Disputes in the construction sector, as in any industry, usually arise due to the failure of one or more parties to comply with contractual obligations.
They can also arise from errors and omissions in contract documentation/design, or suspension/termination provisions (the latter of which is particularly relevant to the Covid-19 crisis).
Construction disputes are often complicated and multifarious, meaning they take a long time to resolve in any event, but they are frequently further delayed by avoidable glitches that occur from the contract drafting stage right through to arbitration proceedings.
Choice of contract
Before a construction project commences, choosing an effective form of contract and negotiating the terms shrewdly puts a party in a strong position if a dispute arises, and may help avoid disputes altogether.
In international construction projects, the Fédération Internationale Des Ingénieurs-Conseils (FIDIC) Rainbow Suite (updated in 2017) is the most commonly used form of contract.
One of the main reasons FIDIC is popular is that it sets out a complete code for progressing from claims, to disputes, to arbitration (if necessary), and the 2017 update made standing dispute adjudication and avoidance boards (DAAB) mainstream.
Establishing a board takes time, but it avoids claims accumulation and promotes a healthy 'use it or lose it' culture.
FIDIC may not suit every project however, as its three-stage process may be overly-prescriptive in some cases.
In certain jurisdictions, other contracts may be used for public or domestic construction projects, such as the Joint Contracts Tribunal (JCT) and New Engineering Contract (NEC), which are popular in the UK.
Most standard contracts do not prescribe methods for demonstrating or assessing disruption to projects, but there are important distinctions between their approaches to assessing delays.
For example, under FIDIC, there is no set methodology for assessing delay; instead, these contracts rely on retrospective analyses of what actually happened and where delays occurred.
The NEC contract, by contrast, prescribes a prospective form of delay analysis, which is helpful in promoting good contemporaneous project management but can create difficulties in arbitration, because forward-looking analyses may not reflect the actual course of events.
Experience suggests that tribunals prefer retrospective analyses to establish the effect of breaches.
As regards Covid-19, it will be very difficult to forecast delays caused by the pandemic, as these often relate to loss of productivity rather than discrete events.
State, employers' and bespoke contracts
Bespoke and hybrid forms of contract are sometimes used by state actors and employers. These typically provide less certainty and visibility on disputes than standard contracts.
When using a bespoke contract, parties should be aware of the following factors:
- Applicable law – This can be important for a variety of reasons, including rules about recoverable damages. Applicable law may determine when a dispute has crystallised and, where international parties are involved, be used to counter the applicable law of another state – both of which can slow down resolution of a dispute.
- Notice of claims clauses – Claims and disputes should be managed proactively and parties should carefully review and follow the claims procedure specified in the contract. This is easily achieved when parties are organised, but is frequently neglected. It is critical to understand when and how a notice must be given, and in what detail, as ignoring or postponing claims will add to delays and costs later on. In some contracts, issuing compliant notices are conditions precedent to the right to time and/or money in construction disputes.
- Escalation and ADR – Parties should ensure they know when to elevate claims from project level to senior management, and then to alternative dispute resolution (ADR) or arbitration. These processes should be clearly outlined in the contract. The full range of ADR options should be considered before starting formal proceedings. Amicable solutions are always preferable (provided formalities are strictly observed when attempting to resolve disputes this way). However, each step takes time, and if notices of delays (NODs) are built into contracts as conditions precedent, if these are missed during attempts at ADR, this risks creating satellite disputes.
- Adjudication – A standing DAAB can iron out delays in forming boards and avoid satellite disputes. Standing boards are more expensive but have the benefits of being on hand to provide ad hoc advice and are ready to hear disputes, if required.
- Arbitration clauses – Poorly drafted arbitration clauses are major causes of delays and satellite litigation. Properly drafted arbitration clauses leave no room for doubt and provide clarity on when arbitration may be commenced. If escalation steps are included as conditions precedent, these should be clear, and not subject to acts of third parties or liable to argument.
- Arbitral institutions – Parties should think carefully about which arbitral institution to specify in their contracts. The mainstream institutions (such as the ICC, LCIA, SCC etc.) will all proactively manage disputes and appoint the tribunals quickly, however there are key differences between institutions, such as opt-out expedited procedures for lower value claims and emergency arbitrator provisions, which can affect the speed at which a dispute progresses. The seat of the arbitration can also be important, as local law can affect tribunal formation, especially if the clause is poorly drafted, and some jurisdictions do not enforce interim measures.
- Force majeure, prevention and frustration – The importance of force majeure clauses in construction contracts has been reinforced by the impact of the Covid-19 lockdown. Detailed, prescriptive force majeure clauses are preferable for avoiding delays, as vague clauses leave interpretation of what constitutes a force majeure event and whether the claimant is entitled to time and/or money to the applicable law (or potentially other clauses in the contract). NEC contracts do not have force majeure clauses but instead have prevention clauses, which entitle the claimant to time and money. Finally, frustration will vary from country to country. From an English law perspective, it is preferable to resolve disputes under the wording contracts rather than resorting to frustration, as this is very difficult to prove.
Keeping projects on track
Projects fall behind for a variety of reasons, many of which manifest themselves at an early stage and can be avoided. These include:
- Impossible schedule/under-pricing – Contractors trying to win work in a competitive and challenging economic environment can under-price jobs and promise impossible timelines. These are set to fail from day one.
- Poor contract drafting and management – Contracts that are too rigid will prompt parties to try to find ways to work around them; contracts that are too loose leave room for interpretation and disagreement. In some cases, parties will not employ a contract manager, which risks parties losing track of progress.
- Unforeseen events/changes – The possibility of unforeseen events and changes to circumstances needs to be addressed in contracts and the reality of construction projects. Changes in the scope/design of a project that are not provided for in the contract create friction between parties and commonly result in delays.
- Visibility and monitoring of the design – Different parties have different understandings of when a design is finalised. Lack of visibility of the design and monitoring of progress are key factors that cause projects to fail.
- Record keeping – Poor records lead to poor reporting and badly designed critical paths. Failure to keep accurate records means that nobody knows whether the project is on schedule.
Importance of the baseline
Establishing the baseline is the first programme of the project and also the first contractual requirement. The baseline is used to measure delays and should ideally use 'as built' dates (i.e., dates of real events) to measure against the baseline plan and avoid different interpretations of delays.
Wrongly defining the scope of a project can result in an inaccurate critical path and inappropriate focus of works. This can lead to contractual milestones being missed and cause critical delays.
Updating the programme properly is important as it defines the actual critical path and establishes good monitoring of the project.
It also instils trust between stakeholders, identifies problems early to allow for extension of time requests, early warnings and notifications.
In many cases, programmes are not updated as forensically as they should be. Complex construction projects often have programmes involving thousands of activities and the process of updating them is extremely onerous and time consuming.
Deciding on an appropriate level of detail in the programme is therefore key to ensuring it is updated properly, as overly detailed programmes are open to mistakes, omissions and manipulation.
Loss of productivity from Covid-19
Covid-19 introduced new causes of loss of productivity that will not have been prevalent in historic analyses. The effects of the pandemic could result in re-routing of the critical path, as different activities may be affected in different ways.
For example, while the design phase may have been able to continue remotely, procurement may have stalled. These differences will need to be accounted for in any loss of productivity analysis to assess the impact of Covid-19 on a project.
Productivity on site may have dropped prior to the implementation of lockdown measures, as there may have been shortages of labour through absenteeism from sickness, self-isolation or travel restrictions.
The introduction of lockdown measures accelerated the negative impact on productivity as contractors were forced to work under more restrictive site operating procedures (SOPs) or in some cases to halt work altogether.
Even as lockdown measures are relaxed, productivity may not return to pre-lockdown levels as many infection control measures remain in place and ad hoc restrictions are being introduced at short notice.
Parties will be keen to adopt strategies that allow them to recover lost time, such as working longer hours; however, doubling the number of hours worked on a task does not automatically halve the amount of time it takes to complete that task.
Assessing delays: Productivity vs cost-based methods
Methods of evidencing loss of productivity in construction projects for arbitration purposes broadly fall into two categories: productivity-based methods and cost-based methods.
Of the productivity-based methods (outlined in the UK Society of Construction Law's delay and disruption protocol), the most commonly accepted method is the 'measured mile' approach. This compares the level of productivity achieved during a period of disruption with that achieved during a period of non-disruption.
This method is often preferred because it assesses productivity specific to a particular site; and because it compares actual productivity with productivity that can still be achieved but for the disruption (i.e., it does not rely on potentially unrealistic tender allowances or data from other site studies).
Post Covid-19, this solution may no longer be available if 'Covid-secure' SOPs continue to restrict working practices. To show the impact of lockdown measures on productivity, contractors may need to show that their planned productivity was reasonable based on established norms or other historic data.
Contractors can also use their work programmes to capture status of works pre- and during lockdown and correlate these with methods of working to demonstrate that there were no other external influences slowing productivity down.
Such analyses are likely to be supported by site diaries and personnel on site, which may be helpful for factual witness statements in arbitration.
Other productivity-based methods include earned value analysis, programme analysis, work or trade sampling and system dynamic modelling, which each have their strengths and weaknesses but should be considered depending on the project in question.
Cost-based methods analyse differences between planned and actual expenditure (on labour and materials etc.) without first analysing loss of productivity in terms of resources.
This is arguably a less robust approach than project-specific studies but can still be a useful cross-check for productivity-based analyses.
Records for analysing loss of productivity
Good record keeping can significantly assist the success of a party's case in arbitration and potentially avoid disputes altogether
Records should be generated contemporaneously. When going into lockdown or any other special measures, parties should record the status of works at that point.
- Programmes – These should record actual progress of all activities within the scope of works at regular intervals, as well as ensure the sequence of outstanding works is realistic and capable of achievement. Ideally, programmes should be resourced and identify the principal equipment and other resources to be used.
- Progress records – Records of progress should be kept daily and capture time spent carrying out specific activities and the resources used (people, equipment and materials). Typical records might include weather conditions, manpower, deliveries, site conditions, working hours, and major plant and equipment used.
- Resources records – These should document labour, materials and equipment used (and unused) on works in specific areas on a daily basis.
- Cost records – Records of costs need to be kept to enable any loss of productivity to be accurately priced. Costs should be site -specific and established in accordance with the contract (for example, see Appendix B of the UK SCL Delay and Disruption Protocol 2nd Edition February 2017).
Efficiency in international construction arbitrations
With good drafting and documentation, arbitration, which can be slow, expensive and unrewarding, is avoidable.
However, irrespective of its faults, according to the 2019 International Arbitration Survey: International Construction Disputes, international commercial arbitration was the most frequently used procedure for resolving construction disputes last year (being used in 71% of cases), followed by domestic commercial arbitration (at 39%).
Once a construction dispute has been submitted for arbitration, there are ways parties can enhance the efficiency of the process.
Construction disputes are known for their factual and technical complexity, often involving large amounts of evidence along with multiple claims and/or multiple parties. These factors alone can cause proceedings to last for several years, even if the arbitration is not delayed by other extraneous factors.
Tools for efficient arbitration
The 2019 update to the ICC Commission on Arbitration Report on Construction Industry Arbitrations provides practical guidance for handling arbitrations efficiently and takes into account recent developments, including revisions to the ICC rules and pre-arbitral forms of dispute resolution (such as dispute boards).
The report also details case management techniques and procedural matters specific to construction arbitration, which can promote cost-efficient proceedings and seeks to facilitate approaches of civil and common law systems while recognising that arbitrators are ultimately responsible for deciding applicable procedural rules.
The five aspects identified by the ICC that can contribute to avoiding delays are:
1. Constitution of the arbitral tribunal
It is essential that the arbitrators appointed to hear a construction dispute are familiar with the construction industry and the main forms of construction contracts and their interpretation.
They also need strong case management skills (including the ability to handle large amounts of digital data) and availability to devote enough time to read and understand all the material, and then to deliberate and draft what are often complex awards.
A three-member tribunal will necessarily take more time to conduct proceedings and parties have the choice to nominate a sole arbitrator to hear disputes up to a value of $30 million.
The 2019 IA survey suggested parties are not generally in favour of submitting dispute to a sole arbitrator, however, and the ICC Commission report confirms this to be the case in civil law countries accustomed to panels of judges.
2. The case management conference
The first case management conference should determine the manner in which the arbitration will be conducted.
The ICC report lists issues that may be useful to discuss during the conference, namely:
- Written submissions and evidence that parties consider necessary to establish their case;
- The need for expert evidence (often crucial in construction disputes);
- The sequence of proceedings, including issues of bifurcation;
- Whether a site visit may be required;
- Issues relating to document management;
- Translation and interpretation issues; and
- Settlement discussions and sealed offer procedures.
Site visits can be very useful in helping a tribunal understand the case. However, this option is not always contemplated at beginning of arbitration, which can be problematic if a site visit is later deemed necessary, by which time members of the tribunal may have less availability and/or the works may have progressed to alter the appearance of the work site.
Document management issues, such as access to project databases, are frequent in construction disputes and it is wise to address this early during case management conference to ensure proceedings are not held up by technical issues.
3. Procedural timetable
Efficient arbitration timetables recognise the need for proceedings to run quickly but also give all parties enough time to argue their case.
Timetables need to accommodate the possibility of expedited procedural rules; the appropriateness of preliminary determinations on issues such as jurisdiction and admissibility; decide the number and order of written submissions; the procedure for document disclosure; and the timing and duration of hearings.
Summary disposal of unmeritorious claims at an early stage and streamlining evidential hearings and submissions also need to be considered when setting the timetable.
Consequently, procedural timetables are difficult to modify once they have been set.
Parties can request to bifurcate proceedings and ask the tribunal to make partial awards on certain parts of claims, which can enhance efficiency by producing results on some issues while others are pending.
Not all cases are appropriate for bifurcation, however, and require consideration of:
- Whether the relevant issues or claims are capable of being adjudicated separately;
- Whether bifurcation will result in cost savings;
- Whether bifurcating will expedite or delay proceedings; and
- The prima facie likelihood of success of the party seeking bifurcation.
Expert witness testimony is very common in construction arbitrations, especially when it comes to technical matters such as quantum, delay and geotechnical matters.
Appointment of experts can however delay proceedings if it is not handled judiciously. For instance, it is important that parties discuss at an early stage whether expertise is required, or whether the relevant matters, technical or otherwise, can be proved in other ways – such as through project documents or witness statements.
For use of experts to be efficient, the scope of expert evidence should be limited to issues strictly relevant to the arbitration.
Because appointing several experts to provide testimony on a variety of technical fields can slow down proceedings, it is important to consider whether party-appointed experts or tribunal-appointed experts are more appropriate.
In some cases, when confronted with conflicting expert evidence, a tribunal may wish to appoint an additional expert to obtain technical assistance directly for the tribunal.
This article was authored by Colin Gibson, Head of Dispute Resolution at Fieldfisher; Marily Paralika, Head of International Arbitration at Fieldfisher in Paris; Simon Sloane, partner, dispute resolution at Fieldfisher; Ewan Maclean, partner, Blackrock Expert Services; and Louk Korovesis, director, Blackrock Expert Services.
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