Is Mediation The Way Forward For Dispute Resolution In The Malaysian Construction Industry?

The construction industry in Malaysia has a number of characteristics which make it ripe for disputes to arise between parties.  It is fundamentally a cyclical and competitive industry where margins on projects can be low but due to the complexity of the projects, the potential for errors and the disproportionate cost of remedying those errors can be high.  

Apart from litigation and arbitration, Malaysia has seen a rise in the use of Adjudication as an ADR method in the recent times. It is also well established that maintaining cashflow during the course of a building project can be a real difficulty, and this directly led to the introduction of a statutory adjudication act in Malaysia in the Construction Industry Payment Adjudication Act 2012 (Act 746) (“CIPAA”), which was enacted by Parliament and came into operation on 15 April 2014.

The Act which is underpinned by the ‘pay now argue later’ principle is a procedure whereby any party to a crystallised dispute may refer that dispute to an adjudicator who, generally within 45 days, will give a decision which is binding unless and until overturned in a subsequent litigation or arbitral proceeding.

So how would the use of Mediation fair as the newer entrant into the landscape?

MEDIATION

Mediation however, has come to be popular in recent times, especially with its inclusion as a means of dispute resolution in theCOVID bill in Malaysia.

The key benefits of mediation over litigation are reduced costs and time. It generally takes 12 to 18 months for a case to come to trial in the high courts and the costs involved are normally significant because of the inevitable need to use experts, often from multiple disciplines, in addition to the multi-party nature of disputes because of the number of people involved in the contractual chain or delivery of the project.  

In contrast, mediation can be arranged more quickly, is logistically easier and significantly cheaper.  

Mediation also has the advantage of being a confidential process, which can result in a confidential settlement, if the parties so wish. This is useful in protecting the brand image and corporate reputation while not causing loss of customer and/or client confidence.

Mediation is first and foremost a private dispute resolution process where the disagreeing parties work with a mediator to negotiate a settlement to their dispute. The mediator is a neutral party with no vested interest in the outcome and is trained to facilitate a settlement between the parties. Furthermore, for construction disputes, the mediator usually has experience in the construction industry. Mediation is also undertaken on a “without prejudice” basis, in that anything said and/or written down during the course of the proceedings cannot be used as evidence in an arbitral or litigation proceeding. 

This is in direct contrast with litigation and arbitration, where control of the dispute is relinquished to a court, judge or arbitrator that has no real interest in facilitating a timely completion of a project or preserving any relationships.

Mediation sessions usually take no more than a day or two, compared to a court trial or arbitration hearing that can take months. Mediation can be scheduled as soon as the parties are ready, while arbitration hearings and court trials often take months to be scheduled. This time advantage is particularly important when the mediation takes place while a project is still under construction, because resolution of disputes clear the way for more cooperation between the project participants.

MEDIATION VS ADJUDICATION

Compared to litigation, adjudication is also a much cheaper and quicker process and has therefore been put to considerable use.  However, mediation still has a number of advantages over adjudication, in particular:

1. Only one dispute between two parties can be the subject of an adjudication unless the parties agree otherwise (which they rarely do).  In contrast, mediation can involve multiple parties dealing with multiple disputes under multiple contracts, thus avoiding the need for a number of different but sometimes parallel adjudications to resolve all matters between the parties.

2. In adjudication, as with litigation or arbitration, a decision is imposed on the parties by a third party, and there is a real concern as to the quality of adjudicator that the parties may be stuck with.  Mediation however, is a voluntary process whereby the parties have the space and opportunity to come to their own resolution.

3. Adjudication is only of temporary finality, whereas the entire aim of a mediation is to bring about a full and final settlement of the parties’ dispute.

4.  Adjudication is often used during the course of the project when there may still be a considerable overlap between the parties’ needs and interests because, for instance, it might be in all parties’ interests to find a way to complete the project.  When that is the case, a restoration of the parties’ relationship may be essential to realise those interests and meet the parties’ needs. In adjudication, there is rarely any meeting between the parties or even a hearing before the adjudicator, with the whole process being conducted on paper (often highjacked by lawyers).

5. In terms of cost and time, Mediation is still a faster and cheaper ADR mechanism than Adjudication in Malaysia. An average CIPAA proceeding will take approximately 4 to 5 months from the date of the payment claim being made whereas Mediation could be resolved within a day or two.  

MEDIATION AS AN ADR TOOL IN MALAYSIA 

Mediation has been gaining prominence as an effective ADR tool in Malaysia with the enforcement of the Mediation act 2012 (Act 749). 

The cardinal rules of mediation are as follows:

• Disputing parties may choose to submit to mediation at any time.

In other words, parties may resort to mediation either before or during the court proceeding. In fact, it is the Practice Direction No. 4 of 2016 (Practice Direction on Mediation), issued by the Chief Registrar of the Federal Court of Malaysia, which mentioned that judges may encourage parties to settle their disputes even after a trial has commenced.

This forum uses judges as mediators to help disputing parties in litigation to find a solution. It is quite common that hearing judges may request the parties to meet in chamber and suggest mediation if the judges found that the dispute may be amicably resolved.

• Disputing parties may decide the terms of mediation.

Parties may come out with a mediation agreement, in writing preferably, and signed by both parties, setting out the terms of mediation like which mediation forum to utilise, parties’ choice of mediator, as well as the express term that mediation communications be treated with utmost confidentiality and privilege from court proceedings.

• The mediator shall have no decision-making power whatsoever.

The mediator shall only play the role of facilitating communications and negotiations between parties, identifying their needs, and developing options amongst them for an amicable solution.

• All disclosures, communications and even admissions made under a mediation session are strictly “without prejudice” or privilege.

Mediation is not subject to discovery or admissible as evidence in any proceedings unless parties’ consent to it.

COVID Bill

Recently, as a result of the COVID 19 pandemic, the Malaysian Parliament passed the Temporary Measures for Reducing the Impact of Coronavirus Diseases 2019 (COVID-19) Bill (“the Bill”) on 25 August 2020. The Bill provides for temporary measures to lessen the negative impact of the COVID-19 pandemic. 

When the Bill is passed, Part II will be deemed operational from 18 March 2020 to 31 December 2020 (“operational period”). If the Minister of Law deems it necessary, then the operational period may be extended.

Clause 7 specifies that if a party is unable to perform their contractual obligations due to any of the measures undertaken pursuant to the Prevention and Control of Infectious Disease Act 1988 to curb the spread of COVID-19, the innocent party will not be entitled to exercise their rights under the contract. The categories of contract, which Part II of the Bill applies to, are:

• construction or supply of construction material, equipment or workers;

• performance bond granted pursuant to a construction contract;

• professional services contract;

• lease or tenancy of non-residential property;

• event contracts;

• contract by a tourism enterprise; and

• religious pilgrimage-related contract

An important takeaway in Clause 9 of the Bill provides for the option of settling any dispute through mediation. In the event the mediation process is successful, clause 9(3) states that parties must then enter into a written settlement agreement, duly signed by both parties and will thereafter be authenticated by the mediator. The Bill further states that the duly authenticated settlement agreement shall be binding on both parties.

KEY SUCCESS FACTORS OF MEDIATION TO THE INDUSTRY

In analysing the key success factors of Mediation in Malaysia, there are some key learnings.

1.Ensure the parties see the process as a means to resolving the dispute and repairing their relationship. 

The parties need to be fully committed to the process and willing to actively participate in the mediation process with a view to resolving the dispute. If the parties do not see that mediation is an effective way to resolve their dispute, or if they are not dedicated to resolving the dispute at all, then there is little chance that the mediation process will be successful. 

2.Create a supportive atmosphere to facilitate sharing, trust and negotiation among the parties: 

In the words of George Mitchell, “The challenge is not getting people to talk, but to get them to listen”.

3.Ensure that the parties are comfortable throughout the mediation. 

The mediator needs to ensure that negotiations do not deteriorate to the point where the parties trade statements or opinions which are not constructive towards the mediation procedure. It is important that the parties are able to express themselves but also that they allow the opposing body the same courtesy. 

4.Ensure clarity in both, the stages of the process and the writing of the agreement: 

The mediation process needs to be clear and transparent throughout, this includes the writing of the agreement. The mediator needs to go through, in detail, the structured outline of what will happen on the day of the mediation. This can be discussed and agreed with the parties prior to the mediation. In terms of drafting the agreement, once the parties have developed a strategy for resolution, the mediator needs to ensure that the decision they have come to is sufficiently reality tested, to ensure that it is a viable, practical resolution.

5.The process should remain fair, logical and command respect throughout in order to allow the parties the best attempt at resolving their dispute: 

In order for a mediation to be successful, the process needs to be fair, and more importantly, seen to be fair to all of those involved. If a party feels that the mediator or the mediation is biased in favour of the other side, they may refuse to participate fully in the negotiations and ultimately dispute the overall resolution if not in their favour. 

6.Parties have a clear understanding of their requirements and participate in an effective feedback process: 

At an absolute minimum, the parties need to be clear on what they want to walk away from the process with. If they have established this in advance then they are free to participate in negotiations with the reassurance of knowing what their minimum requirements would be. This can be shared with the mediator, confidentially, and this will allow the mediator to determine how far apart the parties are from coming to an amicable resolution. In practice, what the parties want from the process can be very different and they can go a long way towards resolution by making conciliatory gestures on issues that are not important to them, as a party, but may be a fundamental condition of the other side. 

7.Acknowledge efforts towards achieving resolution and assist parties to voice apologies and repentance for transgressions.

When the parties make a gesture to help the dispute move towards resolution, the mediator should draw attention to this gesture and ensure that the mediator and the other party acknowledge the effort being made. 

In my opinion, there is still a role for mediation even after a party has the benefit of an adjudicator’s decision because it is only of temporary finality and litigation or arbitration may still follow.  The challenge for mediation in this scenario however is that the ‘winning’ party in the adjudication may feel they have all the negotiating power, even if the adjudicator’s decision was obviously wrong and the outcome of litigation or arbitration would be different.  

In summary, there remains room for more use of mediation to resolve disputes, especially on matters where both parties want to come to an amicable solution but require the experience and guidance from a respected third party. Further to this, mediation could well be a solution to post-adjudication decisions and although they may come with its own unique challenges, it could, in the long run, be beneficial to the industry.