Dealing with a construction dispute can be complex for a whole host of reasons, ranging from the scope of the project, the number of companies and contractors involved to the technicalities of the contractual documentation that underpins everything. To make the process more transparent, our business dispute solicitors put together this guide to provide you with an overview of how construction disputes can arise, how they can be avoided and finally, how they can potentially be resolved.
- What is construction dispute resolution?
- Common causes of disputes in the construction industry
- How to avoid construction disputes
- How to resolve a construction dispute
What is construction dispute resolution?
‘Construction dispute resolution’ is an umbrella term for the process used to deal with and settle a conflict that arises out of a project involving stakeholders to a construction contract – for example, property owners, suppliers, contractors and subcontractors.
Common causes of disputes in the construction industry
There most common causes of construction disputes include:
- Construction defects, quality issues, variations from the original contractual scope and cost increases: Defects and quality issues are significant factors in many construction disputes and can include problems around poor quality workmanship, the use of substandard materials, failure to comply with specific contractual obligations and also incidences of failure to advise those managing the project’s budget or otherwise paying for goods or services of increases in price for materials or labour
- Delays and disruptions: Delays are a common problem in the construction industry and can occur for due to several reasons, including the unscheduled overrunning of and/or delays to a project as well as variations being made partway through a project and the knock on effect on the programme. Most standard form construction contracts will contain provisions for liquidated and ascertain damages resulting from any delay. It is important to understand how such damages will operate and potentially impact upon contractual sums due
- Payment disputes: Materials and labour not being paid for are widespread causes of disputes across all sectors but specifically in the construction industry, claims for unpaid invoices, applications for payment on account and claims for additional payment are typically at the heart of many conflicts
How to avoid construction disputes
Having certain key processes in place can limit the likelihood of disputes happening if your business is involved in the field of construction. Below are some helpful suggestions that, if taken on board, can significantly enhance the chances of avoiding disputes:
Comprehensive contract drafting
It’s really important to have clear, well-drafted and enforceable contracts in place right at the outset: this can’t be emphasised enough. Ensuring you know the contract well can pay dividends if a problem materialises; this means that you’re familiar with the steps the contract sets out if so and crucially, what method or methods of dispute resolution are specified in it.
Using standard form contracts can be helpful, it is however, important to understand the provisions and how such contracts operate. Whilst a dispute may not be in a party’s mind when entering into a contract it is well advised to ensure that the contract takes into the account all of the practicalities of resolving any disputes with their commercial objectives in mind.
Effective project planning and documentation
Having a dedicated project manager or people who are capable of administering the contract can be worth its weight in gold. It can streamline the running of the project and make it more efficient overall, plus having this designated person or people can save valuable time and resources for other members of staff, ranging from the company’s directors to those who are more hands-on with the project, if a dispute does arise. Whilst this may lead to cost in contract administration, it may ultimately be money well spent to ensure the efficient running of the contract.
Carrying out due diligence checks
The importance of carrying out full and proper due diligence checks before you engage and contract with another party should not be underestimated. These can uncover all manner of things such as, vitally, financial problems the other party are experiencing, which may in turn affect their ability to pay for labour or materials, for example, or you might uncover question marks around their reputation or reliability.
How to resolve a construction dispute
There are a few potential ways to resolve a construction dispute, but it’s worth highlighting that it’s usual for adjudication to be specified as the first ‘go to’ method in construction contracts, or for it to be an implied term which means that parties to a construction contract have the ability to adjudicate irrespective of other methods of dispute resolution. In light of this, we’ll cover adjudication as the first potential mechanism to solve a conflict before going on to look at other avenues.
The Construction Act 1996 is the statutory means by which a party to a construction contract can refer a dispute to an adjudicator ‘at any time.’ It’s more suited to some types of disputes than others because the nature of adjudication is to find fast, practical solutions to a problem so as to minimise disruption to the ongoing project (an adjudicator has to decide on a matter referred to them within a 28-day timeframe), so more complex conflicts might be better suited to court proceedings (litigation) or arbitration; although routinely complicated issues can be referred to adjudication, which means parties may be left having to deal with matters in a highly compressed timeframe.
An adjudicator’s decision is binding, but it’s designed to be a temporary or interim solution until the dispute is fully determined at a later date by going to court, arbitration or by the parties’ agreement. Also, while it’s a more cost-effective means of dispute resolution than litigation, the successful party is unlikely to recover their costs of the adjudication, other than the adjudicator usually awards who should pay the adjudicator’s costs.
The main objective of arbitration in construction disputes is to resolve problems fairly by appointing a neutral third party agreed upon by the parties – an arbitrator – to oversee the process and make an award (decision). The parties must opt in to take part in arbitration and a written clause to this effect is required in the contract, with the agreement setting out the procedure that’s to be adhered to.
The advantages of arbitration include the fact that legal costs can be recovered (the arbitrator decides this based upon any cost agreement or legal principles), the dispute is dealt with confidentially and quickly and the award made is binding on the parties. On the flip side of this, it’s not guaranteed that arbitration will necessarily cost less than litigation, there’s narrow scope for challenging the binding decision and also, it might not be the best method of resolving a dispute involving multiple parties.
Mediation is another method of dispute resolution that takes place outside of court. Again, a neutral and suitably qualified third party – the mediator – will facilitate ‘without prejudice’ discussions between the parties with the aim of reaching a potential compromise that’s mutually acceptable to all involved, although you will of course have to be open to making some concessions with a view to reaching a settlement. If a resolution is reached, this can be recorded in a settlement agreement, which will be binding.
Mediation is very cost-effective compared to litigation and there are few disadvantages, other than if your opponent refuses to be reasonable and genuinely doesn’t want to reach a settlement, mediation can be rendered a futile exercise.
The Pre-Action Protocol and Litigation
Before parties to a construction contract can issue (begin) court proceedings, the steps in The Pre-Action Protocol for Construction and Engineering Disputes must be followed. The main objectives of the Protocol are to encourage parties to set out their cases and provide enough information to the other party/parties so as to enable everyone to understand each other’s position and in turn, increase the likelihood of the issues being narrowed and possibly settled or dealt with by one of the dispute resolution methods referred to above.
The timeline prescribed by the Protocol can be summarised as follows:
- The claimant (the business or individual bringing the claim) serves (formally sends to) the defendant (the business or individual opposing the claim) a letter of claim
- The defendant acknowledges receipt of the letter of the claim within 14 days
- The defendant serves a letter of response within 28 days
- The claimant serves a response to any counterclaim within 49 days. If there’s no counterclaim, the parties attend a pre-action meeting (which can include mediation if appropriate) where the dispute either settles, the parties agree to a method of alternative dispute resolution or the claimant issues court proceedings: the dispute is then referred to as ‘litigated’
Once the dispute is litigated, a judge takes control of proceedings and timeframes are put in place with various steps the parties have to adhere to before the outcome of the dispute is eventually determined by way of a judgment being granted after a trial in court – unless for any reason the dispute is resolved earlier in the litigation timetable, which can happen. Whilst litigation may be regarded as the most comprehensive way of resolving a dispute it may be the most expensive means of dealing with things and the stakes can become high from a financial, time and reputational point of view.
Should problems arise, as they inevitably do at times, there are many different ways to resolve a dispute without the need to go to court, depending on the nature of the issue. Our construction dispute lawyers have proven track records of working with companies of all sizes in the construction industry and can help to prevent matters escalating, or provide pragmatic, commercially focused advice in the event that they do.