Designing conflict avoidance into contract terms

With supply chain issues raging thanks to a cocktail of pandemic disruption and geopolitical dislocation, the knock-on effect on the construction industry has been profound. There is perhaps a natural tendency to assume this will result in more legal disputes across the board. However, construction contracts do not always end in a dispute. It is possible to plan and execute projects without automatically proceeding to some form of litigation afterwards. Unfortunately, that is not regarded as the norm. But why?

Construction is invariably complex and risky. Disputes will arise, but many of them could be avoided or at least significantly lessened by early engagement between the parties in a non-contentious, collaborative way. With so many risks outside the contract which parties cannot control, why are they not spending more time reducing the risks that are largely within their control?

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If you want more proof of the benefits of collaboration, look at the CAP (Conflict Avoidance Pledge), a procedure designed by the RICS and rolled out by the Conflict Avoidance Coalition Steering Group (CACSG) in 2018. CAP is backed by well-known organisations such as Network Rail and the RIBA and supports parties working proactively together to avoid conflict and facilitate early resolution of potential disputes. All parties develop their capability to identify potential disputes and use conflict avoidance measures. By promoting this collaborative approach, it empowers parties to stop issues developing into disputes.

To combat the inevitable uncertainties of the world, especially with the ongoing Russia-Ukraine war which will bring greater material supply chain issues, we must switch to a more collaborative approach as embodied by CAP. The results could save money and reduce both risk and stress. The bigger your project, the more you risk by not making this vital change.

Collaboration is key

While the process of contract drafting, negotiation, implementation and then the execution of the works is by its very nature a contentious affair, it does not have to end in dispute. There is nothing wrong with arguing about contract terms. I wish more parties would do so. At least that demonstrates they are reading the contract and are thinking about the terms they are agreeing to.

Healthy debate fosters engagement and, from there, parties can begin to work together

Far too many parties to construction projects have no real idea of their rights, liabilities and obligations – and often even less of a clue about what notices have to be served, when and why. Healthy debate fosters engagement and, from there, parties can begin to work together.

Collaboration must continue during the execution phase of the contract. Some contracts, particularly NEC, even encourage parties to give early warning of events or circumstances that might require more time or money be given to the contractor.

In larger projects, FIDIC makes clear that parties should set up standing dispute adjudication and avoidance boards (DAABs), which fulfil a vital function in providing an alternative to the formal dispute process during the course of the project. The members of DAABs are often lawyers and engineers, who provide decisions on issues arising during the contract and hence reduce the extent of festering disputes.

Enacting change

Parties to construction projects have a choice. They can set out to fight with and push every possible risk onto the other party, without proper compensation, increasing the likelihood of an expensive dispute. Or they can collaborate as advised by the CACSG and ensure no one is left with the brunt of the risk.

Don’t just take a contract from the shelf, especially a contract that is years out of date. There are plenty of more recent versions of all the major forms – use them. Then engage with a lawyer and discuss your objectives, the project risks, and who is best placed to carry those risks. Investigate your supply chain and engage with your funder about their approach and appetite for risk.

Passing risk onto a contractor is acceptable. However, that risk should be clearly identified and described in the contract and not hidden by legal jargon. The contractor must also be compensated for that, either by the contract price or by the time allowed.

Parties to a contract should hold a workshop where everyone can discuss their concerns about the contract or any aspect of their involvement. Make sure everyone understands the content of the contract being signed by asking questions and where necessary challenging their legal and broader project team.

In the current geopolitical climate, each party to a contract should also work to share the repercussions of inevitable supply chain issues, so that no one party is left struggling under the weight of it all. That is true collaboration.

Bill Barton is director of Barton Legal