The Suitability of the Use of Mediation in the Settlement of

Construction Disputes in Malaysia

Nur Ezan Rahmat

and Nazirah Abdul Rahim

Faculty of Law, Universiti Teknologi MARA (UiTM), 40450 Shah Alam, Selangor, Malaysia

Eastlink Consulting, B-3A-12 Gateway Kiaramas, No. 1 Jalan Desa Kiara, Mont Kiara, 50480 Kuala Lumpur, Malaysia

(Nurezanrahmat,nazirahim)@gmail.com

Keywords: Alternative Dispute Resolution, Construction Dispute, Mediation.

Abstract: Construction projects are increasingly complex, resulting in complex contract documents. Complex

construction projects can likewise often result in complex disputes, which mainly arise from the intricacy and

magnitude of the work, multiple prime contracting parties, poorly prepared and/or executed contract

documents, inadequate planning, financial issues, and communication problems. Traditionally, resolving

construction disputes were predominantly relied on adversarial approach. The result is often leads to delay

and cost, not to mention escalation in the maintenance of a harmonious relationship between parties. In the

Malaysian construction industry, the present practice of Alternative Dispute Resolution (ADR) is focusing

mainly on arbitration and most recently adjudication. However, with mediation clauses regularly incorporated

into the standard forms of construction contracts and the introduction of Malaysia Mediation Act 2012,

mediation is also set to be one of the main mechanism in resolving construction disputes in Malaysia. This

article highlights the application of mediation as an alternative route in construction dispute resolution in

major construction standard form of contracts in Malaysia. It is also aims to give the readers an overview of

the suitability in application, advantages and disadvantages of mediation in construction dispute.

1 INTRODUCTION

The construction industry is one of the mainstays of a

country’s economic progress. However, construction

dispute is found to be a very common issue in

construction industry and it has brought negative

impacts to each of the participants in a construction

project.

The nature of construction industry is such that

will always be disputes between various contracting

parties. Disputes are something that construction

project personnel will have to face several times

during the life of a project and it may continue long

after a project has ostensibly finished. Carmichael

(2002) and Singh (2009) found that the contracting

parties in construction project are basically working

for a common target of completing the project which

shows that they are not in competition with each

other, but, different of opinions and conflicts do arise

at times. Immaturity and unhealthy discussions do

expedite the parties into conflicts and disputes.

It was argued that a conflict is actually a catalyst

which can create dialogue, promote creative thinking,

and inspire people to sustainable solutions if a

conflict is able to be well-handled (Richbell, 2008). A

conflict or dispute can be settled by a free frank

discussion if it is handled expeditiously in a mature,

non-emotional manner with a judicious approach

(Singh, 2009). Therefore, Cox & Thompson (1998)

contended that disputes should be avoided. If it is not

possible to be avoided, disputes must be minimized

or resolved as efficiently as possible because disputes

are always wasteful for organization’s resources.

Dispute prevention, flexibility, early dispute

intervention, use of alternative dispute resolution

methods, and a predetermined plan as to how disputes

will be handled are identified as the best practices for

resolving construction disputes (Cox & Thompson,

1998 and Winkler, 2009).

Dispute may be defined as a class or kind of

conflict, which manifests itself in distinct and

justifiable issues (Bower, 2003). However, Fulton

(1989) alleged that conflict and dispute are not

synonymous although the two words are used

interchangeably. Conflict means an inter-reaction

between people who are pursuing incompatible or

competing claims, and in fact conflict is the precursor

to a dispute (Fulton, 1989). A contractual dispute

118

Rahmat, N. and Rahim, N.

The Suitability of the Use of Mediation in the Settlement of Construction Disputes in Malaysia.

DOI: 10.5220/0010054001180124

In Proceedings of the International Law Conference (iN-LAC 2018) - Law, Technology and the Imperative of Change in the 21st Century, pages 118-124

ISBN: 978-989-758-482-4

arises when one party claims something, and the other

party rejects the claim, or disagrees over liability

either expressly or by conduct (Carmichael, 2002). It

is also stated that, when a claim or assertion made by

one party is rejected by the other party and that

rejection is not accepted, the dispute arises

(Kumaraswamy, 1997). Conflict management is

important to prevent a conflict turns into a dispute.

However, disputes are still occurring as a result of

conflict escalation. Therefore, dispute resolution

plays a crucial role at most of the time, especially in

construction industry which is widely known as a

risky business.

Wright (2004) stated that a disagreement in any

of a construction project must be settled quickly

before it develops into a dispute. Emmitt (2010) also

found that conflict is necessitate to be managed so

that it does not suppress information or become

personal and affect relationships. According to

Murdoch and Hughes (2008), contractors are very

keen to preserve a good relationship with clients.

Therefore, some of the parties will often seek

effective and quick resolution on points of

disagreement even if that implies giving up a claim

that would have good chances to succeed in court for

the sake of future business.

(Murdoch & Hughes,

2000).

Disputes are wasteful of a firm’s resources and

therefore should be avoided, wherever possible (Cox

& Thompson, 1998). This is because, the nature of

dispute is costly, lengthy, and complex and eventually

the cost of resolving the dispute always exceeds the

amount of the initial claim (Feld & Carper, 1997). An

owner will suffer the additional costs such as

increased financing costs, increased architectural and

engineering costs, lost revenue, and incurrence of a

delay claim from the contractor for his increased costs

of performance if a dispute is not resolved efficiently.

On the other hand, as the impact of construction

dispute, a contractor will also suffer additional costs

such as increased labour costs, costs of extended

equipment usage, additional construction financing

expenses, additional cost of extended home and field

office overhead, and lost revenue (Rossi, 1991).

Resolution of disputes always consumes much of

the construction professional’s time than is usually

justifies. From the point of filing of a legal claim by a

contractor, the time required to follow the legal

settlement process consumes valuable time that can

usually be spent more profitably in other areas of the

organization’s work (Stephenson, 1996). Edgerton

(2008) also agreed that the contract disputes are

lengthy and costly to all of the contracting parties.

These adversarial disputes severely degrade

productive working relationships and consume time

and money.

It is very often to see the disputes between

contractors and owners escalate into litigation, or the

contractors may absorb a major loss in order to avoid

lengthy disputes proceedings and damaged business

relationships (Pinnell, 1998).

Edgerton (2008) encouraged for the disputes to be

resolved at the lowest possible level so that the

dispute escalation may be eliminated. For example, a

dispute might first be taken to the superintendent or

the inspector at the field level. Then, it would be

escalated to the project level and the project manager.

Next, if it still could not be resolved at that level, the

dispute could move to the executive level.

Subsequently, the final step would be arbitration or

litigation with an outside party facilitating resolution.

2 DISPUTE RESOLUTION IN

THE CONSTRUCTION

INDUSTRY

The construction industry is regarded as one of the

most conflict and dispute ridden industries, which has

resulted in it being one of the most claim orientated

sectors. Traditionally, parties would enter into

litigation, often a costly and longwinded means of

resolving a dispute. Over the years, various methods

of ADR have been introduced into the construction

industry as mechanisms to avoid lengthy and

expensive litigation.

2.1 Adjudication

In certain types of contract, adjudication is a

mandatory pre-step before final process may be

commenced (Simmonds, 2003). The adjudication

process usually commences when it is more to be

achieved by discussion and negotiation, and that the

issue is important enough to warrant the time and

expense of adjudication. In addition, the dispute may

involve matters claimed by either or both parties

(John, 2008). One of the benefits of adjudication is

that it can often lead to a settlement without the matter

going any further due to the party that has lost in

adjudication will think very carefully before

proceeding with very expensive litigation or

arbitration. They might well lose again, with the

additional penalty of paying the other side’s costs

(Ashworth & Hogg, 2007).

The Suitability of the Use of Mediation in the Settlement of Construction Disputes in Malaysia

119

2.2 Arbitration

Fisher (2017) stated that binding arbitration is by far

the most often used alternative to litigation in

construction disputes, and arbitrated construct on

hearings usually involve two parties who are having

a contract dispute and an arbitrator they jointly

choose to resolve the dispute. It is also found that an

arbitrator is usually someone familiar with the

construction industry and most large claims involve

three arbitrators instead of one. Arbitration in

construction is usually performed by experts in the

construction industry such as architects, engineers, or

construction management professionals (Fisher,

2017). Wright (2004) identified that arbitration is a

better route than litigation for solving serious disputes

because an arbitrator with appropriate knowledge and

experience must always have a greater chance of

understanding the complex engineering or process

questions that are likely to arise than a court.

2.3 Dispute Review Board (DRB)

According to Edgerton (2008), dispute review board

is a panel of three experts from construction industry

who follow the progress of a construction project by

visiting the site and attending project meetings. The

conditions precedent for establishing DRB are

usually described in the contract documents. The

owner, contractor and members of dispute review

board have to sign a three-party agreement before

using the DRB to resolve any disputes while

construction is ongoing. Selection of the DRB

members is critical and several selection processes

are available. Normally the board members

themselves will choose the chairperson. By reaching

this consensus process, the perception of any board

members being biased can be avoided (Edgerton,

2008).

2.4 Expert Determination

Expert determination is carried out primarily in a

technical nature of disputes. The expert is required to

use his or her own skills and knowledge to make

necessary enquiries or conduct their own

investigations. The process of expert determination

usually provides a fast and final solution to the

matters in dispute and has been used successfully for

many years in property disputes concerning

valuations (Ramsey, Minogue, Baster & O’Reilly,

2007). The use of expert determination has been

encouraging, particularly for single issue, essentially

technical or valuation and disputes. This is because an

expert can bring his experience and professional

knowledge directly to resolve a dispute. Moreover,

technical issue is proven extremely difficult for a

legal arbitrator or arbitral tribunal, even when assisted

by expert witnesses (Ramsey, Minogue, Baster &

O’Reilly, 2007).

2.5 Negotiation

Negotiation is the art of reaching an agreement or

understanding through bargaining. There are no

formal rules for negotiation, but it is culturally

accepted style (Carmichael, 2002).

Since there are no formal rules, the procedures of

negotiation begin by setting up a forum so that the

parties can attempt to find a way out of the problem,

looking for mutual benefits that can be gained from

resolving the problem in a different way, or look for

compromises in order to overcome the problem

(Egbu, Ellis & Gorse, 2004). Wright (2004) identified

that negotiation is always going to produce the best

chance of a satisfactory solution to any dispute since

it is quick and the bruising encounters that come with

arbitration, litigation or adjudication can been

avoided. If there is an event that complete satisfaction

could not be reached, the objective of negotiation is

to reach a solution that will be acceptable to both

parties. The advantage of negotiation is the cost of

both sides is very much less if compared to other

dispute resolutions and the money that does not have

to go in legal fees can then go towards funding the

settlement (Wright, 2004).

The prevalence of construction dispute indicates

that the current approach to dispute resolution is not

effective enough. First, construction contracts tend to

address dispute resolution by specifying the

resolution methods to be used. Second, dispute

resolution methods are too frequently viewed as a

selection of stand-alone choices. What construction

contract and the persons drafting these frequently

overlook is that dispute prevention and dispute

resolution methods can be effectively combined into

more comprehensive dispute prevention and

resolution processes, where the benefits of synergy

can be exploited to successfully prevent or resolve the

dispute.

3 MEDIATION IN THE

CONSTRUCTION INDUSTRY

Mediation is a method of dispute resolution involving

a neutral third party who tries to assist the disputing

parties in reaching a mutually agreeable solution

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120

(Klinger & Susong, 2006).

Mubarak (2010) revealed

that the mediator can be an individual or a team.

A preliminary meeting will be arranged by the

neutral third party to discover the substance of the

dispute and to decide how best to proceed with a

mediation (Ashworth & Hogg, 2007). In the essence,

a mediator must demonstrate neutrality and patience,

and must collect all the facts before making any

recommendation (Mubarak, 2010). Fenn, O’Shea &

Davies (1998) found that the mediation has proven to

be most effective when used immediately after the

parties have determined that conflict management

techniques have failed and it has been highly

successful in resolving construction disputes at a

fraction of the time and expense required for

litigation.

In the Malaysian construction industry, the

practice of mediation is not new and has persistently

being as part and parcel of the industry. Even though

it has been introduced by several standard forms of

contract, the use of mediation in Malaysia has not

been considered popular. Contrary to other developed

countries such as Australia, Hong Kong, Singapore,

United Kingdom and Kuwait, mediation process has

been recognized as one of the popular techniques of

dispute resolution.

The Chairman of the Mediation Committee of the

Bar Council Malaysia emphasised that business

industry should actively adopt mediation in settling

business related disputes. Mediation process can ease

in reducing the agglomeration of commercial cases

waiting to be judged in the court for the purpose of

expedition in the process of resolution. At its best,

mediation is getting perceived to be one of dispute

resolution techniques for settling construction

disputes.

However, in Malaysian construction industry,

mediation is not a popular method compared to other

types of ADR such as arbitration and adjudication.

Although there are efforts to introduce mediation in

construction industry through several standard forms

of contract, its usage in Malaysia is considerably low

(Arain & Low, 2007).

Mediation is also known as a private, informal

process in which parties are assisted by one or more

neutral third parties in their efforts towards

settlement. The new and distinguishing feature here

is the addition of a neutral third party who aids the

parties in dispute towards settlement. A further

important factor is that the mediator does not decide

the outcome; settlement lies ultimately with the

parties (Rahmat, 2017).

A distinction is often made between styles of

mediation that are facilitative and those that are

evaluative. During a facilitative mediation, the

mediator is trying to reopen communication between

the parties and explore the options for settlement. The

mediator does not openly express his opinions on the

issues. If, on the other hand, the mediator is called

upon to state his or her opinion on any particular issue

then he is clearly making an evaluation of that issue.

3.1 Mediation Clause in Malaysian

Standard Form of Construction

Contract

Mediation can be classified into two types: mandatory

mediation and optional mediation. The former is

when the parties are by court sanction or by

agreement between the parties make it mandatory for

the parties to attempt mediation to settle the dispute

between them and the later, is an option between the

parties. For example, in the context of standard

construction contracts, Malaysian Institute of

Architects (MIA) Standard Form for Building Works

2006 provides for an optional mediation under Clause

35 whereas the Construction Industry Development

Board (CIDB) Standard Conditions of Contract for

Building Works (2000) provides for a mandatory

mediation where the parties must first attempt

mediation and can only commence arbitration in the

event that the mediation fails. On the other hand,

under Clause 35 of Asian International Arbitration

Centre (AIAC) Form of Contract 2017, it appears to

have similar principle to MIA 2006.

In general, the parties to a dispute will most likely

not resort to mediation if the agreement only provides

an option for the parties to do so or for one of the

parties to initiate the process. The trend is however

towards the enforceability of mediation clauses. In

England, the courts had held that if a party to the

contract which contains a mediation (ADR) clause

commences legal action, costs would not be awarded

to his favour if he did not attempt mediation or ADR.

(

see Dunnett v. Railtrack Plc (In administration)

[2002] 2 All ER 850. See also Cable & Wireless Plc

v. IBM UK Ltd [2002] 2 All ER 1041.

Further, in a multi-tiered dispute resolution

clause, it can be said that an attempt at mediation is a

condition precedent to the commencement of the

remaining binding dispute resolution mechanism in

the clause itself, frequently arbitration.

There are pitfalls and problems that can arise in

enforcing poorly or badly drafted mediation clauses.

Boulle & The (2000) have helpfully listed that the

following factors should be paid due attention by

draftspersons of mediation clauses:

i. mediation clauses should be clear and

certain in their own right, or it should be

possible to derive certainty from extrinsic

The Suitability of the Use of Mediation in the Settlement of Construction Disputes in Malaysia

121

documents expressly referred to in the

clauses;

ii. they should be complete and

comprehensive;

iii. they should specify the procedures to be

followed by the parties in setting up and

undertaking the mediation, with some

reference to the identity of the mediator and

timetables to be followed;

iv. alternatively, they should incorporate by

reference the Mediation Agreement or

Mediation Rules of an agency providing

mediation services;

v. they should uphold the non-ouster principle

by stipulating that the parties should first

submit their dispute to mediation before they

institute court proceedings; and

vi. they should avoid provisions requiring

participation in good faith.

With a good and clear mediation clause incorporated

into a construction contract, it will help the disputing

parties to decide when the problem arises.

3.2 Mediation Act 2012

In Malaysia, Mediation Act 2012 has received the

royal assent on 18 June 2012 and was gazetted on 22

June 2012. The act was enforced by the ministry in

August 2012 and has been applied in order to promote

and encourage mediation as a method of ADR.

In the absent of any specific Mediation Rule

mentioned in a construction contract, the Mediation

Act 2012 seeks to facilitate this mediation process.

Generally, the parties are free to agree on the

appointment of any person as their mediator. If parties

cannot come to a consensus, they can request the

Malaysian Mediation Centre of the Bar Council

(MMC) to appoint a qualified mediator from its panel.

According to the Mediation Act 2012, parties may

resort to mediation either before or during the court

proceeding (section 4). In fact, it is in 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.

Disputing parties may decide the terms of

mediation. Preferably, parties may come out with a

mediation agreement in writing and signed by both

parties setting out the terms of mediation. For

instance, in respect of which mediation forum to go,

parties’ choice of mediator, as well as express term

that mediation communication is to be treated with

utmost confidentiality and privilege from court

proceedings.

Mediator shall have no decision-making power

whatsoever. He shall only play the role in facilitating

communications and negotiations between parties

and in identifying their needs, and developing options

amongst them for amicable solution.

All disclosures, communications and even

admissions made under a mediation session are

strictly without prejudice or privilege. It is not subject

to discovery or be admissible in evidence in any

proceedings unless parties consented to it. It shall be

noted that regardless of choice of forum, parties must

fix a return date of not more than one month from the

date the case referred to mediation to report to the

court on the progress and outcome of mediation.

(Practice Direction No. 4 of 2016)

3.3 The Roles of AIAC and MMC

In Malaysia, the construction court has been

established in Selangor and Kuala Lumpur on 1 April

2013 in which it operates to assist the administration

and instantly resolved any matters or cases regarding

construction or connected with construction. Prior to

that, Malaysian Bar has established the MMC in 1999

to introduce mediation in order to provide a proper

solution for successful dispute resolutions and to

provide avenue for successful dispute resolutions.

The centre provides mediation services and trained

mediators who have been accredited and appointed to

the Panel of Mediators of the MMC.

In 1978, The Kuala Lumpur Regional Centre for

Arbitration (KLRCA) was established and offers

facilities and assistance for the conduct of arbitral

proceedings, including the enforcement of awards

made in the proceedings held under the auspices of

the Centre. The Rules for arbitration under the

auspices of the Centre are the UNCITRAL

Arbitration Rules of 1976 with certain modifications

and adaptations. The Centre provides mediation

services and rules which allows the parties to freely

choose their mediator or from its list of accredited

mediators, or failing which the Director of the Centre

shall assist in the appointment of mediator. Recently,

KLRCA has changed its name to AIAC.

3.4 Advantages and Disadvantages of

Mediation in Construction Dispute

Mediation is faster and less expensive than litigation

and arbitration. Mediation sessions usually take no

more than a day or two, compared to a court trial or

arbitration hearing that can take weeks. Mediations

iN-LAC 2018 - International Law Conference 2018

122

can be scheduled as soon as the parties are ready,

while arbitration hearings and court trials often take

years 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 clears the way for more

cooperation between the project participants (Ooi,

2017). Recognizing the effectiveness of mediation in

resolving construction disputes, many construction

industry standard contracts require that the parties

make a good faith attempt to settle their dispute

through mediation prior to instituting litigation or

arbitration. Examples of construction disputes that are

most frequently mediated are:

i. Contractor’s defective work

ii. Architect’s defective plans and

specifications

iii. Delays in project completion and other

schedule issues

iv. Payment issues

v. Changes to the scope of work

vi. Differing site conditions

vii. Property damage to the project

viii. Disputes arising from termination of a

contractor or subcontractor.

This list is however not exhaustive. After there is a

settlement, if other items come into dispute, a new

mediation can be scheduled without affecting the

prior settled items. If a major dispute develops in the

early stages of a construction project, a quick, low

cost mediation can be scheduled which will allow the

project to continue in a timely manner. If binding

mediation is specified, there will be a final and

binding decision and the project will continue in a

timely manner. It is not unusual to have multiple

mediations in larger construction projects.

Mediation is so informal that if a construction

contract does not recognize an ADR option;

mediation may be scheduled by mutual agreement of

both parties to the contract. Both parties have the

opportunity to check the background and experience

of the mediator unless the mediator is specified in the

dispute resolution section of their contract. Most

contractors specify an ADR provider when they find

a mediator or arbitrator who is knowledgeable and

experienced in construction matters and who is fair

and equitable to both parties. In civil litigation, you

have no options in the choice of your judge.

Mediation is a private process and not subject to

public knowledge and possible media attention as can

be the case with civil litigation. Parties can request

various actions, including restructuring of existing

contracts, structured payment terms and even

apologies. Mediation is often successful as it takes

into account the personal and commercial interests of

both parties. Mediation settlements usually have a

high degree of longevity, given that they are

constructed by the parties. (Boulle & Teh, 2000)

For disadvantages, mediation does not always

end with a settlement agreement. Despite the parties’

best efforts, the dispute may not always be resolved

after attending a few mediation sessions. If the

mediation does not produce a resolution, each party

may know information regarding the other party’s

allegations and possible evidence that may be used in

court at a later date.

The informality of mediation could prove to be a

detriment when the parties involved have a disparate

level of sophistication, power, and/or resources which

could possibly result in an un-favourable settlement

for the party that lacks the sophistication, power,

and/or resources to properly understand and resolve

the dispute. Example, between main contractor and a

subcontractor or between a client and a consultant.

4 CONCLUSION

The use of mediation to resolve construction disputes

can thus be said to be the continuing international

trend. At least in Malaysia, it may be premature at this

stage to agree with the following statement of George

H Golvan QC but given time and with the increasing

popularity of mediation as a means of dispute

resolution, and with all infrastructures for the use of

mediation properly in place, a concurring note may be

unreservedly given. The statement is this: “Mediation

is such a suitable process for resolving commercial

disputes that it may well be arguable in the future that

a lawyer who fails to take advantage of an available

mediation procedure, and has instead committed his

or her client to protracted and expensive litigation,

could well be guilty of a breach of professional duty.”

Mediation is particularly well suited to

construction dispute because this dispute tends to

occur as a result of a breakdown in communication

between the parties and, as such, mediation provides

the setting for parties to communicate and negotiate

effectively with the presence of a neutral third party.

It is submitted that, with regard to small, low value

construction disputes, mediation is strongly

recommended and advised where conventional

negotiation methods have failed.

The finality of the mediation could also be

questioned. Parties to a settlement agreement may

attempt to dispute the settlement agreement and still

end up filing suit in court regarding the legitimacy of

The Suitability of the Use of Mediation in the Settlement of Construction Disputes in Malaysia

123

the settlement agreement. By filing suit, the party has

created a new dispute and denied the resolution of the

underlying dispute that led the parties to a mediator.

One way to ensure that the parties will not have to

spend future time still dealing with the same dispute

is to ask the parties to agree that the resolution

reached during mediation will be binding on all

parties involved.

It is submitted that the use of mediation as dispute

settlement mechanism in construction cases should be

promoted and its popularity should be enhanced.

ACKNOWLEDGEMENT

This research is financially supported by the Faculty

of Law, Universiti Teknologi MARA (UiTM), Shah

Alam, Selangor.

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