Risky Business

Jessica Taylor, construction partner at national law firm Clarke Willmott LLP discusses how risk can be turned into a competitive advantage

No business wants to encounter a claim or dispute, but in the construction industry they are very common. There are ways in which companies can minimise risk, through strict contracting procedures and controls, choosing the right procurement route and informed leadership decisions.

There are many variables that can impact a project, ranging from the conditions of the site, through the availability of materials and the contractors’ capabilities. A lot can go wrong during the process, and companies need good forward planning and risk and liability management to address this.

For example, in the High Court case of The Trustees of Ampleforth Abbey Trust v. Turner & Townsend Project Management Limited, the project managers had been charged with getting the building contract signed up. They had already issued a number of letters of intent which the court had to interpret. The contract was never signed by the contractor and this left the school considerably exposed contractually particularly as none of the letters of intent contained key obligations with regard to completion and delay.

Dispute avoidance and management requires clear and continual assessment of risk and liability. It is also about adopting a proactive approach right from the start including having clear documentation and allocation of risk between the contracting parties. For example even contractors who are financially strong struggle with 90 day payment periods. While they don’t expect a ‘click and collect’ payment process cash flow, insolvency is still one of the biggest risks in construction.

Proactive dispute avoidance is about recognising the issues and factors that can lead to a dispute; and taking early steps to deal with them. A range of skills and techniques are needed including identifying when legal advice would be useful.

There are a number of simple steps that can be taken in order to minimise the risk of exposure. These include:

1. Clear contract documentation: Ambiguity is the cause of many disputes; so it is worth the effort to get clear and precise contract working following robust negotiation. If you have absolutely watertight contracts you are much less likely to encounter disputes because all the obligations, rights and remedies are clearly set out. The key is getting the contract right and getting it signed once agreed;
2. Don’t rely on letters of intent. Make sure that if your Employer’s Agent or Project Manager is charged with getting the contractor to sign on the dotted line that they get this done for you. The courts have recently reviewed a number of projects where letters of intent have ended up being relied on the client's considerable cost where the Contract was never signed.
3. Good management: A surveyor, who proactively manages a project for which he or she is responsible, builds on the foundation set by the Contract and can enable early identification of factors that could cause conflict. Issues of concern can be flagged and steps taken to deal with them before they become formal and costly. Do not ignore problems in the hope that they might go away- they won't.
4. Collaboration works: Building co-operation between the project participants in order to foster team working, problem solving and an emphasis on project delivery can assist in the avoidance of disputes. A huge amount of work has taken place in the industry to move from unenforceable partnering charters in the 1990s to robust partnering contracts. But these won't be effective if in reality the culture of the relationship is distrusting and adversarial. No one should be bounced into using a partnering contract without fully understanding the implications as this can cause as many disputes as two party contracts.
5. Clear client objectives: the client itself must have a clear understanding of its own objectives and approach to risk; and this includes its own perception of what a "win" would be in any dispute. Effective dispute management against the background of clear objectives can save projects and relationships and can prevent Contractors from going bust.
6. Keep talking: Sharing information is crucial. A continuing dialogue with key people on the issues minimises the risk of parties and personalities becoming entrenched;
7. Good payment practices: Constructors rely upon cash flow. Once payment provisions have been agreed, valuations should be carried out and payments made promptly.
8. Keep proper records: Do you have your contract and documents in order? If there is a dispute, avoid moral discussions about right or wrong or who was out of order and focus on facts and rights. Evidence is crucial to this and the better or more complete your records are the more likely it is that you will be in the stronger position. If a dispute is unavoidable involve lawyers as early as you can as this is the best way to keep costs down and resolve the dispute quickly.

Jessica Taylor is a published author and external speaker on construction law topics. Her 20 years’ experience covers all aspects of both construction and engineering law. She advises on a wide range of projects as well as on commercial construction disputes.

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