Principles in Negotiation and Settlement of Construction Disputes

Negotiation and Settlement of Construction Disputes

  1. Prepare Adequately

The principles of negotiation in the context of a construction dispute are similar to the principles of negotiation in any other context. The parties have their expectations and a lower limits (usually expressed in monetary terms) or minimum position. Where these lower limits overlap, it should in theory be possible to negotiate a settlement between the parties. However in practice, the situation is rarely this straightforward.

Issues that will inevitably impact on this apparently simple process include:

(a)   People Issues

(b)   Entrenched Positions

(c)    Misunderstandings

(d)   Poor Analysis of items in Dispute

(e)   Manipulation of the Lower Limits

(f)     Games of Bluff.

To drastically improve the chances of the parties in successful negotiations of any construction dispute is to ensure that the parties have a high degree of preparedness prior to any face-to-face negotiations.

(a)   People issues

Before commencing any face-to-face negotiations, it is important to give considerable thought as to who ought to be present or represent a particular party. Factors that should be considered include who has authority to settle the claim, who has access to the relevant information, who is likely to be attending the negotiation meetings from the other party, the influence of the prospective attendees on the key decision-maker, and the relationships between the individual members of the negotiation team of one party together with their relationships with the individual members of the negotiation team representing the other party.

If the aim of face-to-face negotiations is to settle the claim, rather than merely explore issues, then it is obviously very important that at least one member of each team present at the negotiations has the authority to settle the claim. He or she will be the key person representing each party and the rest of the team members should be assembled around these representatives with the goal of helping them to exercise their authority.

Sometimes (although not always) the justification for settling claims is based on a detailed analysis of previous calculations and negotiations. If this is the way in which the negotiations are proceeding, then it is essential that the parties have access to the individuals who were primarily involved in the preparation of analysis and calculations together with those involved in any earlier negotiations. It may not be helpful to have these persons present throughout the negotiations (see entrenched positions below), but arrangements should be made to have access to such persons at all times, either via the telephone or in an adjoining room.

Usually balanced teams contribute significantly to the confidence of the decision-makers. In the event that the negotiation team of one party includes a lawyer, then the other party should give serious consideration to retaining the services of a lawyer to attend the negotiations too. Likewise, if the team of one party contains a commercial manager, the other party should also consider the inclusion of an equivalent representative in their negotiation team. This is a matter for consideration and not a rule to be followed blindly. For example, if the respective commercial managers have an inherent dislike for one another, it might be more constructive if one or both of them were not present at the face to face negotiations.

All team members should try not to become angry in response to aggressive opponents. It is best to deal with aggression in a level-headed and calm manner at all times. If an opponent becomes aggressive, it will be necessary to try to cool him or her down. Taking five minutes out may help to stabilize the atmosphere.

(b)   Entrenched Positions

Human nature is such that it becomes increasingly difficult to change an opinion that has been publicly aired, particularly if others have relied upon this opinion when making their own commercial decisions in respect of a dispute. During settlement negotiations, it is important that are able to make an objective and realistic account of the strengths and weaknesses of your their arguments in respect of the dispute and those of the other party. In some instances a team member from either party who has publicly aired an opinion over many months may actually be very disruptive to negotiation process. They will often have a personal interest in any fresh analysis of the dispute (and ultimate any negotiated settlement reached between the parties) their continued reference and insistence of supporting their earlier opinion, may lead to them advocating the necessity to advocate their previously held position. For these reasons, it is often helpful to limit these individuals input in face to face negotiations to allowing them to explain why their opinion is such as it is, and then exclude them from the further analysis and negotiations so as to avoid entrenchment.

(c)    Misunderstandings

It is surprising how often messages are misinterpreted, even after prolonged periods of communication. It is therefore worth restating key points at regular intervals and clarifying that the message has been received and understood. This will allow both negotiation teams to remain focused on the core causes leading to the disputes and the progress that is being made to negotiating towards a settlement. It should also be realised that it is often a tactic of one party (particularly the party in denial) to encourage the consensus of misunderstanding as a tool in negotiating and the regular review of key points and milestones reached in the negotiation process can help to keep misunderstanding whether they be intentional or otherwise to a minimum.

(d)   Poor analysis of Items in Dispute

Each party will usually base their lower limit on advice as to the chances of success, the size of any potential award, and the legal costs and management time involved in pursuing or defending the claim in the event negotiations were to fail. It is therefore essential that each party base their aspirations as to the outcome of negotiations or potential settlement on advice that is reasonably accurate.

Just as important to any successful negotiation is the quality of advice received by the other party. If they receive advice that is overly optimistic, the prospects for settlement will be dramatically reduced. While it may not be possible to influence the quality of advice received by the other party before the commencement of any face-to-face negotiations, it may be possible during such negotiations to undermine the credibility of that advice and cause your opponent to re-evaluate his or her lower limit. A useful technique which can be adopted in questioning the credibility of advice is to probe the other party’s analysis by asking questions about the logic or basis of their figures. In this way, the inadequacies of the other party’s analysis may become apparent to them, without the other party seeming to take delight in embarrassing them.

(e)   Manipulation of the lower limits.

Lower limits should not be taken for granted or cast in stone. It is usually possible, with some effort, for one party to improve their position in the event that negotiations fail. Revealing this alternative to the other party will often influence a settlement more in the favour of one party than might otherwise have been the case. For example, if negotiations with one supplier in respect of disputed terms and conditions is not moving in the correct direction or are becoming difficult, it may be possible to introduce the alternative of recommencing negotiations with a second or third alternative supplier which will possibly focus the party in reaching. Such a move could have a dramatic impact on the negotiations.

(f)     Games of bluff

Negotiations are fundamentally concerned with exploring the lower limit of the other party and then influencing a settlement as favourably as possible taking account of this lower limit. This necessarily involves one party in advocating the strengths of their case, while rejecting the weaknesses that the other party will be trying to highlight. It is recommended that this process should never involve any dishonesty, as the revelation of such will undermine the credibility and standing of the party and the negotiation team of that party and may even have a negative effect on any negotiation and subsequent settlement.

2.      Negotiation Techniques

Styles of negotiation vary from one individual to another. Crucially, the negotiation process needs to be flexible and must take account of the matter under negotiation, the objectives of the parties and the nature of lead negotiator or negotiation team of the other party.

Attempting to approach an important negotiation without a plan would be foolhardy. Having taken into consideration the issues that have been outlined above both parties should devise a plan in a written format. The plan should concentrate on testing one party’s assumptions about the other party’s objectives and lower limit, influencing the other party to reassess their lower limit, and influencing the other party to reassess their assumptions in respect of the other party’s lower limit. The plan should also indicate how and when to consider additional or improved offers in order to persuade the other party to adjust their position in respect of the dispute and an acceptable negotiated settlement.

Principled negotiation is a useful technique in terms of achieving a settlement, but it will not always maximize that party’s position. The goal of principled negotiation is to explore potential solutions and procedures for settlement in a fair, equitable and non-confrontational manner. Such negotiations are often facilitated and run like a workshop. There are many similarities to mediation except there is no mediator and both parties have to want to reach settlement in the dispute. The parties must allow each other an opportunity to agree the issues and the boundaries of the dispute and to explore potential solutions in a non-evaluative type of forum for this technique to be of any benefit in the negotiation and settlement process.

All parties considering entering into efforts at principled negotiation should be made to understand and satisfy the other party’s true motivating factors, which may not be expressed and may not be consistent among all members of their negotiating team. For example, a director may wish to resolve a dispute prior to a having to report the outcome of negotiations at a forthcoming board meeting, whereas a commercial manager might be seeking to justify a position adopted by him many months ago. Potential solutions need to be designed to satisfy as many of these drivers as possible to allow the other party to view the solutions as advantageous. Members of the negotiation teams need to try to view the negotiations from the perspectives of each of the individuals in other party’s negotiating team. They also need to be conscious of emotions, responses and body language of the other party during the negotiations, to test and adjust their views correspondingly.

If independent experts have been engaged and have been able to agree upper and lower levels for quantum of damages, it could be agreed that the mid-point will be accepted. Alternatively, a more complex distribution curve could be agreed and be the basis of final negotiations. On an issue of liability, the parties could agree to be bound by the decision of an independent expert, jointly appointed and jointly instructed. Any such undertaking needs to be in the form of a written agreement otherwise the use of such an independent expert would be of no benefit other than adding weight perhaps to one of the party’s efforts in attempting to influence the other party in re-assessing their position.

Party’s should where possible avoid single issue negotiations and where appropriate introduce additional issues for discussion in the negotiations. This can often lead to a diffusion of stalled negotiations, where the parties are at loggerheads and allow the other party to consider alternative options to settlement of a dispute. Additional issues should not be introduced to confuse or create additional areas of dispute but should be introduced to provide the other party with alternative options in reaching settlement. Obviously any alternatives introduced should be acceptable to the party introducing them and thus it is important that such are considered in advance of negotiations and not introduced of hand and result in creating a situation unacceptable to either party.

It is not uncommon for some individuals to refuse to negotiate and adopt a ‘Take it or Leave it’ approach. They place an offer on the table and refuse to move from that position either believing that the offer is reasonable and fair or attempting to intimidate the other party. The issue facing the other party when such an approach is adopted is whether the approach is genuine or merely a technique designed to gauge their lower limit.

History of the individual in previous negotiations conducted may reveal the true motives, but this approach can reduce the options for negotiated settlement in the event that the offer fails to satisfy the lower limit of the other party. In the event that the ‘Take it or leave it’ offer is not accepted then either negotiations end or the party making the offer are forced to engage in negotiations to attempt to settle the dispute and the other party may well consider any future offers with contempt believing that a better outcome can be achieved.

Negotiations can often be expensive and time-consuming, with regard to external consultant and advisors’ fees and the involvement of management time from both parties. It is therefore beneficial that negotiations are conducted as efficiently as possible. To this end building up a degree of mutual trust between the negotiators as early as possible in the negotiation process is of vital importance in reducing unproductive meetings and negotiations. It is therefore beneficial if both party’s nominated negotiators should remain honest and consistent in their approach and arguments.

3.      Negotiating against a backdrop of litigation or arbitration

Negotiations may be undertaken at any time and under any terms. However, when negotiating take place against a backdrop of litigation or arbitration it is recommended that the following matters should always be borne in mind.

The party’s should agree that all correspondence generated during attempts to negotiate in a genuine settlement of a dispute is treated as ‘without prejudice’, regardless of whether or not this is stated on the face of the correspondence. This will enable the parties to negotiate freely, without rendering their positions weaker at trial. Should litigation or arbitration go ahead, the ‘without prejudice’ correspondence will not be disclosed to the court or to the arbitrator. Parties may want to consider that all written offers to settle should be marked ‘without prejudice save as to costs’. This will allow the party making the offer to reserve the right to produce the offer in court when the judge deals with issues of costs at the end of the trial.

The existence of ‘without prejudice’ discussions does not stop the limitation period or the timetable for litigation or arbitration from running. Parties should remain alert to the other party acting unscrupulously by using the existence of negotiations as a delaying tactic, dragging out negotiations until after the relevant limitation period has expired, with no real intention of settling the dispute. As limitation periods are very strict, a party could lose the chance to bring a claim permanently. Parties should therefore ensure that any notices in respect of litigation or arbitration are issued within the relevant limitation periods.

It should be remembered that negotiations can continue even after initiating or serving notice of court or arbitration proceedings have been issued. In arbitration, it is possible to obtain a stay immediately after issuing the notice to concur in the appointment of the arbitrator. If negotiations are taking place, written confirmation from one’s opponent as to agreement to stay proceedings should always be obtained.

If negotiations are taking place, the parties can make an application to the judge or an arbitrator requesting a stay in proceedings. In this way, a claimant may avoid incurring further costs of litigation or arbitration, but can restart proceedings at any time if negotiations fail.

One of the main reasons for entering into negotiations against a backdrop of litigation or arbitration is to obtain protection as to costs involved in litigation or arbitration.  Parties should consider what type and level of offer to make in this respect. This situation should be kept under review as litigation or arbitration proceedings develop such as after the disclosure of documents and witness statements where the parties’ positions often become clearer.

4.      Settlement agreement

Where the parties to a dispute reach settlement through negotiation, they should record its terms in a formal written and executed settlement agreement. The agreement is formal evidence that the parties have concluded terms of settlement in respect of the dispute. This avoids potential disputes as to the contents of any ‘without prejudice’ discussions and the terms of any agreement reached. If there is argument as to terms of the settlement, the contents of any ‘without prejudice’ communications may be considered by the court in attempting to determine the party’s intentions.  Please be aware that any settlement agreement would require fresh proceedings to be instigated to enforce the terms of such agreement in the event with of the parties failed to abide with its terms.

The parties to any settlement agreement should take care with the drafting of any resultant settlement agreement so as not to prejudice claims against other parties including contribution or indemnity claims (Lumbermans Mutual Casualty v Bovis Lend Lease Ltd (2004)). Care should also be taken not to inadvertently accept a settlement offer by presenting a cheque offered in settlement of the claim (Andrew Bracken & Ann Trickett v Graham Billinghurst (2003)).

Please also refer to Amicable Settlement – A vital Tool.

MALCONLAW 2011

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