Sweeping Changes to Government Contracts: Part 1 The Background

SCC 59 and ArchSD’s Dispute Resolution Advisor (DRAd) System Handbook (August 2019)

Sweeping Changes to Government Contracts: Part 1 The Background

Sweeping Changes to Government Contracts: Part 1 The Background 1440 810 Cocking & Co

Introduction

The purpose of this article is to draw your attention to Hong Kong Government’s SCC 59 which deletes the time honoured dispute resolution process set out in GCC 86 and replaces it with what is described as the Dispute Resolution Advisor (DRAd) System (“DRAd System”). In fact, the changes go way beyond the role of the DRAd and have far reaching implications for dispute resolution in general under Government Contracts by using final and binding short form arbitration as opposed to adjudication. The adoption of the System is not in itself said to be mandatory, but it is to be broadly adopted across the Works Departments under the Development Bureau, namely ArchSD, CEDD, DSD, EMSD, WSD, and other departments such as HyD, SWD and EPD are encouraged to follow suit. SCC 59 is now commonly starting to appear in new ArchSD tenders.

The process under SCC 59 is far more elaborate than GCC 86 and occupies some 18 pages. SCC 59 is only the final part of an entire DRAd System set out in a Dispute Resolution Advisor (DRAd) System Handbook (“Handbook”). This article will refer to the 118-page Handbook promulgated by the ArchSD in August 2019 which may be accessed from the ArchSD website. The Handbook contains a standard SCC59 in Appendix 5.1 which may be adapted for use.

The stated aims of the DRAd System include:

  • Fostering co-operation between the Employer, the Contractor, Specialist Sub-contractors and Nominated Sub-contractors;
  • Minimising the volume of claims, disputes and delay; and
  • Implementing a cost-effective and expeditious resolution of disputes that arise.

However, while it is early days, the introduction of SCC 59 appears likely to be problematic and may well fall short of the stated aims of the DRAd System.

Brief History

The Construction Industry Council (“CIC”) published Guidelines in September 2010 to discuss the different modes and timing of dispute resolution mechanisms in the construction industry. The aim was to avoid and resolve (if avoidance fails) disputes as soon as practicable. The undesirability of delay in resolving disputes at the post-completion stage was discussed. The introduction of some immediate dispute resolution mechanisms for the parties to use during the currency of the works was recommended.

In the Guidelines, the use of the DRAd was recommended to resolve arguments in the first instance. If the arguments turned into disputes, the parties should be free to choose any one of five dispute resolution methods. They included (1) Mediation, (2) Adjudication, (3) Independent Expert Certifier Review, (4) Expert Determination and (5) Short Form Arbitration.

Subsequently, a Task Force was set up to review these mechanisms.

In August 2015, the CIC published “Reference Materials for Application of Dispute Resolution in Construction Contracts” summarising the discussions and recommendations of the Task Force.

The terms of reference of the Task Force included:

  1. To prepare model dispute resolution clauses for incorporation into commonly used forms of construction contracts.
  2. In preparing for the model dispute resolution clauses, consideration should be given to the types of dispute resolution mechanisms, the desirability to incorporate any institutional dispute resolution rules and procedures into the model dispute resolution clauses, whether any guideline on the use of the model dispute resolution clauses should be prepared and how the model dispute resolution clauses can be integrated with or incorporated into commonly used forms of construction contracts.
  3. To consult the relevant stakeholders on the draft model dispute resolution clauses.
  4. To make recommendations on the promulgation of the final model documents.

The Reference Materials can be downloaded from the CIC website.

According to the Reference Materials, the starting point was to be the DRAd. If disputes could not be resolved amicably, then the parties could agree to choose one of the five mechanisms to resolve the disputes. If no agreement was reached as to one of these, then by default, adjudication would be adopted. Depending on the mechanism to be adopted, some could render a final and binding result thereby resolving the dispute conclusively, whilst others would provide a binding but interim decision which could be challenged and revised by post-completion arbitration. The pros and cons, practical difficulties and other concerns were debated and considered at length and the relevant factors were balanced against one another by the Task Force when coming to the overall scheme.

The Task Force prepared a new set of Special Conditions of Contract, with reference to the Special Conditions of Contract for Adjudication prepared by Development Bureau for the use in public works contracts and a whole new set of Rules for each of the dispute resolution methods.

The Task Force proposed that the post-contract completion arbitration provision should be kept in place.

Significant Differences

Although SCC 59 includes the DRAd as the starting point, it differs significantly from the Special Conditions of Contract that were prepared by the Task Force.

SCC 59 has cut out the Supervising Officer’s (“SO’s”) Decision stage, now a Notice of Dispute must be issued within 28 days of the disputed decision, instruction, order, direction or certificate and the parties must attempt to resolve their disagreement without the DRAd in the first instance. It is only after the Notice of Dispute has been issued that the DRAd can participate. There are then only 14 days for him to help the parties find a settlement before he is required to prepare a Report within 3 days.

SCC 59 provides that in the absence of a settlement or agreement to adopt another dispute resolution method recommended by the DRAd, the default mechanism is Short Form Arbitration which is final and binding. This is completely different from the recommendation of the Task Force. The Special Conditions of Contract prepared by the Task Force provide that if the parties are not able to agree a dispute resolution procedure within 28 days, the dispute shall be resolved by Adjudication (which can be revised by post-completion arbitration).

Another significant difference between the recommendation of the Task Force and SCC 59 is that it was a feature of the DRAd’s role that he had no power to make any binding decision. His function was purely facilitative, encouraging parties to jointly work towards a common goal of completing the works in accordance with the contract. However, SCC 59 gives certain power to the DRAd to make various decisions. For example, the DRAd has the power to decide whether a Nominated Sub-Contractor / Nominated Supplier is a party to the Short Form Arbitration (see paragraph 5 of the Short Form Arbitration Rules).

Conclusion

SCC 59 deviates significantly from the recommendations of the Task Force and the feedback from stakeholders such as HKIS, HKIA, HKCA, HKFEMC, MTR, Housing Department, ArchSD, HyD. In particular, there were serious concerns expressed as to which dispute resolution mechanism should be chosen as the default mechanism. Most stakeholders preferred Adjudication. While SCC 59 still allows the DRAd to suggest another dispute resolution method, this is different from expressly providing for the other options and incorporating Rules for each. It is unclear why Short Form Arbitration has finally been preferred as the default mechanism.

One of the concerns of the stakeholders was whether the DRAd mechanism should be applied to the Subcontractors’ level. SCC 59 attempts to address this issue, but imposes the entire DRAd System on Nominated Sub-Contractors and Nominated Suppliers.

SCC 59 deviates significantly from the recommendations of the model dispute resolution clause prepared by the Task Force. It is not known what plans Government / CIC have to review or monitor the use of SCC 59 or set up another Task Force.

In Part 2, we consider the main provisions of the new DRAd System in detail.

WWL Thought Leaders Hong Kong 2020 | Ian Cocking
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Sweeping Changes to Government Contracts: Part 2 The New DRAd System
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