Resolving construction disputes – Re-setting construction contracts and conditional settlement

In this series of articles, I have explored some of the reasons that construction disputes occur and the process by which construction disputes can be determined by adjudication and the various methods of alternative dispute resolution.

More and more, we are seeing situations where parties that are willing to explore more inventive solutions, rather than just relying on financial claims, can break the impasse and let a project move forward, without ending up in adjudication or court proceedings.

There are a number of considerations that may be appropriate when looking to “re-set” problem projects, or reach a settlement deal which is subject to works being taken to a point of orderly handover. These options are increasingly important in the real world, particularly where there are concerns over whether a party actually has the means to pay a sum of money that reflects its legal obligations.

The Need for Real World Solutions

With insolvencies becoming more and more common as a result of supply chain disruptions arising from Brexit, Covid, global conflicts, and huge inflationary pressures, there is an ever increasing need to consider alternatives to relying on purely financial claims to enforce legal rights. Before hitting the button in enforcing contractual rights, it is always worth stepping back and considering what the practical issues are that need to be overcome in order to break the impasse and either get the project over the line, or to a point where an orderly handover can take place.

Those practical options may end up looking much more attractive if the commercial realities are that enforcing the contractual provisions will result in a paying party being liable for a sum they do not have the means to pay.

Potential Real World Solutions

Hybrid solutions by agreement

In the context of negotiated or mediated outcomes, these look in particular at how to get to a solution which may involve both agreed actions being taken and a sum of money being paid. This is somewhat of a hybrid approach, as it recognises the financial constraints that one of the parties is under.

Contract re-negotiation

If there is a renegotiation of key commercial terms, it is important to ensure that a line is drawn in a way that makes the contract commercially viable for both parties. A re-set can involve drawing a line in relation to a multitude of different issues, such as dealing with variations instructed, extensions of time and sums arising in connection with delays, or agreements to revise the scope of works, programming or sequencing. It may be best to prepare a deed of variation to record the changes being made, particularly if the contract’s at a fairly early stage.

Change the Scope

Perhaps a simpler solution than contract re-negotiation would be to change the scope of the work on an agreed basis, whether by a value engineering process, phasing the works to a way that is commercially sustainable, or by reducing the scope of the work that a contractor is to undertake, on the basis they agree that they will have no claims for loss of profit on the work that’s omitted.

Conditional Settlement

A conditional settlement can be structured so that an agreed sum is to be paid, but with strings attached – for example, by making the sum or instalments of it conditional upon certain milestones being reached, or outstanding matters dealt with on an agreed basis. This can be particularly helpful in breaking an impasse where a party is willing to pay money, but only if key issues are resolved or steps taken to get a project back on track.

Key Considerations

Early Advice on Entitlements – Legal and Quantum

Each project is different, and any strategy using these types of methods must be developed in light of a full understanding of the legal and quantum considerations relating to the project and where it has got to.

Early Engagement – Without Prejudice

Early engagement to explore potential solutions should take place expressly on a “without prejudice” basis, so that it is off the record and means that the parties can speak freely without worrying about falling foul of their obligations under the existing contract terms.

Outcome Focussed

It may sometimes be necessary to adopt a very pragmatic attitude, and consider how to get to an outcome that is not ideal, but far better than the reality of ending up with a financial claim against a party with no means to pay. It is often worth considering what the “least worst” outcome is.

Nothing Is Agreed Until Everything Is Agreed

Negotiations should proceed on the basis that “nothing is agreed until everything’s agreed”, with any agreement being carefully negotiated and recorded in writing, to ensure that clear and enforceable obligations are created.

Pitfalls to Avoid

Termination

Getting termination wrong is, in itself, a very serious breach of contract which will effectively turn the tables in terms of who is liable to who. It can make a bad commercial situation infinitely worse, and so it would be prudent to seek legal advice fully before invoking termination rights.

Suspension

The issue of suspending works is closely related in practical terms to termination. As such, suspending works when you do not have grounds to do so will constitute a serious breach of contract, which could be relied upon by the other party to turn the tables and invoke termination rights, particularly where a party is looking for any excuse to get out of a commercially unviable contract. Again, therefore, suspension should not be considered or deployed lightly, before matters are fully considered and legal advice obtained.

Without Prejudice Correspondence

Real world solutions requires considering what needs to be agreed to make a project work in practical and commercial terms, rather than strictly enforcing potentially unviable rights and obligations under the contract. As already mentioned, it’s therefore critical that discussions take place on a without prejudice basis, so that areas of potential compromise are explored off the record.

Ensure Full Compliance with Contract during Negotiations

Parties must protect themselves by complying with their existing obligations, including particular care to take the steps that must be taken in each valuation cycle by the relevant deadline, to avoid the risk of exposure to a “smash and grab” adjudication.

Conclusions

In summary, disputes with a party of limited financial means are always particularly concerning, but there are opportunities to look for a less orthodox solution, to maximise the chances of getting a better result than would otherwise be the case.

Identifying warning signs that a contractor is struggling and taking early advice to develop a strategy and core commercial objectives for any negotiated outcome is essential, whilst ensuring that you keep complying with the contract during any negotiations.

If you have any questions about the topics raised in this article, please get in touch.

This concludes this series of articles on resolving construction disputes. You may be interested to see my earlier articles on common reasons construction disputes occur, about adjudication, and the various methods of alternative dispute resolution available for resolving construction disputes.