Disputes increase as construction sector recovers

Disputes increase as construction sector recovers

Recent research has shown that the value of construction disputes in the UK reached peak levels in 2013, totalling £16.5m. Laurence Cobb, UK head of construction and engineering at Taylor Wessing, assesses the impact of this increase on the construction industry and the approach lawyers should take to help minimise the cost of conflict.

What is fuelling the increase in construction disputes?

The increase is being fuelled by a combination of factors that have all played a part in creating a potentially more litigious environment:

  • larger projects with larger sums at stake

  • the consequences of a buyer’s market where contractors and sub-contractors are forced to and/or choose the price keenly, and

  • the tightening of the borrowing market

What sorts of disputes are filling the courts?

Following the relatively recent amendments to the Housing Grants, Construction and Regeneration Act 1996(HGCRA 1996) there has been less court activity regarding payment issues than many expected. This is possibly because issues regarding pay less notices have been resolved in adjudications. However, there is still the expectation that more court activity regarding that legislation is not far away. Also, because of a number of high profile insolvencies among contractors and sub-contractors, one is likely to see scattergun litigation against all parties left standing—particularly where other sources of potential funds such as bonds, guarantees and insurance are in play.

Should lawyers be reviewing contracts to try and ward off potential challenges?

Any lawyer will advise that the more care that is taken over the drafting and agreement of contracts the clearer the parties should be as to their rights and remedies. Building in provisions allowing for pre-dispute procedures to try and resolve matters early can only help. However, such review is best done before agreements are made. In particular, where contractual chains exist, it is vital that the parties are clear as to how risk is distributed along such a chain, and whether insurances adequately cover risk. Contractual caps on liability can also control risk at the outset of a project.

How does the increasing litigious environment affect the construction industry?

Disputes cost money—not just in fees but in time, resource and emotion, where the focus should be on running and growing a business. Initiatives such as the Construction Supply Chain Payment Charter are all good news for the industry if adopted, and value engineering with the use of such tools as Building Information Modelling (BIM) is better than a confrontational approach. However, there are situations where financial imbalance between contracting parties means that litigation is the only way to get an entitlement to payment so for some it is vital to their survival and growth. Indeed, the availability of adjudication may have increased disputes overall but shortened the time taken on disputes and the level of costs incurred, so it could be argued to be an improvement for the industry.

What are the knock-on effects?

Serial litigators can get a market reputation and, as a result, risk increased pricing to allow for that reputation. Often better site records are kept for a rainy day in case disputes arise. Another knock-on effect is that any cash starvation down the supply chain will lead to insolvencies and potential skill shortages in specialist areas.

What are your predictions for the future?

These will be principally down to the economy. It is generally acknowledged that there has been a recent upturn in the construction market. If this continues it could create a climate where parties are prepared to do deals to settle outstanding accounts as there will be another job to move on to in order to keep cash coming in and assist growth. However, where pricing remains very keen, disputes will continue to be unavoidable.

As to process, while arbitration remains popular on international projects, domestic arbitrations have become very rare. Adjudication will continue to be popular because of its speed, but is often used for complex disputes for which it is not best suited. In combination with the issue that each party will bear its own costs, regardless of the outcome, this may well lead parties to consider carefully whether a direct trip to the Technology and Construction Court is the better choice commercially—particularly where the court has a well-earned strong reputation for dispute management and resolution. Mediation is also likely to be a growth area with the support of the courts and financial drivers to resolve disputes as quickly and efficiently as possible.

The only certainty is that in an industry with various participants with different skills, roles and resources, construction disputes, while they may change as to forum and timescale, are unlikely to become extinct.

Laurence Cobb is a partner and head of construction and engineering (UK) at Taylor Wessing. He specialises in construction and engineering law; with considerable experience in dealing with dispute management for all forms of construction and engineering projects, ranging from traditional building contracts to complex infrastructure schemes, both national and international. Laurence advises clients in mediation, litigation, adjudication, arbitration and expert determination, as well as during negotiated settlements and in meeting pre-action requirements. Laurence is a member of the Society of Construction Law and writes articles for the construction press and lectures to industry bodies and clients.

Interviewed by Helen Redding. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on  Lexis®PSL Dispute Resolution. Click here for a free one week trial of Lexis®PSL

To read our report on construction and costs budgeting please click here [PDF].

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