Construction disputes: strategic risk management required as recovery progresses

The continuing global ‘permacrisis’ – geopolitical turbulence, supply chain disruption, record inflation, extreme weather events and the continuing impact of the Covid-19 pandemic – calls for heightened sectoral intelligence and strategic risk-management competencies.

Construction law played a major role in resolving the economic consequences of these crises. Various developments in the field around exceptional relief from obligations, and more innovative dispute management processes including the harnessing of ‘infratech’ and legal technology and ‘fast track’ dispute resolution procedures, all combine to afford participants in the sector some degree of protection, provided they avail themselves of the best specialist advice.

Respondents to Pinsent Masons’ 2023 global infrastructure survey said the green transition and green economy would, among other things, offer opportunities to grow revenues and profits and improve their brand reputation. It also found strong support and appetite for developing and using an industrialised approach to the design and construction of new infrastructure to support the green transition and global green economy. However, the survey found a mixed state of readiness across the sector for the changes that will come.

The transition from fossil fuels to clean energy sources will be a major driver of future disputes, according to a major energy arbitration study undertaken by Queen Mary University of London in partnership with Pinsent Masons. According to the survey, these disputes are likely to be wide ranging in nature.

From ‘new normal’ to ‘permacrisis’

Global governments’ response to Covid-19 impacted infrastructure delivery worldwide. Resources were not applied to the tasks in the manner, timing and levels planned before January 2020. Up to a point, host governments, funders, insurers, and developers would accept a share of those consequences. Some projects were ‘too big to fail’ and demanded a pragmatic solution. The more financially pressurised projects were not so accommodating, however, and as a result, large disputes exist in various parts of the world concerning who is going to take ultimate financial responsibility for the delaying effects of the pandemic.

The imposition of fresh sanctions in 2022 against Russia and, to a lesser extent, Myanmar frustrated the delivery of projects in both countries. In the former case, typically, these sanctions affect the movement of goods to and from Russia, the settling of financial transactions with suppliers and developers, and trading with certain businesses and individuals. The very existence of these sanctions has dramatically slowed the decision-making needed to respond to them.

Although general inflation is now declining sharply in most economies, 2022 was a year of considerable price spikes, most pronouncedly in the categories of fuel, wages and construction materials – with already historically high construction material prices peaking as high as 12 percent – placing considerable strain on construction and engineering budgets. Construction-related cost categories of fuel, core construction materials and specialist labour all remain on the upside. This inflationary trend, in turn, led most central banks to hoist prime lending interest rates to levels not seen in fifty years, which in turn has led to project descoping (e.g. the Melbourne Metro), delay (e.g. the Birmingham to Crewe leg of high speed railway HS2 in the UK) and even cancellations (e.g. the LaGuardia AirTrain), whilst impairing the balance sheets of a few strategic lenders. These developments will doubtless lead to an uptick in disputes. 

Combinations of these turbulent phenomena put the delivery of infrastructure services at risk and resulted in extreme defensive countermeasures including cessation of performance; performance bond calls even amidst legal proceedings; and insolvencies and inter-creditor contests. Even attempts by governments to set aside burdensome contracts were litigated in public including, for example, in South Africa.

The unremitting onward march in the scale and complexity of infrastructure projects combined with the increasingly leading role played by technology brings not only enhanced efficiency and flexibility but also heightened concerns about business continuity risks, such as risk of cyber attack, and the challenges confronting integrated design modelling.

Taking refuge in the law

Unsurprisingly, parties facing intolerable challenges to their contractual performance have sought refuge in the law – invoking doctrines and contractual mechanisms that afford relief from strict and pressing obligations of contractual performance. We have seen courts and tribunals grapple with the applicability of ‘force majeure’ and similar provisions to the effect of the Covid-19 pandemic. We previously examined developments across multiple jurisdictions in the context of extracontractual relief from economic hardship and the way in which different jurisdictions treat the principle of ‘good faith’.

In the absence of broad relief from the strict obligation to perform in circumstances of debilitating economic hardship and legal constraints, there remains scope for the existing principles of constructive acceleration, concurrency and managing liquidated damages. These, as well as the general limits to pecuniary liability and the operation of statutes of limitation, attracted fresh treatment in 2022. The management of supply chain/subcontractor performance failures also received comprehensive treatment.

Stand-out dispute resolution techniques and solutions

Project mediation

Legal activity in the global realm of infrastructure law was hardly a completely defensive scene in 2022. There were rays of promise, especially in the flourishing field of commercial dispute resolution. We saw the standing dispute board go from strength to strength in many infrastructure markets because of sustained institutional energies and policy support. Despite some initial skepticism, the ‘standing board’ has benefited from the support of the important multilateral development banks and a strengthened cadre of credentialled dispute board members.

The future is surely brighter with these developments. They chime well with growing institutional support for dispute mediation more generally as well as further reforms to commercial arbitration, led by arbitral institutions that are mindful of the growing alternative solutions afforded by international commercial courts, aimed at improving access to commercially acceptable neutral interventions.

Adjudication matures

As it approaches its 30^th year as a civil procedure designed solely for the building and engineering industries, the geographic spread of statutory adjudication seems to have stalled at the six common law territories of the UK, Australia, Ireland, Malaysia, New Zealand and Singapore – although it may pass into law this year in Thailand, which would become the first civil law system to adopt it.

In each of those territories where is currently exists, statutory adjudication continues to develop through case law. In the last year we noted and discussed the established trend of ‘smash and grab’ claims in the UK (although prevalent elsewhere too); the ongoing standard of procedural fairness; issue estoppel in adjudication in Australia; the latest in the enforceability of adjudicator’s determinations in South Africa; and the effect of insolvency on enforcement.

Future trends

As has been the case for decades, infrastructure ambitions remain stratospherically bold, especially in those societies that have profited from the peak oil and gas bonanza. However, we do not expect that 2023 will see any lessening of the resource-supply constraints that ordinarily restrain the actual pace of delivery of infrastructure assets. Human ingenuity will doubtless adapt to the ‘Great Resignation’ and the geopolitical exploitation of energy resources and vital primary resources; however, technology alone has yet to replace the human mind and body to the extent required to bridge the growing gap between the level of construction planning, design and works production required to make good on the ambition of public and private developers and the level of suitable and available human resources. Systemic short-termism and misallocation of capital still inhibits the realisation of necessary and good infrastructure. In the meantime, technology presents ever greater opportunities and challenges.

Counter-inflationary fiscal policies and anti-free trade policies are likely to worsen the business and contractual dislocations brought about by ongoing wars and sanctions, requiring further recourse to legal techniques aimed at rebalancing contracts and a reinvigorated push for relationship-contracting techniques. The rise in project descoping, mothballing and cancellations will add to the already considerable numbers of infrastructure-related disputes internationally.

In the meantime, the leading dispute resolving institutions – some of whom now celebrating a century of public service – be they state courts or arbitral centers, will doubtless continue to serve the needs of the infrastructure community amid greater reliance on technological systems and tools to achieve greater efficiency and responsiveness. These institutions will celebrate their heritage with a renewed commitment to serving the needs of business in the infrastructure field, despite all the compounding challenges, for generations to come.