Using Alternative Dispute Resolution for Managing Disputes in Joint Venture Construction Projects in Malaysia 1 By Ainul Jaria Maidin "Persuade Your Neighbors To Compromise, Whenever You Can. Point Out To Them How The Nominal Winner Is Often A Real Loser - In Fees, Expenses, And Waste of Time." Abraham Lincoln, American President I. Introduction Construction industry is regarded as an important industry not only because of its constantly evolving size but also because of its contribution to the national economy in terms of gross domestic product and large capital investment. 2 Joint venture projects are a common feature of construction industry and it would be most useful in times of global economic downturn where parties tend to embark on joint venture projects to lessen the risks involved in their undertakings in the construction industry. Most joint ventures arise from express written agreements, but could also be inferred from the nature of the parties‟ conduct of the nature of the venture. As the rights and duties of parties to a joint venture are typically governed by the same principal that govern 'partnerships', each party to the joint venture has the power and ability to bind the other party personally to unlimited liability to third parties, unless of course, the joint venture has been incorporated as a separate business entity. Alternative dispute resolution is becoming a common recourse in the construction industry in the modern and global economy since the last decade. It is not the type of dispute but the different methods for dispute resolution is the focal point. Parties in the construction industry have always been worried about taking their disputes to the court of law because of the formalities, expenses, time, complexity, confrontational and delay in reaching a decision. These factors are the result of the adversarial system of justice applied in the courts. In the adversarial system, parties introduce each piece of evidence (whether oral, documentary or real), argument or point against each other to prove their case on a balance of probabilities before a judge, who pronounces a decision that usually leads to a win-lose decision. A method of adjudication in which active and unhindered parties, usually through their lawyers, contest with each other and present support in favor of their respective positions, usually through the examination and cross- examination of witnesses and the presentation of other evidence, to a neutral and independent decision-maker. In criminal cases, this is often called the accusatorial 1 Paper presented at the Fifth International Conference on Multi-National Joint Ventures for Construction Works, “Joint Venture Strategies to Meet the Construction Business Development Challenges of Global Economic Meltdown”, Kuala-Lumpur, Malaysia, October 21-22, 2009, International Islamic University Malaysia and Kyoto University In collaboration with GCOE Program of Kyoto University (Global Center for Education and Research on Human Security Engineering for Asian Megacities). 2 Hillebrandt, P. M. (1974). Economic Theory and the Construction Industry: The Macmillan Press Ltd.
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Using Alternative Dispute Resolution for Managing Disputes
in Joint Venture Construction Projects in Malaysia1
By
Ainul Jaria Maidin
"Persuade Your Neighbors To Compromise, Whenever You Can. Point Out To Them
How The Nominal Winner Is Often A Real Loser - In Fees, Expenses, And Waste of
Time."
Abraham Lincoln, American President
I. Introduction
Construction industry is regarded as an important industry not only because of its
constantly evolving size but also because of its contribution to the national economy in
terms of gross domestic product and large capital investment.2 Joint venture projects are a
common feature of construction industry and it would be most useful in times of global
economic downturn where parties tend to embark on joint venture projects to lessen the
risks involved in their undertakings in the construction industry. Most joint ventures arise
from express written agreements, but could also be inferred from the nature of the
parties‟ conduct of the nature of the venture. As the rights and duties of parties to a joint
venture are typically governed by the same principal that govern 'partnerships', each party
to the joint venture has the power and ability to bind the other party personally to
unlimited liability to third parties, unless of course, the joint venture has been
incorporated as a separate business entity.
Alternative dispute resolution is becoming a common recourse in the construction
industry in the modern and global economy since the last decade. It is not the type of
dispute but the different methods for dispute resolution is the focal point. Parties in the
construction industry have always been worried about taking their disputes to the court of
law because of the formalities, expenses, time, complexity, confrontational and delay in
reaching a decision. These factors are the result of the adversarial system of justice
applied in the courts. In the adversarial system, parties introduce each piece of evidence
(whether oral, documentary or real), argument or point against each other to prove their
case on a balance of probabilities before a judge, who pronounces a decision that usually
leads to a win-lose decision. A method of adjudication in which active and unhindered
parties, usually through their lawyers, contest with each other and present support in
favor of their respective positions, usually through the examination and cross-
examination of witnesses and the presentation of other evidence, to a neutral and
independent decision-maker. In criminal cases, this is often called the accusatorial
1 Paper presented at the Fifth International Conference on Multi-National Joint Ventures for Construction
Works, “Joint Venture Strategies to Meet the Construction Business Development Challenges of Global
Economic Meltdown”, Kuala-Lumpur, Malaysia, October 21-22, 2009, International Islamic University
Malaysia and Kyoto University In collaboration with GCOE Program of Kyoto University (Global Center
for Education and Research on Human Security Engineering for Asian Megacities). 2 Hillebrandt, P. M. (1974). Economic Theory and the Construction Industry: The Macmillan Press Ltd.
system.3 The theory behind this underlying philosophy of adversarial process is that the
truth of a dispute will surface and thereby justice will be done to compensate the
aggrieved person. The adversarial process is also used to buy time and more often can
bring an unfavourable settlement on the financially weaker party as this process must
determine the winning and losing party.4
In Newacres Sdn Bhd v Sri Alam Sdn Bhd5 and Hartela Contractors Ltd v Hartecon JV
Sdn Bhd & Anor.,6 Gopal Sri Ram JCA found that in view of the mutual trust and
confidence between parties to a joint venture essential for a proper working of the
relationship, where there was reliance by one party upon the skill or expertise of the
other, there was a duty upon the other to use his best endeavours to ensure the success of
the venture. Equity would imply such an obligation in the absence of an express term in
the joint venture agreement.7 Resorting to the use of equity by the courts is often very
much within the discretionary powers of the judges and it is not a matter of right of the
parties in an adversarial proceedings.
Alternative dispute resolution is not a new invention it has been around even before the
adversarial system came about. Alternative dispute resolution advocate the principle that
parties could resolve their disputes in a simpler manner with the involvement of a skilled
third party, who is usually an experienced professional in the particular industry. The
benefits that ensue from the involvement of a skilled third party includes improved and
better communication, continued business relationships, effective management of the
dispute, offering better options for settlement, less formal, private hearing, speed, reduced
costs, and assurance of confidentiality. Skilled third party intervention ensures effective
communication between parties and to focus on solving the problem to reach an amicable
settlement.
The pressures within the millennium construction industry, where construction is focused
on fast track building and other construction projects is bound to create tension and of
course disagreements over collateral and sub-contract terms and warranties. At times
construction contracts are signed after the workmen had entered the site or worst still no
contract is signed. In this situation, where there is no written contract between the parties
to the joint venture, dispute resolution by the court is rather difficult. However, under the
different types of alternative dispute resolution processes, the third party may be able to
bring the parties together in a common arena regardless of the written contract because
the third party can use his own technical knowledge, skill and experience in the
construction industry to help the parties achieve a settlement of the dispute.
3 adversary system. (n.d.). In Legal Definitions. Retrieved November 14th, 2010, from
http://www.yourdictionary.com/law/adversary-system 4 <a href="http://law.jrank.org/pages/468/Adversary-System-traditional-meaning.html">Adversary System
- The Traditional Meaning</a> 5 Newacres Sdn Bhd v Sri Alam Sdn Bhd[1991] 3 MLJ 474
6 Hartela Contractors Ltd v Hartecon JV Sdn Bhd & Anor [1999] 2 CLJ 788
7 Equity is a system of law designed to furnish remedies for wrongs which were not legally recognized
under the common law of England or for which no adequate remedy was provided by the common law.
II. Joint Ventures in the Construction Industry
Joint ventures are established to take advantage of the economic, political and social
conditions prevailing in a particular economy especially at global level. Many
international companies choose to invest in Malaysia mainly because of its political
stability, economic growth and a relatively low cost of labour, availability of raw
materials, good transportation system and also various incentives offered by the
government. Construction joint ventures in Malaysian are becoming increasingly popular
both in multinational construction firms and local government in order to achieve their
individual objectives. There are already established joint ventures between two or more
local indigenous contractors and also between indigenous local and foreign contractors.8
In Malaysia‟s case, international firms were attracted mainly because of opportunities
stemming from the country‟s planned economic growth, country‟s investment policies,
political stability, relatively cheaper labour costs and other available resources.
Construction joint ventures in Malaysia are popular and have involved multinational
construction firms and local government in order to achieve their individual objectives.
The government for Malaysia has also encouraged and supported local contractors to
participate in regional and global markets based on their expertise and experience of
construction of buildings, infrastructure projects, highways, power generation, port and
airport construction. Joint ventures are established to take advantage of the economic,
political and social conditions prevailing in a particular economy.
Joint venture projects are becoming a common feature of the Malaysian construction
industry. Construction organizations have extensively resorted to using international joint
ventures as a mechanism to participate in the construction markets around the world.9
The rapid expansion of construction activities following industrialisation programmes has
intensified the participation of foreign contractors. The Malaysian Government‟s
encouragement and incentives of such arrangements could also be considered as a
significant factor in the development of joint venture projects. Foreign firms are often
require to bid on large infrastructure projects with local partners and a joint venture bid
must have at least 30% bumiputera (indigenous Malay) participation. Malaysia‟s open-
door policy to foreign participation is evidenced by the large amount of payments made
by the Malaysian Government for contracts and professional services. Major projects
such as Kuala Lumpur International Airport, the Petronas Twin Towers, Bakun and
Pergau Dam, Multimedia Super Corridor and The Sepang Formula One Circuit and
various other mega projects were successfully realized with joint ventures.
The number of international construction joint ventures is growing worldwide at an
unprecedented pace, especially in developing countries and Malaysia is also keen to
benefit from this opportunities. The reason for the growth in the joint venture dealing are
8 Hamimah Adnan, “An Assessment of Risk Management in Joint Venture Projects (JV) in Malaysia”,
Asian Social Science, Vol. 4, No.6, June 2008, www.ccsenet.org/journal.html 9 Mohammed, S (2000) Risk Assessment in bidding for international projects – the Australian experience,
Asia Pacific Building and Construction Management Journal, Vol.5, pp 135-152
due to the increasing magnitude, complexities and risks associated with major
construction projects that requires organizations with diverse strengths and weaknesses to
form joint ventures to collectively bid and execute projects (Kumaraswamy.et.al. 2000).
Thus, a joint venture is a procedure used to respond to specific business phenomena such
as access to new markets, specific government policy, business capacity, technology
transfer or economies of scale. An international joint venture is a separate legal
organizational entity representing the partial holdings of two or more parent firms, in
which the headquarters of at least one is located outside the country of operation of 10
Parties seeking to enter into joint ventures must be careful and often ensure that they seal
contracts which will be beneficial to both. The key provisions in any joint venture
contracts inter alia include the followings:11
Clearly defined business objectives
The agreement must prescribe the purpose of the joint venture, the nature of the business,
liabilities, and interests of the parties to the joint venture.
Degree of participation and the management roles of each joint venturer.
Prescribe the roles, management responsibilities, duties and responsibilities of parties and
degree of participation of each party to the joint venture. The provision will be
enforceable in contract, and the terms of the contract must be clearly drafted to define the
roles accurately.
Contribution of capital and ownership rights/Division of the profits and
losses.
Set out the contributions and other resources each party has, method and percentage of
profit and risk and loss sharing in the joint venture.
Dispute Resolution Mechanism
10 Hamimah Adnan, Roy Morledge, “Critical Success Factors In Malaysian Construction Joint Venture
Projects”, Proceedings Of The RICS Foundation Construction And Building Research Conference, 1st to
2nd September 2003 organised by School of Engineering and the Built Environment University of
Wolverhampton, David Proverbs (eds), internet edition, http://www.rics.org/site/download _feed .aspx?
fileID=2332&fileExtension=PDF, accessed on 10th
November 2010 11
Mark Warner, Joint Venture Agreements - Key Drafting Issues, http://EzineArticles.com/?expert=