What are Dispute Resolution Clauses?
Dispute resolution clauses are contractual provisions that set out the process the parties must or may follow from the point a disagreement arises.
These may range from simple requirements to negotiate in good faith to complex multi-tiered procedures involving mediation, adjudication, and arbitration in a specific sequence. The purpose of such clauses is to encourage early settlement, thereby avoiding costly litigation and preserving commercial relationships.
Dispute Resolution Clauses in construction contracts
Construction contracts can take on many forms and dispute resolution clauses vary accordingly.
Standard JCT and NEC contracts tend to adopt a tiered approach, setting out a sequence of options for resolving disputes, moving from less formal methods such as early notice and negotiation between the parties, to more formal methods such as mediation or use of a Dispute Avoidance Board.
In the high-stakes world of commercial construction, disputes can often arise, and how they are resolved can have significant commercial implications. Alternative Dispute Resolution (ADR) clauses are a key measure often used within commercial contracts, in order to avoid the significant costs and inherent uncertainty of litigation. Such ADR clauses in construction contracts dictate how the parties may handle disagreements before they even consider going to court.
Different types of Alternative Dispute Resolution
Construction contracts often include several types of alternative dispute resolution processes, which might include the following:
Mediation
Mediation is a voluntary, non-binding process, facilitated by a neutral third party who helps the parties reach a mutually acceptable settlement. It is informal and confidential, helping to preserve commercial relationships while avoiding unnecessary publicity. Mediation can be used early in a dispute alongside other methods, and is particularly effective for disputes involving ongoing projects, reputational concerns, or where a creative solution is required. Though cost-effective, mediation does not guarantee a resolution and any unresolved issues may still proceed to adjudication or arbitration.
Adjudication
Adjudication is a statutory process designed to resolve disputes within 28 days of referral and is therefore a hugely popular means of resolving disputes quickly. Introduced by the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”), the process is particularly effective for resolving payment disputes, delay claims, and valuation disagreements, while its speed and cost-effectiveness help to keep projects moving. A successful party to an adjudication may apply to the Technology and Construction Court (“TCC”) to enforce an adjudicator’s decision, and unless the adjudicator exceeded their jurisdiction or materially breached the rules of natural justice (e.g. bias or procedural irregularity) then the TCC is likely to enforce an adjudicator’s decision robustly. The adjudication process is often referred to as “smash and grab” due to the potential for unjust outcomes in complex or high-value disputes due to its compressed timeframe. Strict adherence to the timelines specified in the contract is essential, and non-conformance can have serious financial implications affecting cash flow.
Arbitration
Arbitration is like a private “trial” whereby an independent arbitrator (or panel) makes a binding decision, avoiding public scrutiny. Governed by the Arbitration Act 1996, it is often chosen for its confidentiality and flexibility. Parties may select arbitrators with industry expertise, making the process particularly suited to solving complex or technical disputes. Appeals are limited, and parties must bear the arbitrator’s fees and legal costs. Arbitration was once the go-to method for construction disputes but fell out of favour due to rising costs and delays, which have sometimes rivalled litigation in duration. There has recently been a resurgence in its use, especially where parties require a professional decision-maker.
Are Dispute Resolution clauses mandatory?
This will depend on the contractual terms in the construction contract. In short, the courts will try to assess the original intention of the parties when they entered into the contract.
Courts typically adopt a permissive stance when interpreting dispute resolution clauses. Terms like “may” and “might consider” would generally be considered permissive. In that case, the parties would not be required to strictly follow the processes laid down in the contract and can adopt some other form of dispute resolution. However, terms like “shall” and “will” would generally be considered mandatory, and the parties would have no option other than to follow the agreed terms.
When terms of the contract are ambiguous, this gives rise to legal uncertainty and procedural complexity, particularly where the clause is poorly worded or lacks sufficient detail. For example, references to “good faith negotiations” without a defined process can make it difficult to determine whether a party has complied with the clause or whether the clause is enforceable at all.
Statutory Override: The Construction Act
The Construction Act provides a statutory right to adjudicate ‘at any time’ for disputes arising under a construction contract. This right cannot be excluded or delayed by contractual provisions. Therefore, even if a dispute resolution clause requires mediation or negotiation first, a party can still refer the dispute to adjudication immediately. This ensures that dispute resolution clauses cannot block access to adjudication.
Strategic Benefits of ADR Clauses
Dispute resolution clauses offer strategic advantages in managing construction disputes. By setting out a clear process, they help parties avoid premature litigation and encourage early resolution, which can preserve commercial relationships and reduce legal costs. This also helps to provide predictability and structure, allowing parties to plan for potential conflicts and assess risks appropriately. When drafted effectively, they can streamline dispute handling and support the continuity of projects, especially in long-term or complex cases.
Conclusion
Dispute resolution clauses are valuable tools in construction contracts, but their enforceability is the key issue that determines their practical impact. While these clauses offer structure and strategic benefits, their legal effectiveness depends on clear drafting and compliance with statutory frameworks. Ambiguous language or overly rigid procedures can lead to confusion, delays, or unenforceability. Poorly constructed clauses may be exploited to stall proceedings or create procedural hurdles.
The Construction Act guarantees the right to adjudicate at any time, which overrides any contractual sequence that might suggest otherwise. Therefore, even well-intentioned clauses may be rendered ineffective if they conflict with statutory rights. For construction professionals and legal advisors, understanding and ensuring the enforceability of these clauses is essential to managing disputes effectively and protecting commercial interests.
It can be costly if you commence your claim or negotiations on the wrong foot. If you are in any doubt, we recommend that you take early legal advice on the issues in your dispute and your options for bringing matters towards a resolution, specific to your circumstances.
If you have a construction dispute you seek advice on, or you would like to discuss the content of this article, please contact us to speak to Jed Temple or another member of our Dispute Resolution Team.
