UK takes the lead in Construction Dispute Resolution

The annual report into Global Construction Disputes by EC Harris draws a number of interesting and, potentially surprising, conclusions.

In the UK, the amounts disputed and the time taken to resolve construction disputes have both increased; however, the UK compares well to other jurisdictions and is actually the quickest forum for concluding resolutions.  The United States took the longest to resolve disputes at an average of 14.4 months, whereas UK disputes lasted only 8.7 months on average (although this compares unfavourably to 6.75 months a year ago).

It is likely that the UK’s relatively speedy dispute resolution statistics are the result of a number of contributory factors, such as:

  • The success of adjudication, as a fast and effective dispute resolution process;
  • The relatively high quality, efficient service provided by the Technology and Construction Court (TCC);
  • Pro-active party to party dispute resolution;

There is growing evidence that adjudication is increasingly being shunned by construction professionals, possibly due to the propensity for inconsistent and questionable results and some decisions taking much longer than the statutory 28 days.  The recently introduced Construction Act, which allows disputes based on oral contracts to be referred (and also contains a number of other changes to the adjudication process), may lead to an increase in the number of disputes being referred to adjudication.

The TCC continues to enjoy a reputation (when compared with the remainder of the UK court system) for disposing of disputes effectively and quickly.  The successful costs pilot (which has recently been rolled out nationwide) has further increased respect for the TCC and affords the court a much enhanced role in controlling and managing claims and, in particular, legal costs.  Unfortunately, the TCC is not entirely immune from the difficulties currently affecting the civil justice system and has apparently been under threat due to a shortage of judges.  In order to address this problem, steps are being taken to reduce the number of cases heard by the London TCC, which is likely to have a negative effect on the time taken to resolve construction claims in the UK.  In addition, there is evidence of a growing trend for litigation; which may be driven to further increases by the continued availability of conditional fee agreementsand after the event insurance costs recoveries until April 2013.

Party to party negotiation was the most favoured method of dispute resolution, closely followed by mediation.  This is perhaps unsurprising, given that these processes do not involve the sort of significant expenses associated with adjudication, arbitration or litigation.  Parties would, however, be well advised to exercise caution in regard to these processes; in order to ensure they are not exploited as an unsophisticated mechanism to increase margins and recover losses on unprofitable contracts.

Arbitration has fallen in popularity but remains the third most favoured method, followed by adjudication, with litigation bringing up the rear.

What are the most common causes of Construction disputes?

The report found that a failure to properly administer contracts was the most common cause of disputes, followed by conflicting party interests, unrealistic risk transfer from employers to contractors, changes imposed by the employer and ambiguously worded contracts.

What should be done to seek to avoid / minimise the potential for disputes?

Parties to construction contracts should seek to dedicate greater efforts and resources into contract selection and understanding.  Standard form contracts, such as NEC3 and the JCT suite, should be chosen for their suitability to particular projects, rather than (as is sometimes the case) trying to shape the project around the selected contract.

All standard form contracts can and should be amended in order to tailor them to specific requirements and parties should always ensure that any such amendments serve a genuine and beneficial purpose; and that they understand precisely what that purpose is.

There can sometimes be disengagement between parties and legal advisors in the selection of standard form contracts and the drafting of bespoke agreements; simply leaving it to the lawyers to decide what is, and is not, included.  This often leads to unnecessarily complex and poorly understood contracts, which are subsequently overlooked or ignored during the day to day administration of the project; only to be dusted off when the parties eventually fall into dispute.  It can also create unfairly biased agreements, which disproportionately favour one party over the other.  The disadvantage to the unfavoured is obvious; however, the advantage to the other party may only be short lived; as it is in the interests of neither to force the other into oblivion.

Insolvency rates among construction companies continue to be consistently higher than other industry sectors, and increasing numbers of large employers within the construction industry are now recognising the significant benefits to project delivery of close working relationships, good faith and genuine collaboration between parties.  It is to be hoped that such an approach will become industry standard; and that alternatives to formal dispute resolution will continue to increase in popularity and success.  In order to further this goal; lawyers must be challenging to provide construction companies with consistently sound, accessible and cost effective advice.

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If you have an issue and would like a no obligation conversation, email Mike Smyth (Partner and Construction Dispute Solicitor) on mike.smyth@orj.co.uk