The causes leading to disputes in the construction sector

Construction disputes are varied. With more than 25 years of experience in dispute resolution in Arbitration and Court, the author finds that construction disputes are mainly concentrated in 5 main causes:

1. Breach of payment terms – there are 4 main reasons: (1) Unclear agreements and terms on payment; (2) The developer deliberately stagnates or becomes insolvent; (3) The Subcontractor does not receive payment from the Main Contractor because of the back to back payment provision; (4) The parties do not keep books, payment records are incomplete, the content of meetings is not recorded.

2. Delay and extension of construction works – there are 5 main reasons: (1) Delay of one or several other related packages/contracts in the construction project: large construction projects often have many contractors involved at different stages. If Contractor delays in the performance of work will entail delays by other Contractors; (2) The investor and the contractors in the project do not coordinate and cooperate: this situation often occurs for projects with many items, e.g. rough masonry, engineering, foundations,... while the Owner appoints no “Chief” Contractor; (3) There is interference or failure to comply with the procedures of a government agency: for example, a contractor who violates its obligations and is investigated by a State agency will suspend or delay the construction of the bidding package; (4) Force majeure situations: some current projects due to epidemic reasons such as Covid or rain, wind, and storm outbreaks have delayed progress. There is still much controversy on whether Covid is a force majeure; (5) The investor violates the provisions of the contract: delay in handing over the premises, delay in confirmation/approval, etc.

3. Quality and workload – there are 4 reasons as follow: The main contractor and/or subcontractors are incompetent and experienced: in many cases, the contractor has not complied with technical standards leading to the delay of project implementation,  arising many accompanying incidents; (2) The contractor fails to construct the design drawings in accordance with the contract; (3) The contractor incurs additional workload: in case the Parties do not agree or many situations arise that must be handled promptly and there is not enough time for the Parties to agree to settle, it is also a matter prone to disputes; (4) Other causes: natural disasters, enemy disasters, other objective events affecting the quality of works.

4. Guarantees and representations: A common situation in practice is that banks refuse to pay contract performance guarantees, advances or guarantees in general. The reason may stem from the fact that the Parties do not have a clear agreement on the settlement when there are risks in the method of guarantee: conditional guarantee, unconditional guarantee; irrevocable conditional guarantee. In the case of conditional guarantees, the bank often seeks to refuse non-payment. In the case of irrevocable unconditional guarantees, many banks, especially banks in Vietnam, often try to delay non-payment or refuse payment because banks grant substandard guarantees, do not have necessary security measures, so if payment is made, there will be risks. This is a sad reality that should not happen out because it will affect the reputation of banks.

5. Slippage and price adjustment: The causes of disputes related to slippage are very common, especially related to works with variable prices such as engineering, labor rates, slippage in raw material prices, state-funded transport works, etc  ODA. The Government also has regulations to adjust prices because State works often last a long time, leading to price increases and cost increases. However, the main reason is that government documents are often incompatible with local government documents. For example, the price index changes often depending on the economic circumstances of each locality, depending on the circumstances of the dispute. In addition, in many cases the agreement of the Parties is also unclear, for example, works using ODA capital of Main Contractors and Subcontractors are often unclear, while one signatory is the State. The principle of back armor is often difficult to apply in case of slippage

Usually, disputes are not only related to one issue but will cover a variety of mentioned contents: delay progress, acceptance of works, payment schedule, quality of works, bank guarantee,... Example No. 1 is a dispute that the author participated in at ICC lasting 3 years with a dispute value of more than 60 million USD related to an EPE (Engineering – Procurement – Erection) general contractor contract between a Japanese international contractor and a large enterprise in Vietnam. the Parties accuse each other of breach, delay in handing over the contract and a variety of other reasons. Example No. 2 is a dispute at VIAC regarding the delay of the Main Contractor in approving design drawings; disputes related to the quality of work: The subcontractor failed to properly design the revised master plan; or a dispute related to acceptance of payment: The Main Contractor delays payment because he believes that the Subcontractor is not eligible for payment because the Main Contractor has not yet been paid by the Owner, in compliance with the payment clause.

In short, the causes of disputes are many, and the situations leading to disputes are very diverse; there are lawsuits where the disputed value is up to 200 million USD, but there are also cases of only 200,000 USD. With the experience of the past 25 years, the author finds it extremely necessary to prepare to prevent disputes during construction because no construction project is free from conflicts. Commercial mediation is a mechanism that complements other dispute-resolution means. In a contract, the Parties usually agree to resolve the dispute at Arbitration or Court. However, there are many cases where the Parties actively choose the mediation method, even if the Contract does not stipulate that mediation is mandatory before bringing the dispute to the procedural authority.

Some notes for dispute resolution in construction contract general and commercial mediation in particular

Choice of dispute resolution mechanism:

In fact, in the world, there are many different dispute settlement mechanisms depending on national legal policies and agreements between countries. Depending on the nature of the project, the circumstances of the investor, and the project, the Parties may choose to use one or more different dispute resolution methods. In particular, settlement through the Dispute Arbitration Board (DAB), i.e. the principle of resolution by recommendation. The second model is dispute resolution through supervisory consultation. The third mechanism is settlement through the Dispute Settlement Board (DRB) – which has the power to make decisions effective and enforceable compulsory with the Parties. However, this mechanism in Vietnam is not clearly regulated by law. The principle along with the third mechanism is expert judgment. The fourth is the mediation mechanism. Basically, these mechanisms in Vietnam are rarely used, although it is quite common and often used in other countries. In Vietnam, since 2017, mediation has become an official method recognized by law and has started to come to life, becoming a popular method of dispute resolution.

Preparation for dispute resolution:

In fact, enterprises and State agencies often think about settling disputes when disputes have arisen without spending much time on risk management preparation right from the process of drafting contracts to when disputes arise. A very important factor that the Parties should consider is resources, including financial and human resources, to be able to prevent and respond to such eventualities. In addition, legal issues should also be carefully considered. Many businesses today, when a dispute occurs, do not detect what the dispute is, do not identify the source of the applicable law, are vague about the source of the applicable law, and do not pay attention to the statute of limitations. With regard to the lawsuit, one issue that must not be ignored is the preparation of evidence. Many businesses are still neglected on preparing documents. As a result, documents are lost, not stored and evidence to protect their rights is very weak. Therefore, enterprises need to prepare sufficient evidences, witnesses, documents and testimonies to be ready to respond if a dispute occurs.

Some notes when choosing a mediation method

Currently, Vietnam has many regulations related to mediation: mediation in court and non-court proceedings, commercial mediation and construction mediation. Currently, commercial mediation has been officially recognized in Decree 22/2017/ND-CP, there are also provisions on mediation in Chapter 33 of the Civil Procedure Code, the Law on Construction, and the Law on Commercial Arbitration. In the author's view, Vietnam will also soon become a party to the Singapore Convention on Mediation, this is a convention on the recognition and enforcement of mediation agreements in many countries around the world. This will promote the integration process of Vietnam's economy. Another note when choosing to mediate in Court is that disputes are prohibited from mediation by law. However, this issue has not been clearly stipulated, for claims for compensation causing damage to State property will be prohibited from mediation. However, whether transactions arising with large commercial value are applicable, and what is causing damage to State property, the law is not clear. In addition, cases arising from transactions that violate the prohibitions of the law or are contrary to social morals are also not subject to mediation. In terms of mediation, mediation takes many different forms, inside and outside of proceedings.

In addition, we should also use model mediation clauses, agreements before or after disputes arise. Whether the mediation method agreed upon by the Parties in the contract is considered a pre-proceeding procedure before initiating a lawsuit to Arbitration or the Court is also a point to note, depending on each specific situation and case, the dispute settlement agency will make a decision. One case to note is that when the Parties agree on a dispute settlement clause that includes mediation, arbitration and court, what is the order of application of these measures, whether it is necessary to apply all three measures. Currently, the Vietnam Mediation Center (VMC) is providing guidance on interconnection of dispute procedures to support businesses to ensure the highest efficiency. Regarding the statute of limitations, the mediation period is now counted towards the statute of limitations, except in the case of Court. Therefore, the provision of guidance on the interconnection between mediation and arbitration is necessary so that enterprises can effectively take advantage of the mediation method without losing the statute of limitations for initiating lawsuits. Therefore, in the process of conducting commercial mediation, the Parties should also pay attention to the issue of the statute of limitations to ensure. 

The choice of mediation organization is also a matter of concern. Currently, there are two forms of commercial mediation: case mediation and statute mediation (mediation according to the rules of commercial mediation organizations). One question is whether for construction contract disputes with foreign elements, should overseas mediation organizations and centers be selected for mediation? Currently, the issue of recognition and enforcement of mediation results abroad is also a very complex issue. If implemented in Viet Nam, the Parties shall take note of international conventions to which Viet Nam is a party. In addition, before proceeding with mediation, the Parties should thoroughly research the mediator, whether to choose one mediator or multiple mediators, and which mediation language is most appropriate for the Parties to approach.