El Centro Mexicano de Protección y Fomento de los Derechos de

Project Management Centre, Istanbul Technical University, Ayazaga Kampusu, Istanbul

(currently visiting researcher in the School of Built Environment, University of Salford)

The present and the future are connected to the past by the continuity of a society’s institutions. Today’s and tomorrow’s choices are shaped by the past, and the past can only be made intelligible as a story of institutional evolution (North 1990).

Abstract

In the last decade, Alternative Dispute Resolution (ADR) methods have become an established part of the dispute resolution in the UK construction industry, both with respect to the enactment of regulations and to the wide acceptance in practice. A substantial reduction in domestic litigation and arbitration has been observed with the rise of ADR, where the number of new proceedings issued in the Technology and Construction Court dropped to 390 in 2004, which is only 22% of the 1,778 proceedings in 1995 (Gaitskell 2005). The deployment of ADR was initiated by the robust government policies and regulations that promote ADR, such as the Housing Grants, Construction and Regeneration Act in 1996; however, the ADR promoter and provider institutions had also a significant role in the development of ADR in the UK. This study analyses the role of the ADR institutions as a promoter of ADR within an institution building and institutional development concept in quest for constituting a model for developing countries. The research was conducted by a series of semi-structured interviews undertaken with dispute resolution professionals and researchers in the UK and an analysis of an ADR institution ‘Centre for Effective Dispute Resolution’ (CEDR) with a case study approach based on the conceptual framework proposed by Esman.

Introduction

In a construction project, although all parties have the same objective, a building, the motivation for providing the building is generally concerned with the profit to be earned or the benefit to be obtained. Profit for the contractor, sub-contractor and the promoter of the building is earned in different ways. It is often assumed this means that when the profit position of either party is threatened, conflict will emerge (Hibberd and Newman 1997). Cheung et al. (2002) also suggest that disputes are frequently the rule rather than exception in the construction industry and they arise during a construction process for a number of reasons. The quality of materials, standard of workmanship, contractor delays, applications for extensions of time not being granted, variations, cost overruns and the meaning of contractual terms can be the subject of expensive claims and turn into disputes that threaten the success of the project (Adriaanse 2005). It is sufficient to regard it as securely established that disputes are a significant phenomenon within the UK construction industry and that they are a matter of importance to the disputants, as well as to other stakeholders such as developers, owners, non-owning occupiers, contractors, subcontractors and suppliers and professional consultants. Given that, the question arises almost automatically as to how they are resolved. Traditionally, the means of resolution have been straightforward: construction disputes were resolved by litigation or arbitration, like other commercial disputes. The former could be regarded as the legal system’s provision of a response to the need for dispute resolution, the latter as industry’s alternative, an alternative historically so much favoured

that major construction and engineering contracts included provision for it. Yet currently neither can be said to generate unqualified enthusiasm within the construction industry. As a result of a general disappointment with the traditional dispute resolution methods, interest in Alternative Dispute Resolution (ADR) began to grow (Brooker and Lavers 1997).

ADR is a non-adversarial technique which is aimed at resolving disputes without resorting to the traditional forms of either litigation or arbitration (Ashworth 2005: 53). It is defined in the European Commission’s Green Paper (2002: 6) as ‘out-of-court dispute resolution processes conducted by a neutral third party excluding arbitration’. The most widely used ADR methods are mediation, conciliation, adjudication and dispute review boards/panels. The discussion on arbitration in the literature seems to result in defining arbitration not an ADR method but a quasi-judicial procedure because of its features closer to (or worse than) litigation in terms of duration, cost and the level of bureaucracy (EC Green Paper 2002: 6; Adriaanse 2005: 347; Carmichael 2002: 265). The European Commission’s Green Paper also suggests that expert opinion process should not be considered as a dispute resolution method as it is a procedure involving recourse to an expert in support, usually in litigation or arbitration. In this paper, the definition by the European Commission’s Green Paper is followed and Alternative Dispute Resolution methods are referred to by the acronym ‘ADR’, following the already widespread practice.

Rubin and Quintas (2003) suggest that the salient characteristics of ADR make it an attractive option for settling the complex and time sensitive disputes that often arise during the course of construction projects. Beside being a faster, less bureaucratic and more cost-effective process that do not require the use of attorneys to present claims, the real-time approach to disputes can prevent deterioration of business relations and the consideration of disputes by knowledgeable industry professionals can provide reaching more equitable results based on the realities of the construction process instead of applying the strict letter-of-the-law removed from its relevant context.

ADR is widely used in many countries’ construction industries and is spreading fast globally (Cheung 2006). However, although the benefits of ADR are widely appreciated as Cheung (2006) suggests, the adoption and implementation of such new methods is obstructed by the relevant laws, regulations and the absence of adequate institutions. Therefore, resolute government policies for both the adaptation of the legislation and the institutional development are required for viable implementation.

The purpose of this research is to examine the role of institutions in the development of ADR in the UK construction industry within an institution building and institutional development concept in quest for constituting a model for developing countries by semi-structured interviews undertaken with dispute resolution professionals and researchers in the UK and the analysis of an ADR institution ‘Centre for Effective Dispute Resolution’ (CEDR) with a case study approach.

The Development of ADR in the UK Construction Industry

In the last decade, ADR has become an established part of the dispute resolution in construction, and in general commercial dispute resolution in the UK, following its birth and the rapid growth in the United States. Compared to other member states, UK is the first in the EU to institutionalize ADR both with respect to enactment of regulations and to the wide acceptance in practice (Cairns 2005).

The extent to which ADR methods are used is difficult to assess since no national data is available like the number of referrals to the Country Court and the High Court in the case of litigation. This is because of the lack of a single point of institutional control of ADR in the UK like arbitration. In the same way that arbitrators may be appointed by a number of appointing bodies, the growth of ADR depends on the efforts of several institutions which at times appear to be in competition with each other rather than merely complementary. According to ADR Group, which is one of the prominent ADR institutions in the UK, there has been a considerable change in the public perception of ADR. In 1990 the Group received referrals for mediation at the rate of approximately three per month, of which one on average, related to the construction industry. At that time, only one case would generally proceed as far as a full mediation. Many cases failed to reach a mediation hearing simply because one or other of the participants did not understand ADR, refused to participate or was committed to arbitration. In the period to 1993, there was a steady growth, with the number of referrals doubling to about six per month. The percentage of those relating to the construction industry remained approximately the same. The number of cases which reached a mediation hearing increased from about one third to about one-half of the cases referred. Apparently, the period from mid 1994 until mid 1995 saw a considerable change, with approximately five or six cases referred on average per week. Of those, at least 60% actually resulted in a mediation hearing and the success rate in those cases was at least 90%. During the period to 1995, there was a corresponding increase in the value of claims referred to mediation. In 1990, for what was then an untried technique, disputes with a value of more than ₤100,000 were rarely referred. In 1995, the ADR Group was handling cases ranging from ₤50,000 to ₤2.4 million with the number of cases at around the ₤1 million becoming more common (Hibberd and Newman 1997).

Professional Organisations

According to Hibberd and Newman (1997), support for ADR from professional organisations within the construction industry has been somewhat patchy. For instance, the Construction Industry Council (CIC) has indorsed ADR and in January 1993 the National Joint Consultative Committee for Building (NJCC) produced its Guidance Note 7, Alternative Dispute Resolution. The Guidance Note examines when ADR can be used, when it is inappropriate, the problem of confidentiality, and the advantages and the disadvantages of the system. The Section ‘when ADR is inappropriate’ suggests when auditors or others require an imposed decision. It has been a frustration to those who promote ADR that Government departments which profess a need to maintain public accountability always raise the spectre of the auditor as a ground for not adopting ADR techniques. Rather than sound such a negative sound in the Guidance Note with regard to the perceived problem of public auditors, it would have been more helpful if the NJCC had emphasised the need to carry out an educative process among local authorities and other similar organisations. Among professionals, some of the greatest oppositions to the growth of ADR in the UK has traditionally come from the RIBA, although a RIBA architect/client conciliation scheme was developed. The RIBA remains extremely conscious of the relative fragility of its members’ position as contract administrators with the rise of construction procurement methods that challenge the traditional authority of architects. The JCT, of which the RIBA is a pivotal member, has after much initial reluctance, shown support for ADR by publishing its Practice Note 28 in 1995, Mediation in a Building Contract or Sub-contract Dispute.

Today, ADR is an established method for the resolution of disputes in the UK construction industry. It is adopted by the majority of actors of the industry, namely the contractors, sub- contractors, public and private employers, financing organisations, legal professionals and the

judiciary. Nesic (2002) explains, in her discussion of the status of ADR in UK, that the construction industry in UK is the largest single user of ADR (mediation), followed by other industries.

The greatest determining factor in the successful deployment of ADR in UK has been the robust government policies and regulations that promote ADR, such as the Housing Grants, Construction and Regeneration Act in1996 which imposed the statutory adjudication for the resolution of construction disputes, the Woolf Reforms in Civil Procedure Rules in1998 which promote the use of ADR before commencing proceedings and the ADR Pledge in 2001 committing all UK Government Departments and agencies to settle disputes by ADR. These regulations resulted in a substantial reduction in domestic arbitration and litigation, where the number of new proceedings issued in the Technology and Construction Court in 2004 dropped to 390, which is only 22% of the 1778 new proceedings in 1995 (Gaitskell 2005). In the same period, an increase is observed in the number of ADR promoter/provider institutions and organisations, who are an indispensable part of the system.

In quest for a better understanding of the role of institutions in the development of ADR in the UK construction industry, ‘institution building and institutional development’ phenomenon is analysed in the following section.

Institution Building and Institutional Development

Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints and the framework that shape human interaction. In consequence they structure incentives in human exchange, whether political, social or economic (North 1990). World Bank’s Building Institutions for Markets Report (2002) defines institutions as the rules, enforcement mechanisms and organizations supporting market transactions. Institutions can promote inclusive and integrated markets and ensure stable growth. The challenge for policymakers is to shape policies and institutional development in ways that enhance economic development. Policies affect which institutions evolve – but institutions too affect which policies are adopted. According to North (1990), institutions can be formal and informal. Institutions may be created or they may simply evolve over time. The major role of institutions in a society is to reduce uncertainty by establishing a stable structure to human interaction. But the stability of institutions in no way gainsays the fact that they are changing. From codes of conduct to statutes, institutions are evolving and, therefore continually altering the choices available to us.

Institutional building is a perspective on planned and guided social change. It is concerned with innovations that imply qualitative changes in norms, in behaviour patterns, in individual and group relationships, in new perceptions of goals as well as means. It is not concerned with reproducing familiar patterns, with marginal deviations from previous practices, or with incremental improvements in efficiency. The dominant theme is innovation (Esman 1972). Institutional development is a term closely associated with institution building; it implies that the institution already exists, and requires to be developed to meet current development needs.

In institution building one size does not fit all and guidance is always needed on how to develop appropriate institutions by building on the successes of the countries and the good practices, and learning from the failures. But not withstanding the uniqueness of countries, analysis of country experience does hold important lessons for institutional development.

Bank’s Building Institutions for Markets Report (2002) distils four lessons on building effective institutions. The first two are about supplying effective institutions, the second two lessons are about creating the demand for the institutions and the forces for change within the countries.

• Design institutions to complement what exists in terms of other supporting institutions, human capabilities and available technologies. The availability and costs of supporting institutions and capacity determine the impact of any particular institution. By understanding how institutions interact, we can identify priorities. When building an institution or modifying one, the key thing to consider is whether supporting institutions – without which the institution would not be effective – exist.

• Innovate to identify institutions that work and those that do not. Countries may gain from expanding successful public innovations.

• Connect communities through open information flows. Exchanging information creates demand for institutional change by supplying ideas for change from outside the community.

• Promote competition, which will modify the effectiveness of existing institutions and create demand for new ones.

In establishing new institutions, developing countries can take the industrialized countries as a model. However, the differences should be analysed in detail, and the model developed should be adapted to the environment in which the new institution will work. According to The World Bank’s Building Institutions for Markets Report (2002), institutions that work in industrialized countries may not produce similar results in developing countries because of differences in:

• Complementary institutions, such as those promoting transparency and the enforcement of laws

• Existing levels and perceptions of corruption

• Costs, relative to per capita income, of establishing and maintaining institutions

• Administrative capacity, including human capabilities

• Technology

Both existing and newly transplanted institutions can be more effective in developing countries if they are systematically modified to take these differences into account. Institution building is generally a cumulative process, with several changes in different areas building up to complement and support each other. Even small changes can build momentum for future changes, the whole is greater than the parts and even moderate progress in parts can contribute to a better system. Institution builders can be diverse such as policy makers, business people, or community members. Institutional reform is not just the preserve of national governments. Individuals and communities, entrepreneurs, companies, organizations can build institutions, often in partnership with each other. National governments may initiate reform or may simply respond to pressures from the private sector or from external actors. Some ineffective institutions may continue to exist in part not because there is concerted support for them, but because there are no interest groups pressing for change, or forces that would press for change are not adequately organized to do so. Whatever the reason, reforms in these areas could be accelerated. And as these reforms breed new constituencies and forces, they can lead to a demand for greater change.

In industrialized countries the construction industry has evolved gradually, as has the institutional framework which regulates it, to the present stage where it relies on the interaction of a variety of institutions, each with its own specialist priorities such as management and vocational interests of contractors, the development of professional skills and the regulation of the industry through contractual procedures, standard setting and implementation. Developing countries have to find ways to accelerate this evolutionary process, and this usually implies the establishment or development of dedicated institutions. Evidence has been accumulating that such institutions can yield significant benefits in terms of improved national construction capacity and performance, provided they focus realistically on the ambitions and needs of their clients rather than engage in fruitless empire-building (or academic status-building) for its own sake. The qualification is important, since there are other examples of institutions which have failed to understand and meet the needs of their clients, and later foundered through a combination of inertia and the weight of self-imposed bureaucratic procedures. In the UK, ADR promoter/provider institutions have emerged naturally and their survival is a testimony to their utility. The question to be asked here is if these institutions are accepted as successful in terms of their clients’ needs and priorities, how they managed it and whether the seeds of the success be identified and planted elsewhere. In order to answer this question, it is necessary to analyse the institutional factors which lead to success in this specialist area of institutional development and in particular examine the dynamic linkages that must exist between such an institution and its operational environment (Miles and Neale 1991).

Methodology

At the initial stage of the research, an extensive literature study on institutional development and institution building has been carried out to for a better understanding of the phenomenon