Explainer: Dispute avoidance and resolution

Disputes and claims can be hugely damaging to construction projects and everyone involved in them. Consultancy HKA analysed 1,401 major capital projects around the world in 2021 and found that disputed costs on these projects totalled almost US$73bn (£54bn), while extensions of time sought added up to more than 750 years.

These figures are for major projects – the average value of the projects in the HKA report was $1.82bn (£1.35bn) and the average cost being claimed was US$100m (£74m). However, disputes occur just as often on smaller, domestic building and infrastructure projects, and the reason is the same: two parties differ in the assertion of a contractual right.

“Most disputes arise because someone is losing money,” says Ian Heaphy, member of the NEC4 Contract Board responsible for developing and drafting the NEC4 suite of contracts. “Something goes wrong that is going to increase the cost of the project and may add time, and a dispute arises over who pays for that and who is liable.”

The HKA Operating in Uncertain Times report ranked the top causes for disputes, with changes in the scope of the work topping the list. Causes varied by region, but “change in scope” featured in the top three for all regions.

The top 30 causes of claims or disputes worldwide were:

1. Change in scope
2. Contract interpretation issues
3. Contract management and/or administration failure 
4. Design information was issued late
5. Design was incomplete
6. Design was incorrect
7. Poor management of subcontractor/supplier and/or their interfaces
8. Physical conditions were unforeseen
9. Access to site/workface was restricted and/or late
10. Workmanship deficiencies
11. Level of skill and/or experience
12. Claims were spurious
13. Approvals were late
14. Cashflow and payment issues
15. Operational performance
16. Tender errors and/or inaccurate estimates
17. Materials and/or products were delivered late
18. Shortage of skilled and non-skilled workers
19. Installation failure
20. Targets and/or expectations were unrealistic
21. Weather conditions were exceptionally adverse
22. Inadequate responses to information requests
23. Poor interface management with a third party
24. Personality and/or cultural differences
25. Bias and/or failure to cooperate
26. Reporting was incomplete and/or incorrect
27. Late appointment of subcontractor/supplier  
28. Other: sociopolitical/regulatory
29. Covid-19
30. Fraud

The Global Construction Disputes Report by consultancy Arcadis found that the average dispute value in the UK was US$38.6m (£28.6m) in 2020 – the highest UK figure ever recorded. However, the UK is the global leader in resolving disputes in a timely manner, with the average length of time for resolution being less than 10 months, compared with 14.2 months in the US and 14 in Europe.

Martin Burns, head of alternative dispute resolution research and development at the Royal Institution of Chartered Surveyors (RICS), says part of the problem is that there is a history of disputes in the construction sector, and the industry is traditionally adversarial and claims-conscious. He identifies a number of issues that regularly cause conflict between parties:

• Uncertainty – parties go into projects without having planned what to do if disagreements happen.
• Lack of information and transparency – people take up positions based on what they know, rather than having all the information to hand.
• Variations – this is a big problem, and includes the “change of scope” identified in the HKA report as well as the likes of increases in materials costs.
• Contracts – one or other of the parties has not chosen the right contract, or people do not know what it says.
• Tendering process – procuring on lowest cost sets up conflict that could be avoided by a more collaborative approach.
• Behaviour – if the project starts off in an adversarial mood, it is difficult to change.

Disputes result in a range of outcomes that are best avoided, including:

1. The project is late, over budget or not to the desired specification
2. People working on the project become demoralised
3. Relationships between the parties are damaged
4. Reputational damage for the organisations involved

Some disputes can be avoided altogether by identifying early any issues that may escalate and settling them before they become a problem. But inevitably, disputes will occur between members of a delivery team on some projects, so all parties need to develop and adopt a strategy for managing them, and understand the steps that can be taken to avoid them ever reaching court.

The Conflict Avoidance Coalition Steering Group, which is made up of 10 UK clients and professional bodies including the ICE and RICS, has developed a Conflict Avoidance Toolkit to provide information on measures that can help to avoid disputes arising and, when differences do arise, techniques to deal with them early, quickly and cost-effectively.

The aim of the toolkit is to help reduce the damage that disputes can cause to finances, project delivery, brand reputations and commercial and personal relationships, using alternative dispute resolution (ADR) techniques rather than litigation.

It sets out measures that can be taken at every stage of the lifecycle of conflict avoidance and early intervention:

As this lifecycle indicates, work to minimise the likelihood and impact of disputes needs to begin well before a project starts, with a well-drafted and appropriate contract that is clearly understood by all parties. It also includes a ‘dispute avoidance’ stage that advocates setting up a system that explores potential risks connected to a project and includes procedures designed to mitigate any problems that may arise and settle differences before they become formal disputes. 

Network Rail, the UK’s rail infrastructure owner and operator and one of the client organisations on the Coalition Steering Group, includes a formal dispute avoidance system in its contracts. This system includes regular reviews by an independent Dispute Avoidance Panel (DAP) to identify possible conflict areas before they become disputes (see below). The other client in the coalition, Transport for London (TfL), includes an early intervention process known as a Conflict Avoidance Process (CAP) in its contracts.

If a dispute cannot be avoided, the conflict lifecycle recommends early intervention, followed by amicable resolution and, lastly, a formal dispute resolution process. Options during these stages include mediation or conciliation, expert determination, adjudication and arbitration.

ICE offers a Dispute Service that includes a register of people from a variety of professional backgrounds who are qualified to act in any of these situations, including lawyers, architects and quantity surveyors as well as civil, structural, mechanical and electrical and building services engineers.

The Conflict Avoidance Coalition is encouraging the infrastructure and construction sector to commit to a pledge that states: “We believe in collaborative working and the use of early intervention techniques throughout the supply chain, to try to resolve differences of opinion before they escalate into disputes. We recognise the importance of embedding conflict avoidance mechanisms into projects with the aim of identifying, controlling and managing potential conflict, whilst preventing the need for formal, adversarial dispute resolution procedures. We commit our resources to embedding these into our projects.”

As part of the pledge, signatories commit to:

• Working proactively to avoid conflict and to facilitate early resolution of potential disputes
• Developing their capability in the early identification of potential disputes and in the use of conflict avoidance measures
• Promoting the value of collaborative working to prevent issues developing into disputes
• Working with industry partners to identify, promote and utilise conflict avoidance mechanisms

The pledge has been signed by major contractors, consultants and clients and, while it is voluntary and self-assessed, it does show that there are organisations in the construction sector that are committed to avoiding disputes.

As well as organisations pledging to try to avoid disputes, individual engineers can also take steps to ensure that their behaviour does not result in a dispute, or that if a disagreement does arise then it does not escalate. These include:

1. Being open, transparent and collaborative
2. Communicating and having open conversations about what is driving the dispute behaviour or failure to deliver
3. Keeping clear and accurate records 
4. Raising issues and flagging problems as soon as they occur
5. Ensuring senior representatives of all parties are meeting regularly
6. Ensuring they understand the cost of getting into a dispute
7. Depersonalising the dispute and avoiding entrenched positions

One of the most popular standard contract forms for civil engineering projects is the NEC suite, currently in its fourth evolution, NEC4. This contract sets out behaviours designed to prevent or avoid disputes – including Clause 10.2, which states that parties should “act in a spirit of mutual trust and cooperation” – but acknowledges that parties will disagree.

The dispute resolution provisions in NEC4 are found in options W1, W2 and (in the NEC4 Engineering and Construction Contract) W3, one of which must be selected by the parties when they enter into the contract. The parties are also required to provide important information in the Contract Data – for example, whether disputes are to be finally resolved by litigation (i.e. court proceedings) or arbitration. The three options give different routes for resolving disputes (see table below).

However, most construction contracts in the UK are subject to the Housing Grants, Construction and Regeneration Act 1996 – usually referred to as the Construction Act – which includes a statutory requirement that disputes can be referred to adjudication at any time. As a result, any contracts that are subject to the provisions of the Construction Act must use option W2.

In both options W1 and W2, parties first refer the dispute to ‘senior representatives’ – this is mandatory in W1 and by agreement in W2. “The representatives should be people who are sufficiently removed from the dispute and senior enough to see what the dispute is worth in terms of time and money,” Heaphy says. The two sides submit a short statement of case and the representatives decide how they want to settle it. It is an informal process and is limited to three weeks unless both sides agree to extend the time period.

If the two parties still don’t agree after this, the dispute goes to an adjudicator, who can either be named in the contract or appointed when the dispute arises. Often, an ‘appointing body’, such as the ICE or RICS, is named in the contract, rather than an individual, and that organisation will find someone suitable to act as adjudicator. The adjudicator is independent and has broad powers, including being able to ask to see any documentation and talk to anyone on the project. They have only 28 days to consider all of the evidence, although this can be extended by agreement.

The adjudicator’s decision is binding, but not final. If one side wants to contest the decision, the next (and final) stage is a tribunal – either litigation or arbitration.

Option W3 is specific to the Engineering and Construction Contract and cannot be used if the Construction Act applies. The first stage of dispute resolution in W3 is a Dispute Avoidance Board (DAB), which works with the parties to avoid disputes occurring. Two of the board’s three members are appointed ahead of the contract, one by the client and one by the contractor, while the third is jointly agreed when it is decided that they are needed. The DAB makes recommendations, but not binding decisions, and if the parties do not agree with the DAB’s recommendations then the dispute escalates directly to arbitration or litigation.

“Using a DAB is intended to be a more consensual way of resolving and diffusing disputes,” Heaphy says. “They get to know them over time and can suggest commercial solutions and recommend ways forward.”

Although DABs are a stipulation of option W3, there is nothing to stop them being included in contracts using W1 or W2 as a way of trying to deal with disagreements before they develop into disputes.

For all options, the final stage is a tribunal, which is either litigation (court) or arbitration – a choice that will be agreed at contract stage. In the UK, arbitration is rare because the dispute will already have gone through adjudication, where most disputes are resolved. Courts then tend to uphold the decision of the arbitrator. In other jurisdictions, including in the Middle East, and for cross-border disputes, arbitration is more common.