lath am

8/4/2019 Lath Am

1/4

"CONSTRUCTING THE TEAM": A U.S. PERSPECTIVE

V. KING (J.D.)Minneapolis, Minnesota, U.S.A.Copyright 1996, 1998. All Rights Reserved.

I. Summary

There are interesting parallels as well as interesting differences between theproblems identified and solutions recommended in Sir Michael Latham's Report,Constructing the Team, and the state of the U.S. Construction Industry in the mid-1990s. The parallels support the conclusion that the problems facing theconstruction industry worldwide are universal, while the differences can beexplained by reference to differing approaches to project organisation. This paperreviews selected chapters from the Report (Three -- "Project and Contract Strategiesand Briefing"; and Nine -- "Dispute Resolution"), compares the problems identified

therein with the current situation in the U.S., and compares the variousrecommendations with current trends or practices in the U.S. construction industry. The paper will then endeavour to rationalise the parallels and differences byreferences to differing approaches to project organisation and to the underlyingsocial, political, and legal factors in each country. The paper will conclude byattempting to discern what can be learned from the previous analysis byconstruction professionals on both sides of the Atlantic.

II. Background

The early 1990s were a terrible time for the construction industries in the UnitedStates and the United Kingdom. Overbuilt markets, overheated economies,overextended developers and, indeed, simple greed and mismanagement, led to a

significant decline in construction volume. The effect on each country's economy --construction accounts for 8% of GDP in the UK [1] and 4. 4% of GDP in the US [2] --cannot be understated.

However, it can be argued that the industry's litigiousness as much as anythingelse played a major rle in its decline. In the UK, disputes surrounding majorprojects such as Canary Wharf and the Channel Tunnel came to exemplify whatmany saw as the decline of a once-magnificent industry which had built an Empire.In the US, where the absolute number of claims peaked in 1989 [3], somewhatearlier than reported in the UK, the cost per claim for design professionals insuredby one PI carrier climbed steadily from $179,000 in 1985 to $268,000 in 1993 [4];and similar results were reported for the aggregate amount of damages claimed inconstruction arbitration cases in general [5].

Whether the claims explosion of the '80s and early '90s was a cause, symptom,

or effect of the construction industry's other difficulties may be left to others to sortout. What is certain is that -- on both sides of the Atlantic -- the industry'sfactiousness cannot have helped to ameliorate an already desperate situation.

In sorting through the debris, one might examine a number of possibleexplanations for this phenomenon. Undoubtedly, there are many opinions: highinterest rates, inflation, feverish competition for fewer projects, and speculativefrenzy can all take their place in the line of suspects. Certainly, however, poorproject organisation -- a lack of attention to the details relating to project structure,communication, and execution -- can be singled out anecdotally as a key factor inmany claim-ridden projects.

In response to this perception, Sir Michael Latham, a former Conservative MPand ex-director of the UK Housebuilders Federation, was commissioned by H.M.

8/4/2019 Lath Am

2/4

Government to lead a year-long, 250,000 enquiry with the purpose of ending "the culture of conflict and inefficiency that dogs Britain's biggest industry" [6].

The report, entitled Constructing The Team, Final Report of the Government /Industry Review of Procurement and Contractual Arrangements In The UKConstruction Industry[HMSO, London, 1994 (hereinafter "the Report")], was initiallygreeted with "almost universal praise" [7]. In addition to reviewing the state of theUK construction industry, Sir Michael makes 30 recommendations for improving theindustry. Among the recommendations were: creation of a standard form ofcontract based upon the New Engineering Contract; establishment of a buildingclients' lobbying organisation (called 'NewCo' by Sir Michael [8]); clarification ofbuilding liability responsibilities; implementation of 10-year building defectsinsurance similar to the insurance utilised in many parts of Europe; implementationof productivity improvements leading to a 30 per cent reduction in real constructioncosts (Sir Michael points out that construction costs about 30 per cent more in theUK than in the US [9]); requirement of trust funds to ensure companies get paid;broader utilisation of so-called "alternative dispute resolution methods"; and moreextensive use of contracting strategies such as design and build.

This paper proposes to focus on the final two recommendations in the foregoinglist. These recommendations are discussed in chapters 9 and 3, respectively, of theReport. Chapter 9 of the Report is entitled "Dispute Resolution," and Chapter 3 isentitled "Project and Contract Strategies and Briefing". After summarising eachchapter, the paper will describe how the issues raised and recommendations madeby Sir Michael have been dealt with in the US; attempt to explain the differences;discuss the similarities; and suggest how the US experience might be of use indeveloping a further understanding of Sir Michael's recommendations.

III. Discussion

A. Summary

In Chapter 9 of the Report, Sir Michael expresses dissatisfaction with the currentmethods available for resolving disputes in the UK construction industry. He pointsout that arbitration is unsatisfactory because of frequent delays and the "constantspectre of appeal", and recommends development of a project adjudication processwhich would permit speedy resolution of disputes essentially as soon as they arise.Ironically, although arbitration has been the subject of criticism in the US, it isprecisely because in the majority of cases there is no right of appeal from thearbitrator's award. As recommended in the Report, the US construction industry hasalso moved to establish dispute resolution methods other than arbitration, andseems to have travelled farther down this road than the UK industry.

In Chapter 3, Sir Michael emphasizes the importance of developing appropriateproject and contract strategies so as to establish proper allocations of risk, divisionsof authority, and lines of communication. In the US, clients have been utilising

design and build on private projects for many years, with considerable success inavoiding claims. Government agencies in the US have flirted with design and buildbut, due in large part to public bidding laws as well as inertia, have been slow toimplement it in any serious fashion.

B. Chapter 9: Dispute Resolution

Dissatisfaction not only with the frequency of construction disputes but with themanner of resolving them seems strong in both the US and in the UK. Arbitration,which until recently has been a favoured method of resolving such disputes, is underattack in the UK because of its "perceived complexity, slowness, and expense" [10].Similar criticisms [11] have been levelled in the US, where arbitration for many years

8/4/2019 Lath Am

3/4

has been well entrenched as the preferred method of private construction disputeresolution [12].

Interestingly, however, despite the superficial similarities of the criticismslevelled against arbitration in the US and the UK, Sir Michael summarises a basis fordissatisfaction with arbitration in the UK which is the exact opposite of the maincause for criticism of arbitration in the US. In the UK, according to Sir Michael, it isthe "constant spectre of appeal" to the High Court from an arbitrator's decision"which has emasculated the whole {arbitration} process" [13]. In contrast, in theUS it is precisely the lack of ability to appeal from an arbitrator's decision in mostcases, except for the most egregious circumstances such as demonstrated fraud orbias [14], combined with the lack of a requirement for the arbitrator to offer anyreasons whatsoever for his or her decision, which has resulted in the most witheringattacks upon US-style arbitration [15].

In the US, according to one study "a significant number of arbitrators" admit tonot following either the law or the parties' contract in rendering their awards [16].Although and arbitration award can be set aside because the arbitrators exceeded

their authority (which presumably includes the duty to apply the parties' contractincluding its governing law provisions) [17], in practise since the arbitrators need notexplain their decision it is very difficult to establish this ground as a basis forvacating the award.

This attitude appears to enjoy considerable support in the courts. In one case inwhich the author was personally though (fortunately) tangentially involved [18], adispute developed between the owner of a townhome development and the design-build contractor who had constructed the project. Approximately $250,000 worth ofrepairs were needed. Instead of awarding the owner damages for the cost of repairs,the arbitrators ordered the contractor topurchase the entire developmentfrom theowner at a cost of several million dollars -- an equitable form of relief which not onlyfar exceeded the scope of the arbitrators' authority, but also ran afoul of the Statuteof Frauds. Notwithstanding, the Minnesota Supreme Court refused to vacate the

award "merely because the court may believe the arbitrators have erred." [19]

C. Chapter 3: Project Organisation and Strategies

In his introduction to the Report, Sir Michael points out that "Clients are at the coreof the process" in construction, but their "interests are dispersed and vary greatly"[*]. Chapter 3 of the Report, "Project Organisation and Strategies," attempts toreview the common factors involved in the early planning stages of a constructionproject in an effort to determine the key elements needed to

References

1. Latham, M. (1994) Constructing The Team, Final Report of theGovernment / Industry Review of Procurement and ContractualArrangements In The UK Construction Industry HMSO, London, 1994,p. 7.

2. Yuskavage, R. (1993) Gross Products By Industry, 1988-91, SurveyCurrent Business, November, 1993, at 33, 34 (table 2).

3. A record 5,132 construction arbitration cases were conducted in1989, Thomson, D. (1994) "Arbitration Theory and Practice: A Studyof AAA Construction Arbitrators," 23 Hofstra Law Review 1, p. 138.

4. Ichniowsky, T. (1995) "There's No Claims Crisis Now, But NewChallenges Loom,"Architectural Record, August, 1995 pp. 22, 24.

5. Thomson, supra, note 3, p.138.

8/4/2019 Lath Am

4/4

6. Tieman, R. (1994) The Times of London, Business Section, 19/7/94,quoted in DataTimes Online.

7. Taylor, A. (1994) Financial Times, p. 9, 19/7/94.8. Barrie, G. (1995) Building, 13/1/95, p. 7.9. Latham, supra, note 1, p. 64, citing W.S. Atkins (1994) from OECD

data, Table 5.1 of "Strategies for the European Construction Industry-A Programme for Change", European Commission, 1994.

10. Latham, supra., note 1, p. 9011. Thomson, supra, note 3, p.140, citing Pollock, E. (1993) "Arbitrator Finds Rle

Dwindling As Rivals Grow," Wall Street Journal, 28/4/93, p.B1.12. American Institute of Architects (1987)AIA Document A201: General Conditions

of the Contract for Construction, (14th ed. 1987) 4.5.13. Latham, supra, note 1, p.88, quoting paper by Knowles, R. (1994), Construction

Contracts Consultants, April 1994.14. See, e.g., the United States Arbitration Act, 9 U.S.C. 10(a)(3). Most arbitration

acts in the various States are similarly restrictive.15. Thomson, supra, note 3, citing Hinchey, J. (1991) "Yes, We Do Need Special

Rules for Complex Construction Cases!", Construction Lawyer, August1991, American Bar Association, p.1.16. Thomson, supra, note 3, p. 156.17. Id., citing 9 U.S.C. 10 (Supp. V 1994); Ziegler Coal Co. v. United Mine Workers,

484 F.Supp. 445, 447 (C.D. Ill. 1980).18. David Co. v. Jim W. Miller Construction, Inc., 444 N.W.2d 836 (Minn. 1989).19. Id., at 840; cited in Thomson, supra, note 3, p. 154.*. Latham, supra., note 1, p. 3.