Alternative Dispute Resolution: How has the decision of Churchill v Merthyr Tydfil County Borough Council affected dispute resolution in the construction industry?

 The decision of the Court of Appeal Churchill v Merthyr Tydfil County Borough Council [1] was a significant development in relation to resolving disputes by litigation, as it made clear that the court has the power to stay proceedings or order unwilling parties to engage in alternative forms of dispute resolution (“ADR”). It did, however, emphasise that any such order must not prevent the right to a fair trial and must be proportionate to the legitimate aim of settling the dispute.

Since this judgment, England and Wales have seen noteworthy procedural changes with effect from 1 October 2024, which include amending the overriding objective in the Civil Procedure Rules to include the onus of promoting or using alternative dispute resolution[2]. Additionally, the court’s case management powers have been amended to allow judges, if considered appropriate, to order parties to use ADR.[3]

More recently we have seen the court’s approach in one of the first reported High Court cases since the decision in Churchill (DKH Retail Ltd & Ors v. City Football Group Ltd[4]) where one of the parties pursued an application for an order for compulsory mediation. Despite the trial being imminent, the Judge ordered the parties to mediate stating that it was “short and sharp” and would not “significantly disrupt parties’ preparations for trial” (paragraph 41).

This was a case under the Shorter Trials Scheme (a streamlined procedure for cases which can be heard in less than 4 days), so this was likely to be a factor in the court’s decision (and a reminder that each application will be decided on its own facts). However, the judgment demonstrates that the courts expect ADR to remain at the forefront of parties’ minds at all stages of litigation.

ADR in the construction industry

What about the construction industry? Is the recent case law and the court’s approach likely to have an impact?

Perhaps not a significant one in England, Wales and Scotland where the industry is already well versed in ADR, with its own statutory adjudication for ‘construction contracts’ falling within the remit of Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”). This method can allow for certain disputes to be resolved within a short timescale (28- 42 days) and in a relatively cost effective manner. Decisions are also interim binding, meaning that they will be binding unless and until overturned by litigation or arbitration and parties can be reassured that courts are likely to enforce decisions which are challenged (unless there is a jurisdictional challenge or a serious breach of natural justice).

The results of a recent survey demonstrate that statutory adjudication remains a popular form of ADR in the industry and that users perceive that it is an effective method of resolving disputes (KCL Construction Adjudication Report 2024).

Obviously there are a number of contracts which are expressly excluded from the provisions of the Construction Act (either pursuant to section 104 (2) or an express order) where the court’s approach to ADR is likely to have an impact. There may therefore be an increase in court prompted ADR for contracts which do not currently provide for adjudication. It may also mean that parties will think more strategically about how to resolve disputes more efficiently and cost effectively, prior to and during litigation. 

In England and Wales, the TCC already actively encourages parties to consider using ADR in lieu of commencing court proceedings, so it is clear that the industry is geared up to try and resolve disputes without resorting to litigation. In addition, the Pre-Action Protocol for Construction and Engineering Disputes encourages parties to think about resolution by meeting to narrow issues and promotes the early exchange of information (with cost consequences in place if the parties fail to engage).

Furthermore, the dispute resolution provisions in the majority of standard form contracts used in the industry both in the UK and internationally (such as FIDIC, NEC, ICHEME) are formulated to try to resolve disputes without recourse to formal proceedings, containing drafting which allow for a structured or tiered process to escalate and resolve disputes prior to final dispute mechanisms like litigation or arbitration. 

Why is ADR so popular in the construction industry?

There are a number of reasons why ADR is already prevalent and well used in the construction industry. One of the key ones is preservation of relationships; parties are often involved in complex and detailed projects (which may form part of a wider development or offer future opportunities), maintaining relationships is therefore key. Referring disputes to litigation is often the final resort where parties’ positions become entrenched, damaging any existing /future relationship.

Another reason is how time consuming litigation is, taking parties away from either completing the project in question or winning and managing other projects. Cost is also a factor; with the complexities of construction projects, disputes are often extremely technical, detailed and document heavy so costs escalate very quickly. Parties are reluctant to further erode their project margins on such costs, which might result in an unsatisfactory and finally binding result.

Whilst the TCC has looked to find ways to reduce the cost of litigation it remains an expensive and lengthy process. Recent statistics confirm that the courts remain very busy, with fully contested trials taking between 12-18 months from issue to final judgment[5] although experience tells us that 24 months is a more likely time frame.

Generally ADR is seen as a positive approach to resolving construction and engineering disputes which, even if it does not immediately result in full and final settlement, it generally encourages the parties to narrow issues, help gain information about the other side’s position or view point, which can then lead to settlement.

What about the international position?

As a number of international projects are governed by English law, we may see a knock-on effect on cross-border projects. Other jurisdictions may also follow suit, and those which already encourage ADR may make it compulsory in certain circumstances or disputes.

The current global economic climate, market volatility and uncertainty created by events such as the Ukraine War, Brexit and the recent US import tariffs is likely to mean supply chain disruption, delays and price fluctuations, all of which can lead to lengthy and costly disputes. Parties may therefore be more inclined to explore ADR to avoid more expensive formal dispute resolution processes.

Certainly the appetite is already there, internationally ADR is seen as a key means of resolving disputes in the construction and engineering space. The relevant expertise and infrastructure is in place in the form of mediation, dispute review boards, dispute avoidance boards and expert determination. Many jurisdictions already encourage and promote various forms of ADR for construction disputes although it is generally not compulsory at present.

In Austria, ADR is mandatory only for certain non-commercial disputes. In some jurisdictions, such as Belgium, Brazil, Finland, France, and Germany, there are provisions that require (for certain types of dispute) or allow the courts to direct the parties to attempt ADR before or during litigation (similar to England and Wales). In other jurisdictions, such as China, Hong Kong, and Hungary, ADR is voluntary and depends on the parties' agreement. In Belgium, whilst ADR is generally voluntary, lawyers and bailiffs have an ethical and legal obligation to inform clients about ADR options.

At the moment, very few jurisdictions have statutory adjudication which is comparable with the Construction Act (examples include: Canada, Australia, Ireland and Singapore).

However, given the current trend and the global economic position, there may be a move to more jurisdictions adopting a statutory form of ADR. In Hong Kong, the recent (yet 10 years in the making) Construction Industry Security of Payment Ordinance bill (the “Ordinance”), will introduce a statutory adjudication process to deal with payment disputes when it comes into force in August 2025. The Ordinance introduces other key provisions such as the prohibition of conditional payment clauses, strict deadlines for payment responses and the right for claiming parties to suspend or slow down work under certain conditions. If successful and well received, Hong Kong may pave the way for other jurisdictions to follow suit. 

Conclusion

ADR is already popular within the Construction industry and therefore it is unclear what impact, if any, the recent case law will have, particularly where parties already have a statutory right to adjudicate. That said it may encourage parties to think more strategically about how they draft dispute escalation provisions to avoid more formal proceedings and consider other forms of ADR to help settle disputes relating to adjudication decisions such as enforcements and/or challenges (which would otherwise end up in court).

There may also be further amendment to the Construction Act on the horizon to broaden the ambit of statutory adjudication. It could be used on a wider range of contracts, therefore, removing some of the exclusions. There could also be a move to multi-party disputes being resolved by adjudication, increasing its use and popularity even further.

Internationally, it will be interesting to see if more jurisdictions introduce, albeit over time, some form of legislative or statutory adjudication (as we have seen with Hong Kong), particularly given the current economic climate. Indeed, there may be room for the development of an international form of adjudication. One criticism of adjudication is that it is too short a process for larger and technically complex claims. However, that has to be balanced against the cost and time for a longer process which will still only provide an interim binding decision, to be compared with Shorter Trials Scheme or an expediated arbitration process where parties will obtain a final binding decision.

[1] Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416

[2] CPR1.1(2)

[3] CPR 1.4(2)

[4] [2024] EWHC 3231 (Ch)

[5] TCC Annual Report 2023-2024

Our Global Guide to Alternative Dispute Resolution answers the key questions surrounding ADR methods and outlines how processes can differ depending on each country’s local legal system. The guide provides an insight into the current status and enforceability of ADR across more than 40 jurisdictions worldwide.