“The best way to identify pitfalls and risks is to ‘connect the back end of completed projects with the front end of new projects”
Construction disputes have risen globally in value throughout 2013 and 2014 as the market heats up again after the lean years of 2008 – 2012. A combination of economic, legal and behavioural factors can lead to construction disputes. Larger projects are usually long-term transactions with high uncertainty and complexity, so it is impossible to resolve every detail and foresee every contingency at the outset. As a result situations often arise that are not clearly addressed by the contract. The basic factors that drive the development of construction disputes are uncertainty, contractual problems, and behaviour, as well as the availability of cash flow to fund disputes.
Here, Fenella Mason, Head of the Construction team at Burness Paull, clarifies that one of the leading factors driving disputes and risk is the consequences of unexpected changes. Fenella also talks to Lawyer Monthly about the effects of Brexit, the kind of issues that can arise in construction matters, the solutions available, and details the industry roles in identifying legal pitfalls and risks.
What have been the most common legal issues you have dealt with the firm in the last year?
A dominant feature of the last year was claims for defects (as opposed to claims for time and money). It has been interesting to observe the way such claims have played out in relation to PFI contracts in particular. Did the parties really intend that deductions would be made for minor breaches?
Did the parties ever anticipate that the allowable liquidated damages could be so disproportionate to the minor nature of those breaches? Unforeseen events and unintended consequences is a theme which will have consequences for the future. Will there still be an appetite for new PFI projects? How will the perception that the private sector has been unduly benefiting from the public sector impact future procurement models? However, it is a theme which has consequences which extend well beyond the PFI market. Change comes in a variety of forms. It may be legal change, technical change, technological innovation change, process change or indeed change on the scale of Brexit!
Change equates to risk. Who should bear the risk of that change? Who is best placed to manage the risk?
The fact that there will be change, particularly in long running contracts, is foreseeable, even if the details of that change may not be. For current contracts, the risk of change may not fall where the parties intended it to. It will ultimately be a question of interpretation of the words used in the contract, but there is a substantial risk that for current contracts the consequences (financial and otherwise) of the change are not going to fall where the parties thought they would. This is exactly the issue that arose in Arnold v Brittan, currently the leading case on interpretation. And whilst we lawyers love the certainty that this approach produces i.e. the words mean what they say, I wonder how appropriate this approach is in the face of an unprecedented explosion of technology and innovation?
What are the typical contractual issues that clients need assistance with?
One of the key issues which we have seen is a renewed interest in the interplay between insurance and contractual remedies, particularly in relation to latent defects. In many ways the renewed interest in insurance ties in with my earlier comments about the risk of unforeseen events and unintended consequences. I anticipate greater attention being paid, by lawyers and clients alike, to insurance obligations. The decision of SSE Generation Ltd v Hochtief & Other [2015] CSOH 92 was a timely reminder that parties may not fully appreciate how contractual provisions, such as indemnity and insurance, can substantially impact the commercial viability of a project.
The other contractual issue which clients continue to need assistance with is the old chestnut of contract payment dates and notices. 20 years on from the passing of the Housing Grants, Construction and Regeneration Act and 5 years on from the passing of the amendments to it, we are still seeing a lack of understanding of the payment notices process. This may continue to be a regular and reliable source of work for lawyers, but how can such confusion – and hence disagreement and dispute – reflect well on the industry?
How do you go about identifying pitfalls and risks that have been unheard of before by your clients?
The best way to identify pitfalls and risks is to ‘connect the back end of completed projects with the front end of new projects’. The back end of a project tends to be where the disagreements and disputes arise. That is where the lessons can be learnt for new projects. The key to identifying pitfalls and risks for future contracts is to ensure that those lessons are communicated back to those drafting and negotiating the front end of the contract. The lessons might be legal or technical, or indeed both. Either way, this communication is essential. We hold regular “lessons learnt” sessions with clients at the end of projects to facilitate improvements going forward. This is not an innovative approach, but it is a highly effective one.
As a thought leader, how are you helping to develop and implement construction legislation?
The Scottish Law Commission is currently considering reform of the law on third party rights, prescription and penalty clauses, all of which will impact the construction sector. My team actively engage with this process. In my view, Lawyers can and should, take every opportunity to take their clients’ market experience and use it to influence the future development of the law.
