Construction Dispute Trends For 2023
Despite tough conditions caused by COVID-19, leading to a slowdown in construction activities and a significant impact on the global economy, the construction industry continues to grow and evolve. In parallel with growth and innovation, comes disputes.
There is an increasing welcomed focus on sustainability, with many countries making ambitious and public commitments to reduce their carbon footprint and achieve carbon neutrality. For example, Bahrain has pledged to become carbon net zero by 2060 and to reduce carbon emissions by 30% by 2035, whereas the United Kingdom and UAE have similarly committed to reaching carbon net zero by 2050.
The implementation of sustainable construction practices may give rise to disputes in:
- Renewable Energy: the implementation of solar panels or wind turbines on construction sites can often lead to disputes between construction companies, non-profit organisations as well as local communities. Typical issues include visual blight, landscape impact, noise pollution generated by the mechanical operation of wind turbine blades and concerns over the impact on animal migration.
- Recycled Materials: unlike traditional building materials - concrete, steel, and lumber – recycled materials can vary greatly in quality, making it difficult to ensure their suitability for construction projects. This can lead to disputes between construction companies and suppliers over product quality, reliability, and performance.
- Interpretation of Sustainability Standards: there are several international and regional sustainability standards, such as the Leadership in Energy and Environmental Design (LEED) and the Global Sustainability Assessment System (GSAS), but there is a lack of clear guidelines as to how these standards should be applied in the construction industry. Ambiguity over the interpretation of sustainable standards and / or the implementation of sustainable construction practices may lead to disputes.
Cashflow remains king: the financial stability of contractors and their supply chains is critical to the success of construction projects. Contracting in the Middle East is commonly on a back-to-back or pay when paid basis.
When payment flow is paused or stopped at any stage, there are huge ramifications for the entire project:
- Incomplete Works: the most common consequence of a contractor facing insolvency is an inability to complete the work as contracted. This is likely to result in additional costs and delays for the employer who may need to find a new contractor to complete the remaining works. Moreover, the new contractor may need to spend extra time and resources to understand the project's specifications and requirements adding to the cost and time needed to complete the works.
- Liability Issues: an insolvent contractor may not have sufficient funds to pay for any damage caused to the property or to third parties.
- Contract Termination: an insolvency event may trigger termination due to the contractor's inability to complete works or due to liability issues. Such disputes can be complicated and difficult to resolve and are likely to lead to further delays and financial losses for an employer.
Whilst these innovative and world-leading projects will bring significant benefits, their size and scale may give rise to disputes due to:
- Complex contracts: Gigaprojects often involve complex contracts which typically outline the scope of the project, the timelines, and the compensation due for work performed and/or materials supplied. If the contract is it not well defined and / or difficult to interpret, disputes between owners, contractors and subcontractors may arise.
- Lack of coordination: with multiple contractors and stakeholders involved in a gigaproject, any lack of or gaps in coordination or interfacing will lead to disputes over responsibilities and obligations.
- Cost overruns: there are multiple factors that contribute to cost overruns in large scale infrastructure projects. As well changes to the project's scope, design or additional work, gigaprojects are susceptible to all of the risk factors above.
As the world emerges from the COVID-19 pandemic, many countries have eased restrictions put in place to curb the spread of the virus. However, COVID-19 continues to impact the industry through delays to project completion, changing contract conditions, payment disputes, supply chain disruption and force majeure claims.
How to mitigate the risk of a dispute?
There are several steps that stakeholders can take in order to mitigate the risk of disputes including:
- Utilising technology to streamline communication and collaboration between stakeholders.
- Staying constantly vigilant of any potential claims and give the earliest possible notice in order to prevent the disputes from escalating.
- Taking a proactive approach to risk management by identifying and addressing potential risks before they can escalate into disputes.
- Avoiding advancing unmeritorious claims or positions that may lead to disputes.
- Considering alternative project delivery methods.
- Pre-purchasing materials, especially long-lead items to help ensure that the necessary materials are available when needed as well as reducing the potential for delays which could give rise to disputes.
- Adopting a collaborative approach instead of an adversarial approach to project management.