HM Insights

What happens when building projects go wrong?

Building projects always start out with the parties' best of intentions to keep to budget and programme; however, as anyone who has seen an episode of Grand Designs will know, it seems almost inevitable that no matter how meticulously planned a project may be matters will arise which will impact upon the costs and time allocated for the works.  Even once a project is completed and paid for the story is not necessarily over, as defective work can result in on-going differences and disputes.  Our experience is that such claims are rarely straightforward so it is worth seeking specialist advice to guide you through to a resolution.

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Types of building contract dispute

Payment

The most common source of dispute under building contracts relates to payment.  Where work is carried out over several months, it is not uncommon for those works to be varied or delayed, giving rise to arguments over the amounts due to be paid to the contractor.  The contractor is entitled to payment in interim stages and so disagreements about sum due can start as early as the first payment date. 

The Housing Grants Construction and Regeneration Act 1996 (as amended) ("the Construction Act") provides that construction contracts should contain an "adequate mechanism" for interim payment of the contractor.  If a contract does not contain such an adequate mechanism, there are statutory rules that will apply to supplement the contract.   These statutory rules are not straightforward and often failures to properly comply with these result in entitlement of a contractor to an interim payment which does not reflect the value of work actually carried out (known as "smash and grab" claims by the contractor). 

Delay

Your builder may have given you an estimated completion date or there may be a more formal construction programme with a fixed date for completion and milestones to be achieved.  Either way, disputes can arise when it becomes obvious that works are not progressing as expected.

There are numerous possible reasons for delay – perhaps late or inadequate design information is to blame, adverse weather conditions or a large number of client variations.  Often, more than one reason will impact progression of the works at the same time. 

Time costs money for both the contractor (who has to devote its resources to the project longer than expected) and the employer (who will not have a completed building, may have suffered a loss of associated revenue or have had to find and fund alternative accommodation costs).  Unravelling the reason and responsibility for the delay is often a complicated and expensive process in itself.

Defects

Disputes often arise where there are defects in the works - perhaps the contract specification has not been followed, aspects of the works have been missed out or the finish is not as professional as anticipated. Disagreements can then arise as to fitness for purpose, whether the defect is one of design or workmanship and whether or not the contractor or design consultant has met the relevant professional standard of care.

Whilst minor defects may merely be "snagging", material defects may impact upon practical completion of the building.

Latent defects that only emerge after the end of the contractual defects liability period can cause even greater problems, not least with encouraging the builder to come back and rectify the defect after the work is done and the contract retention money has been released.

Avoiding disputes in building projects

Avoiding disputes may be as simple as putting a robust contract in place which clearly sets out the parties' responsibilities and then following those contractual procedures to a T.  Good project management will usually reduce the potential for issues to snowball into large contentious claims, whilst good contract administration is vital to avoiding disputes and bringing a building project to completion on time and on budget.  Employers should ensure they have the appropriate professional advice to support them in these respects- it is generally money well spent.

Nevertheless, despite best efforts to avoid disputes, parties may still find applying the contractual procedures is not enough and legal procedure is required. 

Dispute resolution

When a dispute is unavoidable, parties may (subject to the express terms of their contract) agree to negotiate, mediate or use another method of alternative dispute resolution to resolve the issue.

If there is deadlock between parties or a large sum of money is at stake it may be necessary to commence formal proceedings, following the options under the Construction Act and the contract between them.  Those are:  

Adjudication

  • Adjudication is by far the most popular procedure for resolution of disputes between parties to construction contracts
  • The Construction Act gives all parties to construction contracts a statutory entitlement (but not an obligation) to refer a "crystallised" dispute to adjudication at any time
  • The right to adjudicate does not automatically apply if one of the parties is a "residential occupier" but adjudication may be used if the parties agree
  • Adjudication is a 28-day (subject to limited extensions) dispute resolution process so it provides a quick answer where time is of the essence; however, it is inherently "rough and ready" and all too often prejudiced in favour of the referring party
  • Adjudication decisions are only temporarily binding, meaning that it may still be necessary to resort to arbitration or litigation to finally determine a dispute

Arbitration

  • Arbitration has become a more viable option since the introduction of the Arbitration (Scotland) Act 2010 which addressed some of the inadequacies of the old system of arbitration;
  • The decision maker is agreed between the parties or appointed by a nominating body and can be an individual with specific experience relevant to the issue in dispute;
  • Arbitration has the potential to be quicker and more cost effective that court but that will ultimately depend on the scope of the dispute.

Litigation

  • In many circumstances, traditional litigation is a viable option for construction disputes.
  • The Scottish Commercial Court judges have developed significant expertise in this specialist area and appreciate the complications that apply to the recoverability and quantification of losses in construction claims.

Comment

Construction disputes are inherently complex due to the likelihood of competing claims, the potential for multi-party disputes and the application of the statutory rules in the Construction Act.  Approaching construction disputes as standard claims for recovery of debt risks oversimplifying matters and overlooking sector specific issues which could have an impact on the outcome of the dispute. 

For these disputes, specialist solicitors with construction law experience are best placed to advise on the most appropriate strategy, remedies and procedures.  Harper Macleod has a specialist contentious construction team with substantial experience of construction disputes and adjudications. Please do not hesitate to contact a member of our team to discuss any contractual differences arising on your project.