By M. Osama Jannadi , Sadi Assaf ², Allam Naji ³, and A. A. Bubshait²

ABSTRACT: This paper discusses the appropriateness of contractual methods towards dispute avoidance and resolution (DAR) for industrial projects in Saudi Arabia. It focuses on the private industrial sector in the Eastern Province. A survey was conducted using the principles of quota sampling where 93 questionnaires were distributed to 11 owners, 59 contractors and 23 consultants. The survey consisted of 20 statements that measured the parties’ attitude and opinion towards contractual methods recommended for dispute avoidance and resolution (DAR) during the construction phase. Respondents indicated their level of agreement on a 5-level scale. The results reflect the appropriateness of these techniques or industrial projects. The five contract administration methods for dispute avoidance and resolution (DAR) covered in this study are: Allocating Fair Contract Risk, Drafting Dispute Clauses, Team Building, Provision of a Neutral, and Binding Arbitration.

Key words: contract, disputes, industrial projects, Saudi Arabia

During the past two decades, serious disputes concerning construction contracts have become increasingly common on construction projects in Saudi Arabia. It is common practice for designers, contractors and owners to negotiate small and uncomplicated disputes, but larger and more complex ones frequently hinder the project through involvement with lengthy legal issues. Typically, if a resolution cannot be reached by the parties themselves, expensive, time-consuming legal procedures begin, which severely affects all the participants. Disputes are a reality in every construction project. Without the means to address them, minor issues can fester and grow, with crippling consequences for project participants. The rising cost, delay and risk of litigation in construction disputes has prompted the construction industry to look for new and more efficient ways to resolve these disputes outside the courts.

Within the past decade, the industry in the US has taken steps to avoid litigation and to control disputes by developing and employing various mechanisms for alternative dispute resolution that can be implemented during almost any stage of a construction project. These mechanisms range from simple negotiation to binding arbitration. Experience has shown that when resolution occurs sooner rather than later, and when this resolution is relatively unconfrontational, there is a much better chance that litigation can be avoided. Waiting until the end of a project to address a dispute inevitably makes it harder and more expensive to resolve. Parties involved in a construction dispute, or indeed any commercial dispute, generally prefer to retain control over the outcome and maintain a working business relationship. The objective of this study is to evaluate the appropriateness of the below mentioned contractual methods for industrial projects in Saudi Arabia.

There are many techniques that can be incorporated in preparing construction contracts so as to avoid disputes and, of course, costly and time-consuming litigation. The contract administration methods covered in this study for dispute avoidance and resolution (DAR) are:

Allocating Fair Contract Risk

Drafting Dispute Clauses

Team Building

Provision of a Neutral

Binding Arbitration

It is common local practice for architects/engineers (A/E) to prepare construction contract documents simply by adding to or deleting from a set of previously employed contract documents, and while this cut-and-paste method may save time in preparing the construction contract, it often leads to problems, since documents are not read and prepared as a whole for the specific project. Such practices increase the unforeseen risks for the contractor. It comes as no surprise that parties to a contract often include contract language designed to shift risk to the other party so that the bases for claims and disputes are eliminated (Steen 1994). For example, making a contractor responsible for the impact of unanticipated site conditions may effectively preclude recovery of additional costs caused by such conditions. Similarly, contract dispute clauses can be drafted so that even the submission of a valid claim is made nearly impossible, a practice which actually encourages litigation. Such contract provisions, however, do not prevent disputes from occurring. Often, they only create fractious relationships among the parties involved in the project. Construction-project owners generally have two concerns when they shift unanticipated risks to a contractor. As a result of this risk transfer, the following may occur:

A. the contractor will build a contingency into the price to cover the risk; or,

B. he will not have a contingency and will face financial problems.

Unfair shifting of risk, transferring of all responsibility on a party that is not generally expected to control that risk, can result in that party having to spend time and effort looking for ways to stay alive in the project, usually to the detriment of the project itself. As the costs and risks of construction continue to rise, more construction-industry professionals are turning to a system that fairly distributes risk among all the parties involved, the architect/engineer, the owner, the contractor and the sub-contractor(s). Fairness is an elusive concept, but the objective as defined here is to allocate the risk to the party best able to control it. An equitable contract serves as the first step in building cooperation and close coordination among the project participants, and providing a strong foundation for working out the inevitable disputes before they lead to divisive claims that can negatively affect the schedule and cost of construction.

In addition to identifying responsibilities and allocating risks, a contract should contain language for addressing disputes and claims at the relevant stage in a project (Steen 1994). This includes clauses containing explicit provisions and instructions for parties to resolve disputes as they arise, during the course of the project. For example, provision for a binding resolution can include dispute resolution arbitration under the American Arbitration Association (AAA) Construction Arbitration Rules. Contractual provisions should always require that parties first try to settle all disputes by some non-binding techniques, such as mediation. The American Institute of Architects, the Associated General Contractors of America and the American Arbitration Association have each published suggested guidelines and model contract terms for each provision. The guidelines can be helpful in tailoring the dispute-resolution provisions of a contract to each specific need. The contract language can also be drafted in such a way as to emphasize the notice provisions, which are of paramount importance. The essential elements contained in most notice provisions are: the form of communication, the individual or organization to whom the notice should be directed, the time limits, and other procedures to be followed (Thomas, et al 1990). Less frequently the contract may require an assertion that additional compensation or time is expected. Often, the contract will contain references to the changes clause for additional guidance.

Team building is another dispute-resolution technique that can be instituted at the beginning of a construction project to help allow for better cooperation and coordination among the parties (Steen 1994). One such process, partnering, has gained increasing popularity in recent years. It involves an extra contractual understanding among all parties to form a partnership of sorts to achieve mutually determined goals and objectives as well as to minimize disputes and claims. This agreement is often reached through a partnering workshop, wherein all parties agree to take specific steps to work together, fairly allocate risk and responsibilities and recognize their common goal - a successful project. Although partnering may initially require more manpower and effort, its benefits can be invaluable, creating a more harmonious, less confrontational process and, on completion, a successful project free of litigation and claims.

Partnering allows the parties to move from an adversarial relationship to cooperative team work, from a win-lose strategy to a win-win plan, from a stressful project to a satisfying one, from a litigation focus to solutions and accomplishments, and from finger-pointing to a hand-shake mind-set; it also allows bureaucratic inertia to dissolve and risk-taking to be endorsed (Harback, et al 1994).

In the past few years, a process called partnering realignment has evolved to help stakeholders deal with problems arising during the project, rather than resolving them in court after the project is completed (Brown 1994). This process, when embraced and carried through, has helped turn around troubled projects. Partnering realignment is a corrective process implemented during the project, to help organizations resolve issues, set a new course and maximize the remaining potential for success. It is an attempt to regain and retain control of the project and to plan ways of avoiding future problems.

The most careful planning cannot always prevent disputes and this step is the last chance to resolve a dispute before resorting to a binding settlement (Steen 1994). Providing for a neutral party to analyze issues and providing dispute resolution, if negotiations come to an impasse, is an important step towards minimizing the problems caused by disputes. This technique involves a pre-selected independent "neutral" to serve the parties as an observer, fact finder and dispute resolver throughout the construction process. Ideally, a neutral is selected at the inception of the construction phase of the project to act immediately in resolving disputes that cannot be otherwise settled.

Although procedures for establishing a neutral vary and can be tailored to meet the specific needs of a project, they involve a few basic elements, including the following.

The neutral must be acceptable to and compensated by both parties and must be both independent and impartial.

The neutral is initially given an introduction to the nature, scope and purpose of the project and is furnished with the contract documents. The neutral is then required to regularly visit the project site, meet with key project personnel, and attend project meetings thus being kept informed of project progress.

Whenever the parties are unable to resolve a dispute, it may be immediately referred to the neutral for a prompt non-binding decision.

If the neutral is empowered to make only non-binding recommendations and his recommendation is challenged by either party, the recommendations can be admissible as evidence in a subsequent Alternative Dispute Resolution (ADR) proceeding or in a court of law.

Because the neutral is readily available and knowledgeable about the project, he often can help to mediate or encourage the prompt resolution of disputes. In addition, the time and cost saved by immediately addressing disputes can help to preserve the relationships among the parties and keep the project focused on mutual goals.

The construction industry, more than perhaps any other, has experience with using arbitration for resolving disputes (Steen 1994). Serious contract disputes involving huge cost overruns, long schedule delays and complicated technical specification requirements are, in many cases, best decided by experienced arbitrators. The construction industry's success in moving away from litigation is a valuable lesson to those who today are considering Alternative Dispute Resolution as a substitute for facing litigation, given the current "crisis" in the civil courts. Even having taken the four preceding steps, some disputes will not be resolved. Turning the decision over to an arbitration panel comprised of knowledgeable and experienced industry professionals has many advantages over a judge and jury. Although once seen as the only option, binding arbitration is now considered a last resort, after equitable contracting, ongoing dispute resolution and non-binding Alternative Dispute Resolution techniques have failed.

As in litigation, the parties give up control over the decision and have to proceed in an adversarial forum, endangering future relationships. The perception, if not the reality in every case, is that arbitration has advantages over litigation, including lower cost, more prompt resolution and saving time (Hester et al 1987). Procedurally, a number of approaches to arbitration have been developed.

Perhaps one of the widely publicized forms is the model defined by the American Arbitration Association (AAA), the construction industry arbitration rules (CIAR), but special procedures have been established by other professional associations and individual owners and designers (Coulson, 1983). To date, most published studies of arbitration have focused on the underlying legal principles and not on its organization or performance. With expanded use of arbitration, there is also a rapid evolution in its form and greater interest in its performance. The following are key issues determining its form of application.

Scope of Disputes. In practice, arbitration is frequently limited to specific topics and/or size of claims. The most common rationale for limiting the scope is that it permits the user to capitalize on the benefits of arbitration, such as a quick settlement, without risking large settlements or adverse interpretations of the contract provisions.

Selection of Arbitrators. With binding arbitration, the arbitrators are the final interpreters of the dispute, and hence their selection is taken seriously by all the parties. There are basically three approaches to their selection. Arbitrators may be selected from a prepared list, from permanent board members, or they may be selected prior to the start of the construction project. Perhaps the simplest and most expedient arrangement is for a permanent established arbitration board to hear all disputes of a specified type coming before the owner (Richards 1983).

Settlement of Disputes. In principle, with an arbitrated dispute, the judge or arbitrator reviews facts and orders a fair settlement, which is all that is of interest to the parties. Arbitrators are relatively free to base their decisions upon legal or technical considerations, and may even set aside more formal legal precedents for a decision.

Questionnaires containing 20 statements were developed to measure the attitudes and beliefs of the respondents about the following contract administration techniques/ methods: (1) Allocating fair contract risk (2) Drafting dispute clauses, (3) Partnering as one way of team building, (4) Provision of a neutral, (5) Binding Arbitration. The questionnaires were distributed to industrial owners, contractors and A/Es, that form the population of the study with the limitations given in Table 1. The exhaustive population list was taken from the publications of the Chamber of Commerce and Industry (1993 & 1994).