By Bommel van der Bend and Sebastien Davys-Brown, De Brauw Blackstone Westbroek NV
Resolution of disputes on projects is often an emotionally charged event. A contractor stepping on site for the first day or an employer planning out its next big project never set out with the objective of winning a court or arbitral dispute. In fact, these parties will have had to travel down months if not years of failures to resolve the dispute to end up in the unenviable position of formal proceedings. No party in their right mind would ever want to end up in court. It is costly, takes time and winning will almost never deliver a happily completed project. Unfortunately, it is not only legal proceedings that can ruin projects.
Projects can be held up for months and even years as the parties negotiate and develop their positions before being able to agree on a way forward. During this time the project is often not progressing (or progressing slowly), equipment needs to be preserved, site costs continue to be incurred and cost continue to escalate. A period of a few months of delay in resolving a dispute can result in tens of millions of Euros in wasted expenditure.
The starting point is that construction projects are simply dispute prone. The contracts that underly all major projects have the effect of assigning large construction related risks. Within this assignment of risk is the need for the contractor to survive and remain profitable and the employer’s need to complete the project within a certain period and budget. This assignment of risks and differing interests place the contractor and the employer in diametrically opposed positions. Whilst the contractor and the employer are forced to rely on each other to complete the project, they are at the same time both attempting to limit their risk and financial exposure. The spark that sets this situation on fire is that neither party knows what the full extent of the risks will be in the project – for example are there hidden errors in the design? Are there unforeseen issues in the ground? Will there be a sudden shortage of materials or workforce? Weather conditions? Power outages? Pandemic? In fact, the variety of situations that can place the contractor and the employer at logger heads with each other during a construction project is quite remarkable.
What makes the situation even more difficult, is that construction disputes are hard to resolve. The complex factual and technical nature of construction makes it difficult for either party to understand their position and make or respond to claims in an efficient way. In the majority of cases we have worked on, the full picture of both parties’ positions has not truly been known until much later in the process (often at litigation). At this point the project has already suffered the damaging effect of going into formal dispute. In some instances, it has taken the parties over a year to produce the necessary support, expert assessments and background for their claims to have merit. It is therefore no wonder that there is a growing trend of parties facing difficulty in responding to potentially unsubstantiated claims during construction projects. In fact, the 2020 Arcadis’ Global Construction Disputes Report cited poorly substantiated claims as one of the leading reasons for projects to go into formal dispute.
Most projects approach disputes on the basis of the "relationship approach" to resolution. The execution teams for both the contractor and the employer rely on the relationship built during the project to reach reasonable compromises on disputed items. Within this approach, resolution is heavily focused on maintaining this relationship. As a consequence, there is a certain level of apathy to strict legal strategies and contract management or other measures which would harm this relationship. Claim management in this context is also not normally prioritised. Claim investigation and development is normally reserved only for situations where a disputed item cannot be resolved. Whether because of this or otherwise, the resourcing for claim management teams is normally limited and often only provided in response to certain types of situations (such as receipt of claims).
On top of the disputes being common and difficult to resolve, there are a number of common impediments to resolution. These impediments often originate from human errors in contract drafting and project management. Our experiences in this regard are also supported from the findings of the 2019 Queen Mary Survey on Construction Disputes, which ranked issues with contract drafting and project management as the 2nd and 3rd most common causes for construction disputes. The types of human error that result in impediments to resolution of disputes are as varied as the projects they occur in. The range from by-products of genuine efforts to fix and resolve issues during construction to cases of simple or gross negligence. Putting aside the varied nature of these particular problems, there are five common issues that we tend to see in practice resulting in projects reaching the court room or the arbitral tribunal.
One of the key reasons that disputes become unresolvable and end up in a formal proceeding is a failure to monitor and manage the construction programme. The importance of the programme should not be understated. It is not only the key scheduling tool, but it is also the primary tool used to resolve claims for extension of time and delay damages. When the programme has become unreliable, it makes it impossible to reliably quantify these types of claims. It is also a prime ground for manipulation, and we have seen many cases where the programme has been used to hide and avoid responsibility for project failures. Where the programme is unreliable neither party can understand their positions in relation to time related claims. This in turn normally results in a sort of arms race, where two delay experts battle it out to determine responsibility. Unfortunately, the end of this battle is normally a court or tribunal decision.
One of the most effective ways to ensure quick resolution of disputes is to know your position at the time the dispute arises. Unfortunately, in many of the cases that reach our desks this is not the case. A lot of projects rely on what we consider to be "passive" systems of claim management. These processes rely on project management databases as the repository for all claim documentation with assessment only taking place after a trigger event such as the receipt of a claim. This method is inefficient and can take anywhere between weeks or months to complete. This is, in our view, a common cause of claim escalation. During the period of assessment, progress slows, and the effect of the issue can grow far larger than it originally was.
The interface between different scopes of works, is the most challenging area of construction contract drafting. An example of a classic interface problem is where responsibility passes from construction to commissioning or where a design is passed on to construction. These interfaces are all over construction contracts. Managing these interfaces is the most difficult and requires the most thought. However, we regularly see significant amendments to these scopes during project execution without significant thought or planning. These can occur by failures to understand the contract correctly or through amendments. When scope amendments are made, they are often poorly defined and not consistent with the entire contract. The result of this is a significant level of uncertainty which promotes disputes catalysed by financial reward and risks.
Due to the constant pressure to meet and address issues arising on a construction project, it is normal for the project execution team to develop ways to run the work more efficiently and remove blockers to the completion of the project. Unfortunately, many of these strategies do more harm than good. It is not uncommon for legal strategies to be implemented which are inconsistent with the contractual obligations of the parties. If such a strategy is unsuccessful, it is extremely difficult to untangle and determine a clear division of responsibility. It also tends to open pandoras box of legal doctrines that includes arguments around good faith, waiver and estoppel. This adds significant uncertainty to the parties’ legal entitlement making it harder and harder to resolve any disagreement.
For good decisions to be made around disputes it is imperative that legal strengths and weaknesses are known. One common problem in construction projects is misinformation and anecdotal evidence. In many cases unsupported statements made are picked up and repeated throughout the project team. These statements then tend to build strength despite never having been properly assessed. These types of sentiment can take a life of their own and eventually reach decision makers who are then convinced of the strength or weakness of their position without any proper analysis. When this sort of issue arises the risk of making poor and incorrect decisions that will need to be walked back from is high. This is not an ideal situation and causes uncertainty, confusion and often provides ammunition to the opposing party.
All projects will run into a dispute at some point in time. Some of these will be easily resolved and some of them will test your patience. As identified, the cause of these disputes is the tension between both the parties’ interest in avoiding project risks and the difficulties in resolving the dispute caused primarily by poor contract and project management. The simple message we would like to relay is that whilst a dispute is normal and likely unavoidable, inefficient resolution of disputes is not something that needs to be suffered through. Our suggestion is that inefficient resolution of disputes are primarily caused by a manifestation of two industry norms which can be readily and easily adjusted in project execution.
The natural response to this will be that such an approach is too costly. However, such a response is not comparing apples with apples. If you consider this approach against delays incurred whilst resolving and managing a dispute or the costs associated with court or arbitration proceedings, it is extremely cost effective. This in our view is the ideological shift that has the potential to save projects money in the long run and importantly avoid a dispute destroying a perfectly good project.