April 13, 2021

How to manage construction disputes during the pandemic

The pandemic has caused huge amounts of disruption to construction sites across the country. Here, Kate Onions, partner and head of construction disputes at law firm, Shakespeare Martineau, looks at ways to address the issue.

Following a recent survey that found that construction businesses are concerned about potential disputes due to delay to projects, the Construction Leadership Council (CLC) has provided guidance on how to ‘navigate and accommodate the impact of Covid-19 on existing contracts’. The aim is to avoid disputes both now and in the future.

That said, it is still expected that there will be a rise in the number of claims that turn into formal disputes in 2021, with delays and disruption inevitable due to both Brexit and Covid-19. As such, it is vital that construction companies know how best to manage disputes, including how to avoid unnecessary escalation.

The delays and disruption caused by the pandemic have been felt deeply across the construction industry. At the beginning, many sites were forced to shut completely and only reopen later to enable risk assessments to be undertaken. Those whose projects were largely outdoors were able to do this more easily, but for those carrying out work on smaller indoor sites, this proved to be a complex task. New levels of administration had to be implemented, with questions such as ‘How do we continue safely?’ and ‘How much of a delay will this cause?’ needing to be discussed. Brexit then led to further disruption for some companies, particularly impacting the supply chain and worker availability, adding another layer of complexity.

Companies that had already taken a more digital approach to business have fared best at dealing with these issues. Being able to operate effectively on a remote basis, has allowed better communication between contractor and employer, the wider supply chain and internal staff, as well as making the administration process simpler. However, even the most agile of construction companies have found themselves facing difficulties.

To keep delays and disruption to a minimum, risk assessments must of course be done thoroughly but also pragmatically, striking a careful balance between employee safety and productivity. Areas that could cause delays and / or disruption should be identified and monitored, with a plan of action in case complications do arise (i.e. to mitigate the impact and to notify of any changes to completion dates etc.) This includes revisiting the supply chain and ensuring that there are multiple options should one supplier be unable to provide the materials or services needed. With Brexit creating complexities for imports at present, this could signal a return to more UK-focused supply chains.

Against the backdrop of Covid-19 and Brexit, there are three common themes to the disputes that are arising in a construction context; the first being delay claims. Due to there being fewer workers on site and / or the need for social distancing, as well as difficulties sourcing the right materials, some contractors are struggling to finish projects on time. This situation brings with it the perennial issues of whether employers are entitled to liquidated damages or conversely, whether contractors are entitled to loss and expense associated with the delay.

The second type of dispute noticeably on the rise is claims for payment. With an increasing number of companies facing financial difficulties comes the inevitable rise in instances of contractors and sub-contractors making potentially inflated applications for payment. The important point here is that, if the paying party does not want to pay the amount applied for it is vital that a valid payment / pay less notice is issued. If a payment / pay less notice is not issued in the right form or the required timeframe, then the paying party leaves itself open to the risk of a smash and grab adjudication, where the claiming party claims the full amount of the application for payment, regardless of the true value of the works. This unfortunate situation can leave the paying party with an unwelcome and unexpected gap in their finances.

Finally, there has already been an uptick in the number of defects claims in recent months. With the number of site inspections reduced due to COVID-19, and often a lack of continuity in site personnel, it is possible that this is a trend set to continue, even as the UK begins on its path to lifting restrictions.

Legacy claims in relation to defects are also coming out of the woodwork. When defects claims are notified many years after the works were completed, it can be difficult to piece together who did what and to what specification. More often than not, construction companies are so keen to ensure compliance with GDPR obligations that they have prematurely destroyed all the project documentation they hold. In a digital era, it should not be particularly costly to hold onto relevant documents for the duration of any potential claims; 15 years from practical completion is recommended, in terms of the period of retention. Creating and keeping the relevant documents is not only key for dealing effectively with legacy claims, but all claims. Often in the context of construction disputes, it is the party with the best records who wins.

Of course, the aim is to stop disputes escalating into costly and time-consuming claims, so it is vital to nip them in the bud as early as possible. Sometimes, effective communication is all that is needed, with the CLC recommending that contractors provide early warning of any potential delays or additional costs, as well as updating programme timescales to take these into account. If all parties are on the same page, then disputes are less likely to raise their heads.

Flexibility is also essential, especially at what is a challenging time for everyone. Compromise is better than an incomplete project, so renegotiation can be a productive way forward. Any negotiated contractual variations should be documented to avoid any satellite disputes in this regard.

The CLC is actively encouraging contractors and employers to take a collaborative approach towards project delivery, stating that by acting responsibly and fairly, those in construction can protect the health of the sector and, more generally, the economy.

If a dispute does escalate beyond the communication stage, then adjudication is the most common form of dispute resolution in the construction industry. The advantage of adjudication is the speed. Once a dispute has crystallised, its little more than a month from the start of the process to getting an adjudicator’s decision. However, it is not always the best option, as there are time and financial cost implications. Not only that, but adjudication can also considerably (and sometimes irreparably) damage working relationships.

One alternative is mediation, where parties formally set aside time to discuss their issues with a professional mediator. A high percentage of disputes which are mediated are successfully settled this way, but it must be done at the right time, when the rights and wrongs of both parties are clear. Otherwise, it can be difficult to have a productive discussion.

Early neutral evaluation is another option that involves a third-party to help reach a settlement. A neutral decision maker is appointed, often a Judge or Queen’s Counsel, who hears each party’s submissions and then provides their view on the likely outcome of the trial. This view is generally entirely without prejudice, having no binding effect, so can be an effective way to provide a platform for meaningful negotiation.

Those operating in the construction industry – whether employers, contractors or sub-contractors – have faced a variety of difficulties over the last year, and complexities are likely to remain for some time to come. As a result, the likelihood of disputes arising is consequently increased, but that doesn’t mean working relationships have to be broken irreparably. Following the correct contractual processes, and keeping communication lines open, can ensure the construction industry emerges from the pandemic ready to move forward, together.

Kate Onions, partner and head of construction disputes at Shakespeare Martineau