JOHN FFF O’BRIEN writes that a big part of being Irish is operating with a sense of “fair play” and we instinctively know that ‘the line’ has been crossed.
Parties before they fall into a dispute, believe that they understand most if not all of the facts on the matter and that they either possess or can procure most of the evidence that proves those facts, and that the applicable law will support their position of either entitlement or denial. This level of certainty is measured against a party’s predisposition to risk, and that triggers a decision to go to dispute.
Reaching a light bulb moment
However, in my experience, either party knowing all the facts at the outset of a dispute is seldom if ever the case. Parties will always share a commonality of some of the facts at the start of the process, but invariably each possesses information that the other does not. The objective of every dispute resolution process is to tease out that missing information by one form of pleading or another until all of the facts and supporting evidence are set neatly out on a table allowing them to be objectively considered and tested by a third-party neutral.
When the dispute process reaches this final point, or more practically, as and when new important information unfolds and becomes known along the way to reaching that point, typically one or both of the parties experiences a “light-bulb moment”, which completely changes their exposure to risk, and parallel avenues are sought to stop the onslaught of costs in pursuing or defending a case that will likely be lost. Being aware and remaining alive to the risks that unfold with information exchanges is the key to sensible early commercial settlements.
Lest there be any doubt, costs incurred in resolving construction disputes in arbitration are very significant [as they are in litigation] and include costs of consultants, barristers, solicitors, expert witnesses, the arbitrator, discovery, stenography, accommodation, management time and expenses [the list goes on and on]. Indeed, over my 20 years in ADR, I have experienced significant construction arbitrations where the monthly ‘burn’ costs for the claimant ranged between €100,000 to €350,000, (and the respondent’s cost was reciprocated) and these cases took two to three years to complete.
When a party wins on the substantive issue, the normal rule in Ireland is that its ‘costs follow the event’. This risk that the ultimate loser will pay both parties’ costs at the end of the arbitration, keeps this monthly “cost burn versus live risk” dynamic alive, and that proactively encourages an early resolution of a dispute. It is this parallel process that forms an intrinsic part of successful commercial arbitrations.
Inequitable Revision to the PWC
In early 2021 I published a paper titled “The Perfect Storm” and I remain humbled that it was picked up by the esteemed Dr Nael Bunni, who referred to it at length in his international presentation to the Dispute Resolution Board Foundation (DBRF) on 04 March 2021.
In that paper, I referred to an “inequitable revision” that was incorporated by the Office of Government Procurement (OGP) into the Irish Public Works Contract Tender & Schedule in FTS revision v1.4 on 28 July 2011 at the height of the recession, which remains unamended today. That revision reads as follows:
“We also agree that should a dispute arise under any contract formed by acceptance of this Tender that is referred to arbitration, to the extent permitted by law, under the Arbitration Act 2010 and a sealed offer has not been made, or where a sealed offer has been made and the contractor’s award is greater than the sealed offer (Footnote 4), then each party will bear their own costs in relation to the arbitration proceedings.”
(Footnote 4): If an award is equal to or less than the sealed offer, the Contractor is liable for the costs of both parties in relation to the arbitration proceedings.
This ‘agreement’ set out in the Tender & Schedule of the Contract, stipulates that the default position is that each party pays their own costs in arbitration, even if they win (ie, costs do not follow the event).
It also provides an option that if the Employer decides to make a sealed offer to the Contractor, (normally made early on in the process) and then at the end of the arbitration the Contractor does not get awarded a sum greater than the amount in that sealed offer, the Contractor pays all the Employer’s Costs.
This, however, is not reciprocated. If the Contractor’s award from the Arbitrator is greater than the sealed offer made by the Employer, then instead of the Contractor getting their costs paid by the Employer, they still pay their own costs. In other words, the Irish government will never pay a Contractor’s legal costs on a public works contract, and this crosses a line.
This is NOT playing by the usual rules, and it is certainly not “fair play”.
The general rule
Superior Courts Rules: Order 99 Rule 1(IV) 13.2
“The costs and expenses of an adjudication shall, unless the legal costs adjudicator, for special reason to be stated in their determination otherwise directs, follow the event.”
“The Importance of this general rule was recognised by Clarke J in Veolia Water UK plc v Fingal County Council (No 2) [2006] IEHC 240, [2007] 2IR81,85”
“The overriding starting position should remain that costs should follow the event. Parties who are required to bring a case to court in order to secure their rights are, prima facie, entitled to the reasonable costs of maintaining the proceedings. Parties who successfully defend proceedings are, again prima facie, entitled to the costs to which they have been put in defending what, at the end of the day, the court has found to be unmeritorious proceedings.”
Ref: Para 23-02 Page 720 of ‘Civil Procedure in the Superior Courts’ 3rd Edition Delany & McGrath
Why did the Office of Government Procurement (OGP) unilaterally decide in 2011 to break away from this general rule, which effectively denies a contractor access to an arbitrator’s decision on an Employer’s Representative’s (ER’s) determination that has been found to be unmeritorious? The OGP has done so, to slant the table to its advantage, plain and simple.
Even so, when this amendment initially came in, the OGP left a gaping loophole in the 2009 PWC Arbitration Rule 19.1 that identified that “the costs of arbitration shall in principle follow the event” and the arbitrator may under 19.1.1. “allocate the costs between the parties in a manner the arbitrator considers appropriate.” However, they eventually closed that loophole in the 2014 Rules where sub-clause 6.4.1 states: “Unless the parties agree otherwise…” and thus this agreement mentioned earlier in the FTS Tender & Schedule now prevails.
To take a practical example of how the amendment to the general rule operates, if a contractor undertaking public works finds themselves having made a valid 10.3 claim for, say €250k, and is being capriciously denied of their entitlement by an ER’s determination, they are faced with the prohibitive option of spending €250k in legal, expert and arbitrator’s fees, where if they win their case their net recovery will be €ZERO. Contractors simply cannot afford to take a risk now of even getting a favourable award in arbitration, as their legal and expert costs will be offset against their recovery and will most likely dilute if not drown out the quantum of the substantive award.
Calderbank Offers and parallel mediation
Arbitration is a formidable arena for final and binding dispute resolution and should never be misunderstood as some kind of step before litigation.
Arbitration is like litigation, as it allows for a full judicial process to be carried out but in private, where pleadings, evidence, discovery and hearings carry the full costs of litigation teams for both claimants and respondents.
In any dispute, risk can be categorised into:
– ‘Known’ unknowns, and
– ‘Unknown’ unknowns,
The known unknown risks unfold with an element of expectation, but it’s the unknown unknowns that can dramatically change a party’s risk profile at any stage during a dispute.
The initial risk profile is assessed before the decision is made to refer the matter to arbitration and this applies equally to both parties, and with it brings about the most effective of all dispute resolution tools, and that is the making of sealed offers to the other side. Known as Calderbank Offers, a Respondent will normally make a confidential offer with a short expiry time for acceptance by the Claimant early on in the process.
If the Calderbank Offer expires or is rejected by the Claimant, then after the Arbitrator makes their award on the substantive issue, say two years later, they will ask the parties if any Calderbank Offers were made.
The Arbitrator will then open the sealed offer and if the award to the Claimant is lower than the offer made, then the Claimant will be responsible for the costs incurred by the Respondent from the date of the offer. In other words, the Claimant did not improve their position and should have taken the offer two years ago and, because they have wasted all parties’ time, is penalised by having to pay for the other party’s (taxed) costs. However, if the award is higher, then the Respondent pays all of the Claimant’s costs. This very sensible outcome is prohibited by the amendments to the Public Works Contract.
If the first Calderbank Offer made by the Respondent at the beginning of the arbitration is too low, it will not be accepted by the Claimant, and the arbitration proceeds, but so too does the increasing expenditure of costs on both sides. Additional Calderbank Offers (and counter offers) are often made as the facts and the evidence unfold during the pleading and discovery process, and this concurrent background process continues between the parties sealed out of sight from the Arbitrator.
The most experienced practitioners will be only too aware that many arbitrations do not go all the way to final award, but rather are settled in a parallel confidential mediation process.
Having the risk of paying costs that follow the event in arbitration, forces the parties to really think about their decisions and determinations during a project, because those decisions may one day come under scrutiny by an arbitrator.
The risk of costs against a losing party obliges all parties to undertake their obligations with professional precision, and this fosters an environment to reward future generations of construction professionals building Irish public works projects using best practice, because currently it does not.
Fair play
If an Irish Government ER has determined pro tem, that a Contractor is not entitled to an adjustment to the Public Works Contract sum, then there should be a judicial process where the Contractor can challenge that determination, safe in the knowledge that if successful in his challenge, he will be able to recover his costs from the Irish government Employer. This doesn’t happen in adjudication either, where both parties bear their own costs.
Ireland as a member state in the EU and of the common market for EU tendering of public works projects above €5m cannot allow inappropriate and inequitable provisions to remain in its Public Works Contracts.
Ireland’s international reputation for ‘fair play’ is better than this, and we really must address this problem now.
John FFF O’Brien January 2022
Contact John FFF O’Brien, Principal, John Farage O’Brien, Dispute Resolution & Legal Support Consultants, by phone at 086 803 4330, email: info@johnfarageobrien.ie, or visit www.johnfarageobrien.ie