I posted this a while ago on LinkedIn: could mediation work for single-item disputes on large projects?
This post is to consider the practicalities of applying mediation to issues arising on large EPC (Engineering, Procurement and Construction) projects, and more particularly, whether it may form a stage in the ADR (Alternative Dispute Resolution) or ‘amicable resolution’ process often written into such contracts.
Before proceeding to debate its merits it would be useful to define the term ‘mediation’. A practical working definition for present purposes is ‘Mediation is a process by which an independent intermediary helps the parties in dispute to discuss the issue openly and in confidence to reach a mutually acceptable resolution’.
Large EPC projects are frequently cross-border international projects, where the Owner and Contractor are from different countries and whose personnel are likely to be from many parts of the world. These are technically complex projects such as process or chemical plants, power stations, oil refineries and the like, with contract periods extending over several years. As such, they are fertile ground for the occurrence of events likely to lead to misunderstandings, disagreements and eventually to disputes. Such disputes may range from the simple to complicated, the small to large and all with a greater or lesser effect on cost and schedule.
Although not usually described precisely as “ADR” most standard contracts make provision for dispute settlement outside arbitration in some way seeking amicable resolution by, for example, direct negotiation, conciliation or mediation. These procedures depend on confidentiality, with mediation having the certain advantage of their ‘without prejudice’ status. Most EPC contracts, be they standard forms, hybrid or bespoke, make provision for ADR of some sort, but may not make specific mention of mediation. The typical route after failure to agree on the effect of an event is to issue a notice of dispute, seek a determination from the Owner, followed by attempt at amicable resolution at project level, leading to seeking resolution between senior managers, and where that fails to arbitration.
The phrase amicable resolution can certainly embrace mediation. In the absence of specific mention of mediation in the contract any such process – which is voluntary – necessarily demands the prior formal agreement of the parties. In the context of a large EPC project, securing this agreement to mediate may prove the largest obstacle. This may be partly due to lack of specification of the term ‘mediation’ in the contract. In any event, by the time an issue has reached this point in the dispute procedure, the parties’ positions may have become so entrenched, with both sides postulating and reporting different outcomes to their respective managements, that the prospects of an agreement to mediate may be remote.
On the other hand, either of these same protagonists may take the view that the introduction of an independent mediator – initiation of the mediation process – may be to their mutual advantage. If this view is not the case, then the management layer above these project-based parties may be the one to approach with a view to obtaining an agreement to mediate, perhaps by instruction to their respective project teams. For this to happen, it is certain that an element of persuasion of management will be necessary. This can be effected by calmly and logically setting out the advantages that would accrue to the project, from the point of view of both parties, mentioning notably that the process is (1) voluntary, (2) confidential, (3) without prejudice, (4) cost-efficient, (5) speedy, (6) one that can be effected as the work continues, (7) often successful with more than 70% of disputes resolved on the day or within 3 weeks, and (8) non-binding until an agreement has been achieved and signed.
Events leading to dispute tend to be either based in technical or contractual issues. Rarely do they turn upon a point of law, which would probably render them unsuitable for mediation. Often the dispute arises as a matter of technical or contractual misunderstanding, or misinterpretation of the specification or contract. As such they are of a type for which mediation may provide the way forward. On projects where the documents forming the contract may have been written in [English as] a second language – or clumsily drafted in native English – and where most of the Parties’ personnel use English as a second language, such misunderstandings and misinterpretations are common. These disputes, the more common, are suitable for mediation. Another common dispute that can arise is the evaluation of cost resulting from instructed changes. Whilst there is invariably a procedure for agreement described in the contract, differences of opinion or interpretation can arise and these too are suitable for resolution by the process of mediation.
EPC contracts tend to throw up more than one dispute, often many. It is not to be expected that mediation would be a beneficial means of resolution for more than one issue at a time. This may not be an inherent disadvantage: it is possible, perhaps probable, that once the first mediation has taken place and found by the parties to be a practical means of resolution, it is likely that it would be adopted again for other disputes arising on the project and this would enhance the prospects of an overall settlement at the end.
It is ideal for the confidential discovery of information known only to one of the parties without the absence of the formalities necessary for arbitration or litigation and indeed the possibility that it may later be used in such actions. It is common for one party, often within the Owner’s management team, to hold differing opinions as to how to treat a contractor’s claim. On such previously secreted information can turn a formal judgement, but in mediation it can be safely disclosed without prejudice, which may in this respect be advantageous in itself to the discloser. Typically, the Owner, by management diktat, may have simply ordered his project team to act in a certain manner, knowingly incorrect, seeking in the short term to protect his interests.
The advantage of privacy to both parties is a factor too large to be ignored. Most organisations are jealous of their reputation and avoiding the formalities of public litigation – or even court-enforcement of an adjudication ruling – can weigh heavily on them. With mediation, the only possibility of unwanted publicity is in the event of a party failing to abide by an eventual agreement and that agreement itself becoming the cause of an action for recovery.
For large, usually public companies or state-owned organisations, transparency and subsequent audit may prove to be a disincentive. This can be countered by the practice of explaining in any eventual agreement the precise terms of that agreement in a way that complies with good accounting practice, in particular setting out who does what, when, and for what consideration. This agreement may eventually be covered by formal change order as required by the contract itself.
Positions personally entrenched having been formulated over some months – or even years – may prove a drawback initially but open discussions in caucus are a positive way of de-blocking such long-held views when skilfully handled by the mediator, with the protagonists able to speak freely knowing that what is said can not be used in any subsequent legal or arbitral proceedings. The freedom of speaking off the record can loosen many inhibitions.
As to the procedure, this post has intentionally touched upon this only in passing as the main thrust is to explore the value of mediation on large, usually international, complex projects. It can be seen as a tool for breaking down what may a large dispute into smaller, more manageable parts, and thus resolving that large problem in small steps. The procedure itself, for each issue, would be managed in a manner not significantly different from the norm. There may attend more participants, of various specialities, but in the main the proceedings should as far as is practicable eschew detail with a leaning to finding common ground between the parties, progressing from ‘Position, to ‘Interests’ to ‘Needs’. The competent mediator will be able to find the way from P to I to N (PIN).
Notwithstanding certain special factors, including entrenched positions personally held, it can be said in conclusion that in the opinion of the author mediation for single issues on large EPC contracts can be a useful tool in the resolution of disputes. That such a process can be used also for more than one issue, in series, is likely to be advantageous to the parties in reaching a satisfactory and amicably acceptable outcome to the project.