CONSTRUCTION DISPUTES LANDSCAPE FOR 2024: THE HERE AND NOW AND WHAT TO EXPECT NEXT – SECOND INSTALMENT

With the first half of 2024 behind us, we are looking back at the developments we’ve seen in the construction disputes landscape. This article builds upon our first instalment article published in March 2024.

Technology and Construction Court Annual Report:

In May 2024, the Technology and Construction Court (the “TCC”) published its Annual Report (“Report”) covering some of the developments in England and Wales during the period 1 October 2022 to 30 September 2023.

The Report notes that:

1. There had been an observable increase in disputes connected with complex computer software and IT infrastructure systems;
2. The TCC had experienced a notable increase in cases involving general fire protection issues and flammable cladding/other materials post-Grenfell;
3. The TCC dealt with 193 construction and engineering cases, 115 adjudication enforcement claims and 28 ‘other’ adjudication claims;
4. Procurement challenges make up a significant proportion of the TCC’s portfolio and the challenges cover issues of equal treatment, non-discrimination, transparency, proportionality, manifest error and irrational decisions;
5. There had been a 38% increase in the number of applications heard, reflecting parties’ greater use of early disposal procedures and case management tools; and
6. There had been a continued shift towards electronic working and remote hearings, notwithstanding the recognition that such trials require an amount of co-operation and preparation by parties.

The findings of the Report, including the rise in technology and fire-safety claims and sustained adjudication activity, will likely come as no surprise to those who operate in the UK construction services and are reflective of developments ongoing in the construction industry. We discuss some of the issues further in this article.

Legislative Developments:

As predicted in our previous article, the construction industry continues to navigate and monitor the impacts of recent legislation. We have also seen the impact of the recent UK general election on live legal and regulatory matters.

The Public Procurement Act 2023 (“PPA”) received royal assent last year and is expected to go live in late October 2024. The PPA requires contracting authorities to have regard to the importance of delivering value for money, maximising public benefit, providing transparency and sharing information when carrying out relevant procurements. There are other important aspects regarding future procurement processes and award of contracts under the PPA which are directly relevant to the UK construction industry, so it is important for businesses to continue to watch this space. It is understood that the TCC plans to develop a new procedural framework for managing procurement claims once the PPA is introduced.

We previously reported on the planned reforms to the Arbitration Act 1996. The changes aimed to build trust and to modernise and strengthen the UK’s position on the global arbitration scene. Following the announcement of the UK general election however, there was a race against time for live Bills to be reviewed and progressed as part of the ‘wash up’ process. Notably, the Arbitration Bill did not pass through Parliament before its dissolution. Beale & Co previously provided updates on the proposed changes under this Bill, and its status, and will continue to monitor future developments.

The Litigation Funding Agreements (Enforceability) Bill, relevant to litigation and third party funding, also failed to become new law before Parliament was dissolved. The Bill had sought to reverse the impact of the Supreme Court’s ruling in R (PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 which confirmed that litigation funding agreements (“LFAs”), entitling funders to a percentage of damages recovered on successful claims, are a type of damages-based agreement and so must comply with the relevant regulatory regime to remain enforceable. The decision created uncertainty regarding the enforceability of some pre-existing LFAs, and litigation funders generally welcomed the Bill’s proposals. It remains to be seen whether any of the principles in the Bill will be progressed by the new UK government.

The Building Safety Act 2022 (“BSA”) requirements continue to gradually be introduced by secondary legislation this year. The new regulatory regime for higher-risk buildings came into force on 1 October 2023 and from that date the Building Safety Regulator became the building control authority for higher-risk buildings, subject to transitional arrangements. 6 April 2024 marked the end of the transitional arrangements and implementation of the new building control regime, with the introduction of registered building control approvers (in place of the approved inspector), and registered building inspectors. It was also the date when the new duty-holder requirements became fully operational.

The Leasehold and Freehold Reform Act 2024 received royal assent on 24 May 2024 during the ‘wash up’ period. This act aims to improve the rights of residential leaseholders in England and Wales and might lead to changes impacting the construction, real estate and facilities management markets (see recent Beale & Co commentary). Notably, this Act amends the BSA concerning building defects remediation. The amendments primarily relate to Part 5 of the BSA, which sets out the ‘new’ rights of recourse in relation to building safety defects, and follows publication of the first judgments concerning remediation orders (“ROs”) and remediation contribution orders. The elements which amend the BSA will come into force on 24 July 2024, whilst the remainder of the act will need to be brought into force by statutory instrument by the new Labour government currently anticipated in 2025/2026.

Building Safety:

So far in 2024, the construction industry has continued to experience the impact of extended limitation periods introduced by the BSA, ROs, and the concept of Building Liability Orders (“BLOs”) which open up the possibility of potential recovery from associated companies. While the BSA-related cases heard to date generally indicate that such claims are being promptly managed and heard by the UK Courts, the need for bespoke processes was emphasised by the Report.

A much talked about feature of the BSA was the extension of the limitation period for claims under the Defective Premises Act 1972 (“DPA”), which imposes various duties on those involved in the design, construction, and management of residential buildings. A few months ago, there was some further guidance from the Courts on the application of the DPA which has provided a glimpse of how the DPA might apply to building safety claims in practice (see Beale & Co’s earlier case report on Vainker and another v Marbank Construction Ltd [2024] EWHC 667 (TCC)).

There has been further activity in respect of the use of ROs which require developers or landlords to remedy “relevant defects” in a “relevant building” and within a specified timeframe.  A recent example is Secretary of State for Levelling Up, Housing and Communities v Grey GR Limited Partnership [2024] 4 WLUK 558 (see our case report here). The decision demonstrates how the Courts may utilise its discretion under the BSA and serves as a warning to other freehold owners regarding risks associated with delaying remedial works. Whilst the outcome of each RO application will be fact-specific, the Courts appear receptive to making ROs where the criteria set out in Section 123 of the BSA are met.

The first part of 2024 also saw the first reported case in the TCC dealing with BLOs.

During the remainder of the year, we anticipate further utilisation of the application, sanctions and enforcement routes under the BSA. Additional guidance from the Courts around the approach to these (including on the application of the ‘just and equitable’ test) is also expected. For example, DLUHC has previously indicated that it was closely examining over 20 other buildings registered with the BSF and experiencing unnecessary delays.

The BSA and its related impacts are being closely monitored by the UK construction industry. Updates will continue to be provided via our website and Building a Safer Future hub.

What else to look out for this year?

Phase 2 Grenfell Report

It has been confirmed that the Phase 2 Report is due to be published on 4 September 2024[1].  As previously observed, publication of this report and its findings or recommendations could potentially lead to further claims against construction professionals or products manufacturers and suppliers.

Alternative Dispute Resolution (“ADR”)

In our first instalment, we noted some of the recent steps taken by the Court to encourage parties to explore ADR as an alternative to ligation. We discussed the Court of Appeal Judgment in Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416 which held that a Court can order parties to engage in ADR and/or stay proceedings to allow for ADR to take place where this does not impede the claimant’s right to proceed to a judicial hearing, and is proportionate to achieving the legitimate aim of settling the dispute fairly, quickly and at reasonable cost.

The first half of this year has seen some further encouragement from the Courts for parties to use ADR where possible.

In May 2024, the 166th Practice Direction Update introduced a new pilot scheme under Practice Direction 51ZE, which automatically refers certain small claims under £10,000 to a one-hour telephone mediation process. Only where the claim does not settle following the mediation can the claim proceed to litigation. This pilot scheme runs until May 2026. It is notable that the Ministry of Justice has not ruled out mandatory mediation for higher value claims in the County Court and we may see this requirement introduced later.

2024 has also seen the Court order appropriate directions or apply cost sanctions against a party for failure to comply with a relevant pre-action protocol or contractual requirement in respect of ADR. For example, in Northamber PLC v Genee World Ltd & Ors (Rev1) [2024] EWCA Civ 428 the Court of Appeal considered the evidence required and costs consequences for parties who remain silent in the face of an offer to mediate a dispute. Further, in the case of Conway v Conway & Anor [2024] EW Misc 19 (CC), Nuneaton County Court applied a 25% reduction to the defendants’ costs since they had unreasonably refused to engage with ADR. It is worth keeping this trend under review for 2024.

Recent changes established in the JCT suite of contracts, 2024 Edition, provide for mandatory dispute escalation. The first stage of this process involves a referral to ‘senior executives’ of each party who should meet for direct, good faith negotiations to seek resolution (subject to statutory adjudication). This was previously an optional supplemental provision within the JCT contract.

2024 has also seen a focus on the development of mediator standards. In May 2024, the Chair of the Civil Mediation Council (“CMC”), announced that it plans to establish an independent mediation standards board. This board will advise and develop standards for mediators, trainers and organisations and will progress the CMC registration and standards committee, including its complaints process. The CMC plans to apply for Royal Charter status and expects this will encourage more mediators to register as CMC members.

Collateral warranties as construction contracts?

In our last article, we noted that the position on whether a collateral warranty constitutes a construction contract for the purpose of determining a party’s right to statutory adjudication was due to be reviewed. An appeal of the Court of Appeal decision in Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2022] EWCA Civ 823, which addressed whether collateral warranties are construction contracts for the purposes of the Housing Grants, Construction and Regeneration Act 1996, was heard in the Supreme Court on 29 April 2024. Just as this article was being published, the Supreme Court delivered its judgment, concluding that collateral warranties are not construction contracts – we will shortly be producing a more detailed article on the judgment and its implications.

Artificial Intelligence (“AI”)

Our prediction that the construction industry will continue to use and integrate AI across various projects and industries is already coming to fruition. Several major construction projects worldwide have successfully integrated Al technologies. The Elizabeth Line in London, where it is understood that drones powered by Al have been used for surveying operations, is a prime example.

Our previous article discussed some of the risks associated with the use of AI on construction projects (such as the potential for errors and issues with confidentiality, data protection, cyber-security, ethics and intellectual property). These are all points which should be considered when negotiating professional appointments to minimise the potential for disputes. The use of AI on live projects also needs to be monitored.

In May 2024, the Master of the Rolls delivered its speech “Damned if you do and damned if you don’t: is using AI a brave new world for professional negligence?”. This offered some guidance on the use of digital processes and AI in the legal world, including the judicial system, and outlined potential opportunities and challenges for lawyers using AI.

There is currently limited guidance on the use of AI in the construction industry and we anticipate that the need for this will be addressed by industry bodies. Construction businesses, together with their insurers, must continue to ensure that they keep abreast of any new AI-related legislative and regulatory developments. This includes changes along the lines of the EU’s AI Act, and new or updated guidance issued by UK regulators. UK businesses should also consider reviewing their internal standards and guidelines to mitigate risks associated with AI implementation, for example some organisations are introducing AI-use policies.

Concluding Remarks:

Unsurprisingly, the UK construction industry continues to find itself navigating an ever-evolving landscape shaped by political and economic change, international impacts (including materials and resource scarcity and other impacts), technological advancements and new legislation/regulation. Whilst the industry will continue to embrace such change and innovation, we anticipate that many of the issues identified above could give rise to a range of new risks or considerations for construction and engineering firms (and their insurers). By keeping an eye on the emerging challenges, trends and developments in the industry, organisations can continue to remain competitive whilst taking proactive steps to identify, understand, and mitigate risk and minimise the potential for future disputes.

We will continue to track the various topics we’ve covered in this article. However, please do not hesitate to contact the authors, or your Beale & Co lawyer, should you require advice on the content and applying it to your contracts, projects, or practices

[1] Grenfell Tower Inquiry, ‘Publication of the Phase 2 Report’, 23 May 2024 – Publication of the Phase 2 Report | Grenfell Tower Inquiry