The changing nature of global construction disputes

Out-Law Analysis | 28 Nov 2019 | 11:21 am | 7 min. read

The global market in construction law and dispute resolution is rapidly changing, as contractors grapple with new ways of doing business and new contractual structures.

At the same time, the growth of new dispute resolution mechanisms such as adjudication and dispute avoidance boards (DABs), plus new rules and initiatives to improve existing mechanisms such as arbitration, are increasing global access to justice by enabling parties to resolve disputes in a cost and time efficient manner.

Disputes in focus

The global average value of construction disputes tracked by Arcadis, the consultancy, fell in 2018, down to $33 million from $43.4 million the previous year. However, the average length of disputes increased over the same period, up to 17 months from 14.8 months in 2017.

The growth of new dispute resolution mechanisms such as adjudication and dispute avoidance boards ... is increasing global access to justice by enabling parties to resolve disputes in a cost and time efficient manner.

The most common causes of disputes, according to Arcadis, are:

  • parties failing to understand or comply with their contractual obligations (number 3 in 2017);
  • errors or omissions in the contract document (number 2 in 2017); and
  • failure to properly administer the contract (number 1 in 2017).

Among the practical issues increasingly arising during disputes are public private partnerships, 'infratech' and renewable energy.

Public private partnerships

Public private partnerships (PPPs) are contracts between a public sector institution and a private company, where the private company performs a function traditionally provided by the public sector. The private company assumes substantial financial, technical and operational risks, and in turn benefits through unitary payments from government budgets and fees from users.

PPPs involve new contractual structures, onerous risk transfer and a difficult delivery model, while a typical PPP contract lasts between 25 and 30 years. All of these factors present potential for disputes.

In the UK market, we have also seen a number of disputes arising out of PPP-specific contractual clauses such as 'equivalent project relief' (EPR) provisions. These are used as a way of getting around the prohibition on 'pay when paid' provisions by only giving subcontractors the same entitlement to relief to which the project contractor was entitled under the PPP agreement. ERP provisions offer a mechanism to force risk down the supply chain and preserve the liquidity of the PPP project company, but may lead to disputes if these are challenged.

Infratech

Infratech is the deployment or integration of digital technologies with physical infrastructure to develop assets which use data and respond intelligently. Examples include the use of connected sensors in a public space to optimise and re-direct footfall during busy periods using data analytics; the use of sensors in train tunnels to inform maintenance decisions; and the use of smart motorway technology to actively manage traffic flows and optimise the motorway network.

Research in 2017 by Pinsent Masons, the law firm behind Out-Law, found that 76% of infrastructure respondents expected their overall level of engagement with technology firms to increase, while 53% of infrastructure firms expected to enter into a joint venture with a tech firm in the next three years.

The innovation and change involved in infratech is likely to cause disputes. It involves contracting with new parties in different industries, and will deliver new products which are untested and may fail. We are also likely to see disputes between joint venture partners.

The growing use of building information modelling (BIM) to create and manage information related to a construction project will also impact on dispute resolution due to the sheer amount of data involved. The cost of litigating a case involving a large BIM model with terabytes of files and audit trails could easily exceed even the largest claims today, making it even more likely that parties will turn to alternative dispute resolution (ADR) methods in order to prevent large scale litigation.

Renewable energy

Demand for green design and construction is likely to increase in the short term, with specific emphasis on climate resilience, carbon reduction and alternative forms of energy. Nearly half of respondents to the World Green Building Trends 2018 SmartMarket survey said that they expected to make more than 60% of their projects green by 2021.

As the nature of construction projects change, we will see different disputes emerge. Engineering disruption claims are already fairly common, but as engineers are required to approve ever more novel project designs we could see claims for delay and cost increase. Solar panels raise specific legal issues: the impact of too much rain or too little sun on the short-term success of a project, for example; or high winds picking up debris which damage the delicate panels.

How are disputes being resolved?

Litigation

National courts worldwide are introducing special chambers to challenge the pre-eminence of the English courts in respect of international commercial disputes.

Special chambers where hearings can be conducted in English have already been established in Frankfurt, Hamburg, Amsterdam and Paris, and the Brussels International Business Court is expected to be operational this year. It is likely that further initiatives will follow.

International arbitration

Pinsent Masons' 2019 International Arbitration Survey, in partnership with the School of International Arbitration at Queen Mary University of London, focuses on issues affecting the efficiency of resolving disputes on international construction projects and how that might be improved. Findings suggest that although arbitration is seen as the most widely selected process for resolving international construction disputes, there is a desire within the construction sector to make the dispute resolution process and most particularly, arbitration, more economical and quicker for the end user.

A number of recent developments are intended to speed up existing arbitral procedure.

The International Chamber of Commercial (ICC) published its recommendations for the effective management of construction industry arbitrations in February 2019. Its recommendations included multi-tiered dispute provisions; selecting arbitrators based on their familiarity with construction and related case management and IT skills; avoiding document production requests where possible; and having regard to the 'expeditiousness' requirement in the ICC rules.

Competition among arbitral institutions and user demand for increased efficiency and lower costs has led to many institutions introducing expedited procedures and summary determination, including the Stockholm Chamber of Commerce (SCC), Hong Kong International Arbitration Centre (HKIAC) and ICC. These changes are likely to increase the popularity of arbitration in European jurisdictions, where litigation has traditionally been favoured.

Finally, the Rules on the Efficient Conduct of Proceedings in International Arbitration ('Prague Rules') were signed on 14 December 2018 and are now available for parties to adopt in their arbitration proceedings as an alternative to the IBA Rules on the Taking of Evidence in International Arbitration. The Prague Rules seek to promote procedural efficiency in international arbitration by adopting procedures more akin to a civil law inquisitorial style.

Adjudication

Adjudication is a procedure for resolving disputes without resorting to lengthy and expensive court procedure. The UK and other jurisdictions make the availability of adjudication mandatory for parties to a construction contract. The decision of an adjudication is final and binding, provided it is not challenged by subsequent arbitration or litigation.

Statutory adjudication was first introduced in the UK in 1996 and has since been introduced in Australia, New Zealand, Singapore, Malaysia and, most recently, Ontario, Canada where the procedures came into effect on 1 October 2019. Adjudication also exists in South Africa as a non-legislated process which is regulated by terms of reference and rules agreed to by the parties.

It is worth noting that in some jurisdictions including the UK and New Zealand, any disputes arising out of a construction contract can be referred to adjudication. In others, including Australia, Singapore and Malaysia, only payment disputes can be referred.

ADR and mediation

Parties are increasingly willing to participate in alternative dispute resolution (ADR), particularly mediation.

The latest editions of some of the standard form construction contracts including FIDIC, NEC4 and JCT contain escalating dispute resolution procedures in differing forms. Typically, such escalating provisions involve an initial referral to senior executives or directors followed by either mediation (by agreement) or a form of adjudication or expert determination procedure, and then either arbitration or litigation.

ADR is also promoted in legislation and standard form contracts such as the pre-action protocols in England, the new Danish standard contract AB 18 and the recent revisions of the Norwegian standard forms of contract for offshore construction. ADR service providers have also reported high success rates.

Dispute avoidance boards

Dispute avoidance boards (DABs), also known as dispute avoidance/adjudication boards or dispute resolution boards, have also seen a significant increase in their use.

Who is paying for dispute resolution?

Third party funding is where a third party, who is not a party to the dispute, agrees to share the risk and finance all or part of the legal and other costs of the litigation in return for a fee.

Third party funding is not a loan, but is so-called 'non-recourse' funding and accordingly can be expensive. A third party funder's fee will typically be a multiple of cash advanced or a percentage of the money recovered, whichever is the greater. If the case is lost, no money is repayable to the funder.

For third party funders, the main issues are the value of the claim and potential recovery; the claim having good merits; and there being no issue as to the opponent being good for the money and the client being able to enforce payment in the event of success. Funders prefer cases that are not too dependent on factual or uncertain expert evidence.

Competition among arbitral institutions and user demand for increased efficiency and lower costs has led to many institutions introducing expedited procedures and summary determination.

In a third party funding scenario, the client remains primarily liable for its solicitors' costs and expenses, albeit that the funder enters into an agreement to indemnify such costs. The client and its litigation funder must also consider the potential liability for the opponent's costs in the event of the litigation being unsuccessful.

It is important to note that third party funding is not legal in all jurisdictions: for example, in Ireland or in Nigeria. Check the laws in each jurisdiction to see if third party funding is legal.

Pinsent Masons has recently agreed a £25 million litigation funding arrangement with Augusta Ventures. The arrangement gives Pinsent Masons' clients preferential rates in exchange for Pinsent Masons making Augusta its preferred supplier of third party funding. The arrangement also helps to fast-track due diligence processes and allows Pinsent Masons to vet the commercial terms.

Neal Morris and Charlie Chetwood are construction disputes experts at Pinsent Masons, the law firm behind Out-Law.