Most construction contracts contain provisions requiring the parties to 
attempt amicable settlement before referring disputes to arbitration or other formal proceedings. Despite this, such provisions are frequently underutilised, with the parties often regarding them as little more than a contractual hurdle to be side stepped along the way to the arbitration courts.
This is unfortunate. Properly approached, the amicable settlement process provides an opportunity to resolve disputes without the considerable time, expense and uncertainty associated with formal proceedings.
However, successful settlement rarely results from simply bringing the parties together. Preparation, timing and a realistic understanding of the respective contractual and commercial positions are essential.
The following considerations may assist parties in making more effective use of these provisions.
1. Understand the Contractual Procedure
The starting point is the contract itself. Amicable settlement provisions commonly prescribe notification requirements, escalation procedures and periods within which negotiations must take place.
These requirements should be carefully examined, particularly where commencement or completion of the procedure is a prerequisite to formal dispute resolution.
The parties should also understand how the procedure interacts with outstanding claims, notice requirements and other contractual obligations. Commencing settlement discussions does not necessarily suspend contractual deadlines or preserve rights that have otherwise been lost.
2. Establish the Merits Before Negotiating
There is little advantage in entering negotiations without a proper understanding of the underlying contractual entitlements.
Claims should be subjected to a critical examination of entitlement, causation and quantum, including the strengths and weaknesses of the supporting evidence.
This exercise should extend to the opposing party’s claims and defences. An employer facing a substantial extension of time and prolongation claim, for example, must assess its exposure just as carefully as the contractor pursuing recovery.
An independent review by someone not previously involved in preparing or defending the claim can be particularly valuable. Project teams and their advisers sometimes become too closely associated with positions developed over many months.
A realistic assessment of the likely outcome of formal proceedings provides an essential basis for meaningful settlement negotiations.
3. Understand the Other Party's Position
Consideration should be given to the circumstances influencing the opposing party’s approach. Is its position based upon genuinely held contractual or technical arguments, perhaps following advice from consultants? Alternatively, is it primarily seeking a substantial reduction in its financial exposure, irrespective of the underlying merits?
The distinction is important. Further technical submissions may assist in the former circumstances but achieve little in the latter.
The other party’s previous conduct, commercial pressures, financial circumstances and reputation for resolving disputes should also be considered.
Understanding these matters may assist in determining both the appropriate negotiating strategy and the prospects of achieving settlement.
4. Prepare the Case Properly
Insufficient preparation is frequently an obstacle to successful negotiations. Simply reproducing previously rejected claims, correspondence and supporting documents is unlikely to persuade the other party to reconsider its position.
The matters in dispute should be critically reviewed and presented through concise, properly substantiated arguments. Where appropriate, claims should be updated, weaknesses addressed and areas of agreement identified.
Consideration should also be given to obtaining an independent assessment of particularly contentious technical or financial issues.
The objective is to enter negotiations with a clear understanding of the case and sufficient evidence to support the proposed settlement.
5. Appreciate the Cost of Formal Proceedings
The time, cost and effort associated with arbitration or litigation should not be underestimated.
Legal and expert fees, management resources, delayed recoveries and the uncertainty of the eventual outcome may significantly affect the commercial value of pursuing a dispute.
These considerations apply to both parties. An employer successfully defending a substantial claim may nevertheless incur considerable expenditure, while a contractor obtaining an award may recover considerably less than anticipated after costs and delays are considered.
However, the prospect of expensive proceedings should not become a reason for premature concessions.
Both parties should understand their respective exposure and use this assessment to establish realistic settlement parameters without unnecessarily weakening their negotiating positions.
6. Timing Is Important
The timing of amicable settlement discussions may materially influence their prospects of success.
On construction projects, the parties’ commercial interests and relative negotiating positions frequently change as completion approaches.
Before taking-over or handover, both employer and contractor may have compelling reasons to resolve outstanding matters in order to facilitate completion, commissioning, final payments or the achievement of contractual milestones.
Following handover, some of these incentives may diminish.
It is therefore important to understand the duration and procedural requirements of the contractual settlement mechanism and to consider commencing discussions whilst opportunities for mutually beneficial arrangements remain available.
This does not suggest withholding performance or disregarding contractual obligations. Rather, settlement opportunities should be considered at an appropriate stage, rather than automatically deferred until completion.
7. Involve the Appropriate Decision Makers
Disputes can become entrenched at project level, particularly where individuals have been personally involved in the events giving rise to the disagreement.
Many contracts provide for escalation to senior management, and this can be effective in moving discussions away from entrenched positions.
Senior representatives may be better placed to consider the wider commercial consequences, including future business relationships, financial exposure and the advantages of achieving an early resolution.
Those participating in negotiations should also have sufficient authority to consider proposals and, where appropriate, conclude an agreement.
8. Prepare for Every Outcome
Amicable settlement negotiations should be undertaken with the objective of achieving a commercially acceptable resolution. Nevertheless, there can be no assumption that the other party will approach discussions with similar intentions.
Before commencing the process, the parties should establish their settlement objectives, acceptable parameters and the consequences of failing to reach agreement.
They should also understand the subsequent contractual procedures, applicable deadlines and requirements for commencing formal proceedings.
Care should be taken to preserve contractual rights and to consider the status and confidentiality of communications and settlement proposals.
A party that is properly prepared to pursue its position through formal proceedings, if necessary, will generally be better equipped to negotiate effectively.
Conclusion
Amicable settlement provisions offer an important, but frequently overlooked, opportunity to resolve construction disputes before the substantial expense and disruption of formal proceedings.
They should not be regarded merely as procedural steps to be completed before arbitration or litigation.
A successful outcome requires a sound appreciation of contractual entitlement, an objective assessment of the evidence, an understanding of the other party’s commercial position and proper consideration of the alternatives to settlement.
Above all, timing and preparation are fundamental. Parties that approach amicable settlement discussions with a properly developed case and a realistic appreciation of their commercial circumstances are considerably better placed to achieve a satisfactory resolution.
davidbrodiestedman@dispute-iq.com
Disclaimer
This article has been written by David Brodie-Stedman. The opinions expressed are solely those of the author and do not necessarily represent the views of DisputeIQ Claims Settlement Services LLC.
