Research Trends & Conclusions: Construction 2012
With the benefit of over 15 years of independent research, encompassing thousands of votes from international clients a private practitioners, and hundreds of hours of interviews, Who’s Who Legal examines the recent trends and developments in the global construction law marketplace.
The UK Office of National Statistics (ONS) traces the origin of the recent return to recession (following 2012’s first quarterly GDP analysis in April) to a significant drop in construction sector activity. Output dropped by three per cent during the period, according to the ONS, which identified dramatic cuts in government investment (including reductions in spending of 25 per cent in public housing and 24 per cent in public non-housing) as a major contributing factor to the slowdown. Among the lawyers we spoke to in London, the vast majority agreed that the domestic construction market had been particularly slow over the past year. “Our work is almost exclusively international in nature at the moment,” says one respondent. “Outside of the London 2012 Olympics, there have very few projects in development.”
The previous edition of this research reported a major trend towards non-domestic work among the leading lawyers in the UK and US, as foreign – predominantly Chinese – investors developed projects in the developing countries. And this trend has persisted strongly during this research period, sustaining the practices of lawyers in England despite their lack of engagement on home soil. “English firms are profiting from the value placed on their lawyers’ expertise abroad, in projects proceeding under English law,” declared one source. “There’s a great push among firms to develop their international connections throughout Africa, Asia and the Gulf region.” However, according to some of the lawyers we spoke to, the appetite for imported legal expertise from the developed West into emerging markets is lower than it has been in previous years. “It makes much less sense to hire British or American lawyers than it did this time last year,” notes one lawyer in Eastern Europe. “More spending by the government means domestic law knowledge has higher value.”
In several jurisdictions outside of the UK, lawyers noted an increase in the volume of new construction projects involving public money. “The vast majority of new contracts are being conducted under public private partnerships (PPPs),” according to one source, who noted that a “modest comeback in private commercial lending” was being met with increased enthusiasm from governments looking to engage in new building projects. Lawyers throughout mainland Europe, the Middle East and Asia all noted that an increase in PPP work was buoying up the construction market in their jurisdictions and was generating more work for lawyers who specialise in the discipline. Researchers also noted a trend towards the adoption of the PPP model in construction matters among emerging markets where it was not previously in place: Slovakia opened its first PPP infrastructure project in 2011, and Lithuania’s first ever PPP project, a bypass in Palanga, is currently in the bidding stage. “PPP contracts are very complex,” says one lawyer in Brussels. “Effective drafting demands highly accomplished legal expertise and a strong understanding of jurisdiction-specific law.” As such, lawyers that can offer these services to clients on both sides of the partnership are in high demand.
Among European projects, the most common focus is green energy. Last summer, the German government announced that it would seek to phase out its dependence on nuclear power – which currently accounts for nearly 25 per cent of the county’s electricity – in its entirety over the next 10 years. The German environment ministry claims that 10 per cent of this shortfall can be redressed by increasing the efficiency of machinery and buildings, alongside measures to increase the share of wind power in the country’s power generation. Such developments within the EU’s largest economy were followed by the publication of figures by the European Commission in February that confirmed employment in the EU’s green energy sector accounted for over a million jobs and, while the sector’s revenue had increase by an average of 15 per cent year-on-year, with Germany leading the field in terms of both employment and turnover (€36 billion in 2010). “For construction lawyers these developments represent a major opportunity,” says one lawyer in Germany. “The increased complexity of green building and demand for a greater number of renewable power facilities around the country means there’s a lot of work to be had.” The Grenelle Environment consultation process between the French government, local authorities, employer organisations, trade unions and NGOs – aimed at defining a framework for environmental protection – saw the enactment of “Grenelle 2” in 2010, with a number of decrees implemented in the past year. These encompass energy-efficiency diagnostics for buildings, renewable energy construction projects and the labelling of construction materials; lawyers in the country predict a “strong impact” on the regulation of future projects, leading to greater demand for legal advice. Lawyers in Norway, the Netherlands, Poland, the Czech Republic and Ukraine noted a similar push towards renewable power-related construction projects, many of which are utilising the PPP model.
The United States, Australia and jurisdictions in the Middle East, while utilising public money, tend to be focusing on more traditional sectors in which to develop projects, and results have been more mixed. In Australia, government stimulus spending and low interest rates in the residential housing sector, which saw a boom in 2009 and 2010, have been followed by a dramatic decline in new house sales over the past year. “The government is focusing on PPP to kick-start the economy,” stated one lawyer, “but the natural resources in Western Australia are viewed as a safer bet than the housing market.” A number of lawyers in the country noted that firms – predominantly based in the financial centres of the Eastern seaboard – were placing a greater emphasis on expanding their construction law presence in the resource-rich Western territories, with new offices and lawyer moves emerging as a “major trend”.
Lawyers in the United Arab Emirates have witnessed “a shift in emphasis away from Dubai and on to Abu Dhabi” recently. Last year Citigroup reported that the value of construction projects that had either been placed on hold or scrapped altogether in Dubai had risen to $958 billion, encompassing more than half of such projects in the Middle East and North Africa (MENA) region. Abu Dhabi’s project rate is more measured and government work is strong, with lawyers expecting PPP to play a greater role going forward. “The decision-making processes under PPP tend to take longer and be more complex,” according to one source in the Emirates, “so high-quality legal counsel is at a premium.” Public projects are also strong in other MENA countries: Qatari lawyers expect to see lot of work resulting from the country’s successful bid to host to 2022 FIFA World Cup, while in Oman lawyers are optimistic following last year’s cabinet reshuffle and the government’s renewed focus on infrastructure modernisation. “The Arab Spring rattled the confidence of some investors,” says one Omani lawyer, “but the new government is determined to do the best it can in building better schools, transport infrastructure and hospitals.”
Lawyers in the US also noted that the public sector was more active in pursuing projects in 2010 and 2011, at the same time as “some commercial lenders are cautiously re-engaging with the construction field”. One source noted that their practice has been focused more than 50 per cent on government contracts in the past year: “Power, hospitals and local infrastructure have all been high on the agenda.” However, recent figures published by Bloomberg report that public construction spending has been in steady decline in the US so far this year; private work, meanwhile, posted a slight uptick. “Non-contentious construction work has been busy on the whole,” says one lawyer, “but the sector is still shaky, and it is just a matter of time before projects garner disputes.”
Respondents to our survey in the US and elsewhere pointed out an uptick in construction disputes over the past year as the effects of the credit crunch continue to impact projects. In America, “clients are placing greater emphasis on alternative dispute resolution methods, particularly adjudication,” in the words of one lawyer. The UK and some countries in mainland Europe echoed these sentiments as clients pursued favourable settlements after private construction project defaults. An emergent trend in these negotiations is the use of “partnering”: a process by which project participants gather under the guidance of a trained neutral to build personal relationships and understandings of one another’s risk, with the hope of engendering a more collegial environment and avoiding formal dispute mechanisms. Formal disputes nevertheless persist, and nowhere has this trend had a bigger impact than in Hong Kong’s construction law market, which is “booming” according to local sources. The lawyers we spoke to noted the country’s continuing rise to importance as an arbitration forum for international, predominantly Western, companies doing work in China.
Those firms that have been consistently strong in previous editions of this research retain their dominant standing in this year’s findings.
While the majority of these firms witnessed no reduction in the number of listings they achieved in this edition, with both overall market leaders – Peckar & Abramson and Pinsent Masons LLP – posting an increase on last year, none advanced beyond their previous highest total. Compared with last year, which saw Clayton Utz, Smith Currie & Hancock LLP and White & Case LLP all demonstrate steady expansion, and Jones Day dramatically double its total with hires from Howrey LLP, the current listings provide a more conservative picture. Our findings suggest that all six leading firms remain the strongest players in the global construction law marketplace, but that these firms have contributed minimally to the overall expansion of the number of listed lawyers in the guide year-on-year. This edition features lawyers from 46 law firms that were not recognised in the 2011 edition, suggesting that, while the sector’s leading lights remain unchanged, less established firms are nevertheless demonstrating great leaps in the sophistication of their construction services.
Taken together, the information we received from lawyers during the research for this edition points to an increase in the importance of the role governments have to play in construction projects. Overseas investment by emerging superpowers like China and India is still driving the workload of lawyers, particularly in England where domestic projects are slow. However PPP is on the increase in several regions around the globe and has seen a number of lawyers focus more closely on their domestic markets rather than projects outside of their borders over the past year. Pressure from international regulators towards greener economies can only serve to increase the complexity of these projects and place greater demands on clients and their lawyers on both sides of the table. Meanwhile, the sector’s strong precedent for the use of alternative dispute resolution continues to create ever more innovative methods to avoid costly court battles, which is a major asset for an industry still very much beset by the damaging impact of the global financial crisis.
The role of the world’s leading construction lawyers seems to be clear. As both projects and disputes increase in complexity, lawyers with the ability to add value through their understanding of complicated regulatory frameworks and difficult negotiations will see no slowdown in their workloads for the foreseeable future.