Focus on EPCM Disputes - Dealing with multi-party disputes under EPCM

Introduction

The structure of EPCM has numerous potential benefits for the Client: the ability to progress design and construction in tandem, potentially giving time savings for the Project; accessing the project risk pot by breaking the works into smaller works packages with interfaces being separately managed rather than “priced in” and allowing the Client to spread performance and insolvency risk. This structure and its benefits are examined in more detail in our articles “What is EPCM?” and “When would you select EPCM?” and “Comparison between EPCM and EPC”.

However, the multi-party nature of EPCM and lack of single point responsibility can also lead to complex and protracted multi-party disputes, where issues of liability and responsibility between different parties can be fractured and unclear and governed by lower levels of available contractual liability. We touch on this in more detail in our article “EPCM - Why disputes arise and resolution strategies”.

Multi-party = multi-dispute

Given the structure of EPCM, the Client does not have the benefit of a single point of responsibility and recourse as it would under an EPC arrangement.

Who the Client has to pursue will depend on the nature of a claim but for many defects it is a mixture of the EPCM Contractor and one or more works contractors. Unlike an EPC contract, the Client will therefore have to give more consideration as to the nature of the dispute and how this has arisen to establish which party is at fault and pursue them accordingly (or pursue more than one party at the same time in order to maximise its recovery).

As is usual with complex construction projects, issues relating to design, programme and cost increases are not always clear cut and detailed investigations in respect of the cause and effect will often be required. This is where a well thought through dispute resolution strategy is particularly helpful – see our article “EPCM - Why disputes arise and resolution strategies”

Dispute resolution provisions

It is therefore important to understand what the EPCM Contractor’s contract and works contracts say regarding dispute escalation and resolution.

If there is a disparity in dispute resolution procedures across multi-contract projects, this could lead to a series of concurrent arbitrations and/or court proceedings in relation to similar issues, potentially resulting in conflicting decisions. There is also the considerable cost and time burden of dealing with multiple disputes on multiple fronts and the possible delays and issues with enforcement.

To the extent possible it is therefore beneficial for each of the works contracts to contain the same dispute provisions, so that there is one forum to deal with disputes and the possibility to consolidate similar disputes or add parties.

This can be difficult to achieve, particularly if there are multiple parties, potentially in different jurisdictions and with separate legal teams doing the negotiating. For those contracts where negotiation requires a different position, this should be factored in when amending other clauses – for example recoverability of legal costs and enforcement issues.

Types of dispute forum

Below is a short summary of the types of forums that could be used under an EPCM structure and how they lend themselves to multi-party disputes.

Adjudication

Adjudication is a compulsory dispute resolution mechanism that applies to works carried out in Great Britain that constitute “construction operations” under “construction contracts” as defined by Part II of the Part II of the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”)¹ .

It is a quick 28 day process (which can be extended by agreement), often described as "pay first, argue later", where crystallised disputes are referred to an adjudicator under a chosen nominated body. The decision is binding, unless and until it is overturned in Court proceedings or arbitration.

If the works packages are construction contracts², the parties will have an automatic statutory right to adjudicate under the Scheme for Construction Contracts (the “Scheme”) at any time. It is also likely that the EPCM contract will be a construction contract, particularly if it includes design work.

The default position under adjudication is that only one crystallised dispute under one contract can be referred to an adjudicator. Adjudication is also not well suited to multi-party disputes, given the inherent difficulties with trying to manage multiple submissions from different parties in a short time frame.

Although the Scheme provides that an adjudicator can adjudicate related disputes under different contracts at the same time, this is at best envisaging parallel adjudications as opposed to multi-party adjudication. Contractual adjudication regimes may seek to improve the prospects of parallel adjudications (i.e. the same adjudicator being appointed and the relevant timings being achieved), however, there is an inherent risk that such provisions are unable to contemplate/deal with all scenarios. Generally speaking, an adjudicator’s decision under one construction contract cannot bind a third party who is not a party to that contract.

Given that statutory adjudication is likely to apply under EPCM, it is still worth including bespoke provisions compatible with the Scheme for Construction Contracts, which are consistent across all contracts and which (for example) include the same nominating body and, where possible, an agreement to use the same adjudicator for related disputes within the necessary timeframes.

Arbitration

Arbitration is a contractual alternative method to court based litigation of resolving disputes, where the parties refer a dispute to an arbitrator or panel of arbitrators to make a binding decision (where there are limited grounds for challenge at Court).

Arbitration typically lends itself well to multi-party disputes, as drafting can be included to select the same arbitration rules, seat and/or arbitration agreement across multiple contracts. Consolidation drafting can be included such that two or more separate arbitral proceedings could be merged into one or joinder drafting (where a third party is joined into existing proceedings). Indeed, many of the commonly used rules (such as the ICC and LCIA) have provisions dealing with multi-party disputes.

Arbitration can also be seen as more favourable if there are international parties (common under EPCM), as there is the ability to pick a seat perceived as more neutral and the process is confidential. However, arbitration is contractual process therefore a party’s agreement is required for either joinder or consolidation.

Court

In England and Wales, the Courts anticipate that various forms of multi-party claims can be brought. The Civil Procedure Rules (CPR) permits any number of claimants or defendants and any number of claims being covered under one claim form. The test is whether all of those claims can be "conveniently" disposed of in the same proceedings in light of the Court’s overriding objective to deal with cases justly and proportionately. Parties can also be added and substituted after a claim, with the Court’s permission.

There is therefore the benefit of simplicity in terms of there being no need to deal with joinder/consolidation in the contracts. However, there is still the need for consistency as if one of the contracts has provided for arbitration the Courts are unlikely to have any jurisdiction over disputes arising under that contract.

Given the international nature of EPCM projects, there may also be challenges persuading parties not based in the UK to submit to the exclusive jurisdiction of the Courts in England and Wales as well as concerns around the public nature of litigation.

Alternative forums

Parties should also consider dispute escalation clauses and provisions relating to mediation or expert determination across works packages, as these processes can encourage the exchange of information and help to narrow issues in dispute. Although generally non-binding (unless the parties agree a settlement), there are significant benefits to all parties in terms flexibility, time and cost.

There is also the possibility of agreeing bespoke contractual provisions relating to dispute boards, where a board of decision makers can be appointed at the outset of a project and, therefore, will be familiar with the project and the parties. Decisions can be non-binding or interim-binding (unless and until challenged through the Courts or arbitration) depending on what the parties agree.

Consistency is key

The different forums and approaches only serve to demonstrate how important it is for the parties to have an awareness of dispute resolution strategy at the procurement and negotiation stage in order to try and ensure a consistent drafting approach across multiple contracts under EPCM.

Another way to manage or mitigate the risk of multi-party disputes is to try and deal with issues pre-emptively and proactively – the importance of early meetings, notification and reporting procedures and the sharing of information and documentation cannot be underestimated.

If things do go wrong, there are many steps that can be taken during the works to help resolve disputes before they escalate. Our article “EPCM and Project Advisory Services” outlines how our experienced team can assist with any issues.

[1]                 Certain specific types of work are excluded from the Construction Act

[2]                 Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649)