Has the financial crisis killed the construction dispute?

Tough times mean more construction disputes - at least they did in past recessions. The theory goes that as money gets tighter and future workloads look uncertain, businesses start to search for ways to claw back money on live projects and previous contracts. But this recession has not seen the rise in claims that most construction and legal professionals expected. Why?

It’s difficult to get a clear picture of what’s happening on the ground. Available statistics can seem contradictory. For example, on the face of it figures from the Technology and Construction Court (TCC) show that disputes rose in 2008-09, by 41% on the previous year. But the figure could be skewed by large cases such the Buncefield claims, and the court records show that only 30% of those cases were pure construction. And when it comes to adjudication, research from Glasgow Caledonian reveals that there were just over 1,500 construction adjudications last year, slightly less than the previous year.

So if statistics like these only give us a snapshot of how contentious the industry has become, how do we find out the real impact of the downturn on construction disputes? In an attempt to find some answers Building and law firm Addleshaw Goddard brought together a panel of industry and legal experts to debate whether the financial crisis has killed off the construction dispute.

The panel generally agreed that at the start of the recession they all would have predicted an explosion in disputes. Mark Hilton, partner and head of contentious construction at Addleshaw Goddard, puts it this way: “We all anticipated a massive increase in contentious work, but talking among lawyers and clients it’s been exactly the opposite to that. In fact it seems there’s been a massive reduction in the number of adjudications taking place. Has the recession hit people so hard that they have modified their views and they’re not going to

Crippling costs
If it has, what could be the reason? Cost was identified by the panel as a major cause of the perceived decline. David Barnes, director of clerking at barristers’ chambers ThirtyNine Essex Street, argues that at the start of the recession a fear of insolvency pervaded the industry: “The focus was on the job and dealing with cash flow.”

Many round the table agreed, reporting anecdotal evidence of disputing parties settling through negotiation and mediation. “Lots of claims are being resolved by negotiation, cases are settled because people aren’t prepared to pay the costs of dispute resolution,” says Tim Tapper, director in charge of dispute resolution at Cyril Sweett. Hilton agrees: “Now the concept of mediation is more acceptable, people are much more willing to mediate - that’s just common sense.”

Nick Gray, head of consult services at Faithful + Gould, says the attitude of banks and project investors is central to the decision to avoid the courts: “There is insufficient appetite to finance these large matters through any form of litigation. The banks look at the balance sheets of businesses and they are frequently unwillling to finance a speculative dispute.”

And it’s not just the courts that are seen as expensive - adjudication is also falling out of favour. Paul Darling QC, head of Keating Chambers, says this once-popular dispute resolution method has reached a plateau and is being rejected in favour of arbitration. Research by Sweet & Maxwell shows that the number of arbitration referrals in 2009 went up 31%. Darling says: “Adjudication was novel when it came in and people got very excited about it and it grew. The quality of adjudicators was mixed and then improved dramatically, but now one is hearing more complaints about quality, and the fact you don’t get your costs is also acting as a further drag.”

A changing culture

For some round the table there is a more positive explanation for the decline in disputes that points to an industry that was changing its contentious ways before the recession hit and is now more determined to work together to get through difficult times. Anna Winstanley, strategic design director at Laing O’Rourke, says there is an increase in collaborative working among contractors. “If there is an issue we try to address it before it becomes contentious,” she says. “We try to build up trust”.

There could be a risk of disputes if people are squeezed and pressured into committing to long-term fixed contracts

Anna Winstanley, laing o’rourke

The view that trust is fundamental to avoiding disputes is backed by Stephen Livingstone, programme control director at BAA, but he goes further. It must be underpinned by “good strong contracts that clearly define the obligations of both parties and that are managed proactively by competent professionals”.

This willingness to work together has also been witnessed by Andrew Dellow, of hurleypalmerflatt, who says: “Probably 80% of our business is based around relationships and long-standing clients. It’s very rare for us to have disputes because, given our long-term client relationships, we can address issues before they get to that point. Knowing people over years means it’s much easier to pick up the phone and say ’look there’s a problem’. And in the current market you can sense contractors are raising concerns very early.”

Trust must be underpinned by strong contracts that clearly define parties’ obligations

Stephen Livingstone, BAA

The worst is yet to come
But if this combination of financial constraint and collaborative working has prevented a deluge of disputes thus far, not everyone is convinced these forces will be enough to hold the floodgates in the future. Tapper says: “I’m not seeing this change in approach in working collaboratively across the industry. At first the recession was so deep that the number of disputes decreased, but we are seeing this change already. Disputes have gone up since the spring because people are more confident and the need to get cash has come to the fore.”
In particular, Tapper says professional negligence cases are on the rise, with Windsor Insurance Brokers reporting a 30-50% increase in this type of claim against engineers. Paul Connolly, a director at Turner & Townsend, fears more in the future: “This recession has seen capacity taken out of the industry, disputes could increase because of a lack of competence across all parts of the industry.”

In fact, Dellow says, disputes of all kinds will soon be on the rise: “We will see an increase as balance sheets emerge - 2009 was the low point and this year we noticed fees go up slightly and clients waking up to cheap prices not necessarily being the best value. So the bubble will burst in the next three years.”

And as some firms become able to spend money on disputes, others could be forced into taking action for the opposite reason. Several years into the downturn some businesses can’t keep soaking up losses imposed higher up the supply chain and their fear of destroying a client relationship is now outweighed by the prospect of profit losses or - at worst - going under. As Dellow says: “The industry has taken short-term hits but this might not be sustainable if it goes on for several more years”.

Lawyers are also being called upon to deal with an increasing number of international disputes. Tapper says: “Lots of companies have expanded quickly overseas and caught a cold. These are big projects and big complex disputes.” Mike Barker, buildings group practice manager at Mott MacDonald, says that clients overseas are simply more savvy about taking on disputes: “Sixty-five per cent of our work is international. Clients are more sophisticated and more willing to go to dispute.” Lawyers in the UK have inevitably benefited from this trend, according to Barnes: “Our order book for international disputes now is as big as our UK one was 15 years ago. There is a bigger risk of disputes on major international projects.”

Perhaps the most worrying trend highlighted was the mistakes some companies are now making that could be the seeds of tomorrow’s disputes. For example, the panel agreed that entering into fixed-price contracts was a real danger for the industry. Keating Chambers’ Darling says: “Are people now getting into fixed-price contracts with no room for inflation? In medium-term contracts, if there is an increase in prices and no allowance for ’fluctuations’, that will decide if things get messy.”

This recession has seen capacity taken out of the industry, disputes could increase because of a lack of competence across all parts of the industry

Paul Connolly, Turner & Townsend

The panel felt that public sector projects are particularly dependent on the fixed-price approach and are often driven by considerations of lowest price rather than best value, particularly after the government’s spending review. Winstanley from Laing O’Rourke has some words of warning: “There is uncertainty about the government’s capital review until it is concluded. There could be a risk of disputes if people are squeezed and pressured into committing to long-term fixed contracts”. Faithful + Gould’s Gray believes the inflationary pressures are likely to remain “benign” for the next few years, but low economic growth may put public sector projects at greater risk of disputes in the future.

If one culprit emerged, it was the one-off, inexperienced client. As Mott MacDonald’s Barker puts it: “The single client is so dangerous to all of us.” The panel recognised the industry is split between repeat clients - often of major infrastructure projects - and those who come to the industry for a single project and go for lowest cost. As Winstanley notes: “With clients who insist on the lowest tender you can see you could be buying trouble.”

Collaboration is key
The panel also reached general consensus on the steps needed to avoid a resurgence of the protracted and costly court dispute. First it was agreed that the collaborative approach of some first-tier clients and contractors needed to be replicated down the lower tiers. As Livingstone says, the collapses of Rok and Connaught are reminders that risk is there and that clients should look for “hot spots” in the supply chain. He also believes in the importance of setting the right tone as a client, within BAA but also to help one-off clients understand “good client behaviour”.

And lawyers have their part to play, too. While collaborative working is a goal many in construction are working towards, inevitably some projects will be hit by disputes. The range of dispute resolution methods the claims industry now offers has widened over the past 10 years or so. As Darling says: “Claims professionals, whether lawyers or surveyors, are better at thinking of solutions to fit the needs of their clients.”

Sixty-five per cent Of our work is international. Clients are more sophisticated and more willing to go to dispute

Mike Barker, mott macdonald

The funding of dispute resolution is also an area that is evolving fast, with some law firms increasingly offering alternative pricing structures. Hilton says: “In the last
two-to-three months people are increasingly keen to explore disputes and look at solutions such as conditional fees.” Conditional fee agreements (CFA) enable the client to pay a law firm less than the normal rate if the case is not successful, and a success fee if it is (see box for more details). This type of flexible approach is also being seen among barristers, as Barnes says: “Lawyers are being asked to be increasingly collaborative, to have a menu of fee options and to share the risk”.

It seems ironic that while construction has championed partnering within the industry it has yet to fully partner with its legal advisers. As Hilton says: “Construction has been the slowest sector to take up alternative methods of pricing. When you ask clients ’Have you heard of CFA?’ The response is often ’No, what’s that?’”.

So it would seem that the construction dispute is far from dead, and in fact could be given a new lease of life as the construction economy emerges slowly from its worst period in a generation. If contractors, clients and consultants want to protect themselves from the excesses of the litigation seen during and after the last recession they will need to work more collaboratively with each other and with their dispute advisers.