A perfect storm of costs, risk and potential presents legal challenges

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Victoria Tyson of Corbett & Co., writes for IG about the likelihood of growing legal challenges amid growing global shocks, and makes some suggestions about how to prepare. 

The ongoing legacy of the Covid-19 pandemic which started in 2019, the residual effects of the Suez Canal obstruction in 2021, the consequences of the 2022 Russian invasion of Ukraine (including increased energy costs and escalating labour, equipment and material costs), and a skills shortage arising out of the early retirement of key personnel following the Covid-19 pandemic, are raising concerns that construction projects will stall and/or that costs will increase.

As a result, it is likely that we will see an increase in claims and disputes concerning:

  • The wording and interpretation of the contract.
  • Additional time and prolongation costs.
  • Causation (in particular in respect of the Covid-19 pandemic).
  • Time-bars.
  • Price escalation and cost adjustment (particularly in respect of the cost indices / reference prices and the Base Date).
  • Variations to the contract (for example, contractors pushing back on variations until a cost is agreed, and employers omitting works).
  • The record demand for construction products and key equipment (such as dredgers and specialist rigs for wind farm installation).
  • Passing claims down the line and ‘subbie bashing’ where larger firms financially bully smaller subcontractors they are working with.
  • Cash flow problems.
  • Decline in quality as money gets tight and speed is prioritised.
  • Terminations where contracts are no longer viable, the money runs out or the contractor defaults.

Dispute Boards (DBs), i.e. Dispute Adjudication Boards (DABs) under FIDIC 1999 and Dispute Avoidance / Adjudication Boards (DAABs) under FIDIC 2017, may be asked to consider some of the following key clauses in the FIDIC forms of contract:

  • Force Majeure[1] and Exceptional Events[2].
  • Extension of time for Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or Government actions[3].
  • Variations[4].
  • Adjustments for Changes in Legislation[5].
  • Adjustments for Changes in Cost[6].
  • Employer’s Financial Arrangements[7].
  • Termination[8].
  • Electricity, Water and Gas[9] and Temporary Utilities[10].
  • Limitation of Liability[11].

Possible solutions
There are some practical solutions which can be implemented on both existing and new projects to avoid the escalation of such claims into a ‘long tail’ of disputes, such as:

  • Acceleration agreements to pick up time post pandemic and to reduce inflationary risk. Among other things, consideration would need to be given to the additional resources and supervision required, a revised programme, a statement on working hours and the settlement of any outstanding claims etc.
  • Agreement on cheaper alternative materials or those which can be procured more quickly.
  • Identifying capacity in the supply chains, buying price volatile goods, equipment and materials in advance and negotiating a delayed delivery or stockpiling them.
  • Movement away from fixed cost and towards target cost and reimbursable forms of contract.
  • Division of projects into smaller contracts, so that the Employer may pull out of a project which becomes unviable.
  • Reduction in bid validity periods, or date limit pricing for specific materials, in order to limit the Contractor’s period of risk.
  • Inclusion of the optional adjustment for changes in cost provisions, but only after obtaining expert advice on the appropriate formula and cost indices / reference prices. Fix the Base Date appropriately.
  • Inclusion of caps on Variations. This would protect the Contractor from having to complete the varied works at, or with reference to, the rates and prices included in the Contract, and from an extended project period.
  • Flexibility in the drafting of the Specification / Employer’s Requirements. For example, being less prescriptive about the procurement of materials in respect of the identity of the supplier and/or the type of material, and permitting alternative products if previously specified materials have dramatically increased in price.
  • Including provisional sums for specific defined materials to allow for greater price flexibility.
  • Procurement of goods locally, where possible, in order to reduce transportation costs.
  • Building closer and more collaborative relationships.

Challenged for Dispute Boards
If such claims do escalate into a ‘long tail’ of disputes, DBs will face considerable pressures, including:

  • Failure to appoint a DB. As belts are tightened parties may resist the appointment of DBs on a standing basis due to the perceived cost. If a DB’s boots are not on the ground, it will impinge on the benefit of real time avoidance or resolution of disputes and the DB will have less opportunity to get up to speed with the events on Site. DBs must not put any additional obstacles in the way of their appointment such as unrealistic fees or additional demands such as first-class travel etc.
  • Excessive numbers of disputes. If disputes are not avoided or resolved in real time they will elongate, build up and overlap. A DB member does not have limitless capacity, especially if engaged on several projects simultaneously. This might impact on the quality of the decisions and, in turn, the weight they are given. DBs must be wary of damaging their reputation by overstretching themselves. In order to address workload pressures, some DB members employ assistance akin to tribunal secretaries used in arbitrations, but this can raise further problems.
  • Late decisions. Under both the FIDIC 1999 and 2017 editions, once a dispute is referred to a DB it has 84 days to give a decision. Several disputes could be referred to the DB at the same time each with significant supporting evidence. A failure by the DB to give a decision within the agreed time period might be fatal. DBs must honour the deadlines or obtain an extension of time from the parties.
  • Use of expertise. Whilst a standing DB ought to be on top of the factual evidence, challenges on causation and the complexities of price adjustment formulae and indices might see the DB faced with significant expert evidence which is outside of its own technical knowledge. This is exacerbated in the case of sole member DBs. In the FIDIC 2017 editions, the DAAB Procedural Rules give DAABs the express power to appoint one or more experts with the agreement of the parties.
  • Disputes that are perceived to be outside of a DB’s technical expertise are more likely to be challenged. This is especially so where inconsistent decisions on the same legal issues can be pointed to. In the past, published FIDIC cases were rare, but this is changing. See, for example, the FIDIC cases table on our website. In the Procedural Rules the DB is expressly empowered to take the initiative in ascertaining the facts and matters required for a decision.
  • Shortage of DBs. Ultimately, longer projects and an increased number of disputes may result in DB members taking on fewer appointments and a consequential shortage of competent and experienced DB members.

By far the best approach is for the parties to avoid disputes in the first place.

In summary, there are some difficult times ahead for the construction industry. But the challenges and the impact of those challenges can be managed. Claims need not lead to a ‘long tail’ of disputes and additional pressure on DBs provided prompt action is taken to resolve them.

 

Victoria Tyson can be contacted about these issues on +44 (0)20 8614 6200 or by email at [email protected] to discuss your concerns and for advice on what steps you can take to avoid the escalation of claims into destructive disputes.

[1] Clause 19 in the FIDIC 1999 editions.

[2] Clause 18 in the FIDIC 2017 editions.

[3] Sub-clause 8.4(d) in the FIDIC 1999 editions; sub-clause 8.5(d) in the FIDIC 2017 editions.

[4] Clause 13 in the FIDIC 1999 and 2017 editions.

[5] Sub-clause 13.7 in the FIDIC 1999 editions; sub-clause 13.6 in the FIDIC 2017 editions.

[6] Sub-clause 13.8 in the FIDIC 1999 editions; sub-clause 13.7 in the FIDIC 22017 editions.

[7] Sub-clause 2.4 in the FIDIC 1999 and 2017 editions.

[8] Clauses 15, 16 and sub-clause 19.6 in the FIDIC 1999 editions; clauses 15 and 16 in the FIDIC 2017 editions.

[9] Sub-clause 4.19 in the FIDIC 1999 editions.

[10] Sub-clause 4.19 in the FIDIC 2017 editions.

[11] Sub-clause 17.6 in the FIDIC 1999 editions; sub-clause 1.15 in the FIDIC 2017 editions.