Choosing dispute resolution methods in a financial crisis

The social effects of the financial crisis are numerous. A change in the economic situation necessitates corresponding changes in the way legal services are delivered.

The dispute discussed below shows that, when engaged in dispute resolution, a lawyer must not only fulfil the traditional legal role, but must also analyse and reconcile social, economic and political factors in order to adapt to changing circumstances and best protect the rights and interests of the parties concerned. In this way, lawyers will demonstrate their value in times of crisis.

On 31 May 2007 a property development company and a contractor (a construction company) entered into a construction contract in relation to a property development project. The parties set out in detail in a contract the construction period, time extensions, responsibility for remedies resulting from delays, methods of payment, other breaches and consequential remedies, and methods of settling disputes.

In March 2009 the project was approaching completion. However, the contractor made various excuses to delay the process of certifying completion, resulting in a failure to complete the project on time. As the date when the developer had to deliver the completed property to its buyer was fast approaching, the developer found itself facing the legal risk of a delayed handover. Believing it was in a strong contractual position, the developer decided to file a claim, and engaged lawyers to represent it in the case.

Proceedings launched

The lawyers representing the developer immediately started proceedings, and applied for an asset freezing order over the contractor’s assets. The contractor filed a counter-claim, and also applied for an asset freezing order over the developer’s assets. The relationship between the parties worsened. After some investigation, the lawyers discovered that most of the construction monies paid by the developer to the contractor had not been used by the contractor in the construction, but had been used to make other investments, which had then suffered losses in the financial crisis. Furthermore, the asset freezing order imposed by the developer on the contractor had resulted in cash flow problems for the contractor, which then used this as an excuse to withhold wages from its staff. This in turn triggered a union-led action by the contractor’s staff to claim for lost wages.

Construction project disputes involving large sums of money can stretch for one or two years, or even longer, from the filing of the initial claim to the final judgment. During that time, jurisdiction has to be determined, the quality of the works has to be verified, construction costs have to be checked and losses have to be assessed. As the date for final delivery approached, the possibility of the buyer suing the devloper for losses due to the delayed handover increased. The contractor was also facing financial difficulties resulting from the possibility of having a court judgment enforced against it while its assets were frozen.

Alternative found

Looking at the detailed circumstances of the case, when the dispute first started, small projects (such as landscaping, external water supply and the installation of electrical systems) which had been subcontracted out by the developer had not been completed, which was one of the reasons why the whole project was delayed. This could have become a major argument for the contractor to refuse to pay compensation.

A further difficulty for the developer was that if it tried also to claim for losses incurred as a result of having to compensate the buyer for late delivery of the property, the court may have rejected the claim on the basis that at the time the contract was made, the contractor could not, or could not reasonably have been expected to, have foreseen such a loss. Therefore, by insisting on using litigation to resolve the dispute, the final result could have been that both parties would lose out. The developer finally accepted the lawyers’ advice and opted for mediation to resolve the dispute.

As the dispute had already attracted a lot of attention from the government, the lawyers suggested that the best way forward would be to involve both the relevant government departments and the court, which could use their standing and influence to encourage the parties to settle. This could then be followed by the court issuing a settlement order which could be enforced, so that both the dispute and its social consequences could be resolved.

After much coordination by the lawyers, the relevant government departments and the court organized a mediation meeting between the developer, the contractor, the buyer, and representatives of the contractor’s staff.

After many rounds of negotiation, all parties arrived at an understanding and resolution, with the court drawing up a settlement order between the developer and the contractor. Not only did the developer finalize the certification process for the completion of the building works on time, enabling it to deliver the completed property to the buyer as agreed, it also gained in public stature due to its active involvement in the government’s scheme to resolve the dispute. At the same time, as the developer paid the remaining construction monies to the contractor, the financial pressure on the contractor eased, enabling it to pay the outstanding wages to its staff.

On the surface, this was a piece of litigation which the developer looked bound to win. However, it was ultimately resolved by mediation. The lawyers’ suggestion of mediation resulted in the best protection of the developer’s interests.

Open-minded approach

Resolving disputes is not merely about getting a piece of paper showing a favorable judgment. Winning a case does not always mean that the interests of the winner are protected. In these unique times of financial crisis, dispute resolution often necessitates the consideration of many other factors, such as political and economic positions, whose impact on the case can often be crucial. Therefore, lawyers must consider the specific practicalities in each case, and analyse the interests of all parties concerned. This will enable the lawyers to assess each party’s chances of success, so as to advise on the best ways to resolve the dispute.

Ma Jiangtao is senior partner of Dacheng Law Offices in Beijing and head of the dispute resolution department. His main areas of practice are real estate, corporate law, administrative law, investment, dispute resolution and compliance.