parties becoming rooted in their positions. Mr Egan took delivery of a new Audi TT car. The following month, Mr Egan made numerous complaints regarding the car. He sought to return the car stating it was unsatisfactory. Legal proceedings commenced. The Court of Appeal referred to the parties as “completely cuckoo” having “between them spent in the region of £100,000, arguing over a claim which is worth about £6,000”.

The Court of Appeal denounced that this was a case that “cries out for mediation”. This was reasoned as it was “perfectly obvious what can happen”. It was explained that often “Feelings are running high, early positions are taken, positions become entrenched”. Resultantly “experts are inevitably involved”. While Egan was in the context of litigation, the same could be said to be applicable to adjudication. It is commonplace in adjudication for the parties to acquire the services of experts and be legally represented. This obviously brings with it not only increased costs but also reliance on the advice sought.

In Paice v Harding, the core matters in dispute were ones of valuation or as Coulson J termed “relatively straightforward quantity-surveying disputes”. Notably, the parties commenced a succession of serial adjudications. It is palpable that running parallel was the accumulation of incurable party costs. The dispute, albeit intertwined with tactical intricacies, remained one of valuation which mediation would tackle head-on.

Coulson J commented that the employers “have not been well served by the adjudication process” and that “serial adjudications often bring with them significant jurisdictional risks”.

He concluded by saying:

“Despite all of that, and coming back to what this case is all about, namely the true value of the defendant’s final account, the chances must be high that at present, the claimants have overpaid the defendant. After all, he was paid the entirety of his final account claim because of the absence of a valid payless notice…

… It seems to me that a mediation would resolve these relatively straightforward quantity-surveying disputes between the parties…

… They are much better off going down that route than waiting for an appeal hearing in the Court of Appeal, which will not be finally determinative of the disputes between them, and will instead relate to whether or not an adjudication should have been injuncted something like a year after that adjudication actually took place. That again confirms the view that I expressed at the outset of this Judgement, that this case is a long way away from the sort of dispute for which adjudication was intended”.

The salient point then, from a party perspective, is when commencing adjudication, parties are placed in an unfamiliar arena. Dependence upon expert advice becomes focal. Matters move from being in the hands of the parties and into the hands of lawyers. Relinquishing control of the dispute as it moves into legal areas alien to the parties involved, coincides with a relinquishment of the incurred costs, and ultimately, the decision provided.

The law operates in a fashion which is black and white. Judgements can turn on the construal of a single word, determining a clear winner and loser. Consequently, the barometer of the decision and award is confined to the inflexibility and rigidness of the law from within which it resides. However, businesses rarely operate in such a clean-cut fashion. Instead, they are built upon compromise. With compromise, comes flexibility. With flexibility, comes options, and therein lies one of the great advantages of mediation.

This is illustrated by the Court of Appeal’s comments in Egan who stated at the time of the dispute,

“The car was practically brand new. It would not have been vastly different from any demonstration car. The commercial possibilities are endless for finding an acceptable solution which would enable the parties to emerge, one with some satisfaction, perhaps a replacement vehicle and the other with its and Audi’s good name intact and probably enhanced, but perhaps with each of them just a little less wealthy”.

In the context of construction mediation, the potential solutions can be as innovative as the parties and mediator can think up! Furthermore, mediation assists with the centring of the focal issues at hand. Often the initially projected rationale for a party’s position can be fictitious and subordinate to the real reasoning. Take the below illustration:

Party A – Alleges widespread defects with the works. As a result of various contra charges, they value works at £0.00 meaning no payment is due to the contractor.

Party B – Internally accepts there are a few minor defects but is unwilling to admit them externally for fear of “giving away their position”.

After probing, Party A admits to the mediator that the extent of the defects alleged might be exaggerated. They provide subsequent words to the effect:

“We couldn’t pay now anyway. The amounts have been reported and its financial year end next week. To change our stance, I’d have to report up the chain, go through governance, and admit my error”.

The skill of a trained mediator is to hone in on such comments and extract the “real” reason behind the dispute. This can then be used to frame the dispute in a different light to propose possible alternative solutions.

In the above example, a simple suggestion from the mediator such as

…“In exchange for all defects being rectified, would you be willing to make full payment within two weeks (i.e. after the financial year end)?”… might lead to the resolution of an otherwise deadlocked dispute.

What the above example hopefully demonstrates, is that the presence of a mediator can add a different dynamic to discussions. In direct negotiations between Part A and Party B, it would be extremely unlikely that Party A would openly express an unwillingness to pay due to financial constraints. However, doing so in the presence of a mediator offers no risk. This subsequently helps the mediator to offer alternative workable solutions.

The comments of Ramsey J in Northrop v BAE depict what a skilled mediator can offer to parties in dispute. In Northrop v BAE, BAE refused mediation contending “the dispute was about contractual interpretation” and that it was an “all or nothing” dispute, meaning that, if “NGM were right it would recover in excess of £3 million, but if it were wrong it would receive nothing”.

Ramsey J condemned such a viewpoint. He stated this “ignores the ability of the mediator to find middle ground by analysing with each party its expressed position”. This enables the mediator with their skillset of evaluation and facilitation to “find solutions which have not been considered”. Resultantly, this could bring “other commercial arrangements or disputes into the discussion” to find plausible resolutions.

In PGF II, it was commented that the party’s stalemate may have originated from a misinterpretation of the respective party positions and facts. As a result, it may have “needed a fresh mind to spot it”.  The Court of Appeal stated this was “precisely the sort of insight which a trained and skilled mediator, experienced in the relevant field, can bring to an apparently entrenched dispute”. As the Court of Appeal reiterated in Egan, a mediator can often bring “an air of reality to negotiations” doing “more for the parties than negotiation”.

The question which then naturally arises is…

When should disputing parties consider mediation?

Unfortunately, there is no definitive answer. Generally, a prerequisite is that the parties have knowledge and fully appreciate the respective positions. It should also occur before costs become an inhibiting factor.

LJ Mummery advised, “An attempt at mediation should be made right at the beginning of the dispute and certainly well before things turn nasty and become expensive”.

Comparably, Coulson J stated in Nigel Witham “a premature mediation simply wastes time” which as a result can “lead to a hardening of positions on both sides” making “settlement doomed to fail”.

Conversely, delaying mediation “until after full particulars and documents have been exchanged” can produce insurmountable party costs which “themselves become the principal obstacle to a successful mediation”.

Instead, what is required is to

“identify the happy medium: the point when the detail of the claim and the response are known to both side, but before the costs that have been incurred in reaching that stage are so great that a settlement is no longer possible”.

In CIP Properties, Coulson J again reiterated the fruitfulness of doing so, stating:

“A professional mediator, engaged at the right time in the process and in the right spirit of cooperation by the parties, will often be able to resolve the most intractable case and save everyone a good deal of money, time and effort”.[3]Which as a result saves “everyone a good deal of money, time and effort”.

Concluding Opinion

Mediation could be seen as the dispute resolution equivalent of site investigations. A ground investigation report does not, and cannot, guarantee the state of all underlying ground conditions. A borehole might be undertaken which indicates little change from the existing known conditions. Simplistically, this could be considered a “wasted” cost (ignoring the advantageousness of that information in itself). However, the cost of a borehole which discovers the presence of rock, avoiding standing time and allowing a contractor to plan for encountering such conditions, pays for itself multiple times over. Comparably, mediation does not promise the successful resolution of a dispute. However, if in the instance it does, the economic and relational gains can be huge. As LJ Ward stated suggestions for mediation “is not a sign of weakness” but rather the “hallmark of commonsense”.

In Burchell v Bullard, it was commented that “the costs of ADR would have been a drop in the ocean compared with the fortune that has been spent”. Even if mediation does not work, it rarely represents wasted costs. Take a final account dispute encompassing disagreement predominantly over three variations/compensation events. Two may find a settlement with one remaining in dispute. Resultantly, the parties then may wish to commence adjudication on the outstanding disagreement. This still produces a lessening of costs. With fewer items in dispute, this equally gives fewer billable hours from lawyers and adjudicators and thus lessens the incurable cost.

However, arguably one of the bigger benefits that mediation can offer is the strengthening of party relations. In adjudication, for example, a party may feel “wronged” being on the receiving end of a poor decision. Understandably, this creates feelings of resentment and animosity towards the opposing party. This in turn leads to the souring of relations. In Contrast, mediation forces parties to work together. The solutions achieved can create a sense of “pain-pain” (or ideally “win-win”) for the parties as concessions are made. Consequently, feelings of recognition and acknowledgement are created through the respective party’s compromises which produces a sense of mutual respect. Furthermore, the outcome of mediation is party-driven and consensual. This removes any party’s feeling of perceived unjustness that may emanate from an award or decision.

Therefore, in conclusion, the question should not be “if” parties should mediate following a dispute, but rather, “when”. Ideally, this should be when the parties know the respective cases, and the cost threshold for legal fees is yet to be crossed.

Mediation offers a cost-effective solution to resolve disputes with cost proportionality should always be at the forefront of party thinking. From adversity, mediation also presents the opportunity for growing disputing parties’ relations rather than seeing them deteriorate. However, that comes with a caveat. Parties must be fully immersed in the process with the genuine aim of settling matters. The saying goes, half-heartedness never wins a battle. This is resoundingly true when spoken in the context of mediation.

[1] PGF II – [24]
[2] PGF II – [25]
[3] CIP Properties v GT [2014] – Para 4.

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