Theresa Mohammed and Beth McManus ask why industry disputes are still on the rise.
Beth McManus (l) and Theresa Mohammed
Following the publication of the National Construction Contracts and Law Survey 2015 towards the end of last year there has been speculation as to why the number of disputes in the industry has continued to rise.
The three surveys conducted by RIBA Enterprises’ National Building Specification (NBS) over the past four years show an upward trend: in 2011, 24% of respondents had at least one contract that went into dispute, rising to 30% for 2012. The most recent survey shows a steep increase: 44% of respondents say at least one contract went into dispute in the past 12 months.
The fall in workloads during the recession could account for the lower number in the first survey, given that the spare funds for pursuing disputes simply weren’t available.
On the other hand, our experience has been that squeezed margins and pressure on profits actually prompt disputes, however in recent years these have often been resolved without recourse to costly legal proceedings. We have certainly seen a pattern of contractors actively managing risk and taking advice during the project, rather than the old-fashioned approach of serial adjudications or expensive litigation at the end of the job.
In general, it costs money to run a dispute, so even when parties have confidence in their prospects many hold off pursuing claims via legal proceedings until their financial situation is more secure. It is worth noting that, although a greater number of disputes has been recorded in the most recent survey, this is compared to the very low base of the recession data.
A recent increase may be due to pricing disputes coming to a head where contractors on longer-term contracts have underpriced to secure work and this has encouraged claims for variations and performance disputes due to under-resourced works. “Low-balling” for work may have kept revenue streams open during straitened times, but in a recovered economy, parties appear to be feeling the effects of contracts previously valued at artificially low levels.
“‘Low-balling’ for work may have kept revenue streams open during straitened times, but in a recovered economy, parties appear to be feeling the effects of contracts previously valued at artificially low levels.”
So parties may have had historical claims but waited until recently to pursue them. Disputes clearly use up time and money so parties need access to a fighting fund before starting a claim.
At Trowers & Hamlins, we have definitely seen a rise in the number of claims commenced in court despite a significant increase in civil court fees by the Ministry of Justice, but we continue to advise clients to resolve disputes wherever possible as there will inevitably be irrecoverable costs and a huge diversion of precious management time.
The increase in civil court fees that came into effect in March 2015 has no doubt acted as a significant deterrent to commencing litigation – particularly if due to non-payment. The issue fee for money claims worth £10,000 or more increased substantially, to 5% of the value of the claim (capped at £10,000). For a claim of £200,000, the pre-March court fee of £1,515 increased by 560%, to £10,000 – a major increase for mid-value disputes.
It is worth considering that the fee change may have prompted those parties aware of the increase to rush to issue claims, even on a speculative basis, before March 2015. This spike may at least partly explain the higher number of disputes in the most recent survey, but following the increase there is likely to be less appetite to litigate less robust claims.
As for adjudication, we consider that there is a certain degree of nervousness around the risk of adverse adjudicators’ decisions that can be enforced with relative speed. Further, the body of case law on technical defaults – for example in pay less notices or payment notices – has shown a significant change, moving away from “smash and grab” adjudications. This may mean that parties are instead having to consider longer-term solutions.
As such, the emphasis in the future is likely to be on alternative dispute resolution methods. From our own caseload, we have seen clients taking risk advice at an earlier stage in disputes. This prompts early resolution of any issues without recourse to formal proceedings.
The obvious practical point is that it is better to avoid disputes if possible, given the cost and time consequences involved. Collaborative working is universally encouraged, but some parties still prove resistant to increasing this. A commitment to active contract management and clear communication would also help to avoid disputes spiralling into legal proceedings.
But no matter what method of collaborative working is contractually specified, it can only be as successful as the people using it.
Team-wide commitment to collaborative working in both letter and spirit is required from the outset to reduce the number of disputes. This approach also improves the chances of resolving disputes at an early stage. As finances hopefully improve, we must be optimistic that future surveys by the NBS do not show the same continuing trend.
Theresa Mohammed is partner and Beth McManus solicitor in the dispute resolution and litigation team at law firm Trowers & Hamlins
