Out-Law / Your Daily Need-To-Know

How industrialised construction will change the nature of construction disputes

Out-Law Analysis | 23 Nov 2021 | 11:50 am | 7 min. read

The industrialisation of construction processes is likely to reduce the number of some types of construction disputes because harnessing the power of technology and data should enable better management of projects.

However, new kinds of disputes are likely to the emerge from the move towards industrialised construction and, where they do arise, they are likely to be on a larger, more strategic scale, possibly spanning multiple projects and geographies.

Expect new forms of disputes

The nature of construction disputes will change over time with the industrialisation of construction processes. There is potential for an increase in some types of dispute, some of which are not currently familiar to the industry.

One example of this could be disputes between traditional contractors and technology providers working in new collaborations.

Waddel Helen

Helen Waddell

Partner

Disputes could also arise more frequently out of commercial contracts or purchasing agreements where more work is carried out off-site

Joint ventures (JV) are popular corporate or contractual structures for drawing together different businesses with different skills to complete major infrastructure projects. Where construction companies and technology providers decide to pursue a JV, they will want to consider measures to counter the risk of disputes arising, which include taking steps to understand their JV partners better from the outset, agreeing the right split of responsibilities and liabilities and making provision for early resolution of disputes, such as through the involvement of a Disputes Avoidance Board.

Disputes could also arise more frequently out of commercial contracts or purchasing agreements where more work is carried out off-site. Off-site manufacturing of standardised components will be a core feature of industrialised construction, however offsite manufacturing is not currently very compatible with traditional forms of construction contracting, particularly in the area of entitlement to payment for activities completed. Disputes could relate to supply issues, defects, product recalls, or other product liability issues, for example. Where products become standardised and used in multiple projects, such as in the current car manufacturing industry, the risk of product recall issues is thankfully rare. but when it does happen it tends to happen on a very large scale. We are already starting to see signs of this in parts of the construction industry where supply chains are limited and products standardised, such as in offshore wind. To address the risk of issues such as this becoming business critical, contractors and others in the supply chain will want to explore liability caps and other contractual protections, as well as insurance.

Output-based disputes relating to the operation of the infrastructure asset, as we currently see in PPP/PFI contracts, could also become more prominent with the industrialisation of construction processes – including disputes driven by ‘net zero’ carbon requirements. For instance, we may see more disputes arising out of a failure to meet standards based on construction or production data available, such as carbon use in production, and/or asset data, such as on energy consumption. This risk should spur on employers and the supply chain to better understand what standards are adopted and how they can be met.

Contracts are also more likely to focus on the output from the whole life of infrastructure assets in future rather than the construction phase alone. This raises questions about how liability is determined across the life of the asset and for risk sharing under the contract. Practical issues will need to be considered. For example, where project boards operate, thought should be given as to whether there should be a requirement for unanimous decision making and how the model governing project decisions impacts on liability and ultimately disputes.

We also anticipate a rise in disputes over intellectual property (IP) rights in a world where data and technology are significant assets and will become increasingly valuable on construction projects. Some of the current standard form contracts lack the detail that is likely to be needed in addressing IP issues in the future. For example, the FIDIC suite of contracts contain four clauses in relation to IP, but these days many bespoke contracts contain far more detailed IP clauses running to multiple pages to reflect better the ownership of IP rights throughout the whole life of the asset.

Disputes over the control of data, rights to use data and the management of data – including around security and privacy – are likely to increase in particular. Legal rights that can be associated with data include copyright, database rights and trade secrets. It is advised that parties make provision in their contracts for issues pertaining to the control of data, rights of use and responsibility for its management because data in and of itself cannot be ‘owned’ - only when collated in a form that satisfies the relevant test conforming to a legal right can we talk of ownership. In this regard, given the rise of AI and the ‘internet of things’, more data than ever is being created, often automatically, giving rise to the very real risk of ’ownership’ disputes. Data trusts are potential structures for providing stewardship of data and for enabling compliant data sharing. Where disputes do arise, there is a risk of injunctions arising to halt the use of data which in turn could significantly impact the timely completion of works and, more importantly, the ability to use the asset which would be a major issue on energy and infrastructure projects.

Thought will also need to be given to variation provisions and whether and how manufactured components can be changed. In an industry where off-site manufacturing will become more prevalent, changing components in one project has the potential to impact a whole production line that produces components for other projects. This is an area where disputes could arise and warrants consideration of whether a bespoke approach to variations is needed in project contracts.

As with traditional manufacturing, off-site manufacturing is likely to entail the use of resources in countries where labour and materials are cheaper. Naturally this brings with it foreign exchange risks, which can lead to disputes. This can be a significant issue when markets are volatile. Projects which are structured around the procurement of significant inputs priced in established market currencies will have to develop sophisticated mechanisms for dealing with local currency volatility.

Incorrect provision for and allocation of foreign currency risk can pose a significant risk to project delivery through exposing the employer to major cost overruns which can prejudice the project if the employer agrees to carry foreign currency risk which is incorrectly priced. If procurement is via one main contractor then the risk is that contractor is unable to meet significantly increased payment obligations owing to third party overseas suppliers. In a worst case scenario, this could even bankrupt the main contractor due to incorrect foreign currency pricing or misalignment between the payment obligations of the contractor to the overseas suppliers and those of the employer to the contractor, leading to overseas suppliers terminating supply contracts.

Off-site manufacturing raises a raft of other geographical issues that need thought to avoid potential causes of dispute arising. For instance, infrastructure projects in developing economies often have significant local content requirements as well as local job creation requirements, notably where projects are government-led. On-site installation of complex components manufactured off-site may require local labour force upskilling and project contractual documents to allow for that, failing which significant disputes can arise.

Community engagement and education will also be important if on-site activities are to change and traditional skill sets no longer required. Projects will face significant challenges if the communities in which they are being implemented are resistant to them as a result of changing patterns which do not generate jobs as expected.

Off-site manufacturing is easier in smaller geographic markets where there is skilled labour, such as Europe, but perhaps less beneficial where there is significant distance from the manufacturing centre to site and investment cannot be recouped, such as in Australia. Delay issues experienced during manufacturing or transportation are likely to increase with limited options to source alternative or local solutions.

One of the other impacts we anticipate from the industrialisation of construction processes is that tier one contractors may take on ‘fitness for purpose’ obligations for components that have been standardised and therefore it may not be possible to pass similar obligations to others in the supply chain. Contractors should therefore carefully consider product suitability, and who is responsible for making the product selection, and be cautious when issuing warranties and agreeing liability caps.

Some forms of dispute likely to become less common

 

While we anticipate that new types of construction disputes are likely to emerge from the industrialisation of the industry, other, more traditional, forms of dispute may become less common.

Off-site manufacturing and standardisation should help to reduce the frequency of defects disputes associated with on-site installation. In some jurisdictions it can sometimes be a struggle to secure the quality of workmanship required and for main contractors a major pre-occupation is the availability of labour and necessary skill levels. Industrialised production offers an opportunity to develop skills, and thus improve quality, through effective training of a smaller and more dedicated workforce. That said, if a defect is discovered, it could have a far more extensive impact if products have been used across multiple projects.

Off-site manufacturing undoubtedly provides a safer, more controlled environment, which brings the significant benefit of reducing health and safety incidents and the resultant investigations and prosecutions that necessarily follow. These health and safety benefits are likely to be greatest where on-site climatic conditions, such as extreme heat or cold, can be mitigated by maximising off-site manufacturing and reducing the number of people physically required on site.

Off-site factory assembly of major components allows operations to be conducted in a safer, healthier environment. This should lead to more efficient, productive use of labour; less wastage and loss of materials and supply items; adherence to higher specifications using quality tools and machinery operated by a trained, healthier and happier workforce.

Improved technology and data should help parties reduce the scope and better understand the cause of their disputes if and when they arise. For example, productivity disputes are likely to diminish because of live data monitoring showing whether the scheme is progressing as it should.

Although the increase in standardisation brings many positives, it also has the potential to stifle innovation, so it remains very important for risk to be properly allocated to ensure the industry continues to push the boundaries, not least to deliver on the zero carbon requirements that will be a major delivery requirement across the global industry going forwards.