COMMERCIAL ARBITRATION2012

PAPER 1.3

Drafting Dispute Resolution Agreements:

A Construction Lawyers Perspective

These materials were prepared by Karen Martin of Fraser Milner Casgrain LLP, Vancouver, BC, for the
Continuing Legal Education Society of British Columbia, March 2012.
Karen Martin

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DRAFTING DISPUTE RESOLUTION AGREEMENTS: A CONSTRUCTION LAWYERS

PERSPECTIVE

I.

Introduction ....................................................................................................................................................... 1

II.

Tip #1: Tailor the Clause to the Situation .................................................................................................... 2

A. Design a Process to Suit the Likely Disputes ..................................................................................................................... 3
B. Consider Expert Determination ............................................................................................................................................... 3
C. Time Limits .......................................................................................................................................................................................... 3

III.

Tip #2: Consider Options for Negotiations Clauses ................................................................................... 4

A. Involvement of Senior Representatives................................................................................................................................ 4
B. Full Disclosure .................................................................................................................................................................................... 5
C. Good Faith/Best Efforts ................................................................................................................................................................ 5

IV.

Tip #3: Address the Possibility of Multi-Party Disputes............................................................................ 5

1. Aligning Contracts ............................................................................................................................................................... 6
2. Project Protocols................................................................................................................................................................... 7
3. Addressing Issues Required to be Litigated ............................................................................................................ 7

V.

Conclusion: Best Practices from the CCA Protocols .................................................................................. 8

VI.

Appendix ASample Dispute Resolution Clauses ...................................................................................11

VII.

Appendix BSection 108 of the Housing Grants, Construction and Regeneration Act
1996 ...................................................................................................................................................................28

I.

Introduction

Most construction contracts employed in British Columbia contain tiered dispute resolution clauses that
require negotiation and/or mediation to be pursued before arbitration. Some samples are included in
Appendix A to this paper.
For example, the standard form fixed price construction contract between owner and contractor, CCDC 22008, provides a process in which:
(1)

a consultant makes a finding on the interpretation, application or administration of the

contract, which is binding, unless within 15 days a notice of dispute is delivered;

(2)

the parties are obligated to make all reasonable efforts to resolve their dispute by amicable
negotiations, and must provide frank, candid and timely disclosure of relevant facts,
information and documents;

(3)

the parties must request a designated Project Mediator to assist with mediated negotiations
under the CCDC 40 Rules;

(4)

10 days after request (or later if agreed), the Project Mediator must terminate the mediated
negotiations if no resolution has been achieved;

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(5)

within 10 days of the termination of mediated negotiations, either party may refer the
dispute to arbitration under the CCDC 40 Rules for Arbitration and Mediation of
Construction Disputes;

(6)

on the expiry of 10 days with no reference to arbitration, the arbitration agreement is not
binding.

The Master Municipal Construction Document (MMCD) commonly used by municipalities in BC to retain
contractors to build civil works provides for a tiered dispute resolution process that can be summarized briefly
as follows:
(1)

initial decision from a Contract Administrator, which is binding, unless within 10 days, a
notice of dispute is delivered;

(2)

amicable negotiations with disclosure;

(3)

a non-binding Referees decision within 10 days of appointment (or longer if agreed);

(4)

if resolution is not reached within 10 days of the Referees decision, either party may demand
a Settlement Meeting be convened within 30 days;

(5)

if resolution is not reached within seven days of the start of the Settlement Meeting, either
party may request the other party to agree to binding arbitration, or, without notice,
commence litigation.

On the Canada Line Public Private Partnership project, the Concession Agreement incorporates a Dispute
Resolution Procedure (Schedule 14) that sets out a procedure similar in general terms to that found in the
MMCD contract.
In this paper, these clauses will be used to make suggestions on selected topics to solicitors drafting dispute
resolution clauses.

II.

Tip #1: Tailor the Clause to the Situation

Concern is sometimes expressed about potential wasted time and expense associated with mandatory
negotiations and/or mediation as conditions precedent to arbitration, particularly where one or both parties
are perceived not to be interested in a negotiated settlement. However, tiered dispute resolution clauses are
still extremely commonly employed in construction contracts, which may be explained by:

the very high likelihood of disputes on construction projects, due to the length of the
contractual relationships, and therefore the desire for collaborative dispute resolution;

the tremendous amounts of time and costs associated with the adjudication of construction
issues, and the opportunity cost in terms of diverting resources away from other projects;

the adverse impact on the success of the project itself;

the prevalence of long-term relationships and the importance of reputation in the industry;

the complexity associated with the involvement of multiple parties;

a desire by construction players for control over the solution to disputes;

the experience and approach of the construction bar, driven by clients desires to avoid
arbitration or trial.

To reduce the risk of wasting time and money on unnecessary pre-arbitration steps, the following suggestions
are offered for consideration by the drafters of dispute resolution clauses in commercial agreements:

consider the types of disputes likely to arise, and design a process to suit;

include time limits for pre-arbitration steps;

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A.

consider an expert determination phase.

Design a Process to Suit the Likely Disputes

Often the arbitration clause in a commercial agreement is taken from a precedent with little or no thought
given to whether it should be revised to make it suitable for the particular relationship created by the
agreement. In order to tailor a dispute process to a particular type of contract, the drafter should consider the
nature of the relationship, including the importance of speedy resolution of disputes, the types of issues likely
to arise between the parties, and the best options for resolution of those types of disputes. Where disputes are
likely, the parties may consider appointing a contract mediator at the negotiation phase, akin to the Project
Mediators or Dispute Review Boards sometimes employed on construction projects.
A discussion of the advantages and disadvantages of each type of resolution process is beyond the scope of this
paper, but some general observations can be made. Disputes about matters related to business judgment tend
to be amenable to resolution through negotiation or mediation. Factually complex issues often benefit from a
structured mediation process and may require some limited discovery rights. Legal issues may be best suited
to an adjudicative procedure, but nevertheless may still be amenable to resolution in a more consensual
process. Technical issues may be best resolved by the involvement of an expert.
See Robert N. Dobbins, The Layered Dispute Resolution clause: From Boilerplate to Business Opportunity, 1
Hastings Bus. L.J. 159 (2005) for a more detailed discussion as to how to tailor a tiered dispute resolution clause,
and John M. Townsend, Drafting Arbitration Clauses: Avoiding the 7 Deadly Sins, Dispute Resolution Journal,
Vol. 58, No. 1 (February/April 2003) for a summary of common drafting errors and suggestions for avoiding
them.

B.

Consider Expert Determination

Some of the issues arising on a construction project can be technical in nature and therefore a referee
process is often included in the dispute resolution clause in construction contracts, pursuant to which an
expert provides an opinion that may be binding or non-binding. Examples are provided in the attached
MMCD (G.C. 17.5) and Canada Line (s. 1.4) contracts.
Issues to consider in drafting such clauses include:

C.

appointment procedures;

independence and impartiality;

attaching a referees agreement;

whether to specify aspects of the referee process (i.e. written or oral evidence and submissions);

time limits, including on the decision;

scope of the decision (length issues);

whether to give direction to the referee as to how the decision will be made or what criteria
should be taken into account in his decision;

whether the decision is binding or not binding, or whether the opinion is binding unless written
notice of dispute is provided within a specified period of time;

the confidential and without prejudice nature of the process.

Time Limits

In order to minimize the risk of unnecessary delays and to force the parties to address resolution in a timely
way, time limits should be inserted in the tiered dispute resolution clause. MMCD goes further to set out the

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intention of the parties, by stating that the parties agree that timely resolution of disputes is mutually
beneficial and therefore that the time limits shall be strictly enforced (G.C. 17.8).
Other provisions designed to minimize the impact of delays in dispute resolution on the relationships,
transaction or project may also be considered. Common provisions that help avoid the dire consequences of a
construction project halting pending resolution of disputes include:

an agreement that the parties will not delay performance on account of a dispute (MMCD GC
17.2.2);

an agreement that the consultant may provide instructions, which the parties agree to follow
(on a without prejudice basis), to allow the performance of the contract, with the ability to
recover costs if the instructions were in error or at variance with the contract provisions (i.e.,
GC 8.1.3 of CCDC 2 2008; MMCD, GC 17.2.3 and .4);

a requirement that parties must act in accordance with the consultants finding or a referees
decision pending final resolution of the dispute (i.e., see Canada Line Contract, s.1.10);

an adjudication1 or project referee process, whereby a relatively quick decision is made by an

independent adjudicator, which is binding on the parties until the dispute is finally decided.

III.

Tip #2: Consider Options for Negotiations Clauses

Three issues that may arise when drafting the negotiation component of a tiered dispute clause are:

A.

involvement of senior representatives;

obligation to provide full disclosure;

obligation to negotiate in good faith or use best efforts.

Involvement of Senior Representatives

It is relatively common to require at some stage of a tiered dispute process that senior representatives be
involved in negotiations. This requirement is based on experience that there can be hurdles to resolution
when the persons intimately involved with the facts underlying the dispute are in charge of the negotiations to
resolve the dispute. While the input of such persons may be beneficial to ensure that the decision-makers
have the necessary background, requiring senior representatives to be involved in, or even solely responsible
for settlement negotiations may eliminate unnecessary human factors, and allow objectivity and strategic
business factors to be applied early in the resolution process.
Sometimes, the mere fact that the next step in a dispute is to involve senior representatives encourages the
parties to resolve their issues.
By way of example, the MMCD and Canada Line Contracts provide respectively as follows:
MMCD
17.4.2 For the purpose of negotiating the Dispute each of the parties shall consider
appointing new representatives, where possible, who have not been directly involved
in the Work, although neither party shall be obligated to do so.
Canada Line
1.3

Negotiation

See s. 108 of the Housing Grants, Construction and Regeneration Act, 1996 U.K. c53, Appendix B.

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Within 5 Business Days of one party receiving a Dispute Notice from the other,
senior management representatives of the parties will meet and make reasonable
good faith efforts to resolve the Dispute by amicable negotiations. The negotiations
of the parties under this Section 1.3 will be without prejudice in any subsequent
proceedings regarding the Dispute.

B.

Full Disclosure

Negotiation clauses often require full disclosure, presumably to seek to ensure that a negotiated settlement is
not made without the opportunity to fully explore the strengths and weaknesses of the other partys position.
For example, under CCDC 2 2008 and MMCD, the parties agree to provide without prejudice, frank, candid
and timely disclosure of relevant facts, information and documents to facilitate the mandatory negotiations
under the dispute provision.
The Canada Line contract does not have such a requirement for the negotiations phase, but the parties agree
to comply with all reasonable requests from the Referee for additional information, documents and access to
personnel.
The goal of these provisions is certainly laudable, and although one could envision valid complaints that such
full disclosure had not occurred, in the writers experience, such challenges are extremely rare.

C.

Good Faith/Best Efforts

Negotiation clauses commonly require the parties to use best efforts or good faith in negotiations, or in the
construction context, often obligate the parties to participate in amicable negotiations. These phrases are
inserted to attempt to prevent undermining of, or even abuse of the negotiation or mediation process through
conduct designed to increase expense and delay or to gain an advantage for future processes, rather than to
resolve the dispute.
Concern is often expressed about the vague and uncertain scope of these terms and the extent to which they
may expose the parties to a risk of litigation on whether there has been compliance with such clauses.2 There
has been litigation in the US about issues such as whether it was a breach of good faith for representatives not
to have full settlement authority, to attend a mediation without being sufficiently prepared or with no
intention to negotiate a resolution, or to fail to make a reasonable officer. However, it appears that litigation
on this topic in the context of dispute resolution clauses is rare in Canada, and there are other purposes
related to assisting the parties with dispute resolution that may be achieved with this language.
One partial solution is to insert requirements in the dispute resolution clause relating to procedure that are
more specific and objective, such as provisions for a minimum length of mediation, or a required exchange of
written positions.

IV. Tip #3: Address the Possibility of Multi-Party Disputes

Construction projects involve multiple players, multiple contracts and complex relationships, which poses
challenges for the use of bilateral arbitration proceedings as an effective dispute resolution approach. This has
not caused the drafters of construction contracts to avoid using arbitration clauses and tiered dispute
resolution provisions. However, there is a risk that the same set of facts on a project may give rise to some
claims that are the subject of an arbitration agreement and some claims that the parties wish to litigate.

John Lande, Why a Good-Faith Requirement Is a Bad Idea for Mediation, CPR Institute for Dispute Resolution,
Vol. 23, No. 1, (January 2005).

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Section 15 of the Commercial Arbitration Act, R.S.B.C. 1996, c.55 allows a stay to be sought from the court of
any litigation in respect of a matter that has been agreed to be submitted to arbitration. Conversely, if the
arbitration agreement is found to be void, inoperative or incapable of being performed, the stay order will be
denied, and the litigation may proceed.
Disputants have relied on this provision to argue that an arbitration clause cannot be enforced in a multi-party
dispute context.
The case law tells us that incapable of being performed does not mean merely difficult, but requires some
incapacity beyond the control of the parties.
In addition, inoperative requires more than a mere overlap of issues with non-parties to the arbitration.3 The
presence of a non-party to the arbitration agreement in litigation does not make the arbitration agreement
inoperative, and the defendant party to the arbitration agreement is entitled to the stay of proceedings
provided the other requirements of s. 15 are met.4
The court also has the discretion to stay an action of a non-party to the arbitration agreement under ss. 8 and
10 of the Law and Equity Act, R.S.B.C. 1996, c.253, and this provision has been successfully employed in order to
avoid a multiplicity of proceedings, particularly where the issues are intertwined with the issues in the
arbitration and the risk of inconsistent decisions is high.5
Some tools available to manage the multi-party facet of construction disputes include:

1.

(1)

aligning contracts;

(2)

project protocols;

(3)

addressing issues required by statute to be litigated.

Aligning Contracts

The parties to the multiple contracts on a project may attempt to use similar dispute clauses in their separate
contracts. They may name the same Project Mediator or Project Referee. They may agree to use the same
arbitration rules. They may also specifically address disputes that are the subject of another contract (see
Canada Line Contract, s. 19).
Within their own contracts the parties may include consolidation provisions in relation to all disputes arising
on a project (see CCDC 2008, G.C. 8.2.7.2), or arising from the same facts (see CCDC 40, Rule 21.1). Here is an
example of language recommended by the American Arbitration Association on construction projects to
address multi-party issues:
The owner, the contractor, and all subcontractors, specialty contractors, material suppliers,
engineers, designers, architects, construction lenders, bonding companies and other parties
concerned with the construction of the structure are bound, each to each other, by this
arbitration clause, provided that they have signed this contract or a contract that
incorporates this contract by reference or signed any other agreement to be bound by this
arbitration clause. Each such party agrees that it may be joined as an additional party to an
arbitration involving other parties under any such agreement. If more than one arbitration
is begun under any such agreement and any party contends that two or more arbitrations
are substantially related and that the issues should be heard in one proceeding, the
arbitrator(s) selected in the first filed of such proceedings shall determine whether, in the

Prince George (City) v. McElhanney Engineering Services Ltd. (1995), 9 B.C.L.R. (3d) 368 (C.A.) at paras. 33-35, leave to
appeal to S.C.C. denied, [1995] S.C.C.A. No. 467.

Ibid., at para. 37.

James v. Thow (2005), 5 B.L.R. (4th) 315 (B.C.S.C.) at para. 105.

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interests of justice and efficiency, the proceedings should be consolidated before that
(those) arbitrators(s).6

2.

Project Protocols

On large construction projects, the participants may agree to a project protocol that can be incorporated into
multiple contracts. This is designed at an early stage of the project when the parties are perhaps best
motivated to avoid disputes. This document would address the same topics referenced in the immediately
preceding section, but may also go further to set out detailed procedural rules for the specific dispute
processes contemplated for the project. Often the process starts with a pre-construction workshop designed
to set a collaborative tone for the project.

3.

Addressing Issues Required to be Litigated

Where a dispute resolution agreement provides for mandatory arbitration, the drafter may wish to consider
whether any disputes may arise that are required by statute to be the subject of litigation. This may help avoid
an application under s. 15 of the Commercial Arbitration Act.
For example, the Builders Lien Act, S.B.C. 1997, c.45, requires that any action to enforce a claim of lien must be
commenced in the BC Supreme Court within particular time limits in order to maintain the lien.
A builders lien claimant who is a party to a contract with a mandatory arbitration clause is faced with the
unfortunate predicament of selecting either arbitration or litigation and risk being in breach of either the
contract or the lien legislation, or he may attempt to comply with both by arbitrating and litigating the same
dispute. Some of the principles the courts have applied to address this problem include:
(a)

there is a strong judicial policy in favour of arbitration since it preserves the intention of the
parties, is harmonious with the objectives of the commercial arbitration acts and encourages
arbitration as a viable dispute resolution alternative7;

(b)

arbitration and builders lien legislation are not necessarily inconsistent on this point. They
can co-exist8;

(c)

the courts prefer to stay the lien action to allow the arbitrator to make the decision as to the
quantum of monies owing under the contract, which can then be enforced under the lien in
the action9;

(d)

if the arbitrator finds that there is no amount owing, the lien action is resolved;

(e)

a finding for some monetary award under the contract will assist the court in determining
how much, if any, to secure through the lien;

(f)

staying the lien action avoids multiple proceedings, duplication of evidence, further
complexity in issues and allows the court to focus on issues of law and the arbitrator to focus
on issues within his technical expertise; and

National Construction Dispute Resolution Committee, The AAA Guide to Drafting Alternative Dispute Resolution
Clauses for Construction Contracts (2007) http://www.adr.org/sp.asp?id=29575.

Sandbar, supra, n. 4.

BWV Investments Ltd. v. Saskferco Products Inc., [1995] 2 W.W.R. 1, 17 C.L.R. (2d) 165 (SK.C.A.). See also Kvaerner
Enviropower Inc. v. Tanar Industries Ltd., [1995] 2 W.W.R. 433, 157 A.R. 363 (C.A.).

Ibid., Automatic Systems Inc. v. Bracknell Corp. (1994), 18 O.R. (3d) 257, 74 O.A.C. 111 (C.A.); Dawson (City) v. TSL
Contractors Ltd. et al., 2003 YKCA 3, [2003] B.C.W.L.D. 413.

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(g)

commencing an action under builders lien legislation does not waive ones right to
arbitration.10

GC 8.3.2. in CCDC 2 2008 addresses this topic by expressly providing that the commencement of
proceedings to enforce a lien is not a waiver of a right under the contract to require arbitration to adjudicate
the merits of the claim on which the lien is based.
A non-construction example of such a situation is a shareholder oppression claim under the Canadian Business
Corporations Act, R.S.C. 1985, c. 44, which is required to be adjudicated by the BC Supreme Court. Where the
oppression claim is based on a dispute as to the interpretation of a shareholders agreement containing an
arbitration clause, the BC Court of Appeal has found that the oppression proceedings should be stayed under
s. 15 of the Commercial Arbitration Act until after the arbitrator has made his findings.11
For a recent consideration of the applicability of s. 15 of the CAA in a builders lien context, see Tylon Steepe
Homes Ltd. v. Pont, 2009 BCSC 103. Justice Burnyeat found an arbitration clause in a construction contract to
be void or incapable of being performed, as well as inoperative for several reasons, including that the clause:

provided that if two arbitrators cannot agree on a third arbitrator, either party can apply to the
Justice of the Court of Queens Bench for British Columbia;

provided that the cost of the arbitration is to be paid in accordance with the direction of the
arbitrator(s) failing which the procedures of the Arbitration Act of Canada shall govern;

entitling a party to demand arbitration, failing which the parties shall select an arbitrator
and the arbitrators decision shall be final and binding, did not make arbitration mandatory.

V.

Conclusion: Best Practices from the CCA Protocols

In 2009, the American College of Commercial Arbitrators convened a summit to address concerns that
arbitration had become too much like litigation, and published a number of protocols for expeditious and
cost-effective commercial arbitration.12 They represented a call for a return to fundamentals of arbitration.
The following recommendations of relevance to the scope of this paper flow from the findings of the CCA:
(1)

Where speed, economy and efficiency are important to a client, tailor dispute resolution
processes to achieve those needs.

(2)

Avoid using boiler plate dispute provisions that include loose procedures leaving considerable
leeway to counsel and arbitrators, unless there are good reasons for doing so. Be deliberate
and proactive in drafting these clauses.

(3)

Make sure the dispute clause gets appropriate attention at the deal table and get input on
goals and options from the client, in-house counsel and, a litigator/disputes lawyer.

(4)

Consider mandatory pre-arbitration negotiations and/or mediation.

(5)

Consider putting limits on discovery in the clause.

(6)

Consider time limits for arbitration.

As lawyers, we have professional obligations to advise our clients to avoid or end litigation where a dispute will
admit of fair settlement. We also have general obligations to our clients to have adequate knowledge of the

10

See Sandbar, supra, n. 4 and Prince George, supra, n. 2.

11

ABOP LLC v. QTrade Canada Inc., 2007 BCCA 290.

12

College of Commercial Arbitrators, Protocols for Expeditious Cost Effective Commercial Arbitration (2011), 1
J.C.C.C.L. 187.

1.3.9
substantive law and the practice and procedures by which that law can be effectively applied in order to
provide competent legal services.13
The standard form dispute clauses used in the construction industry represent an attempt by one industry, or
particular players in that industry to design a dispute resolution process that is tailored to the types of disputes
that commonly arise on construction projects. A similar approach may be used by solicitors drafting dispute
resolution clauses to address their clients business goals. The ability to refer to a particular provision in a
dispute clause can be a powerful tool for disputes lawyers attempting to assist clients to settle their disputes.

13

Section 3(3), Canons of Legal Ethics, and Section 1, Chapter 3, Professional Conduct Handbook, Law Society of British
Columbia.

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VI. Appendix ASample Dispute Resolution Clauses

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VII. Appendix BSection 108 of the Housing Grants, Construction and Regeneration
Act 1996