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Preventing Disputes From Crystallising – A How To Guide

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One of the major conclusions reached by the NBS National Construction Contracts and Law Report 2018 was that disputes are not going away.  This is an industry wide problem, as disputes are commonplace and can have disastrous consequences for a project.

The infamous case of Walter Lilly & Company Ltd v Mackey & Anor (2012) demonstrates just how quickly a dispute can escalate.  The hearing lasted 16 days, 32,000 pages of documentation were put before the Court, 9 factual witnesses and 8 experts were called, and the parties spent around £9 – £10 million in costs.  At the end of the matter, the Court awarded Walter Lilly an extension of time and £2,330,666.26 in loss and expense, plus contractual interest.  The relationship between the parties was irreparably ruined, the project took a back seat to the dispute, and the legal costs far outweighed the amount awarded, or even the amount claimed.

With that in mind, this article will set out some of the common causes of disputes and steps to take to avoid them, plus ways to limit the impact of disputes should they arise. By following these tips, you will be able to reduce risk and steer well clear of a matter such as Walter Lilly v Mackey.

What are the most common causes of disputes in construction?

To understand dispute avoidance and management, we must first analyse the common causes of disputes.

Uncertainty

There are multiple points of uncertainty which can affect a project.  The difference between the amount of information needed and the amount of information available for the project will usually be a source of uncertainty.  As a result, not every single detail can be planned prior to commencement of the project, and the higher the uncertainty, the higher the propensity for change during the project.

Compensation events (under NEC and PWC) and variations (under the JCT) are one result of uncertainty leading to an alteration to the scope of the works.  The need for change management is often inevitable, but without caution a compensation event or variation can generate disputes by increasing the costs of the works and creating delay.

Complexity

Every added point of complexity in a project is a source of potential friction, and the more complex a project is, the more likely it is for friction to arise that can escalate into a dispute.  Factors which increase the complexity of a project include the number of stakeholders (and their associated different interests), the number of interfaces associated with the project, the number of bespoke deliverables, and the details of the contracting arrangements.

The Channel Tunnel, for example, was one of the most complex construction projects in history, and almost predictably ran into cost overruns of 80% and several major disputes.

Complexity in a project is also likely to inflate the cost of litigation, should a dispute reach that point.  The Wembley Stadium project generated a lengthy dispute relating to issues with the more complex aspects of the design and in particular the steelworks, including the roof, the arch, and the ground works, which had a knock-on effect for other sub-contractors.  The case, Multiplex Constructions (UK) Limited v Mott MacDonald Limited, resulted in huge legal costs that again outstripped the sum awarded to the contractor by several million.

Contractual Issues

Issues with the conception and drafting of the contract can also increase the risk of a dispute.  Parties should pay attention to bespoke amendments that seek to reallocate risk, as these amendments often seek to shift risk to the party least able to carry it, thereby leading to escalation of disputes as said party is faced with shouldering unacceptable risk.

Ambiguities and inconsistencies in the wording of the contract regularly lead to disputes.  A lack of clarity in even minor clauses can set the parties on a collision course for a dispute without them even realising and this often goes hand in hand with parties failing to understand their contractual obligations.

Poor contract administration has frequently been found to be the number one cause of disputes.  Poor planning, poor record keeping, a lack of procedures and guidance and more fall under this umbrella.

Human Behavior

Any project can fall afoul of basic aspects of human behavior.  To take the Scottish Parliament Building as an example, a lack of communication between parties was cited as one reason for the 730% increase and 3-year delay to the cost of the project.

Fundamentally, some parties may simply have an unrealistic view or set of expectations in regard to the project, which will clash with reality further down the line.  Simply not thinking through timeframes, budgets, and requirements has caused problems in many projects, continuing with the Scottish Parliament example, “scope creep” was a major factor in the continuing changes to the design of the building over the course of the project, and the significant delay and associated costs.

Other human factors such as a lack of trust between parties, poor leadership, and under-resourcing can all increase the chances of a dispute developing.  Lack of trust and even dislike between is common, as evidenced by cases such as Walter Lilly v Mackey.

 

Tips to prevent disputes from crystalising

The solutions to the causes of disputes are as interlinked and multifaceted as the causes themselves but following these tips will help to reduce the risk to your project.

Project management

Good project management is fundamental to reduction of risk.  This includes, but is not limited to:

  • Addressing any important questions at the beginning of a project;
  • Having a clear scope and realistic, well thought out goals;
  • Maintaining excellent communication between parties;
  • Monitoring progress constantly and accurately, with systems in place to handle delay smoothly should it occur; and
  • The need for good management spans the entire project team, from the client, to the design team, and to the contractors and sub-contractors.

Ensure you have a handle on the principles of good project management and keep your project on track.  For more on the topic of good project management, see our recent article “Poor Project Management – A Key Issue in Construction Contracts”.

Clear contract documentation

Having a clearly drafted contract is the most important step in ensuring all the parties involved are certain of their obligations.  The best way to ensure this is have the contract reviewed before signing and negotiating potential issues before they crystalise into a dispute.

Good payment practice

Good payment practice begins with a properly drafted contract, covering the likely scenarios and unambiguously laying out payment procedure.  Review the procedure at the outset and keep notes and records of when interim and final payments are due.

It should be noted that a fair and transparent payment mechanism that is understood by both parties is the best way to reduce risk surrounding payment.  Be clear on when payment applications should be made, what can be claimed for, how the amount should be assessed, when the employer should issue notice of the certified amount and when each payment is to be made.  Compliance with an agreed payment mechanism will reduce risk.

Be sure to address any issues with payment quickly, and collaboratively if possible.  In the event of changes to the works, the contractor should diligently provide the employer with the relevant information to assess and value the changes and must be able to substantiate the amount being claimed.  The employer, for their part, should be able to assess applications fairly and with an eye to collaboration.  Failure of either the contractor or employer at this stage will greatly increase the risk of a dispute forming.

Record keeping and regular reporting

“A party to a dispute… will learn three lessons (often too late): the importance of records, the importance of records and the importance of records.” – Max Abrahamson, Engineering Law and the ICE Contracts, 4th Edition.

Proper record keeping begins in the pre contract stage.  Keep records of pre contract meetings, tenders, and how risk is considered and priced.  Record all emails, telephone conversations, letters, meetings and instructions over the course of the project.  Be sure to record all payment applications, invoices and certifications, along with maintaining labour allocation sheets, site diaries, and programmes of work.

Adopt BIM and the associated tools and technologies that aid in record keeping, accountability between parties and reporting over the course of the project.  Additionally, taking regular site photographs is always helpful.  Should any kind of delay or disruption occur, ensure records are kept of their causes and the efforts taken to mitigate them, and you’ll be in the best possible position to manage the dispute.

Use an Adjudicator to remove conflict

Obtaining a Decision from an Adjudicator to resolve a dispute may have its own costs and difficulties but will almost always be a faster and cheaper method than proceedings to litigation.  This is why the Government and the Courts have been nudging parties towards Adjudication for decades.

Always consider if Adjudication might be a more practical and commercially viable method of removing conflict, rather than escalating further.

Collaborate, compromise, and consider letting it go

Always maintain a realistic and level-headed approach to disputes.  Sometimes, it simply isn’t worth putting the project, your relationship with other parties and your business in jeopardy by dogmatically pressing on.  Adopting collaboration techniques that leverage all the above techniques will greatly reduce risk and usually benefit all involved.

Whatever issue has arisen in the project, be proactive in resolving it.  Do not ignore it, do not hope it will go away.  Issues will always be easier to resolve at the early stages.

Willingness to compromise is the premier factor in avoiding disputes, and the best antidote to the many human factors that create and exacerbate issues in a construction project.  New and developing technologies such as BIM and modelling in 4D, 5D, and 6D are extremely useful in organising risk allocation early in the process and allowing collaboration in resolving problems.

The vastly inflated legal fees incurred in Walter Lilly v Mackay are the premier example of why sometimes, a dispute should just be resolved through compromise or even let go.  Seek legal advice and consider as rationally as possible both what you have to gain, but also what you potentially have to lose.

What can Quigg Golden do for you?

If any of the above issues concern you or your business do not hesitate to contact us. Quigg Golden provide training, contract review, and commercially focused advice to clients across The UK and Ireland, and are market leaders in dispute resolution.

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