Abstract
Disputes are inevitable in construction. Tremendous losses caused by dispute are so amazing that professionals try to figure out how to manage it. It is a practical way to study the dispute problem from the perspective of governance theory. In this study, the paper intends to investigate the characteristics of contractual governance for disputes. Based on governance theory, the framework of contractual governance for dispute is constituted of governance structure (GS) and governance mechanism (GM). The flexibility of GS and GMs are all explored so as to better draft the contracts. By a multiple cases study, a new conceptual model instructing governance picture for construction disputes was proposed which was mainly inspired from literature. The cases study shows that the GS determination is rigidly drafted and executed while the mostly GMs are flexibly designed. The rigid GS has an advantage to a stable foundation and the flexible GMs are apt to coordinate the disputes.
Introduction
The growth of urbanization leads to extensive population and infrastructure demand. The complex construction project requires plenty of building materials and participants with different roles and background. Diversities in construction bring project management in challenge and conflicts lead to dispute among participants. Nearly all the construction projects are affected by various disputes [1], many of which are resulted in failure. It is believed that conflict situations among participants often underpin disputes [2]. Due to poor communication and cooperation, disputes arise to make the project delay and cost overrun [3]. The performance of project is affected by disputes because of project suspended. The construction manager should allocate unnecessary cost to dispute management [4]. It is estimated that the annual cost caused by dispute is at $5 billion [5].
The concept of governance relates to “all of process and operation of governing undertaken by a government, formal or informal organization though laws, norms, power or even customs” [6]. In construction, project governance relates to transactions which contain three factors including specificity, uncertainty and frequency [7, 8]. The project operates spontaneously and smoothly under governance law. It is regarded that governance as an “invisible baton” controls the operation of project. Contractual governance as a crucial way to govern the project is generally highlighted. To some extent, construction contract arranges the rights and obligations for parties, which lays the foundation of basic framework. Poppo and Zenger [9] insisted that contract clause could effectively reduce the incidence the risk of opportunism. Zhang et al. [10] studied the risk allocation for parties based on contract and cooperative behavior affected by contractual governance. Thus, the behaviors of participants are governed by contract in the process of performance [11, 12]. The project outcomes are gradually achieved according to the requirements of contract [13]. That means contract as a main governance form dominants the operation of project. Dispute management as a special field of project management also needs to be governed by contract. In the dispute related chapter of a contract, specified clauses are arranged purposely in order to avoid disputes. The clause replies who is responsible to dispute management and how to handle it. In this regard, the design of governance structure and governance mechanism has great significance to dispute resolution which can provide a framework to draft clauses.
On the other hand, the characteristics of governance can be described as rigidity and flexibility [14]. Rigid governance (RG) refers to compulsion and autocracy while flexible governance (FG) means negotiable space for matters. RG and FG as two kinds of governance characteristics have completely different governance effects. The contractual governance has both rigidity and flexibility. Clause expressions in different ways mean different connotations. How to draft dispute related clauses determines the effectiveness of dispute governance. For this reason, research on the governance characteristics of clauses helps more understanding the contractual governance. However, the dispute related clauses are unconsciously written in contract by drafter. They have nearly little knowledge on governance theory leading to drafting terms arbitrarily. To bridge the gap of how to draft clauses comprehensively, this manuscript contributes some knowledge on contractual governance for disputes. In Section 3, the characteristic of contractual governance for project management is studied through literature. Varieties of matters are governed rigidly and flexibly by contract. In Section 5, six cases are selected for this research in China representatively. In Section 6, the flexibility of contractual governance for disputes is discussed based on the selected cases. Then, a conceptual model trying to demonstrate the framework of dispute governance is proposed. The manuscript probably has visible significances to professionals.
Literature review
Construction disputes
Participants from parties with various backgrounds probably cause negative conflict to project [15]. Disputes likely occur if conflict cannot be managed properly after escalation [16]. Researchers over the world have contributed a mass of literature on construction disputes which become a hot topic in project management area. In the early stage, the connotation of dispute was defined from multiple perspectives [17, 18]. It is helpful for investigators to originally learn disputes. Then, the researches on source of dispute are gradually presented. Scholars studying the origins of disputes have advantages to deeply understand dispute so as to properly manage the disputes. Cost overrun [19] and time delay [20] leading to disputes often make the parties embarrassed. These two sources are universal in project management. Disputers claim that cost overrun and delay adversely affect the project performance. Frequent variation [21] and payment problem [22] hinder the process of construction which may harm the parties’ interests. Besides, cultural background [23] and uncertainty [24] as the other dispute factors threaten the cooperation of parties. Cultural gap makes hard to communicate decreasing the possibility of cooperation. Uncertainty issue undefined in the contract means the possibility of loss. For dispute resolution, Cheung [25–27] had contributed many researches on construction dispute resolution. Specified methods are adopted to study the way of construction dispute providing a help for dispute-plagued managers. Alternative dispute resolution (ADR) is often used to solve disputes issues in western countries [28] while dispute review board (DRB) is assembled to handle tough matters[29, 30].
Rigid governance and flexible governance
The concepts of rigid governance and flexible governance are firstly proposed in sociology. Different governance characteristics mean distinct governance spaces for organizations. To reach the governance goal, governors should take account of adopting proper governance structure and governance mechanism. He and Wei [31] introduced social work into social governance to improve traditional government which was characterized as rigidity. She claimed that rigid government lacked human care and consideration to diverse public needs. Gao [32] argued that artificial intelligence and blockchain enhanced the rigid governance which further strengthened the alienation risk. Elastic governance could balance the rigid governance and flexible governance. In construction, project governance is studied for a long time. Flexible governance in terms of relational governance characterized as flexibility implies trust and respect among parties [33]. Laine et al. [34] quantitatively studied the mechanism of repair effort affecting project control while repair effort could also be regarded as a variable of relationship. Indeed, it needs flexibility for project governance due to strategy changes [35]. Project needs the ability to pursue different governance modes and controls to achieve performance outcomes [36]. However, there is too little knowledge on actors’ roles in controlling uncertainty to provide flexibility in an interactive manner [37].
Contractual governance for construction projects
Construction projects going on smoothly can be governed by contracts preventing speculation. Contract is an expression of agreement on specified issue. The parties ought to obey the clauses that defined obligations and rights for each party. Otherwise, it shall be considered as breach of contract. In governance context, contract regarded as a governing mode increasingly attracts people’s attention. Researchers have contributed lots of literatures on contractual governance in construction projects, including contract drafting [38-41] and applications [42]. Sarhan et al. [43] started to critically review construction procurement and contract related articles on investigating governance problems for clients and decision makers in transaction cost economics (TCE). Yan and Zhang [44] empirically studied the interplay of contractual governance and trust affecting the project performance from a dynamic perspective. They are applied in PPP projects as well [45]. In large scale of megaprojects, the cooperative and opportunistic behavior are varied by contractual governance and relational governance, although guanxi is just a contextual variable [46]. Huo et al. [47] suggested that contractual governance was not only depending on contract completeness but also relating to contract implementation. Therefore, contract enforcement as crucial aspect of governance protecting the interests of stakeholders is only determined by contract execution rigidly and strictly [48, 49]. From perspectives of GS and GM, there are also existing literatures in recent years. Scholars try to analyze the motivation of project execution which enables to provide valuable instructive significance for drafters. Governance structure as the basic foundation of contract contains but not limiting to transaction cost economics [50], corporate social responsibility and risk management [51]. Governance mechanism belongs to motivation mechanism of the organization operated on the governance structure. In other words, governance structure likes a skeleton while structure mechanism likes meridian and pulse for a person. Overall, the project success depends on the correct governance mechanisms [52].
The clauses of contracts governing different aspects have relatively distinct governance spaces. However, the governance characteristics of clauses are rarely studied. For dispute management, the clause descriptions referring to different contents are decided by the specificity and importance of matters. Some clauses are described rigidly while the other ones are flexibly delivered. On the contrary, the flexible clause means the matter can be negotiated which has probable floating space. Some clauses are required to implement without any doubt ensuring the stability of basic governance structure. The negotiable clauses guarantee the probability of successful coordination. Both types of clauses have specified functions to dispute management. In this regard, to investigate the clause characteristic can enable us to understand contractual governance for disputes further.
Proposition of the clause characteristics in contract
In the previous studies, flexible contracts are proposed by researchers aiming to study the characteristics of contracts [53]. Contractual flexibility can be taken as an advantage to face following uncertainty in construction [54]. Barton even assumed that contractual flexibility could bring better outcomes to project [55]. However, too much flexibility in contract may cause opportunism due to the vagueness of contract [56], which is often negatively evaluated. Contractual flexibility is presented by clause drafting that the drafter can control content flexibility. Song [53] in his study argued that contractual flexibility included two aspects, i.e., content flexibility and executing flexibility. Executing flexibility emphasized the process of contracting or this could be explained whether it was strictly supervised. On the contrary, contractual rigidity means the contract must be implemented without any negotiations. The rigidity can be considered as compulsory. That requires contract performance must comply contract stipulation strictly. Rigid clauses discussed in the study are taken as contractual control via a questionnaire [57]. In this study, contractual control variable belongs to a category of contractual rigidity. Table 1 shows the rigid and flexible contract study performed by clause expression in literatures.
The rigid and flexible contract study in existing literatures
The rigid and flexible contract study in existing literatures
Whether the contract is rigid or flexible, the characteristics of contract are involved in contract content and execution [53]. Contract content drafted by word expression can reflect manager’s intention. The manager intends to control the flexibility for the matters that the clause can be purposely formulated. From the Table 1 listed, the contents including contract price, negotiation mechanism, income and dispute management prefer adopting flexible clauses to manage [53, 58]. It is pointed that dispute matters for negotiation usually are dealt with flexibility. In rigid contracting, right and obligation definition, award and penalty mechanisms, termination mechanisms are rigidly governed by contracts [59]. In light of this, the contract contents governed by various flexible scales are differently emphasized. For contract execution, it plays an important role in contractual governance. After all, the contact execution relies on human’s actions even if the clauses are written in contract rationally. The dispute management we care in this study refers to negotiation mechanism and settlement procedures which are mostly dealt with flexibility. This paper further aims to investigate the characteristics of contract clause so that some new findings may be provided via cases study.
From the perspective of governance theory, the contract clause expressions described in this table can be categorized into GS and GM. For instance, the formulation of “the contract price can be adjusted according to the market risk.” is marked as CPMF in which the third letter is represented “governance mechanism”. From the logic of definition, the third letter of CRSR means “structure” referring to governance structure. All the abbreviations in the table where the fourth letter is referring to flexibility or rigidity. Table 1 rearranged from the view of GS and GM is shown in Table 2.
The classification of contract clause expressions
Governance structure keeps basic framework of governance while governance mechanism with various flexible scales is helpful to achieve governance goal. Since then, GMs are distributed in flexibility and rigidity. GS applied in Flexibility is absent because unstable foundation cannot support contracting. The governance structure should be included in contract and executed rigidly. The governance mechanisms are very different compared to GS. GMs with flexibility covers price adjustment, negotiation, dispute settlement and risk response [53]. These items flexibly handled are favorable to balance interest among parties so that the governance objectives can be achieved. On the other hand, reward and punishment measurements executed rigidly belong to incentive measurement which motivates the contracting. Yong [60] assumed that the project success was associated with proper GS which was empirically proved by international data set. Given the analysis mentioned, a conceptual model trying to reveal the interplay of project governance and success is shown in Fig. 1.
Derived Conceptual model from previous literatures.
This manuscript focuses on the characteristic analysis of contract clauses referring to dispute management in order to propose a conceptual model governing the disputes. Some literatures on characteristic of contractual governance are investigated which can provide us lighting idea for this study. Dispute related clauses as part of contract have similar characteristics like the other clauses. In light of this, a multiple cases study (MCS) is adopted to discuss the characteristic of contract clause on dispute [61]. The descriptions and formulations of clause are distinguished by governance space. Through MCS, we can sum up regular conclusions for contractual governance. Meanwhile, a rough conceptual model is proposed illustrating the governance logic for disputes. The model instructs that the clause generates dispute handling process and which clause can be intervened. The research idea of this study is shown in Fig. 2.
The methodology flowchart of this study.
To guarantee the integrity of this study, there are literatures on dispute and governance theory for research. The proposition of so called “rigid and flexible clause” is derived from other contract clause study by literature [53]. MCS method is adopted to verify the proposition. After this key step for research, scholars may catch tiny clues on how to weigh the flexible space for clauses. Flexible space is controlled by drafter so as to meet the goal of dispute management.
There are amount of construction contracts in Chinese construction market. Most of the contracts with little dispute related contents are in prevalence playing a symbolic role among parties. However, with the increasing attention of dispute management, dispute chapters have a rapid increase in contracts as a formal part for negotiation. The cases used in this study are selected from nearly 260 contracts from Chinese mainland from 2000 to 2020. The data is collected from most developing provinces covering from building, transportation, coastal engineering, water conservancy projects and so on. However, not all the contracts are satisfied with the requirements of this study. Most of the contracts with little related contents are abandoned. Some smaller and less influence projects are dismissed as well. 6 representative cases are selected from 5 provinces in the rest of contracts. The six cases are outlined by overview of the project profiles below:
Case study A: A community construction project
This project is a residential project named as Lujiaba Community Construction located in Huzhou, Zhejiang province. The contract was signed in 2016 and completed in 2017. It spent nearly 40 million RMB and good results were achieved. During the contracting, the project was disturbed by surrounding residents and dispute was rising to threaten the contraction. The owner rapidly responded to their claim and managed the dispute successfully. The clauses referring to dispute were systematically arranged that rising disputes were handled successfully.
Case study B: A campus of kindergarten and primary school project
This project is located in Taizhou, Zhejiang province. The building constitutes of a kindergarten accommodating with 500 children and a full primary school. The construction area covers over 20,000 square meters. 121 million RMB was spent and the construction lasted for 2 years. It is noted that the project is no longer a pure government investment project. Instead, an investor sector is involved to provide huge funds so that it can make profit in return. More stakeholders’ participations enhance the complexity and disputes tend to occur. To deal with the potential disputes, an independent chapter introducing dispute management is carried on in the contract.
Case study C: An expressway
This project is an expressway located in Wuzhou, Guangxi Zhuang Autonomous Region. The expressway started in 2021 and the project cost huge with high requirements. It costs nearly 1600 million RMB and spends over 4 years to complete. Cangwu and Zhaoping are two county cities located in mountains and valleys. The harsh natural environment increases the difficulties of construction and the corresponding risk of dispute is increasing. In consideration of this specified condition, the contract arranges a series of clauses to prevent dispute occurrence. Claims from parties are taken seriously and settled according to contracts.
Case study D: Another expressway
This expressway project started in 2011 connecting Weifang City and Rizhao City in Shandong province. It runs through southern and northern parts of Shandong which has strategy significance for this peninsula. The project costs over 10,800 million RMB and lasts for 3 years. Many famous construction enterprises participated in this project and they cooperated very well although the contract still described the regulation of dispute management. The only disputes were coped and resolved by contract which shows the importance of contractual governance.
Case study E: A university campus
Hubei Communication Technical College (HCTC) is a college in Hubei transportation industry. The new campus needs to be built and the budget exceeds over 2.3 billion RMB. The project is just one part of the entire campus, only 3 buildings are engaged to implement. The project value is about 86 million RMB. A large number of stakeholders are working together, conflicts are evitable and disputes are easily rising. Therefore, plenty of information on dispute management is delivered in the contracts. Stakeholders’ claim can be managed properly during the contracting.
Case study F: An infrastructure construction
This project covers a vast area near coastal zone located in Panjin, Liaoning province. It consists of several buildings and infrastructures in this area. The project started in 2015 and was completed in 2016. The dispute clause is so distinguished that it requires all the disputes must be solved quickly. Otherwise, the troublemaker will be severely punished until it is dismissed. In such atmosphere, the potential dispute no longer inoculates and will be prevented finally.
Findings and discussion
Overview description for the dispute in the contracts
The selected 6 cases with dispute related clauses are quite different. It is considered that the difference is not only attributed to project overview, but also related to contract signing time. With the development of Chinese construction market, dispute governance in contract is also changing accordingly. Marques [62] considered that dispute management in PPP contract included review board, mediation, conciliation, independent expert, arbitrary and litigation. Each process had its own function. The cases are no exception but a little difference existed under Chinese conditions. For research convenience, six construction contracts corresponding to six projects respectively are labeled as C1 to C6. The processes of dispute management in the cases are shown in Table 3.
Review of dispute management for the cases
Review of dispute management for the cases
All the contracts signed after 2010 which could generally imply the trend of dispute management. There is dispute review board (DRB) instructed in the contract after 2015 which is brought from western countries. The dispute is handled by negotiation without any notes about committee before. Dispute coordination fee should be paid for committee accompanied with DRB. Unlike western countries, the Chinese coordination logic is rapid and efficiency prior resorting arbitrary and litigation instead of lengthy and drawn-out debating process. Litigation is the final solution selection for disputers which is the same at home and abroad.
As one part of contractual governance, dispute governance is applicable in practice. The GS for dispute governance includes two parts, i.e., clause content and execution as discussion in Section 3. To explain the clause referring to GS, it is better to extract GS related clauses further studying its characteristics. The contents stated on GS in the selected 6 cases are diversely manifested. Table 4 provides more information of GS on dispute. The execution data was collected from the managers’ interview of the projects respectively after project completion. Not all the contracts have description on DRB. C4 and C5 just point that the dispute can be solved by the third party. The disputes are handled casually in both projects which are assumed unequal or unpersuasive. All the contracts stipulate the rights and obligations for disputer which are executed strictly. This is because the rights and obligations are defined by his positions and roles. Otherwise, the dispute management is involved in chaos. C1 and C2 both describe the recommendation, supplementation, demission and reorganization of DRB. It is astonished that DRB supplementation is not so implemented according to contract by C2. This is the hidden danger for subsidiary dispute occurrence among parties. Overall, the contents referring to GS are rigidly drafted and partly executed strictly. The reason is that GS is attributed to the objective situation of the project. Any flexible implementation will lose trust to threaten the foundation ofgovernance.
The category of GS related clause for dispute management in dimensions
The category of GS related clause for dispute management in dimensions
The descriptions on GM are much more than GS (Table 5). The GMs generally instruct why and how to manage disputes. Why engaging dispute management answers the question of the motivation. For instance, C1 and C5 stipulate the punishment mechanisms for troublemaker. Anyone who has no normal reason will not raise a dispute. C3, C4 and C5 stipulate the decision mechanism for dispute settlement while the other contract does not. The mechanisms with rigidity for dispute partly lay the foundation of motivation. On the contrary, contact clause and its execution with flexibility basically imply how to settle the disputes. All the contracts stipulate that the dispute should be solved by negotiation which is a typically flexible feature. Negotiation strategy has impact to the anxiety and pressure for disputants [63]. The behavior of negotiation belongs to the scope of interest distribution [64]. Therefore, negotiation as a flexible method is adopted by nearly all the contracts. Dispute transferring mechanism makes the dispute solved as possible when the dispute cannot be settled by themselves. Dispute transferring provides more options for dispute settlement. In dispute execution, some flexible treatments make it handled in elasticity. Table 6 summarizes the characteristics of governance mechanisms for dispute.
The category of GM related clause for dispute management in dimensions
The category of GM related clause for dispute management in dimensions
The characteristics summary of governance mechanisms for disputes
The mechanisms summarized from the contract clauses play different roles in dispute governance. External mechanisms enforce the manager to intervene disputes while internal mechanisms provide approaches. To some extent, external mechanisms can also be divided into different categories. In Table 6, punishment mechanism (PM) promotes the disputes to be solved. Obviously, it is a pressure for manager. The reputation selection mechanism (RSM) as a selective mechanism is a competition mechanism. The potential bidder who involves in a dispute will be eliminated. For performance evaluation mechanism (PEM), it is an external evaluation mechanism which is also characterized as a pressure. The external mechanisms mentioned above without exception are rigid either clause content or execution. The external mechanisms with rigidity solve the problem of motivation, otherwise all the stakeholders will be punished by beaching the contract. However, the internal mechanisms generally refer to settlement approaches and decision mechanisms which imply how to handle the disputes. The majority of internal mechanisms are flexible according to the descriptions in the Table 6. In particular, all the dispute governance approaches are flexible that can negotiate with each other. The negotiation process has advantage to balancing the interests so that the disputers are satisfied with the intermediate strategy. From the literature review of section 3, a new conceptual model describing the governance way to settle the disputes is shown in Fig. 3.
A new conceptual model describing the dispute governance via cases study.
The proposed conceptual model basically makes a clear picture in which a framework of dispute governance is proposed. The GS as a skeleton defines the parties with specified roles. The robustness of the GS ensures the reliability which is considered to be necessary. The GMs are designed as three aspects in which a logic relationship is exploratory obtained. Of course, dispute decision is made after the disputers are motivated by external mechanisms. Then, proper approaches adopted tries to settle the tricky matters. In this figure, dispute settlement approaches with flexibility are mostly described by clauses. However, impact elimination approach and compensation mechanism is just narrated in C3. The clarity of governance picture helps better drafting the contracts. The managers can also have aid of this picture so as to improve the level of project management.
Contract clause drafting has significance effect to dispute management [53]. Professionals should make clear how to draft the clause so that the disputes can be properly handled. But there are rare literatures illustrating the logic of drafting. It is necessary to clarify the governance logic between the disputes and contractual contents. This study tries to investigate the flexible governance approach for disputes.
This paper begins with a review of construction disputes and contractual governance through literature. Then, according to the existing literature, the characteristic of contractual governance is investigated. The content in the construction contract and its execution are generally rigid for GS. Most GMs are characterized as flexibility in order to improve the effectiveness of dispute management so as to increase the possibility of success for disputes coordination. Afterwards, a conceptual model illustrating the project governance logic is proposed. Drafting dispute management chapter aims to improve the level of dispute management. The effect is not so good when professionals draft clauses disorganized just only relying on fragmented experiences. The conceptual model from literatures may provide significant reference for professionals. Given the current condition, it is significant to explore the dispute governance from the perspective of construction contract. In empirical section, this manuscript adopts a multiple cases study method to investigate the contractual governance for disputes in six projects in order to demonstrate the more refined logic system for dispute governance. Although the projects selected cannot represent the overall construction projects in China, they still can represent the trend of dispute management hereafter. The study results show that the contractual governance logic for dispute is similar to the other fields of project governance. A new conceptual model from the selected projects relating the characteristic of contractual governance is generated to provide guidance for drafters. In this figure, more details are illustrated covering motivation, decision and approach of which the flexibility is discussed. The Fig. 3 can provide more information than the former one. It is more favorable to take as reference for professionals because of its feasibility.
In future studies, empirical studies in this field will be considered. Empirical studies rely on quantitative data that is more persuasive than qualitative research. The flexibility space for GM is investigated from qualitatively to quantitatively which is from low-level to high-level for academic research. In particular, the flexibility quantification should be accounted for empirical studies. It is beneficial for manager to balance the rigidity and flexibility for clause drafting that is essential for dispute management [65]. In current Chinese construction market, the criterion for dispute management is still vague. Mainly because few professionals realize this practical problem. The fermented criterion is practical in Chinese situation which is undoubtedly originated from construction society. In the future study, a criterion for drafting practical measurements from the level of construction contract should be fermented that can promote the development of disputegovernance.
Data availability
The data used to support the findings of this study are included in the article.
Conflict of interest
The authors declared that they have no conflict of interest.
Footnotes
Acknowledgments
None.