The role of Alternative Dispute Resolution (ADR) in PFI

As sure as bricks and mortar, disputes will arise in the construction industry.  Much as we might like, there is no radical way of avoiding them, but there are ways of making life easier through Alternative Dispute Resolution (ADR).  This term encompasses a range of dispute resolution processes such as mediation and conciliation, both of which are voluntary, usually conducted in private with a third party.

Despite the benefits, it appears that ADR is not finding its way into PFI contracts, but PFI is a prime candidate for the use of ADR.  This is because:

  • It involves a large number of parties
  • Often, the firm carrying out the construction has an interest in the project company responsible for the project
  • Preserving long-term relationships is key to the working of the PPP through the life of the project
  • Public sector budgets and private sector margins dictate that money should not be used on protracted litigation or arbitration
  • The PFI process is particularly susceptible to adverse media, which private ADR can avoid

Adjudication is provided for in most contracts and is often used for the determination of PFI disputes.  However, while it provides an alternative to litigation, it does not possess the benefits of other ADR processes, principally mediation. 

Adjudication involves a temporarily binding determination by a third party, so there is little scope for finding an inventive and mutually acceptable solution.  In addition, it is an adversarial process that can often damage relationships. 

PFI disputes usually involve a number of different parties and issues, limiting the benefit of the adjudication process.  As a result, relations can be damaged, causing a drain on time and resources and diverting attention away from project delivery.  Additionally, if the outcome is contested, then the matter will be raised in court, leading potentially to adverse publicity.
 
By contrast, mediation in particular, does possess many benefits, yet seems little used in the PFI arena. 

Government guidance on PFI contracts does not ignore ADR processes.  SOPC3 (and SOPC4) contain drafting that obliges the parties to consult in good faith and, if such consultation fails to resolve the dispute within a certain timescale, either party may refer the dispute to adjudication.

However, unfortunately, such a clause cannot be stepped down to the design and build subcontract or operation and maintenance sub-contract since it is at odds with the Construction Act 1996, which affords the right to refer a dispute to adjudication at any time.  In practice this mandatory obligation to consult does not appear in many of the standard forms, and if it does appear it is usually deleted at the request of the project company.

Many of the standard forms do make provision for a cross-party liaison committee or liaison group, however these are informal and are only as effective as the parties taking part. 

Encouragingly, it appears that these committees are having the desired effect in a number of cases. The Report on Operational PFI Projects by Partnerships UK (March 2006) found that contractual dispute resolution procedures had only been used in 16% of projects during the operational phase. 

So how to take things forward in this atmosphere of collaboration and dispute avoidance?  Mediation might be a popular buzzword, but it is just not fashionable.  However, it is effective - about 75% of disputes referred to mediation are successfully resolved.

Partnering is a concept that many in the construction sector sign up to and aspire to.  There are signs that the long established adversarial culture in the UK construction sector is giving way to more inspired thinking, facilitated by the recent buoyancy in the sector. 

Adversarial processes, such as litigation or adjudication, will always have a place, but these should be seen as a last resort.  There is a good argument now for mediation to be promoted and recognised as the primary means of resolving PFI disputes, where other routes have been unsuccessful, and in the years to come it is possible that ADR will become the norm. 

Chris Arnold and Iain Drummond are both partners specialising in construction and special projects with UK law firm Shepherd and Wedderburn.

 

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