Construction dispute numbers soaring amid pandemic disruption

A recent report from consultancy firm Arcadis showed that the average value of disputes increased to $54.26 million in 2020, up from $30.7m in 2019 and $33m in 2018. In the UK last year the average construction dispute was valued at £27.7m, an increase of 117% from 2019.

However, the average length of disputes dropped to 13.4 months – down from 15 months in 2019, and 17 months in 2018.

Construction dispute resolution is unique, utilising more specialist forms of dispute resolution than any other industry. For example, as well as more traditional processes such as court litigation and arbitration, parties to a construction dispute are likely to turn to one of several forms of alternative dispute resolution such as dispute boards or mediation, or a state-legislated adjudication process in one of the many jurisdictions where this is now available.

Why is the number and value of disputes rising?

Construction projects often find themselves creating a unique prototype on a unique site, governed by contracts which promote an often adversarial approach between parties with low barriers to entry and with under-capitalised businesses.

As a result, the propensity for things to go wrong and disputes to be created remains rife; Oxford University’s Saïd Business School has found that nine out of 10 mega infrastructure projects go over budget.

While the construction industry globally has adapted remarkably well to the pandemic, nevertheless almost all projects have suffered delay and disruption to some extent and the forms of contract at best contain force majeure clauses which do not always adequately address the unforeseen circumstances of the pandemic, leading to disputes over budget and programme.

Construction projects continue to be impacted by the global coronavirus pandemic, with a knock-on effect on claims. Across Europe, the Middle East and Africa, contractors expect Covid-19 will continue to impact their projects until at least 2023. Across Africa, where vaccine roll-out is slower, the pandemic may have an impact on projects for even longer.

The often-low barriers to entry and under-capitalised nature of many contracting businesses leads to frequent insolvencies in the construction supply chain – which is another frequent cause of disputes.

These insolvencies have been exacerbated by the pandemic. For example, in the UK alone, 1,600 construction companies became insolvent in the year to March 2021 – more than in the pandemic-stricken hospitality and retail sectors.

There has also been an increase in disputes around building safety, initially around cladding in high rise buildings, but now on a second wave of fire and other safety issues – from defective ‘fire stopping’ features to fire door ratings. Although this increase began in the UK, it has become a global issue.

More disputes have also arisen out of private finance initiatives; and public-private procurement projects, particularly those now deep into operational phases, are leading to disputes over defects, availability and change – including political change.

But if disputes are bigger and there are more of them, it seems surprising they are being resolved faster. The answer is in innovation: innovation in deploying new, faster-track processes; innovation in using faster-track procedures in existing processes; and innovation in using new technology in those processes, to speed up dispute resolution.

Innovation in disputes

The fast-track adjudication process in particular has taken off globally – there are now statutory mandated versions from Australia, to Singapore, South Africa and Canada. According to the Arcadis survey, adjudication is now the third most common construction dispute resolution process.

In addition, there has been a big increase in the use of dispute boards which often enable disputes to be resolved earlier than ‘full’ court or arbitration processes.

Courts and arbitration bodies are also adopting faster track processes – often streamlining disclosure and factual witness evidence stages in particular.

The pandemic itself has driven technological change, with increased use of virtual hearings instead of physical ones. This speeds up the scheduling of hearings, especially on international matters. Technological innovations in legal project management, document management and review have also greatly sped up the ability to get through the fact and document heavy construction dispute processes.

The ‘new normal’

There is already an uptick in disputes arising from the post pandemic supply chain disruption and its impact upon construction projects. An August 2021 Financial Times article highlighted the issue in a UK context, but the challenges are global.

The pandemic has led to a rise in shipping costs, plus reduced capacity in Chinese ports, and the Financial Times reported the cost of transporting a 40ft-container from China to northern Europe had risen about from $1,500 in May 2020 to more than $13,000 in July 2021.

That supply chain factor is coupled with disputes arising from widespread increases in costs of labour, materials and energy – all of which are vital for the construction process. The global price of steel has rocketed, with seven price rises in 2021 alone, while energy prices have also risen globally.

Although decarbonisation will provide many opportunities for construction in the infrastructure and energy sectors, it is also likely to be another driver for construction disputes. This is already materialising in disputes over the massive wave of construction of renewable energy assets – from on and offshore windfarms to solar farms and battery storage facilities.

The extent of the challenge is revealed by a recent UN report (105 page / 29.3MB PDF) suggesting that construction sector is responsible for 37% of carbon emissions. The construction industry, therefore, must also look at its own carbon emissions as well as supporting carbonisation elsewhere in the economy. That degree of change will itself lead to increased disputes.

The number of construction disputes could reduce in the future. Industrialising construction, and accelerating modern construction methods could remove all or much of the ‘prototype’ factor in projects which so often leads to things going wrong.

New forms of collaborative contracting, which are being introduced globally, may also support a reduction in the number of disputes.

However, the positive effect of these developments is not yet being felt. It therefore remains vital to use the right processes to resolve construction disputes as swiftly, cost effectively and ideally amicable as possible.

Co-written by Charlie Chetwood of Pinsent Masons