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Sponsored briefing: Key trends in contentious construction

The team at Watson Farley & Williams discuss the latest developments in the sector

It has been a busy few years for the London contentious construction team at Watson Farley & Williams. Following the recruitment of specialist Rebecca Williams in 2015 and the relocation of former Bangkok partner Rob Fidoe in 2016, the team has gone from strength to strength, building on the capabilities of the firm’s leading non-contentious practice to make its mark in the construction market. The team, which was joined by construction hotel and leisure expert Barry Hembling in 2019, is now an award-winning practice, working for domestic and international clients operating across a range of sectors, and conducting groundbreaking litigation, which is shaping new law. This includes the landmark decision in PBS Energo AS v Bester Generacion UK Ltd [2019], where the English High Court refused to enforce an adjudication decision as there was a properly arguable defence that the decision had been obtained by fraud – the first occasion on which the court refused to order enforcement in such circumstances.

What really sets the Watson Farley team apart from its competitors is its approach to disputes. Rather than waiting for a one-off big-ticket case to come along, the team’s primary aim is to help facilitate the completion of construction projects, from advice on de-risking at the outset, assistance on dispute avoidance during the life of the contract, through to diffusing tensions and navigating clients away from costly and protracted disputes where issues do arise. The team understands that finding pragmatic, commercial solutions is ultimately what is best for the client. Members of the team are frequently embedded with clients, enabling real-time advice to be given throughout the project, informed by the client’s key commercial imperatives and on-site realities. And if an unavoidable dispute does arise (an unfortunate reality in the industry given the very significant sums at stake), this way of working means the client is in the best possible position to obtain a positive result.

With particular expertise in the renewables market, the team has advised on around 75% of all UK offshore wind farms.

Working seamlessly with non-contentious colleagues and alongside construction disputes professionals across its global network, the team advises on a wide range of projects at any one time, exposing them constantly to new scenarios and a consistent pipeline of work. With particular expertise in the renewables market, they have advised on around 75% of all UK offshore wind farms in some capacity, giving them an unrivalled understanding of the industry, the technical legal issues clients face and who the key players are.

So what key trends and developments do the team see on the horizon?

Contract confusion

Construction and engineering projects are notoriously susceptible to disputes, both in the UK and internationally. Standard-form contracts, such as FIDIC, Joint Contracts Tribunal and the New Engineering Contract have sought to address this by ushering in a new age of fair and balanced risk allocation, collaborative working, reciprocity of obligations and dispute avoidance. But old habits die hard. FIDIC has indicated a very limited take up of its 2017 contract. Meanwhile, standard forms continue to be heavily amended and risk allocation structures altered, sometimes sowing the seeds for disputes before work onsite even begins.

Heavy amendments to standard forms bring further problems, including greater risk of inconsistency and ambiguities in drafting. The Supreme Court’s decision in MT Højgaard A/S v E.On Climate & Renewables UK Robin Rigg East Ltd & anor [2017] is a case in point. Add in the fact that commercial and legal teams still do not co-ordinate as well as they could, the complexity of the works being executed, the number of different contracting parties, extremely fine margins and, particularly in the case of renewable projects, use of cutting-edge technology, and it is easy to see why disputes in this area continue to proliferate.

Energising renewables?

In the UK offshore wind sector, offshore construction works continue to pose the greatest risk of disputes for developers and owners. The last two years have seen contract prices awarded for UK offshore wind projects plummet – in the last year the contract price fell below the UK government’s ‘reference price’ for the first time. Such low energy prices will inevitably place pressure on developers and operators to keep greater control of costs in the construction phase.

Historically, a fertile source of offshore wind farm disputes has been the installation of subsea export cables. Significant improvements in subsea cable technology and design has reduced problems with the cables themselves, but disputes still regularly arise in respect of defective installation. Varied seabed geology and conditions in UK waters frequently result in subsea cables not being buried to intended depths and/or being uncovered or otherwise impacted by scour (movement of seabed sediment). Procuring detailed and accurate subsea surveys of the sediment geology along cable routes can be crucial to ensuring that cable burial is undertaken successfully and without negative future impact on the seabed. Increasingly, the cost associated with procuring such surveys will be easily offset by the savings achieved by avoiding disputes with contractors for defective cable burial and future liabilities to the Offshore Transmission Owners post-divestment of transmission assets (including export cables).

The UK battery storage sector has undergone rapid growth thanks to reduced manufacturing costs, incentives to combine battery storage with renewable energy projects and anticipated easing of regulations.

The UK battery storage sector has, meanwhile, undergone a period of rapid growth thanks to the reduced cost of manufacturing battery packs, growing incentives to combine battery storage projects with renewable energy projects and anticipated easing of regulatory restrictions. Indeed, research by RenewableUK found that last year the number of UK companies involved in the sector increased by over 50% and the total cumulative capacity of battery storage planning applications grew to over 10,500MW.

However, this influx of new participants in the sector could lead to greater competition at the tender stage, and a corresponding ‘crunch’ on contract prices and profit margins. This may result in more disputes during the construction phase, as contractors submit variation and delay claims (often on a speculative basis) in an attempt to recoup or increase their revenues from the project. The rapid growth of the battery storage sector and the involvement of new entrants could also see a growing number of disputes about what constitutes best practice, the applicable market and industry standards and whether or not works or technologies are ‘fit for purpose’ – a particular issue in circumstances where there are inconsistencies between commercial contract terms and technical specifications.

Cladding scandals

Domestically, the real estate, hotel and leisure sectors are continuing to grapple with the uncertainty of the combustible cladding scandal and the need to introduce a proper system of regulation.

The scandal is not just confined to the aluminium composite material cladding system used on Grenfell Tower. High-pressure laminate cladding, for example (installed at The Cube student accommodation, which caught fire in November 2019), failed fire safety tests 80% of the time while the category of cladding similar to that blamed for the rapid spread of the Grenfell fire failed 60% of the time.

Phase 2 of the Grenfell Tower Inquiry began in January 2020 and will consider issues including cladding products, their testing and certification. Conclusions from Phase 2 may help clarify the extent of responsibility of those involved in the installation, design and certification of cladding now known to be dangerous.

Remedial works had not commenced on the vast majority of private residential blocks over 18 metres with the same Grenfell cladding type, but building owners in England can now apply for grants from a £200m fund intended to accelerate the repair rate. Although the fund aims to protect lessees from repair costs, it is contingent on building owners committing to recover monies from responsible third parties. As no litigation funding is available, it remains to be seen whether building owners will be willing to pursue expensive claims where recoverability is uncertain or where there is a cost risk from unsuccessful claims. Residents might still end up paying, albeit towards a litigation fighting fund rather than towards cladding repairs.

Phase 2 of the Grenfell Tower Inquiry may help clarify the responsibility of those involved in the installation, design and certification of cladding now known to be dangerous.

As for regulation, the current system has been shown to be woefully inadequate, with unsafe cladding installed and certified for use on hundreds of buildings. Dame Judith Hackitt has recommended a new system requiring architects and contractors to certify that their designs and works satisfy building regulations. A golden thread of health and safety information will also be retained, covering all stages of a building’s life cycle and ensuring that those who construct, design and maintain our buildings can be held accountable.

Although it was proposed that the measures should only apply to residential buildings over 18 metres, there are concerns this may create a two-tier system for residents in smaller blocks. There is also uncertainty about the extent to which the new system will apply beyond residential blocks to other buildings where people sleep, such as student accommodation, hospitals and care homes. It had been thought that hotels would be exempt from the new measures given the widespread use of sprinklers, but that was before hotel fires in Eastbourne and Brentford at the end of last year.

Fire safety thus remains high on the agenda. What is required is prompt action and answers as to how this scandal could ever have occurred in the first place. Hopefully we will receive them this year.

Whatever happened to the likely LADs?

Meanwhile, the end of 2020 will see the Supreme Court grappling with the issue of post-termination liquidated damages awards.

Liquidated and ascertained damages (LAD) provisions are crucial in construction contracts, where delays occur all too frequently. It is well recognised that where delays have been suffered on a project and the parties have agreed LAD provisions, awards generally apply to works up until termination, after which only general damages are recoverable. The Court of Appeal’s judgment in Triple Point Technology, Inc v PTT Public Company Ltd [2019] recognised this, noting that it is generally considered to be the orthodox approach.

However, that same judgment attracted considerable attention in the market for the way in which it explored two other potential outcomes to a post-termination liquidated damages claim and went on to apply one of those less orthodox approaches to the case at hand. The decision raised questions as to how LAD awards might be made in the future and is now the subject of an appeal to the Supreme Court.

The decision in Triple Point v PTT raised questions as to how LAD awards might be made in the future and is now the subject of an appeal to the Supreme Court.

The dispute, in which Watson Farley acted for PTT (the Thai state-owned oil and gas company) throughout, arose out of claims for payment of invoices for the design, supply and implementation of an integrated commodities trading risk management system that Triple Point Technology had been commissioned to carry out. In the event, PTT was successful in defending all of Triple Point’s claims and counterclaiming for breach of contract in respect of various failings by Triple Point to carry out/complete the project. Those failings included significant delay, for which PTT successfully claimed liquidated damages.

The LADs originally awarded followed the orthodox approach and were calculated by reference to the period of delay suffered, being the period from Triple Point’s failure to meet certain agreed completion dates up until the date the contract was terminated with such works remaining incomplete.

Triple Point challenged the level of LADs awarded on appeal, arguing that the provision agreed between the parties was to be construed such that LADs would apply only to those parts of the works that were delayed but completed prior to termination and not to other aspects of the works that were also delayed but had not been handed over prior to the termination date.

The Court of Appeal’s judgment found in favour of Triple Point on this issue, resulting in a significantly reduced level of LADs. That judgment bears close reading, particularly in its analysis and application of the three possible outcomes in relation to a liquidated damages provision where a contract has been terminated (the third outcome being a scenario whereby LADs continue to apply even past the date of termination, until completion of the works – albeit by a third party – have been achieved).

Some commentators have noted that the current position on LADs appears to be more uncertain than ever and so the Supreme Court hearing is one that will be watched with great anticipation. Its decision should bring greater certainty to a question that practitioners regularly grapple with, giving both the drafters and the interpreters of such vital provisions within construction contracts an answer to the current predicament: whatever happened to the likely LADs?

Partners Rob Fidoe, Barry Hembling and Rebecca Williams (co-head of London dispute resolution); Senior associates Alexander Creswick, Andreas Efstathiou and Mark McAllister-Jones
L-R: Partners Rob Fidoe, Barry Hembling and Rebecca Williams (co-head of London dispute resolution); Senior associates Alexander Creswick, Andreas Efstathiou and Mark McAllister-Jones