The Law Society Neutral Evaluation and Neutral Determination Scheme
The Law Society launched its Neutral Evaluation and Determination Scheme (LSNEDS) to complement its dispute resolution suite of mediation (LSMS) and arbitration (LSAS). LSNEDS provides a very useful non-binding evaluation or temporarily binding determination to deal quickly and cheaply with disputes while preserving parties’ ultimate rights and inhibiting the dispute from infecting performance more generally. This article explains the new scheme.
Sometimes an unstable peace can be as destructive as any civil war.
Truces are only durable when they create real justice.
Charles Duhigg, The Power of Habit
Two New Mechanisms
The Law Society has created two new dispute resolution mechanisms to complement its existing suite of dispute resolution methods of mediation and arbitration under the Law Society Mediation Scheme (LSMS) and the Law Society Arbitration Scheme (LSAS). The new mechanisms are neutral evaluation and evaluation, combined in one scheme known as the Law Society Neutral Evaluation and Determination Scheme (LSNEDS).
LSNEDS may be used on its own or in conjunction with the LSMS and LSAS. Under LSNEDS, neutral evaluation leads to an advisory evaluation only whereas determination results in a temporarily binding determination. The concept of temporary finality has been borrowed from the effective construction security of payment regime1Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed). where determinations are binding unless and until the substantive dispute is dealt with finally in the usual way by a court or tribunal.2 See Chow Kok Fong, An Overview of the Singapore Security of Payments Regime (“Chow Kok Fong”), at 5 et seq <http://www.intellitrain.biz/scl/downloads/outline%20of%20bldg%20&%20construct%20industry%20security%20of%20payment%20act.pdf> (last accessed 11 December 2018).
The process is one of quick and summary evaluation or temporary determination of contractual disputes by Neutrals. It is similar to security of payment regimes around the world of an application followed by appointment of the Neutral,3 In chronological order, the Housing Grants, Construction and Regeneration Act 1996 (UK), Building and Construction Industry Security of Payment Act 1999 (NSW), Construction Contracts Act 2002 (NZ), Building and Construction Industry Security of Payment Act 2002 (Vic), Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed), Construction Contracts Act 2004 (The Isle of Man), Building and Construction Industry Payments Act 2004 (Qld), Construction Contracts (Security of Payments) Act 2004 (NT), Building and Construction Industry Security of Payment Act 2009 (SA), Building and Construction Industry Security of Payment Act 2009 (Tas), Building and Construction Industry (Security of Payment) Act 2009 (ACT), Construction Industry Payment and Adjudication Act 2012 (Malaysia). a response from the respondent and a determination on the papers or after a truncated hearing if the parties agree, all within limited times.
LSNEDS may be used in a contract or where there is contract between the parties. If there is no contract, after the dispute arises the parties sign an agreement to use LSNEDS to resolve their dispute. Sample stand-alone, non-tiered and multi-tiered clauses for use in contracts and a sample agreement to use where there is no pre-existing contract have been drafted and are on the Law Society’s website in a handbook to guide parties through the process.
Purpose – The Disputes Iceberg, Ring-Fencing and Drawing the Poison
The overall purpose of LSNEDS is to provide a short, sharp evaluation or determination of all or part of a dispute to enable the parties to end it and move on if they can. If they cannot, full adjudication is still available in the usual way – their rights are preserved. Experience with the security of payment regime in many countries suggests that parties are able to accept or accommodate the preliminary adjudication without needing full, final resolution.
LSNEDS is aimed primarily at those disputes for which there is no practical alternative form of resolution. There are many such disputes where, for a variety of reasons explained below, parties do not commence mediation, litigation or arbitration and do not engage external counsel other than perhaps to advise on particular issues. For these disputes, there is often no appropriate form of resolution and they go unresolved or unsatisfactorily resolved, leading to further issues. Charles Duhigg, in his book The Power of Habit,4 Random House, 2012. said that an unstable peace can be as destructive as any civil war and that truces are only durable when they create real justice.
There is a “disputes iceberg”, with 10 per cent or less of disputes being above the surface and seen by private practitioners. Below the surface, and dealt with by the parties themselves, lies the other 90 per cent or more of disputes. The tip of the iceberg – the visible 10 per cent – can be divided into roughly one-third at the very top being high value, complex disputes. The lower two-thirds of the visible tip are the remaining smaller, less complex disputes.5 Naturally, these figures are very broad approximations and will differ among companies and industries.
While primarily directed at the unseen 90 per cent, LSNEDS is designed to be used in any of the types of disputes making up the iceberg. In the 90 per cent of cases where private lawyers are usually not involved – typically of lower value and complexity – LSNEDS can be used to provide an independent opinion, to ring fence a dispute to prevent it growing or souring the relationship, and in most cases to resolve the issue quickly and cheaply .
The same can be achieved in the 7 per cent or so small and medium disputes where private lawyers are involved, with the additional potential use of LSNEDS being used to evaluate or temporarily determine part of a dispute. In cases where external lawyers are involved, there may be a level of legal complexity or number of discrete issues that would benefit from separate evaluation or determination. LSNEDS could also be used for the same primary purpose of the security of payment regimes, to get money flowing on interim payment claims.6 Chow Kok Fong at 18.
In the 3 per cent or so large and complex disputes, LSNEDS would have less application but could be useful for independent opinions or preliminary determinations on discrete issues.
The Disputes Iceberg
The “disputes iceberg” looks like this, with the blue section being those below the waterline, mostly unseen by external counsel and not referred to mediation, litigation or arbitration:
The Unseen 90 Per Cent
Disagreements and disputes crop up in performance of contracts all the time, and often litigation or arbitration are not suitable vehicles to resolve them. These are the 90 per cent below the surface. Expense, uncertainty, timidity, preserving reputation, unfamiliarity with disputes procedures and avoidance of conflict are some of the reasons formal proceedings are not taken. Those issues can remain unresolved for long periods, sometimes for the life of the contract. They can fester and cause rancour between the parties, and sometimes souring relationships to the point of unworkability. An unresolved disagreement can cause a breach of the disputed provision or can spill over to other provisions. As Duhigg observes, an unstable peace can be as destructive as any civil war in many types of relationships.
These sub-surface disputes can create an unstable peace and be very destructive. A weaker party, practically unable to commence formal proceedings, may quite deservedly feel the situation is unjust. She may feel disappointed in the law not providing some accessible means of addressing the power imbalance and resolving the issue.
Commercial parties are often reticent to issue notices triggering mediation or formal proceedings, with it being seen as a failure on their part to negotiate a resolution. The evaluation and determination process would be less confrontational in that the parties do not have to meet and it feels less formal to commercial people. Some might still be hesitant but there will be braver souls willing to launch out.
Parties can be reluctant to commence formal proceedings for fear of being bound forever by the result, and of setting unwelcome precedents. Advantages of the LSNEDS are that parties are not saddled with the result forever, they have a second chance at success, the evaluation or determination is confidential and strictly limited to those parties and that dispute. It can be a trial run of the parties’ positions, with experience in security of payment schemes showing that mostly parties will accept the result but without foreclosing the possibility of formal , final resolution. This is not to encourage a multiplicity of proceedings but to give practical finality where possible while preserving substantive rights.
Construction Security of Payment Regimes
LSNEDS is modelled on these regimes, with a short application-response-determination process which is temporarily binding. There is no similar scheme for general non-construction contracts. The security of payment regimes have been successful in resolving progress claims under construction contracts while the contracts continue to be performed, avoiding the breakdown of relationships and the termination of contracts.
Anecdotally, few progress claims determined under a security of payment regime have been relitigated in proceedings on the substantive dispute. In the initial stages of the introduction of those regimes, there were a number of challenges to determinations for non-compliance with the statutory procedure and on procedural fairness grounds (particularly in New South Wales).7 See, for example, Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421. Those challenges have decreased as the Courts have more clearly enunciated tests for validity of determinations and adjudicators have become more proficient. There will always be some challenges to determinations under a statutory scheme. Construction lawyers now saw that the long, tedious construction trials of the past have been replaced in the main by security of payment adjudications and mediation.
It remains a possibility that a party who commences litigation or arbitration on the substantive dispute might obtain a stay of a determination pending the resolution of the proceedings. This is an advantage as it preserves parties’ rights and the court’s or tribunal’s discretion in appropriate cases.
The Law Society’s Alternative Dispute Resolution Committee, initially under the chairmanship of Lawrence Teh8 Partner, Dentons Rodyk, Singapore. and later Chong Yee Leong9 Partner, Allen & Gledhill, Singapore. established a working group10 Members of the working group include Cameron Ford, Paul Sandosham, Sujata Bhargavan and Emmanuel Chua. to examine the suggestion of an evaluation and determination scheme. The working group reported that the scheme would meet a commercial need and would complete the Law Society’s alternative dispute resolution suite.
Evaluations are non-binding so the question of enforcement does not arise. Non-participation in the evaluation process can be made a breach of contract if desired to encourage participation. It could also be stated that a party who does not participate must pay all the costs of the process.
Determinations are enforceable as part of the contract, and money Determinations are debts due and payable within 30 days. So, for example, if a party acted contrary to the Neutral’s interpretation of a clause, the other party would have its remedies for breach of contract. Again, the party acting contrary could defend those proceedings by pleading the substantive dispute, including its preferred interpretation.
A creditor under a Determination can sue for breach of contract or on the debt if the Determination is not performed by the other party. In those proceedings, the only questions are whether the Determination is valid and whether it has been performed. Those proceedings are not on the substantive dispute but on the Determination only. Any judgment in those proceedings does not involve a merger of the causes of action in the dispute. The Determination does not create any estoppel or res judicata and is ignored by the tribunal or court except as to any moneys paid under the determination.
The debtor under a Determination may commence proceedings to declare the Determination invalid and/or sue on the substantive dispute, but the proceedings will not act as an automatic stay of the Determination. It will be up to the court or tribunal to decide if a stay should be granted.
There is no appeal from an Evaluation or a Determination. There is no need for an appeal from an Evaluation as it is non-binding. If a party is unhappy with a Determination, the remedy is to commence proceedings to declare the Determination invalid and/or sue on the substantive dispute. It would be up to a tribunal or court to stay the Determination and the LSNEDS rules state that nothing in them affects that power.
Use With or Without LSMS and LSAS
LSNEDS may be used in any order, with or without LSMS and LSAS. An appropriate combination may be crafted to suit the contract and the situation. For example, parties could use LSNEDS to obtain an evaluation before mediation and then to obtain a determination after mediation if the dispute was not resolved. They could pause a mediation to obtain an evaluation for guidance in the mediation. Any combination is available to suit the parties and the dispute.
The process is:
- Notice – anytime during the term of the agreement.11 The agreement means the underlying contract or the agreement to submit to LSNEDS where there is no contract.
- Application – between 14 days and three months after Notice.
- Neutral appointed – seven days after Application.
- Response – 14 days after Application (whether Neutral appointed or not)
- Evaluation/Determination – 14 days after Response.
There is no prescribed form for any of those steps, but the rules set out what the documents must contain at a minimum.
A more detailed depiction of the process after the notice is given is:
Neutrals are lawyers who have been approved by the Law Society to make evaluations and determinations. They are experienced lawyers in their field and are also usually qualified arbitrators under the LSAS or internationally recognised bodies. When the Law Society receives an application under LSNEDS, it appoints a Neutral it considers is appropriate to the subject matter, value and nature of the dispute.
A party may object to the appointment of a Neutral and if the Neutral continues to act, the party may complain to the President who may withdraw that appointment and appoint another Neutral. It is expected that most Neutrals would decline to act if a party objects unless that objection was totally unreasonable and designed to frustrate the process. The President’s discretion to withdraw the appointment would be exercised on normal principles relating to bias, confidential information or other principles relied upon. The party challenging the appointment should provide the President with all information necessary for the discretion to be exercised.
Features of LSNEDS
Notice of Intention
Details of the process are set out in the rules and the handbook but some notable features of the process is that a Notice of Intention to commence an evaluation or determination must be given within a certain window of time before an application is made. A fresh notice must be given if the window closes before the application is made. The dispute in the application must not exceed the scope of the dispute in the notice. Notice is required to avoid an applicant from taking months meticulously preparing a voluminous, detailed application and then dumping it on the respondent unawares.
The application must contain everything on which the applicant intends to rely and the applicant must anticipate the respondent’s likely responses. A Neutral is under no obligation to permit an applicant a reply or to ask for further submissions. She might choose to if the applicant could not fairly have been expected to anticipate the response. In the vast majority of cases, it is expected that the Neutral would make the evaluation or determination on receipt of the response with no further communication with the partiesand no hearing.12 Most security of payment adjudications in Australia are completed without a hearing, even in the large complex construction cases they attract.
It is not intended that the scheme attracts the full measure of natural justice that would apply to administrative or judicial proceedings. The appellate courts of Singapore and Australia have held that the statutory security of payment schemes on which LSNEDS are based afford only the level of natural justice contemplated by the schemes themselves.13W Y Steel Construction Pte Ltd v Osko Pte Ltd (2013) SGCA 32 at (41); Brodyn Pty Limited t/as Time Cost and Quality v Philip Davenport and Dasein Constructions Pty Limited (2004) 61 NSWLR 421 at (57). Justice McDougall said extra-judicially:14 Robert McDougall J, Natural Justice and the Building and Construction Industry Security for Payments Act 1999 (NSW) (2014) NSWJSchol 2 at (4) <http://www.austlii.edu.au/au/journals/NSWJSchol/2014/25.pdf> (last accessed 11 December 2018).
“… the requirements of natural justice must be fitted within the statutory scheme. In particular, the right to be heard is confined by the time restraints on adjudication determinations and the restrictions on what matters may be considered in reaching a determination. The common law rules of natural justice have therefore, to some extent, been circumscribed …”
In practice this will mean that the time allowed for parties to make and comment on further material will be short, measured in a few days or less, and comments will only be sought from parties who have not had an opportunity of commenting previously.
The Response should contain all the material and submissions relied on by the Respondent. There is no right of further submissions and, in the usual case, the Neutral will not ask for further submissions.
There is no provision for preliminary points to be argued separately, such as whether the disputes in the Application are fairly related to the disputes in a notice to intention to commence or whether the Application was in time. All arguments must be included in the Response – procedural, preliminary and substantive – on the assumption that the Neutral will not ask for further material and will decide based on the Application and Response.
Time for delivering a Response runs from the time of the Application, not the time of appointment of the Neutral. This is to avoid delay where there are issues with the appointment. If a Neutral is appointed after the response is delivered, the President will provide the Neutral with the Application and Response together on appointment.
In the highly unlikely situation where a Neutral is not appointed until close to the time for the Evaluation or Determination, the Neutral can seek an extension of time.
A Neutral may dismiss an application without making an Evaluation or Determination if the time available, including any extension, is insufficient because the dispute is too complex or for any other reason. This procedure should be used sparingly and it is better to seek extensions than to dismiss an Application. It might be used where the applicant appears to have taken its time to amass a voluminous or complicated application which the respondent could not be fairly expected to answer in a reasonable time.
Adjudication Procedure – Informal, No Hearing, Documents Only
Neutrals are urged to make an Evaluation or Determination without formality and without a hearing if at all possible. This will usually mean conducting the adjudication by email – receiving documents, corresponding with the parties by email, and rendering the Evaluation or Determination.
A Neutral may hold a conference and call for further submissions if more information is needed but Neutral’s are strongly encouraged to make an Evaluation or Determination on the Application and Response alone. This works well in construction security of payment schemes overseas where hearings are the very rare exception, even for large, complex claims. The purpose of the schemes would be defeated if the processes became mini-trials requiring hearings and cross-examination.
If the Neutral requests further submissions, information or documents from a party, the other party should have an opportunity of being heard on the further material. That does not necessarily mean that on every occasion the other party will have the right to make submissions on the further material. It will depend on the context in which the request for the further material has arisen, the nature of the material, whether it calls for a response and whether the other party has already substantively addressed the issues in the material.
Burden of Proof – Balance of Probabilities
Evaluations and Determinations are made on the balance of probabilities. If the Neutral is not satisfied of a matter to this standard then the alleging party fails to establish its allegation. That may mean allegations in the Application or Response are not proved, with the effect that the Applicant or Respondent respectively may fail.
If all parties consent, a Neutral may adjudicate multiple Applications between the same parties or between different parties.
Content of Evaluations and Determinations
Evaluations and Determinations must be reasoned, in writing, signed and dated, state any amount to be paid, interpret a contract if required, deal with any security under the contract, and be given so as to reach the parties by the required date.
The reasoning must tread a line between being enough to satisfy the parties that their arguments have received proper consideration, but not so much that time and cost are multiplied and the summary nature of the process is defeated. Adjudications do not finally determine the rights of the parties. Reasoning is not required to the standard of a court judgment or an arbitral award. It is not necessary to set out the facts and arguments in extensive detail to show that all have been considered. It is sufficient to mention the decisive or contentious facts and submissions and then deal with them logically and reasonably according to the law.
Time for Result; Extension
The parties must receive the Evaluation or Determination within 14 days after the Neutral receives the Response. This applies in all situations, including where the Neutral is appointed after the Response is delivered and where a second Neutral is appointed. In those two situations, the Neutral will receive the Response at the same time as the Application and time will begin to run.
If the Neutral believes the Evaluation or Determination cannot fairly be delivered in the time allowed under the rules, she may seek an extension of time from the President of the Law Society, stating very briefly why more time is needed. It is expected that the President will extend time reasonably in the majority of cases. The parties do not have a right to be heard on a Neutral’s request for an extension of time.
If a Neutral does not deliver the Evaluation or Determination in the time set by the rules or extended by the President, the process comes to an end on the date the Evaluation or Determination was due and the President, at the request of a party, must appoint another Neutral to complete the process on the documents already delivered by the parties.
If a Determination does not contain the required contents, it is void but the parties have a choice. They may agree to treat it as a valid Determination or an Evaluation; they may agree to request the neutral to correct the Determination so it complies in which case a valid Determination must be delivered within seven days; or if they do not agree, either party can request the President to appoint another Neutral who will appoint and provide the new Neutral with all the material in the first adjudication including the purported Determination.
Parties are jointly liable for the Neutral’s fees unless a costs order is made. The Neutral can require security for her costs and may refuse to deliver the Determination until the costs are paid. No extension is needed and a Determination delivered late because of non-payment is not invalid.
If the Determination is or might be delayed because of non-payment of fees by one party (usually the Respondent), the other party (usually the Applicant) may pay all of the fees. The Neutral can then include in the Determination or in a costs decision an order that the defaulting party pay the paying party the defaulting party’s share of the costs.
The parties bear their own costs of Evaluations and Determinations, and in Determinations the Neutral decides the proportion in which they will bear the Neutral’s fees and the administrative charges.
These features are a summary of the handbook which contains more guidance.
Footnotes [ + ]
|1.||↑||Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed).|
|2.||↑||See Chow Kok Fong, An Overview of the Singapore Security of Payments Regime (“Chow Kok Fong”), at 5 et seq <http://www.intellitrain.biz/scl/downloads/outline%20of%20bldg%20&%20construct%20industry%20security%20of%20payment%20act.pdf> (last accessed 11 December 2018).|
|3.||↑||In chronological order, the Housing Grants, Construction and Regeneration Act 1996 (UK), Building and Construction Industry Security of Payment Act 1999 (NSW), Construction Contracts Act 2002 (NZ), Building and Construction Industry Security of Payment Act 2002 (Vic), Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed), Construction Contracts Act 2004 (The Isle of Man), Building and Construction Industry Payments Act 2004 (Qld), Construction Contracts (Security of Payments) Act 2004 (NT), Building and Construction Industry Security of Payment Act 2009 (SA), Building and Construction Industry Security of Payment Act 2009 (Tas), Building and Construction Industry (Security of Payment) Act 2009 (ACT), Construction Industry Payment and Adjudication Act 2012 (Malaysia).|
|4.||↑||Random House, 2012.|
|5.||↑||Naturally, these figures are very broad approximations and will differ among companies and industries.|
|6.||↑||Chow Kok Fong at 18.|
|7.||↑||See, for example, Brodyn Pty Ltd v Davenport (2004) 61 NSWLR 421.|
|8.||↑||Partner, Dentons Rodyk, Singapore.|
|9.||↑||Partner, Allen & Gledhill, Singapore.|
|10.||↑||Members of the working group include Cameron Ford, Paul Sandosham, Sujata Bhargavan and Emmanuel Chua.|
|11.||↑||The agreement means the underlying contract or the agreement to submit to LSNEDS where there is no contract.|
|12.||↑||Most security of payment adjudications in Australia are completed without a hearing, even in the large complex construction cases they attract.|
|13.||↑||W Y Steel Construction Pte Ltd v Osko Pte Ltd (2013) SGCA 32 at (41); Brodyn Pty Limited t/as Time Cost and Quality v Philip Davenport and Dasein Constructions Pty Limited (2004) 61 NSWLR 421 at (57).|
|14.||↑||Robert McDougall J, Natural Justice and the Building and Construction Industry Security for Payments Act 1999 (NSW) (2014) NSWJSchol 2 at (4) <http://www.austlii.edu.au/au/journals/NSWJSchol/2014/25.pdf> (last accessed 11 December 2018).|