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Construction lawyers can expect to be busy in the coming months, as the anticipated rise in contract disputes becomes apparent, writes Chris Arnold, consultant (Construction and Projects) at Aberdeen’s leading commercial law firm, Paull & Williamsons.

Past experience has shown that a decrease in profit margins for building contractors will lead to an increase in construction disputes; this was seen, for example, during the last big housing slump in the early 1990s, when house prices dropped dramatically and demand for housing bottomed out. Some analysts are forecasting that tender prices in the construction sector are expected to fall by 10 percent in 2009, and a further six percent in 2010.

It is during the hard times that legal disputes increase and it falls to the lawyers to protect their clients’ interests particularly with the anticipated rise in claims related to contractual failure - for example if work is not completed on time or within budget. Contracts must be absolutely watertight to ensure against lengthy and costly litigation, this is especially important given budgets will inevitably be tighter.

Despite this, the industry is actually in a much better condition than it was in the early 1990s, and since then two key pieces of legislation have come into force, which both prompt and facilitate the successful resolution of disputes.

Much has been written about the pros and cons of the Construction Act 1996 and the merits or otherwise of changing it- in fact amendments are currently going through Parliament. I suspect however that there are very few people who would dismiss the well-meaning intention of the Act to speed up payment and minimise the time and cost of resolving disputes when they do arise.  For example, who remembers life before a contractor had a statutory right to suspend work due to non-payment? Having said that, how many contractors have in fact withdrawn their labour on this ground over the years?

Likewise can anyone recall life before adjudication? It is so much part of the industry’s psyche nowadays and it is hard to imagine not having this particular weapon at your disposal. No doubt in some cases it has been misused, but the courts are alive to that and have sought to impose controls and ensure that adjudicators’ decisions are enforced save in exceptional circumstances.

The Late Payments Act 1998 came into force almost by stealth, starting with claims by small businesses against large businesses, expanding to claims by small businesses against each other and finally in 2002 to all claims for late payment. It is a useful weapon especially in a time when cash is tight (the default rate is 8% over base rate) but again how many people have actually used it successfully?  A recent Court of Appeal judgment (Ruttle Plant Hire v Secretary of State for Environment Food & Rural Affairs) has provided some guidance as how the statutory provisions should be operated and ruled that an incorrect invoice is not in itself a bar to recovering interest on the sums correctly demanded.

Developers, contractors and their legal advisors will need to be aware that the economic recovery is in its very early stages and therefore legal disputes are more likely. Preparation and complete clarity in the terms of agreed contracts are vital, if parties wish to avoid their much-cherished liquidity being lost in the courts. For example a dispute on the substantive merits of a ground conditions claim may in certain cases be inevitable, but with careful drafting a challenge on whether a particular provision is part of the contract should be avoidable.

These and other developments in legislation have improved the way that business is conducted in this dynamic industry and hopefully leave it better placed to recover when the current economic slump ends and people can begin to look forward to improved market conditions.

For more information contact Chris Arnold, at Paull & Williamsons (01224) 621621.