10/02/2016
In a 2013 report by consultants EC Harris, it was revealed that one in five construction joint ventures ended in a formal dispute in 2012. Let’s face it, with tight deadlines, multiple contractors, sub-contractors, suppliers, insurers and investors, making it through a large-scale construction project unscathed by disputes is an ambitious goal for any organisation.
Construction Contracts
However, there are steps companies can take when negotiating a joint venture and undertaking a large construction project that will minimise the risk of a time-wasting, money-draining, stress-inducing dispute occurring. In the first part of this series on Construction Dispute Resolution, you will find a number of tips on ways organisations can prepare and negotiate construction contracts to protect their best interests and prevent disputes from arising.
The Most Common Grounds For Construction Disputes
The following issues are frequently the mainstays of construction disputes.
Defects in the Work
One of the most obvious claims that could arise in a construction project is a claim for defective works. Patent defects may arise in the works as they progress, which the contractor will need to remedy before practical completion, to avoid being in breach of contract (unless the employer decides to accept the defect and deduct sums from the contractor if it has the right to do so under the contract). Minor defects may also be detected that will not prevent certification of practical completion, but which will form a snagging list of issues to be addressed.
By contrast, latent defects may only become apparent some years after completion of the works—for example, defective construction of foundations leading to subsidence, or inadequately installed waterproofing resulting in water ingress can take some time to appear. By the time such defects are discovered, the employer will often no longer have the contractual ability to require the contractor to return to correct them, which can lead to claims being brought against the contractor by the employer, or by parties that have subsequently acquired the right to do so (eg by acquiring an interest in the property)
Design Flaws
Not all defects will arise from the contractor's poor workmanship. A defect could also arise because of a design flaw. If this is due to a consultant's failure to exercise the skill and care required by its appointment (or by the Supply of Goods and Services Act 1982) or otherwise to carry out the design in accordance with its appointment, the consultant may be liable.
Claims about design may also be made against the contractor in the event that the contractor has taken responsibility for the design.
Completion Delays and Extensions of Time
The building contract will usually require the works to be completed by a specific date. If the works are not completed on time, this could cause the employer additional cost, e.g., financing costs, loss of revenue or the need to arrange temporary office accommodation for its staff.
The contractor has no statutory or common law right to an extension of time to complete the works. Therefore standard construction contracts provide express contractual provision for the contractor to be granted an extension to the contractual completion date.
Extensions of time can be a contentious issue. The contractor may claim that an event has occurred entitling it to an extension of time, and while the employer may agree that the event has occurred, it may disagree that it had any effect on the contractor's ability to complete the works or disagree as to the extent of any delay. For example, the employer may agree that a 'relevant event' has occurred, such as exceptionally adverse weather, but it may contend that this event has had no effect on the contractor's ability to complete the works on time, eg if the works on the critical path involved the contractor carrying out works to the interior of the property at the time of the adverse weather, so that the works (and, therefore, the contractor's ability to meet the completion date) were not actually affected by weather. Claims for extensions of time can often lead to disputes.
Loss and expense
Loss and expense claims are a particularly contentious issue in construction contracts. Claims for loss and expense are brought by contractors in relation to the additional cost incurred because of a disturbance in the regular progress of the works (for a reason which is not at the contractor's risk). For example, where the contractor is entitled to an extension of time to complete the works the contract may also entitle the contractor to claim for the costs of being on site for a longer period.
Claims against the employer
It is not only the construction team that could find themselves defending a claim. Claims are also commonly made against the employer, for example for extensions of time to the date for completion of the works, for payment of additional money for variations to the works and/or for related loss and expense. If the employer fails to pay the contractor on time, a claim could also be made, or, subject to the terms of the contract, other steps taken by the contractor (e.g., suspension of its work) which could affect the progress of the works.
Non-payment by the employer
If the employer, without justification, fails to pay the contractor in accordance with the contract then it will be in breach of contract, and the contractor will be entitled to make a claim, in accordance with normal common law requirements.
In addition, if the contract is subject to the Housing Grants, Construction and Regeneration Act 1996 and if the full amount of any payment due to the contractor/consultant is not paid by the employer by the 'final date for payment', either in accordance with the contract or the Scheme for Construction Contracts (as relevant) then, unless the appropriate 'pay less' notice has been issued by the employer, the contractor/consultant may claim against the employer.
Using the Construction Contract to Avoid Disputes Crystallising
The construction contract is the number one weapon for both the employer and main contractor when it comes to fending off construction disputes. The importance of having each section drafted by a legal professional cannot be over-estimated, as ambiguities within the contract documentation are the cause of many construction disputes. Many of the common areas for disputes outlined above can be mitigated by drafting clauses in the contract to head off the possibility of a disagreement.
An example of this is ‘delays to completion and extensions of time’. It is usual for the parties to include a provision entitling the employer to claim liquidated damages if the contractor is late completing the works. Constructions contracts should also outline how patent defects will be rectified and the timescale in which this will be done.
Adjudication Provisions in the Construction Contract
The right to adjudicate disputes can be expressly provided for in the construction contract. Although parties also have a statutory right to adjudicate under the Housing Grants, Construction and Regeneration Act 1996, providing for it expressly in the construction contract provides the following advantages:
- The ability to specify the name of a preferred Adjudicator or an adjudicating body
- Set out the Adjudicator’s powers
- The parties can stipulate the manner by which Notice of Adjudication and other supporting documents are to be delivered
Conclusion
Although it is inevitable that construction disputes will sometimes arise when large, complex projects are worked on by multiple parties, having a well-drafted, water-tight construction contract with a clear dispute resolution process documented will help parties avoid costly, stressful litigation proceedings.
In Part Two of this series, we will discuss the best way to manage a construction dispute should one arise.
Fisher Scoggins Waters are a London based law firm who are experts in construction, manufacturing and engineering matters. We act for both employers and contractors and are regarded as one of the best construction dispute resolution firms in the UK. If you would like to discuss any points raised in this article, please phone us on 0207 993 6960.