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Global Construction Disputes - Avoiding the Same Pitfalls

3 October 2017 YMG News
By Natalia Otlinger

On 19 September 2017, Arcadis Contract Solutions UK and Pinsent Masons jointly organised a seminar regarding the global trends in construction and engineering disputes. The event was supported by the CIArb’s Young Members Group and hosted at Arcadis’ offices in London. 

Global Disputes Arcadis Event 2017L to R  Tom Hawkins, David Greenwood,  and  Kevin McIver

Kevin McIver from Arcadis gave the opening remarks, welcoming the participants and introducing the distinguished speakers: Tom Hawkins (FCIArb) from Arcadis and David Greenwood from Pinsent Masons

Kevin also shared the news that Arcadis has recently obtained CIArb Corporate Membership and acknowledged the CIArb’s kind support for the event. 

Tom Hawkins began his presentation with an introduction to the Arcadis Global Construction Disputes Report 2017 (the “Arcadis Report”), pointing out that the Arcadis Report is divided into sections concerning global and regional trends. It consists of annually summarised data in respect of construction disputes, focusing on common causes, average value, typical length, most popular resolution methods and regional nuances. 

Global trends 

Starting with a global perspective regarding the average value of the disputes, Tom emphasised a significant increase of this parameter in Asia, from the US $67 million in 2015 to the US $84 million in 2016. He attributed this considerable development to the complexity of projects conducted in this region. This number is expected to increase in the nearest future. 

Tom noted that in respect of the length of disputes, the global trend indicates a slight decrease in average duration. In Asia, for instance, the average duration of a dispute was reduced from 19.5 months in 2015 to 14.6 months in 2016. However, in the UK and North America, an opposite tendency can be observed. In the UK, the disputes lasted 1.3 months longer in 2016 than in the previous year and in North America disputes lasted on average 2.1 months longer than in 2015. 

The Arcadis Report identified the five most common sources of disputes. The most common cause turned out to be a failure to properly administer the contract. The second reason was linked to poorly drafted or incomplete and unsubstantiated claims. Tom mentioned that the second cause was usually closely connected with the third one, namely, parties’ failure to understand and comply with their contractual obligations. In practice, the most common examples of such situations are improper notices which do not follow the contractual provision concerning notification. The fourth most common dispute cause was errors and/or omissions in the contract documents and the fifth was incomplete design information or employer requirements. 

In relation to the most commonly followed dispute resolution methods, the global trends indicate that construction disputes are more commonly resolved by direct negotiation between parties. Arbitration and mediation held, respectively, second and third position in this ranking. Tom mentioned that this list looks slightly different for the UK due to the existence of adjudication. 

From a global perspective, Tom also identified the most common problems causing construction disputes such as commodity and currency volatility or scarcity of labour and professional staff. 

David Greenwood added a few remarks concerning the Arcadis Report from the point of view of Pinsent Masons. He explained that as Pinsent Masons’ roots originate from the construction industry, their Construction Advisory and Dispute team always carefully considers and makes good use of the Arcadis Report.  

Subsequently, David referred to arbitration as the most frequently used dispute resolution mechanism for global construction disputes. He elaborated on the most important advantages of arbitration, such as flexibility of the procedure, choice of a seat, confidentiality and worldwide enforcement. He praised the disclosure procedure, which is significantly more efficient and faster in the arbitral proceedings than during court proceedings. David gave an example of a disclosure exercise in a court case which lasted almost a year and compared it to the very flexible and speedy arbitration process. On the other hand, he underlined that the flexibility of ADR mechanisms could also lead to a disadvantage. This is particularly noticeable when it comes to missing procedural deadlines, which unnecessarily prolong the dispute. Regarding the enforceability of the awards, David mentioned the uncertainty created by Brexit. 

UK trends 

Moving to the UK-focused part of the Arcadis Report, Tom demonstrated that the average value of a dispute has increased from US $25 million in 2015 to US $34 million in 2016. He emphasised that this is the highest reported increase since the first Arcadis Report back in 2010. In reference to the average length of disputes, the report shows a slight increase in the UK from 10.7 months in 2015 to one year in 2016. However, Tom highlighted that notwithstanding this increase, in the global context disputes in the UK are still the quickest to be resolved. Regarding the most common causes, the UK statistics are identical to the global ones. The most frequent causes of disputes are represented by a failure to properly administer contracts, followed by poorly drafted claims and parties’ failure to comply with the contractual provisions. As previously mentioned, adjudication is one of the most frequently used ADR mechanisms in the UK. 

Describing the potential and actual problems which may influence the building industry Tom mentioned the UK general election and the implications of Brexit. One of the considerable difficulties the construction industry will face as a result of Brexit is a shortage of skilled workers. Contractors and employers should consider in advance and be prepared for the implications of these labour deficiencies. 

In respect to this problem, David underlined the substantial impact that shortage of skilled workers would have on the construction industry, even if the so-called “soft Brexit” scenario happened. In the event of a delay during a construction project, it will raise a contractual question, namely whether this shortage of skilled workers due to Brexit was foreseeable.  David also praised adjudication as a convenient dispute resolution method containing a promise of a quick financial recovery . However, he underlined that adjudication is more useful during the project rather than after the construction has been completed. He also mentioned the second edition of the Pre-Action Protocol for Construction and Engineering Disputes[1], which allows the parties to define what is contentious at a very early stage of the dispute. Another trend, described by David regards the increased importance of mediation and negotiation which usually lead to a settlement, that helps the parties save time and costs as well as maintain their business relationships. 

Looking towards the future, David highlighted Pinsent Masons’ perspective on the predicted tendencies. Firstly, a steady stream of disputes from public finance initiative contracts is expected. As an example of such investments in infrastructure, David mentioned Crossrail, High Speed 2 and Thames Tideway. In general, a movement towards collaborative construction can be observed in the immediate future. Other novelties which need to be kept in mind by practitioners are infra-tech innovations such as for instance building information modelling (BIM). It is highly anticipated that the developments in technology will influence the infrastructure and generate a significant number of new disputes, including those related to IP rights. 

Practical advice on avoiding disputes 

In the last part of the presentation, David offered practical tips to avoid the escalation of disputes. He underlined the importance of the careful consideration of the whole contract, including any amendments and ancillary documents. Within the contract, the greatest significance should be given to the requirements and timescales for notices. As previously mentioned by Tom, it is of vital importance to comply with contractual provisions determining when, where, to whom and in which form a proper notice should be served. 

Another important tip concerned the invaluable importance of keeping records. No matter how smoothly the parties may cooperate, a party to a construction contract should always keep the evidence of what was agreed outside of the scope of the original contract. In this sense, David recommended keeping records such as progress reports, site diaries, photographs and meeting minutes. He suggested that the parties should take a proactive rather than reactive approach towards record-keeping and advised that they should be properly kept from the outset. Although many records are now retained in electronic form, David indicated that hard copy evidence is still of much importance.

With regards to the potential early settlement of a dispute, David shared some tips which can be adopted during negotiations. He suggested escalating the level of seniority of the party representative attending ‘Without Prejudice’ meetings for the sake of perceived objectivity and neutrality. Another important point is to have structured and timetabled negotiations with a precisely defined end date. During such negotiations, it is a good idea to task the key members of the team of both sides to meet and mutually indicate what can and cannot be agreed on and why. It is also a good strategy to provide samples of records to show that if the dispute was to escalate the party is in possession of reliable documents. Sometimes sending a strongly worded and well-reasoned persuasive letter drafted and sent by an external lawyer can also be a smart move. 

Interactive session 

After the presentation, the speakers gave the audience a practical exercise to put their knowledge into practice and share some ideas and experiences relating to the initial phase of disputes. The participants were given the following scenario to consider: A contractor submitted the final account and a note of inclusion in respect of a high-value design and build project in Central London. The employer, via email, refused to pay for the additional lighting installation in the sum of over £2m stating that the purported variation was always within the scope of the contract and therefore it does not constitute a variation. The employer also stated that the contractor failed to provide any records proving the incurred additional £2m. The participants’ task was to identify all steps that should be taken by the contractor in this situation to prevent the escalation of the dispute. 

The participants worked in groups and discussed potential dispute avoidance strategies. Afterwards, conclusions were exchanged between the groups, which lead to an interactive discussion. 

Tom concluded the event by thanking the participants and inviting them to networking drinks, kindly hosted by Arcadis.