Construction disputes: avoiding delays in conflict resolution

September 2020 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

September 2020 Issue

Construction disputes can arise for a number of reasons. Usually, it is because one or more parties have failed to comply with contractual obligations, because of errors or omissions in contract documentation and design, or over suspension and termination provisions, which are particularly relevant in the COVID-19 crisis.

Construction disputes are often complicated and multifarious, meaning they take a long time to resolve and are frequently further delayed by avoidable obstacles.

Choice of contract

Choosing an effective form of contract puts a party in a strong position if a dispute arises and may help avoid disputes altogether. In international construction projects, the International Federation of Consulting Engineers (FIDIC) Rainbow Suite, which was updated in 2017, is the most commonly used form of contract. FIDIC sets out a code for progressing from claims, to disputes, to arbitration (if necessary). The 2017 update to FIDIC made standing dispute adjudication and avoidance boards (DAAB) mainstream, a development intended to avoid claims accumulation.

The FIDIC may not suit every project, however. Other contracts may be preferable for public or domestic projects, such as the Joint Contracts Tribunal JCT and the New Engineering Contract (NEC). There is no set methodology for assessing delay under the FIDIC; instead, these contracts rely on retrospective analyses of what happened and where delays occurred. The NEC contract, by contrast, prescribes a prospective form of delay analysis, which promotes contemporaneous project management but can create difficulties in arbitration, because forward-looking analyses may not reflect the actual course of events.

Experience suggests tribunals prefer retrospective analyses to establish the effect of breaches.

State, employers’ and bespoke contracts

Bespoke and hybrid forms of contract are sometimes used by state actors and employers.

When using a bespoke contract, parties should be aware of certain aspects, as outlined below.

Applicable law. This may determine damages rules and when a dispute has crystallised. Where international parties are involved, it may be used to counter the applicable law of another state, which can slow down the resolution of a dispute.

Notice of claims clauses. Parties should carefully follow the claims procedure specified in the contract. It is critical to understand when and how a notice must be given, and in what detail, as ignoring or postponing claims will add to delays and costs later.

Escalation and ADR. Dispute escalation processes should be clearly outlined in the contract. Alternative dispute resolution (ADR) options should be considered before starting formal proceedings. However, if notices of delays (NODs) are conditions precedent, missing these during attempts at ADR risks creating satellite disputes.

Adjudication. A standing DAAB is more expensive but has the benefit of being on hand to provide ad hoc advice and hear disputes, if required.

Arbitration clauses. Properly drafted arbitration clauses leave no room for doubt about when arbitration may be commenced.

Arbitral institutions. Mainstream institutions will proactively manage disputes and appoint tribunals quickly. However, there are key differences between institutions which can affect the speed at which a dispute progresses. The seat of the arbitration can also be important, as local law can affect tribunal formation and some jurisdictions do not enforce interim measures.

Force majeure, prevention and frustration. Detailed force majeure clauses clearly establish what constitutes a force majeure event and whether the claimant is entitled to time and money. NEC contracts have prevention clauses, which entitle the claimant to time and money. Frustration will vary from country to country.

Keeping projects on track

Projects fall behind for a variety of reasons, many of which can be avoided. Some of these reasons are listed below.

First, impossible schedule or under-pricing. Contractors can under-price jobs and promise impossible timelines. These are set to fail from day one.

Second, poor contract drafting and management. Contracts that are too rigid will prompt parties to try to find ways to work around them; contracts that are too loose leave room for disagreement. Failure to employ a contract manager risks losing track of progress.

Third, unforeseen events or changes. Changes in the scope or design of a project not provided for in the contract creates friction between parties and commonly results in delays.

Fourth, visibility and monitoring of the design. Parties can have different understandings of when a design is finalised. Lack of monitoring is a key factor that causes projects to fail.

Finally, record keeping. Poor records lead to poor reporting and badly designed critical paths.

Importance of the baseline

The project baseline should ideally use ‘as built’ dates to measure against the baseline plan and avoid different interpretations of delays. Updating the programme properly defines the actual critical path and establishes good monitoring of the project.

Loss of productivity from COVID-19

COVID-19 has introduced new causes of loss of productivity that will not have been prevalent in historic analyses. The effects of the pandemic could result in the rerouting of the critical path, as different activities may be affected in different ways. Productivity on site may have dropped prior to the implementation of lockdown measures, as there may have been shortages of labour due to sickness, self-isolation or travel restrictions.

The introduction of lockdown accelerated the negative impact on productivity as contractors were forced to work under more restrictive site operating procedures (SOPs) or halt work altogether. As lockdown measures relax, parties are keen to adopt strategies to recover lost time, such as working longer hours, however doubling the number of hours worked on a task does not automatically halve the amount of time it takes to complete that task.

Assessing delays: productivity vs cost-based methods

Evidencing loss of productivity in construction projects for arbitration purposes broadly falls into two categories: productivity-based methods and cost-based methods.

The most commonly accepted productivity-based method is the ‘measured mile’ approach. This compares productivity achieved during a period of disruption with that achieved during a period of non-disruption. This method is often preferred because it compares actual productivity with what can still be achieved but for the disruption. Post COVID-19, this may no longer be a solution if standard operating procedures (SOPs) continue to restrict working practices. To show the impact of lockdown, contractors may need to demonstrate that their planned productivity was reasonable and based on established norms or other historic data. Contractors can also use work programmes to capture the status of works pre- and during lockdown to demonstrate that there were no other external influences slowing productivity down. Other productivity-based methods include earned value analysis, programme analysis, work or trade sampling and system dynamic modelling, which should be considered.

Cost-based methods, on the other hand, analyse differences between planned and actual expenditure without first analysing loss of productivity in terms of resources. This is arguably a less robust approach but can be a useful cross-check for productivity-based analyses.

Records for analysing loss of productivity

Good record keeping can significantly assist a party’s case in arbitration and potentially avoid disputes altogether. Programmes should record actual progress of all activities within the scope of works at regular intervals and ensure the sequence of outstanding works is realistic. Records of progress should be kept daily, and capture time spent on specific activities and the resources used (people, equipment and materials). Resources records should document labour, materials and equipment used (and unused) daily. Records of costs need to be kept, enabling any loss of productivity to be accurately priced.

Efficiency in international construction arbitrations

Construction disputes are known for their factual and technical complexity, often involving large amounts of evidence, along with multiple claims or multiple parties. These can cause proceedings to last for several years, even if the arbitration is not delayed by extraneous factors.

Tools for efficient arbitration

The 2019 update to the ICC Commission on Arbitration Report on Construction Industry Arbitrations provides practical guidance for handling arbitrations efficiently. The ICC identified the following five aspects of avoiding delays.

First, constitution of the arbitral tribunal. Arbitrators should be familiar with the industry and the main construction contracts. They also need strong case management skills and availability to understand the material, deliberate and draft awards. A three-member tribunal will take more time to conduct proceedings and parties have the option to nominate a sole arbitrator to hear disputes up to a value of $30m.

Second, the case management conference. The first case management conference should determine how the arbitration will be conducted, including provisions for site visits and document management. Site visits are not always contemplated at the beginning of arbitration, which can be problematic if a visit is later deemed necessary. Document management issues, such as access to project databases, are common in construction disputes and should be addressed early.

Third, procedural timetable. Timetables need to accommodate the possibility of expedited procedural rules, the appropriateness of preliminary determinations, decide the number and order of written submissions, the procedure for document disclosure and the timing and duration of hearings. Summary disposal of unmeritorious claims at an early stage and streamlining evidential hearings and submissions also need to be considered.

Fourth, bifurcation. Parties can request to bifurcate proceedings and ask the tribunal to make partial awards on certain parts of claims. Not all cases are appropriate for bifurcation and require consideration of the nature of the claims, potential cost savings, timing and the likelihood of success of the party seeking bifurcation.

Finally, appointment of experts. Parties should discuss, at an early stage, whether expertise is required, or whether the relevant matters, technical or otherwise, can be proved in other ways – such as through project documents or witness statements. It is also important to consider whether party-appointed experts or tribunal-appointed experts are more appropriate.

Marily Paralika is a partner at Fieldfisher. She can be contacted on +33 (0)1 70 37 81 00 or by email: marily.paralika@fieldfisher.com. Ewan Maclean is a partner and Louk Korovesis is a director at Blackrock Expert Services. Mr Maclean can be contacted on +44 (0)20 7836 0158 or by email: emaclean@blackrockx.com. Mr Korovesis can be contacted on +33 (0)1 73 00 08 70 or by email: lkorovesis@blackrockx.com.

Marily Paralika

Fieldfisher

Ewan Maclean and Louk Korovesis

Blackrock Expert Services