Expert Forum Arbitrating Construction Disputes

CD: Could you provide an overview of key trends and developments impacting the construction sector over the past 12-18 months?

Yamamoto: Over the past 12 to 18 months, we have seen continued impact on the construction sector from the ongoing coronavirus (COVID-19) pandemic and associated global supply chain disruption. Critical supply chains, already weakened during the initial stages of the pandemic, have struggled to withstand distortions, including logistical bottlenecks and 'lumpy' supply, caused by shortages in skilled labour and raw materials, sharp rises in shipping costs and shipping delays caused by periodic port shutdowns. Together, these have generally resulted in higher prices for inputs which have in turn raised the cost of delivering construction services, making it difficult for contract counterparties to honour their contractual commitments. Force majeure and hardship claims have often resulted, albeit not always with success.

CD: What types of construction-related disputes are you seeing? Are there any common themes or underlying causes of conflict?

Yamamoto: Reflecting the ongoing global energy transition, we recently have been seeing an increase in the number of disputes arising on renewables projects. Renewables projects typically involve highly complex, capital-intensive infrastructure, with complex contractual and regulatory frameworks. Often, they are implemented against a backdrop of significant time, cost and policy pressures. Combined, this means that disputes are not uncommon. Other underlying causes of dispute include the fact that, given the lack of standardised contracts for renewables projects, such contracts are usually based on standard construction documents which are then heavily amended. Particularly when there is a rush to market on these projects, such amendments can be poorly drafted and can give rise to disputes. Environmental, social and governance (ESG) and social licence issues, and associated scrutiny, can also add a level of additional risk and political pressure.

CD: What are the main advantages of choosing arbitration to resolve construction sector disputes? How would you characterise the industry's appetite for arbitration?

Yamamoto: Given that the underlying subject matter of construction sector disputes is often very complex and highly technical, a key advantage of resolving disputes by arbitration is the ability to choose a decision maker - the arbitrator - for the case, who has relevant experience. Arbitration also offers advantages where disputes are likely to be multijurisdictional and require cross-border enforcement action — because the New York Convention provides for recognition and enforcement of foreign arbitral awards. Further, the ability to appoint a neutral, independent and impartial tribunal can be of particular importance where major projects are likely to involve significant international elements and where — rightly or wrongly — there may well be concerns that domestic courts will favour domestic parties. For these reasons, arbitration is expected to remain a popular choice for the resolution of construction disputes.

CD: Conversely, what are some of the issues and challenges that parties may need to address during the arbitration process?

Yamamoto: Challenges can arise in arbitrating multi-party disputes or multi-contract disputes. Both scenarios are typical in complex construction projects. In particular, difficulties can arise when an arbitration agreement is not drafted to cover all stakeholders in a project who might potentially be party to a future dispute. Arbitration is a consensual process and, where a party has not entered into an arbitration agreement, that party generally cannot be compelled to participate in arbitration proceedings — unless it consents to do so, which is unlikely in a dispute setting. Where multiple contracts are involved, parties should be careful to ensure that dispute resolution mechanisms are not contradictory and remain 'fit for purpose' across a project. This is likely to require bespoke drafting, potentially including the use of an 'umbrella' arbitration agreement applying across a suite of project documents.

CD: Looking ahead, what are your predictions for arbitration levels in the construction sector? What trends do you expect to shape this space?

Yamamoto: In the Asia-Pacific region, we expect an ongoing increase in arbitration levels in the construction sector in 2022 and beyond. This will be driven by regional infrastructure spend and the ongoing energy transition. The speed of technological change in the renewables sector, together with new players entering the market, is expected to contribute to this anticipated increase. However, we anticipate that users in the construction sector will remain concerned with the perceived inefficiency of construction arbitration, arising from the belief that the time and costs associated with arbitration often are disproportionate to the amounts at stake. We expect to see this driving interest in alternatives to arbitration — such as mediation — as a means of dispute resolution for the industry.

The article was first published in the April–June 2022 issue of the Corporate Disputes magazine. Click here to read the full article for insights of other practitioners alongside Megumi Yamamoto.