Claims & Construction Dispute Resolution Procedures

Recourse to law

This can be a costly trap for the unwary. Resolving construction disputes through legal proceedings can take more time and money than correcting the defects from which they arise. At the outset, the full costs of pursuing and defending claims cannot be forecast with any certainty. Litigation and arbitration rarely favour the impecuniary. There is no point in fighting a legal action unless to win, but expert advocacy is not cheap. If one side buys expert help, the other parties to the dispute will want equal representation and advice to avoid being disadvantaged. Keeping up in the face of escalating legal costs may become unmanageable, forcing the poorer parties to withdraw.

Confronting inexorably growing legal costs, litigants can find themselves in a dilemma – facing, on the one hand, having to risk still more money and, on the other, losing all by backing down first. Withdrawing a claim, like losing in court, carries with it not only the loss of money already spent on the dispute but also the risk of having to compensate the other side for their legal costs. These combined costs can grow rapidly to exceed the sums originally in dispute.

When facing legal action over building defects, always weigh the cost of proceedings against the value of the issues in dispute. It is rare to recover the full cost of a dispute.

Recovery of Costs

Say there is a dispute between a developer and a builder over defective work which would cost £100,000 to correct. Assume that it is a simple dispute, which goes to trial and that the developer spends £30,000 on legal costs while the builder spends £10,000.

After 9 months of dispute, the judge finds entirely in the developer’s favour and awards him costs. The builder will not agree the costs as he, having spent only £10,000 himself, thinks a claim for £30,000 by the developer is extravagant and unjustifiable.

In such circumstances, the courts assess the awarded costs. The assessed costs may, from experience, lie between 40% and 80% of the actual costs. It is the process whereby the court reviews the parties’ legal costs and decides which parts are recoverable from the losing parties and which parts are not.) In this example, 60% of the developer’s legal costs are awarded. That is, the builder is required to pay £18,000 toward the developer’s legal costs.

The builder therefore has to pay to the developer £100,000 for the rectification of the defects and £18,000 in recoverable legal costs. The net result is that the developer had to spend £130,000 but recovered only £118,000, a net loss of £12,000. The builder, on the other hand, is out of pocket by: £100,000 for the cost of rectifying the defects; £10,000 for his legal costs and £18,000 for the developer’s assessed legal costs – making £128,000 in total. The lawyers are, of course, some £40,000 better off. That is the overall additional cost to the builder and developer of failing to reach an agreement without recourse to law.

The developer would have saved delay and effort if he could, at the outset, have negotiated a compromise settlement for about four fifths of his claim, and the builder stood to save something in the order of £40,000-£50,000 by accepting such a compromise.

Proportionality

The watchword is ‘proportionality’. The more disproportionate the cost of a dispute to the value of the matter in dispute, the more desirable it is to avoid full-blown litigation or arbitration. Disputes rarely get to a final hearing; the parties usually settle out of court, often regrettably after the costs have grown alarmingly.