Dispute resolution in construction
What is a Construction Dispute?
A construction dispute is a scenario where a disagreement happens between signatories of a construction project. Conflict usually occurs when one party accuses the other of violating part of the contract they agreed on or whether the project’s obligations are not met or delivered.
Since construction projects often take a long time to be completed and come with a high uncertainty level, it is sometimes difficult to prevent such disputes.
And though some disputes do not necessarily count as a breach of contract, they could eventually lead to one and could even force one party to seek legal help or remedy.
Here’s a breakdown of common factors that increases the probability of disputes during each phase of a construction project.
Problem with the workforce
Poor communication between teams
Variations and project delays
External factors such as weather
The financial position of the contractors
An adversarial attitude between parties involved in the project
Slow decision-making process
Post contract changes by the project owner
Unrealistic expectations from parties involved in the project
How to minimise Construction Disputes
To minimise the possibility of construction contract disputes, each party involved must optimise each stage of the construction process for efficiency.
In other words, a construction contract and specific clauses must be made known and explained in detail to all parties involved.
Parties involved can also move to ensure that:
Have an in-depth plan before the actual work begins.
Each party involved in the project must read and understand each section of the contract.
Parties involved must speak out about specific sections within the contract that they disagree with individuals tasked to handle scheduling, estimates, logistics, human resources, and pre-construction tasks must diligently deliver their required tasks.
The schedule has executable and realistic completion dates – and takes into consideration possible disruptions and delays.
Potential risks are identified in advance or dealt with proactively.
The entire process is well documented – with daily and weekly reports.
Systems are in place that improves efficiency.
Navigating Malaysian Dispute Resolution Laws
If you are about to do a construction project in Malaysia, it would be wise to study and understand local dispute resolution laws, processes, and judicial bodies that oversee disputes.
Don’t get us wrong, though. We’re not implying that doing a construction project in Malaysia is filled with headaches, but more so you know your legal options (and its processes) situation arises.
As a start, there are two options available when resolving a construction dispute in Malaysia.
You can either go with Dispute Resolution or Alternative Dispute Resolution.
Dispute Resolution (DR) – refers to the process of going to court to resolve a construction dispute.
Alternative Dispute Resolution (ADR) – refers to the process of resolving a construction dispute outside of the courts.
For this part of the article, we will focus on different talking points tied to DR and talk about ADR much later.
Sadly, we cannot cover all the legalities tied to every law – as that would take too long, and because we are not lawyers.
We can provide you with several talking points about the Malaysian judicial system and critical laws on dispute resolution.
DR talking point #1: Court types
The first thing you need to understand is that the Malaysian legal system is no different from most judicial systems in the world:
The Malaysian legal system is governed by:
The Subordinate Courts’ Act 1948
The Courts of Judicature Act 1964 (“CJA”)
The Rules of Court 2012 (“ROC”) – pertains to the High Court and Subordinate Courts
The Rules of the Court of Appeal 1994 – pertains to the Court of Appeal
The Rules of the Federal Court 1995 – pertains to the Federal Court
DR talking point #2: Judicial structure
Malaysian courts consist of Superior and Subordinate courts when it comes to judicial structure.
Superior courts – are made up of the High Court (made up of the High Court of Sabah and Sarawak and the High Court of Malaya), Federal Court, and Court of Appeals.
Subordinate courts – are made up of Sessions Courts and Magistrate Courts.
There are also courts with specialist nature like the Admiralty Court, Intellectual Property Court, and the Construction Court.
Consulting with a legal professional is the ideal method if you want to fully understand each court’s specific purpose and deal with it if you get into a construction dispute.
DR talking point #3: Civil proceeding
When it comes to civil proceedings, it’s generally divided into:
Filing and closing of pleadings
Pre-trial case management
Trial and post-trial submissions
When filing a civil action, the first stage is to file and service a writ.
The defendant gets fourteen days to file a formal dispute against your claim. If said writ did not come with a Statement of Claim, the plaintiff has fourteen days to present the Statement of Claim and serve it.
NOTE: Statement of Claim pertains to a court document that details the monetary amount owed to the plaintiff by the defendant – as well as the reasons why the plaintiff issued a claim.
The defendant, on the other hand, has fourteen days to issue a defence or counterclaim. The plaintiff will then get another fourteen days to reply to said defence or counterclaim.
All pleadings will become closed 14 days after the plaintiff has replied to the defendant’s reply/counterclaim.
Then comes pre-trial case management – which is the last stage before the trial commences. The trial usually takes around three months.
After the trial has concluded, both parties’ legal counsel would have two months to submit their submissions and reply submissions before a post-trial submission hearing.
DR talking point #4: Legal cost/Compensation
The rule of thumb is that the losing party is the one who pays for the legal cost incurred by the winning side.
The court will decide how much compensation the winning party gets and will base said ruling by assessing factors under Order 59 rule 16(1) of the ROC.
These factors include:
The complexity of the reason behind the dispute
The responsibilities, specialised knowledge, and skill by the counsel of the winning party
Importance and volume of documents presented
NOTE: These entries are based on our extensive industry experience and should not be considered legal advice. For a more detailed explanation of the Malaysian legal system and laws associated with dispute resolution, the best method would be to consult with an attorney.
Importance of a Dispute Resolution Clause in Malaysia
A dispute resolution clause aims to establish how parties to a contract should behave/act when resolving a dispute.
Dispute resolution clauses are typically at the end of a contract.
A typical dispute resolution clause looks like this.
“Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be decided by arbitration in accordance with the Rules for Arbitration of the Kuala Lumpur Regional Centre for Arbitration. The appointing authority shall be the KLRCA. The number of arbitrators shall be one. The place of arbitration shall be Malaysia. The language to be used in the arbitration proceedings shall be English. The law applicable to this contract shall be Malaysian law.”
Typically, most signatories of a contract do not bother going through dispute resolution clauses. They think that the said section contains “standard” or “not as important” – as they are familiar with or have read countless contracts before. Then some just leave it to their legal representation to interpret said clauses.
That’s a bad idea.
In general, lawyers will not let their client sign an unfavourable contract. Still, in certain situations (especially in construction projects), members of the project decide on the fly without consulting their lawyers, much less reading the contract before signing.
This action sometimes leads to misunderstandings with others involved in the project – leading to delays, and in some cases, court action.
Why does your contract need to have a Dispute Resolution Clause?
A contract without a dispute resolution clause (or one with a poorly written clause) heightens the probability of encountering “pre-dispute” disputes regarding factors like procedures, jurisdiction and governing laws.
Getting into construction disputes with shady parties with deep pockets, resolving pre-disputes can drag on for years – arguing over the merits of a dispute resolution clause – before even tackling the leading cause of the dispute.
All parties involved would waste their time and money unnecessarily.
To avoid this, you need to have a dispute resolution clause within your contract and have its content made clear to each signatory. One should not expect renewal contract terms as given, nor should it be just glossed over when assessing a contract.
Here are some scenarios that could happen to you if you decide not to fully understand your dispute resolution clause’s contents.
You might find yourself in a costly dispute resolution process. For example, you could end up arbitrating a USD 20,000 claim against three arbitrators leveraging the International Chamber of Commerce Rules of Arbitration.
The International Chamber of Commerce website defines the ICC Rules of Arbitration as:
“They define and regulate the management of cases received by the International Court of Arbitration® from 1 January 2021. The ICC Arbitration Rules are used all around the world to resolve disputes.”
When dealing with entities outside of Malaysia, you might have to resolve your dispute in a different country – which can be a financial, logistical, and tactical nightmare.
A poorly written dispute clause can force you to spend tons of money on legal fees to challenge and enforce a dispute resolution clause.
Alternative Dispute Resolution (ADR) in Malaysia
Alternative Dispute Resolution (ADR) is about aggrieved parties settling their dispute outside of court proceedings.
Below are the two ADR processes used in Malaysia.
Mediation is a purely voluntary act between concerned parties to resolve their dispute – with a third party acting as a mediator and handling the negotiations and communication between parties involved using the Mediation Act 2012.
The concerned parties are the ones who choose who this third party mediator is.
If both parties cannot agree with this, they can seek help from the Malaysian Mediation Centre of the Bar Council (MMC) to appoint one for them.
If the dispute is resolvable due to this mediation, both parties must sign a Settlement Agreement. If not, then parties can choose to pursue arbitration or litigation.
Sometimes, parties involved in a dispute choose to go directly to litigation or arbitration without mediation. When this happens, the judge will suggest mediation and even present him/herself as the mediator.
All communications, admissions, and disclosures made during mediation are free of any prejudice.
If said mediation is not successful, the parties concerned are not allowed to use any communications, admissions, or disclosures presented during the mediation process for arbitration or litigation.
Arbitration is the process of settling a dispute through the use of an independent third party arbitrator.
Both parties decide who this arbitrator is and have a say on the rules and procedures used in the arbitration proceedings.
The Arbitration Act 2005 governs all arbitration proceedings within Malaysia. It also employs the UNCITRAL Model Law on International Commercial Arbitrations as part of the act – with the KLRCA as the primary appointing entity.
The law does not set specific qualifications for arbitrators. Still, parties involved should choose one with prior experience or have technical expertise in handling and resolving construction disputes.
Most choose to use Malaysian based lawyers as arbitrators. Still, since arbitration proceedings are not bound by the Legal Profession Act 1976, parties involved have the right to either pick laypersons or even legal professionals from other countries.
When it comes to arbitration decisions, the arbitrator must provide a detailed rationalisation of his/her decision. If a party feels aggrieved by an arbitrator’s decision, the said party could seek the High Court’s assistance to review the said arbitration decision.
And that’s all there is for this article.
As you can see, Dispute Resolution is a time consuming and technical process. And as much as we want to include all the information about it, it wouldn’t make an exciting read.
If you want a more detailed explanation about Dispute Resolution or need expert advice about the topic, don’t hesitate to send us an email or call us.