'Proactive' construction dispute management needed to ensure swift resolution, experts say

Out-Law Analysis | 06 Jul 2016 | 4:22 pm | 3 min. read

FOCUS: Global construction disputes are taking markedly longer to resolve, while cash flow issues in constrained market conditions are making firms less likely to settle than ever.

While the increasing duration of disputes has been a consistent trend over recent years, the jump in average duration was even more pronounced in 2015 - to a global average of 15.5 months, according to the latest annual global construction disputes report by Arcadis, the consultancy (17-page / 3.9MB PDF).

Indeed, this global average figure may mislead. In our experience, international arbitrations involving construction disputes are taking between two and three years on average to resolve, and sometimes even longer. However, the relevant statutory adjudication regimes in the UK and Australia mean that disputes in these jurisdictions can be resolved within a few months, bringing down the global average.

There is also an increasing reluctance to settle disputes, with cash flow problems for both employers and contractors probably the biggest driver of this. This is paradoxical, because while international arbitration is rarely good for cash flow it is often the best means of dispute resolution for the balance sheet and the profit and loss account. The growth in disputes is exacerbated by declining order books, a reducing prospect of repeat business and accounting treatment of claims, which often incentivise contractors to avoid settlement and the consequent reduction in the balance sheet.

Like Arcadis, we fully endorse the need for proactive dispute management to ensure early and satisfactory resolution of disputes – especially those that may end in international arbitration. By actively addressing points of contention as they arise, employers and contractors stand the best chance of avoiding costly and time-consuming formal disputes - while alternative dispute resolution (ADR) procedures can help to save both time and money when matters become more serious.

Construction disputes in 2015

While the report is limited to the projects and disputes on which Arcadis was instructed to act, its large geographical coverage - namely North America, UK, continental Europe, Middle East, Asia and Australia - and the breadth and volume of projects and disputes which inform the report make the findings fairly reliable. Indeed, the main trends identified in the report are very much consistent with our experience from 2015. Compared with the results of its 2014 report, Arcadis found:

  • global construction disputes have decreased marginally in value, to a global average of $46m in 2015;
  • disputes have markedly increased in duration to a global average of 15.5 months, most notably in Asia where the average duration jumped from 12 months in 2014 to 19.5 months in 2015;
  • the most common cause of disputes is failure to administer the contract, as was the case in 2014;
  • one in four joint ventures end in dispute; and
  • party to party negotiation remains the most common form of resolving disputes, as was the case in 2014.

According to Arcadis, the most common cause of disputes in 2015 was failure to administer the contract. We think this is more likely to be a symptom of a distressed project than the true cause of disputes. Working with our clients, we have found the most common cause of problems to be failure to undertake or pay regard to due diligence, which leads to contracting with 'the wrong counterparty'. The second most common cause, in our experience, is over-optimism: the failure of parties to make proper allowance for the technical and financial challenges of the particular project.

Moving on to attempt to identify the main factors behind the increase in disputes, Arcadis pointed to the continued fragility of the global economic recovery as well as general volatility caused by a combination of the following factors:

  • turbulence in the commodity and currency markets;
  • legacy effects of tenders priced in the immediate aftermath of the financial crisis, and the ensuing economic recession;
  • the rising global cost base and strain on the supply chain;
  • labour and professional staff shortages;
  • significant reduction in the prices of oil and natural resources, leading to a radical rethink of strategy and delivery across the major projects affected.

Looking slightly closer to home, Arcadis also referred to the instability caused by the UK's referendum on EU membership and the impact of China's increasing investment into UK and EU infrastructure projects.

With many of these causes and trends here to stay, at least in the short term, the evidence tends to suggest that it will be a challenging 2016/17. Speculating on how these challenges might impact on the construction industry and give rise to future disputes, Arcadis is anticipating an increase in the cancellation, suspension, termination and restructuring of projects. It also expects many of the biggest supply side contractors to place a greater focus on maximising returns on their existing projects, rather than fighting for new work.

Should these prophesies come to fruition, the careful and effective management of disputes will be more important than ever. Given the difficult legal and contractual issues that this will throw up, failure to properly administer the contract seems odds-on for a third year in a row as the main cause of global construction disputes.

Mark Roe is head of international arbitration and David Greenwood is an international construction law expert at Pinsent Masons, the law firm behind Out-Law.com.