24th February 2016
Common causes of construction disputes
Authors - Lorna Carter and Umran Kadir
Lorna Carter and Umran Kadir from law firm Hewitsons LLP look at the most common types of construction disputes and the methods that can be adopted to resolve these with minimal fuss.
Types of construction dispute
The most typical construction dispute is about money; in particular not being paid. Payment terms relating to commercial construction contracts are subject to the Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2011 (known as the Construction Act). The Construction Act creates an entitlement to staged payments and prohibits pay-when-paid clauses. Non-payers must carefully follow the Construction Act’s requirements to provide formal notices known as “pay less” notices allowing them to hold back payment on valid grounds. Failing to provide these notices on time gives the party requiring payment a relatively straightforward case in adjudication.
Delays are relatively common in construction projects. Some delays are not the fault of any party, such as inclement weather, but, in principle, damages would be recoverable from parties responsible for non-excusable delays. Sometimes these are pre-estimated and agreed in advance - these are known as liquidated and ascertained damages (LADs). However, there are often disputes about the cause of the delay and who is responsible. Complex legal analysis and establishing what, if any, damages are payable will be required for concurrent delays. These are delays which run side-by-side for whom different parties are responsible.
Extensions of time
Where there is a delay for which the Employer is responsible a contractor is entitled to apply for an extension of time avoiding LADs, subject to the terms of the contract. Care must be taken to comply with the contract terms in providing notice of the delaying event and such information is required by the contract in order to obtain the required extension.
Defective works can range in severity from pure snagging items to undetected structural issues that may only be discovered years later. Most construction contracts allow a contractor to return on site and rectify any defects during an agreed rectification period. Failure to allow the contractor to return during the rectification period could result in the Employer’s right to recover damages being significantly reduced.
Professional negligence claims usually arise where an Employer is alleging that a consultant or contractor involved in a project has carried out their design without due skill and care. In contracts for services where the professional is acting in the course of a business, if not expressly dealt with in the contract, it will be implied by the Supply of Goods and Services Act 1982 that their services will be carried out with reasonable skill and care, within a reasonable time and for a reasonable fee. It is possible to exclude or limit these duties, for example through net contribution clauses. We acted for the consumers in the first case on the enforceability of such clauses against consumers West v Ian Finlay & Associates (2014).
How to resolve?
It is often useful for the parties to meet in order to talk frankly about the dispute. It is important that those with sufficient knowledge and the necessary authority settle the dispute attend and, if a settlement is reached, the terms of agreement should be recorded in writing and signed by the parties to try to avoid misunderstandings. It is helpful for such meetings to be held on a ‘without prejudice’ basis so that the parties are free to make comments which may not be referred to in Court if a deal is not struck.
This is a confidential and non-adversarial form of dispute resolution. The mediator attempts to facilitate negotiation of the dispute to reach a resolution. Parties will generally bear their own costs and share the mediator’s fees. Again, it is important that those with sufficient knowledge and the necessary authority to settle the dispute attend. If settlement is reached, the terms of agreement will be recorded in writing and the decision will be binding. Even where a settlement is not reached, mediations tend to narrow the issues and the parties may well achieve a settlement later.
Adjudication is a quick and confidential process. It is automatically available at any time for disputes where there is a ‘construction contract’ as defined by the Construction Act.
The adjudicator must issue his decision in 28 days although this may be extended by agreement. The successful party can seek a Court order to enforce the decision. In relation to costs, the parties pay their own but the adjudicator decides who is to pay his fees. Due to the fast nature of adjudication it is important to seek legal advice early on.
Court action can be a long and expensive process and, if not managed properly, the costs can end up dwarfing the sum in dispute. There is a Pre-Action Protocol for Construction and Engineering disputes which means that the parties should exchange correspondence in a specified format and also meet on a without prejudice basis before issuing Court proceedings.
Court action is commenced once a claim form is served on the defendant. The dispute is then classified according to the sum claimed. For small claims (under £10,000), legal costs are not recoverable from the other side so parties tend to represent themselves. Reasonable legal costs are recoverable on fast and multi track claims but the Court will not usually award more than 70 per cent of costs to the successful party. Court action is a last resort.
Sometimes the nominated dispute resolution procedure in a contract is arbitration. In our opinion this is best employed on large complex disputes where the parties intend to continue with their commercial relationship, as it provides a confidential procedure with an arbitrator who is generally a construction specialist. Again this should be seen as a last resort.