Determinative v Non-Determinative Processes and how they affect your Professional Indemnity (PI) Insurance
It is not uncommon for consultants to experience a dispute at some point in their career. Projects are increasingly complicated making the resulting disputes more complex too, but, lengthy and expensive litigation is no longer the default method used to resolve all disputes.
Alternative Dispute Resolution (ADR) are a series of processes and methods used to resolve professional disputes which are alternative to litigation.
Since the early 1980s, Alternative Dispute Resolution (ADR) has been on the rise in Australia, both in frequency and variety. This has been a critical aspect of improving access to justice and reducing the time and cost of resolving disputes as they become increasingly complex.
Even though a variety of ADR methods exist, a one size fits all approach is often applied despite varying disputes.
ADR processes need to be considered and implemented on a case by case basis, bearing in mind the type, nature and quantum, or value, of a dispute as well as the percentage of liability you may have.
Another thing to consider is the availability of resources, however this should be weighed up against the quantum of a dispute.
In this article we explore the different methods of ADR available for consultants with PI insurance, and consider:
- Different types of ADR;
- Determinative v. Non-Determinative Processes;
- What happens when you have a dispute; and,
- How determinative processes can conflict with obligations you owe to your insurer under your professional indemnity policy.
The Rise of ADR
Alternative Dispute Resolution, commonly referred to as ADR, gained popularity throughout the last four decades, as litigants caught up in long and expensive litigation, increasingly experienced dissatisfaction with the existing legal framework available for resolving disputes.
Rising Cost of Litigation a Driving Force for ADR
With inflation and the state of the economy, including the effects of the pandemic, the standard cost of litigation is now estimated to be $10,000 AUD a day for each party. This includes paying for a solicitor, a barrister and any court costs.
Further to this, disputes have become more complex as consultants embark on bigger and more complicated projects which come with increased liability. Access to litigation, once the only means of resolving conflict, has become a privilege, and has now further evolved to a last resort. An estimated 80% to 90% of disputes are now resolved before litigation.
Litigation is not only financially taxing but stressful and time consuming. With courts constantly at capacity, ADR can sometimes deliver faster and cheaper outcomes.
ADR has become an all but compulsory step in the dispute resolution process. It is unheard of to bring an action in court without having attempted any form of ADR first. In fact, many courts and tribunals have in-built ADR processes such as mediation meetings. There are also many new types of civil processes and boards, such as DBDRV in Victoria, which make it a requirement to attempt mediation before you are able to apply to have a dispute heard in a court or tribunal.
Types of ADR processes available in Australia
There are many varieties of ADR, however, the processes most relevant and frequently used by consultants are:
- Expert Determination
There are also far less commonly used “Dispute Resolution Boards” (DRBs) which are predominantly adopted for very large projects, usually upwards of $100 million in value. Lately there has been some discussion as to whether Australia should embrace DRBs and make this a mainstream method of ADR.
Determinative v Non Determinative
ADR processes are split into determinative and non determinative processes. Some types of ADR work by having an independent decision maker impose a binding determination on the parties (Determinative), whereas others are more of a “by agreement” approach where a facilitator helps the parties try to reach a mutually agreed outcome (Non determinative).
Determinative forms of ADR, particularly arbitration and expert determination, can sometimes deliver faster and cheaper results, however, often conflict with obligations you owe to your insurer under your professional indemnity policy. This is because professional indemnity policies provide that the insurer has the right to manage the defence of claims notified under the policy, and pre-emptively agreeing to a specific form of determinative dispute resolution prevents this. This is especially true when the dispute involves the errors of other parties, such as a sub-consultant you may have engaged.
If you have engaged others as your subconsultants and the claim is caused by the negligence of one or more of the subconsultants, your insurer is unable to join them as parties to an arbitration as they are not a party to the agreement you have with your client. Your insurer is therefore required to pay the costs of the arbitration as well as the costs of litigation when later pursuing the negligent subconsultants.
Further, if the subconsultants have been negligent, your insurer is forced to defend the indefensible in the arbitration proceedings and when recovery proceedings against the subconsultants are pursued, the subconsultants are likely to allege that you failed to sufficiently defend their position.
In a worst-case scenario, although unlikely, you may be denied cover, so it is important to check that the terms of your consultancy agreements don’t force you into any determinative processes, the biggest culprits being arbitration and expert determination.
Consultancy agreements often set out a specific ADR procedure which must be adhered to. Always have the ADR clauses in your consultancy agreements reviewed to make sure that they do not force you into any determinative ADR processes. You should also not agree to be bound by the terms of any head contracts which could also contain unfavourable ADR clauses.
Handling Professional Indemnity Claims and Disputes
If you have made an error or omission in your professional services or are accused of being negligent by your client, you should immediately notify your PI insurer, who will assign a claims manager to handle the dispute on your behalf. The claims manager will take over management of the claim and will assist you in attempting to resolve the dispute by the procedure set out in your consultancy agreement, i.e. with negotiation, however this may not always be possible as you may be immediately brought into litigation.
If you have any exposure to the claim being made against you, the claims manager will consider all the facts and circumstances of the claim to determine whether the claim is covered by the policy. This includes whether any exclusions in your policy have been triggered.
Assuming the insurer agrees that the claim is covered by the policy, your claims manager will consider your liability exposure and with your approval will attempt to negotiate a resolution of the claim. If the claims manager considers that you have no exposure, the claims manager will assist you in defending the claim being made against you.
The usual process involved when a claim arises is:
- You receive a demand from another party;
- You notify the claims department;
- If you have agreed to arbitration in your consultancy agreement, this must be adhered to;
- If not, most often than not, proceedings in a court or tribunal will be commenced which will involve a court/ tribunal mandated ADR process, usually mediation or in some jurisdictions this is known as a compulsory conference.
- Depending on what stage the dispute is up to, your claims manager, with your approval, will seek to settle the claim at the mediation or compulsory conference.
Resolving disputes with ADR
The most prevalent form of ADR in construction disputes with consultants is mediation. Insurers prefer to resolve disputes with mediation because it is non-determinative.
There are different types of ADR which are commonly used in construction disputes. Your insurer will consider the value of your claim, as well as your proportion of liability for the overall claim when deciding which method to use to resolve the dispute.
If you have a low value dispute, then your insurer is likely to attempt a cheaper medium such as negotiation, before proceeding to mediation, in an attempt to avoid incurring substantial costs. In cases of a smaller value dispute, if your insurer believes you are at risk of being found liable, the insurer is likely to attempt to settle, with your approval, on commercial terms as quickly as possible to avoid incurring legal fees.
However when the quantum of the claim is higher, it requires careful consideration. If the dispute is of greater value and more complex, it will be more costly to defend. It is for this reason that ADR is worth exploring.
ADR in low, medium and high quantum disputes
It is appropriate to assign the simplest and most cost effective form of ADR to the lowest quantum dispute, and likewise, a more sophisticated form to a large quantum, and likely more complex dispute, which also means greater fees. This also depends on your liability exposure.
You should first follow the ADR procedure set out in your consultancy agreement, however once this has been exhausted, and if the dispute is not resolved, your claims manager will take over.
The following two examples demonstrate how both the value of a dispute, considered together with the percentage of overall exposure the consultant has in a dispute, determines what method of ADR is first attempted to resolve a dispute.
Example 1 – Low Quantum Dispute
Incorrect material for window frame| $2,000 paid in full and final settlement via Negotiation
Liability Exposure: 10%
An architect/ building designer was engaged on a small commercial project. They specified a colour of paint (black) to be used on external windows, but the specifications were left in the hands of a sub-contractor who had an extensive knowledge on brands and types of paints suitable for certain materials and conditions. Unfortunately, as this was a small project there were not comprehensive terms and conditions agreed upon and it was therefore unclear where the responsibility fell.
A few weeks after the project was finalised, the paint on the windows started to leak off and pool, after some heavy rainfall. This damaged some other external components of the building.
It was found that the type of paint used on the aluminium window frames was not suitable for external use.
It was alleged that the building designer should have specified an exact paint product that would be “suitable for the intended purpose”.
The architect successfully established that this was not in their scope of services, and that they had not been negligent in any way.
There was some pushback, so to avoid incurring legal fees, a commercial offer of $2,000 (below excess) was made which would be part of the cost of cleaning the affected materials.
This offer was accepted, and the remainder of the cost and liability fell to the other parties involved, including the window frame manufacturer.
Example 2 – Medium to High Quantum Dispute
Defective Roof | $175,000 paid
Liability exposure: 40%
The owners of a newly built residential complex noticed roof overhangs bending downwards and undertook a structural restoration. Alleging that the original construction and design were faulty, the owners sued the engineer, the builder and the architect.
The potential exposure for the architect was up to 40% of $720,000 in damages.
The parties went to mediation twice, and on the second attempt were able to reach a resolution.
The total claim was settled for $600,000.
The architect paid $175,000
The engineer paid $125,000
The balance was paid by the builder.
You can find more of these examples in our Alternative Dispute Resolution Webinar.
Lessons from ADR in the Professional Indemnity Context
In ADR, there are no “winners” or “losers”. In the case of non-determinative ADR, it is a bargaining process. Any party who is determined to “win” is wasting the other parties’ time. You should always go into any form of ADR with an open mind and genuinely attempt to resolve the dispute. The longer it takes to resolve a dispute, the more it will cost. Your insurer will usually cover your legal fees, if you have a costs exclusive excess/deductible. If you have a costs inclusive excess/deductible, you will be responsible for the legal fees up to the amount of your excess/deductible.
Maintain good relationships from the start
If a dispute arises, other parties are less likely to be adversarial if you have established a good working relationship and have been respectful of one another during the project.
In some cases, disputes are exacerbated by feelings of anger and frustration, and can be very emotionally challenging. This state of mind can lead to a long, drawn- out dispute and it can also become financially taxing.
Good working relationships mean that even when something goes wrong, the foundations for resolution are already there. It is in the best interest of both (or all) parties to cordially resolve the dispute and mitigate any loss as quickly and efficiently as possible.
ADR, unlike litigation, can help parties to a dispute preserve a long-term relationship due in part to the emphasis on finding a mutually agreeable resolution. ADR is a more flexible process than litigation – where courts decide remedies, the parties to a dispute in ADR can come to an agreement that is considered otherwise unusual in a standard legal setting.
ADR Clauses in your Consultancy Agreements
Most consultancy agreements already have an ADR clause. If you choose to specify a particular kind of ADR process in your contract, be sure to settle on one that suits your business and does not trigger any exclusions in your professional indemnity insurance policy – no one method will suit everyone.
If you are provided with an agreement which already sets out a method, then if you place your professional indemnity insurance through our sister business Planned Cover, you may be able to have your agreement reviewed by one of our risk managers to avoid being bound by any determinative processes, most frequently expert determination and arbitration.
It is best to avoid disputes where possible, which includes maintaining a good working relationship with all other parties on a project, clear communication and records and assisting the principal to mitigate any loss, at the coalface, rather than letting it escalate.
If you do have a dispute that is covered by your professional indemnity insurance, your insurer will take over management of the dispute and decide how best to approach it depending on the nature of the claim, and the willingness of the other parties to negotiate a resolution.
Expert determination and arbitration clauses in your agreements conflict with obligations you owe to your professional indemnity insurer, so you should only agree to these determinative processes in your consultancy agreement, if they are to be pursued “with the agreement of all parties” which allows you the freedom to decide whether to pursue them at a later stage and with the agreement of your insurer.
For more information, examples and an in depth look at ADR for consultants, watch our Alternative Dispute Resolution webinar. We presented this webinar on 8 February and the recording is now available for purchase through our online CPD library.
This article is only general advice in respect of risk management. It is not tailored to your individual needs or those of your business, nor is it intended to be relied upon as legal or insurance advice. For such assistance you should approach your legal and/or insurance advisors.