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A catalyst for change?

Construction Law International homepage  »  September 2020

 


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Shona Frame
CMS Cameron McKenna Nabarro Olswang, Glasgow

 

The construction industry has long been renowned for its contentious nature. In the UK, going back to the Constructing the Team report by Sir Michael Latham in July 1994,1 there were repeated references to adversarial attitudes within the construction industry. Sir John Egan in his Rethinking Construction report in 19982 referred to the ‘strongly ingrained adversarial culture’ within the construction industry.

The Latham report led to the advent of statutory adjudication in the UK. The industry embraced this new, fast-track form of dispute resolution and this quickly led to a transformation in the way disputes were dealt with – earlier, quicker and cheaper – but still very much a dispute culture.

One of the issues flagged by Sir Michael was the impact of economic factors on the construction industry:

‘Many of the industry’s problems have been worsened by economic difficulties […] If the economy is weak, the industry will suffer, and its participants will try to alleviate that suffering at the expense of others (including clients). It is not easy to create teamwork in construction when everyone is struggling to avoid losses. If the economy is going wrong, little will go right in the construction industry.’

The impact of Covid-19 on the world’s economy has been unprecedented with no area unaffected. In May 2020, the Asian Development Bank predicted the impact of the pandemic could cost the global economy between $5.8tn and $8.8tn, equating to 6.4%–9.7% of the world’s economic output.3 In the first quarter of 2020, Japan had a 3.4% fall in GDP,4 Germany a 2.2% contraction5 and France 5.5%.6 In the UK, the Office for National Statistics reported in June that the economy has experienced a significant shock since the start of the pandemic with GDP falling dramatically and record falls in output for production, services and construction. The monthly decline in GDP in April 2020 of 20.4% is three times greater than the fall experienced during the 2008–2009 global financial crisis, where in the 13 months from February 2008 to March 2009, GDP contracted 6.9%.7 Taking Sir Michael Latham’s comment in that context indicates there is a perfect storm brewing for the construction industry.

There are concerns in the context of commercial contracts about the ‘risk of a deluge of litigation and arbitration placing a strain on the system of international dispute resolution, and reducing the prospect of more constructive solutions and increasing the prospect of uncertainty of outcome’.8

That concern is very much to the fore in construction. Both government and industry bodies in the UK have spoken out to encourage responsible contractual behaviour, acting fairly and reasonably and collaboration between contracting parties.

The UK Cabinet Office Guidance Note on responsible contractual behaviour in the performance and enforcement of contracts impacted by Covid-199 is a request from government for all parties to resolve all contractual issues arising as a result of Covid-19. In particular, parties are encouraged to act fairly and reasonably when administering contracts and agreeing variations.

The Construction Leadership Council issued ‘CLC Covid-19 Contractual Best Practice Guidance’.10 It encourages parties to recognise the unique circumstances and asks that industry works together to support the long-term health of the sector by constructively resolving all contractual disputes arising from the pandemic. It suggests that, notwithstanding contractual provisions, Employers and Suppliers should seek to take a collaborative approach towards successful project delivery and discuss whether an extension of time can be granted and any additional costs shared in any event, in light of the unforeseeable and unprecedented nature of Covid-19.

The Scottish government’s ‘Coronavirus (COVID-19): impact on construction contracts: CPN 1/2020’11 is on a similar theme. It suggests that engagement should progress ‘honestly, openly and constructively, recognising the mutual need of clients and contractors to pragmatically address issues relating to COVID-19’. It recommends that the situation is not used as an opportunity for one party to gain from the loss of another party. The overriding objective behind the guidance is to help to ensure that the economy retains a viable construction sector and that businesses emerge ready to resume work on existing projects and new opportunities.


there is a perfect storm brewing for the construction industry. 


The Royal Incorporation of Chartered Surveyors (RICS) has also noted the financial cost of disputes in the construction industry and the harm caused to business relationships, brand reputations and delivery of projects by conflict. It is promoting the Conflict Avoidance Pledge.12 Signatories to the pledge affirm their belief in collaborative working and use of early intervention techniques throughout the supply chain to try to resolve differences of opinion before they escalate into disputes. The pledge emphasises the early identification of potential issues and steps being taken to avoid escalation including:

• incorporating conflict avoidance mechanisms into projects with the aim of identifying, controlling and managing potential conflict, while preventing the need for formal, adversarial dispute resolution procedures;

• working proactively to avoid conflict and to facilitate early resolution of potential disputes;

• early identification of potential disputes and use of conflict avoidance measures;

• promoting the value of collaborative working to prevent issues developing into disputes; and

• working with others in the industry to identify, promote and use conflict avoidance mechanisms.

There has been a trend over many years for more collaborative provisions in contracts. The New Engineering Contract (NEC) was the frontrunner with this and its Clause 10.1 ‘mutual trust and co-operation’ provision. This found favour with Sir Michael, who recommended that: ‘The most effective form of contract in modern conditions should include: A specific duty for all parties to deal fairly with each other, and with their subcontractors, specialists and suppliers, in an atmosphere of mutual cooperation.’ This has been followed by similar provisions in other commonly used standard form contracts.

The latest editions of the FIDIC, NEC4 and JCT forms each contain escalating dispute resolution procedures. It is notable that even the language of the clauses has changed emphasis towards resolution. The NEC4 dispute provisions are contained under the heading ‘Resolving and Avoiding Disputes’ and JCT 2016 ‘Settlement of Disputes’ with only FIDIC 2017 sticking to ‘Disputes and Arbitration’, though it has included a change in language in its dispute board provisions to Dispute Avoidance/Adjudication Board (DAAB) and in its Guidance notes, records that ‘[it] is generally accepted that construction projects depend for their success on the avoidance of Disputes between the Employer and the Contractor and, if Disputes do arise, the timely resolution of such Disputes’.

In the 2018 International Arbitration Survey,13 the increasing use of escalation clauses featured. The majority of those interviewed considered that escalation clauses are beneficial to the overall process of resolving a dispute.

However, it is clear that guidance from government and industry bodies and contractual terms on their own will not deter claims if parties are intent on pursuing this route. The reality is that sometimes, against the background of an often fiercely negotiated contractual structure which allocates parties’ rights and obligations and risk, it is difficult for parties to step aside from that to reach a compromise. Sometimes parties find themselves in a position where there is no option but to resort to formal dispute resolution because a matter of principle or a matter which could set a precedent elsewhere is at stake, the financial implications are simply too high or the gulf between them is too wide.

Against that background, it may be said that continuing to do things the way they have always been done contractually is unlikely to bring about different results. Even pre-Covid, alternative contractual mechanisms were starting to attract more interest so might it be that these increased calls from government and industry now start to prompt change?


The one thing for sure is that massive change is afoot and the pace of change is only likely to accelerate. 


Alliancing as a concept has been used to good effect for procurement of infrastructure in Australia, Finland and New Zealand and is gaining real traction in other countries, including Germany. That collaborative model based on principles of good faith, trust, openness and collaboration is predicted by some to start to become more mainstream given the need for this is likely to be driven by technological developments, such as building information management (BIM), that require more collaborative working between parties for the full benefits to be obtained. It is by no means yet mainstream, but there is a clear direction of travel in favour of this form of contracting that is anticipated to increase over the short to medium term.

The Institution of Civil Engineers (ICE) Project 1314 is another example. It arose from a perception that ‘the transactional model for delivering major infrastructure projects and programmes is broken. It prevents efficient delivery, prohibits innovation and therefore fails to provide the high-performing infrastructure networks that businesses and the public require’. Project 13 promotes use of the ‘enterprise model’ for infrastructure delivery meaning a long-term relationship between owners, investors, integrators, advisers and suppliers whereby they are commercially incentivised to deliver better outcomes for users from infrastructure investment.

However, this will take a mindset shift and, for that, education is crucial. Availability of labour remains a challenge in the construction sector. However, the need for a skilled labour force goes far beyond traditional technical skills but will also involve both softer skills – leadership, team-working, innovation and collaboration – and technological skills – people who understand how to use the avalanche of new technology to the benefit of the industry. Leadership from those involved in procurement of infrastructure is also required.

It is clear that there is a blend of complex issues at play with competing priorities and interests among stakeholders at all levels of the supply chain. However, the factors at play point towards an industry that is ripe for disruption. The one thing for sure is that massive change is afoot and the pace of change is only likely to accelerate.

A recently published Scottish Government paper: Under Construction: Building the future of the sector in Scotland15 concluded that: ‘Only with leadership, collaboration and cultural change will the construction sector be able to realise its full potential contribution to Scotland’s economy’; and ‘Without such leadership, enduring challenges around procurement, access to finance, innovation and the sector’s cultural image continue to act as barriers to progress’.

The UK Infrastructure and Projects Authority’s ‘Analysis of the National Infrastructure and Construction Procurement Pipeline 2020/21’ from June 2020,16 which sets out plans for up to £37bn of infrastructure spending, includes the statement:

‘Government is committed to working collaboratively with industry to ensure that it emerges from this crisis with the capability and capacity required to support the economic rebuilding that will be necessary. This collaboration has already been demonstrated in the initial response to COVID-19, which saw government and industry working together on a number of initiatives including issuing guidance on responsible and fair contractual behaviours. As we move into recovery and renewal, we must take forward this way of working if we are to be successful in our ambition to ensure the construction industry not just survives but thrives.’

With a construction industry that, in the UK, had seen output fall by a record 18.2% in the three months to April 2020,17 and which is likely to have little appetite going forward for the ‘pass the parcel’ model of risk allocation combined with continued low margins, these statements are to be welcomed. There is a real opportunity for government to set the tone and lead the change towards a more collaborative way of working.

Given the myriad other challenges that are likely to be faced as a result of Covid-19 and the global economic shockwave it has caused, the construction industry is ripe for change. Perhaps, if Covid-19 acts as a catalyst for this change, then perhaps we may yet see a positive legacy for the construction industry from this situation.

 

Notes

1 Sir Michael Latham, Constructing the Team: Joint Review of Procurement and Contractual Arrangements in the United Kingdom Construction Industry (London, July 1994) https://constructingexcellence.org.uk/wp-content/uploads/2014/10/Constructing-the-team-The-Latham-Report.pdf accessed 22 June 2020.

2 Sir John Egan, Rethinking Construction, Construction Task Force (London, 1998) https://constructingexcellence.org.uk/wp-content/uploads/2014/10/rethinking_construction_report.pdf accessed 22 June 2020.

3 ‘Coronavirus “could cost global economy $8.8tn” says ADB’ BBC News (London, 15 May 2020) www.bbc.co.uk/news/business-52671992 accessed 22 June 2020.

4 ‘Japan’s economy falls into recession as virus takes its toll’ BBC News (London, 18 May 2020) www.bbc.co.uk/news/business-52570721 accessed 22 June 2020.

5 ‘Coronavirus pushes German economy into recession’ BBC News (London, 15 May 2020) www.bbc.co.uk/news/business-52673727 accessed 22 June 2020.

6 ‘In Q1 2020, GDP dropped by –5.8%’ Insee (Paris, 30 April 2020) www.insee.fr/en/statistiques/4485646 accessed 22 June 2020.

7 ‘Coronavirus and the impact on output in the UK economy: April 2020’ Office for National Statistics (London, 12 June 2020) www.ons.gov.uk/economy/grossdomesticproductgdp/articles/coronavirusandtheimpactonoutputintheukeconomy/april2020 accessed 22 June 2020.

8 ‘Breathing space – a Concept Note on the effect of the pandemic on commercial contracts’ British Institute of International and Comparative Law (London, June 2020) www.biicl.org/documents/10307_legal_considerations_in_mitigating_mass_defaults_wb_final.pdf, accessed 22 June 2020.

9 ‘Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency’ Cabinet Office (London, 7 May 2020) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/883737/_Covid-19_and_Responsible_Contractual_Behaviour__web_final___7_May_.pdf accessed 22 June 2020.

10 ‘CLC COVID-19 Contractual Best Practice Guidance’ Construction Leadership Council (London, 7 May 2020) www.constructionleadershipcouncil.co.uk/wp-content/uploads/2020/06/Construction-Leadership-Council-Covid-19-Contractual-Best-Practice-Guidance-7-May-2020.pdf accessed 22 June 2020.

11 ‘Coronavirus (COVID-19): impact on construction contracts: CPN 1/2020’ Scottish Procurement and Property Directorate (Edinburgh, 9 April 2020) www.gov.scot/publications/coronavirus-covid-19-impact-on-construction-contracts-cpn-1-2020 accessed 22 June 2020.

12 ‘Conflict Avoidance Pledge’ RICS www.rics.org/uk/products/dispute-resolution-service/conflict-avoidance-pledge accessed 22 June 2020.

13 ‘2018 International Arbitration Survey: The Evolution of International Arbitration’ White & Case (2018) www.arbitration.qmul.ac.uk/media/arbitration/docs/2018-International-Arbitration-Survey---The-Evolution-of-International-Arbitration-(2).PDF accessed 22 June 2020.

14 See www.p13.org.uk accessed 22 June 2020.

15 Under Construction: Building the future of the sector in ScotlandEconomy, Energy and Fair Work Committee (Edinburgh, 2 July 2019) https://sp-bpr-en-prod-cdnep.azureedge.net/published/EEFW/2019/7/2/Under-Construction--Building-the-future-of-the-sector-in-Scotland/EJFWS052019R08.pdf accessed 22 June 2020.

16 Analysis of the National Infrastructure and Construction Procurement Pipeline 2020/21 Infrastructure and Projects Authority (London, June 2020)https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/892451/CCS118_CCS0620674232-001_Pipeline_document_2020_WEB.pdf accessed 22 June 2020.

17 Construction output in Great Britain: April 2020 Office for National Statistics (London, 12 June 2020) www.ons.gov.uk/businessindustryandtrade/constructionindustry/bulletins/constructionoutputingreatbritain/april2020 accessed 22 June 2020.

 

Joanne Clarke is a Director at Corbett & Co International Construction Lawyers in London and can be contacted at jo.clarke@corbett.co.uk.

 

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