Contract litigation set to increase
Clients and developers wanting to save cash from building contracts could send the number of legal disputes over unfinished or late projects rocketing, law firms have warned
As construction companies come under more pressure from plummeting profits and low occupancy rates, they are also increasingly facing the additional strain of potential litigation if they do not deliver on time.
Although liquidity damage cases rose steadily during 2009, lawyers said they expected a spike in the number of contractors and design teams sued for over-running this year.
Before the economic downturn, it was more likely a developer would take on an unfinished site to move tenants in quickly, but as fewer people are able to purchase property, they are now looking to use unfulfilled contracts to claim back costs.
Industry figures warned a jump in lawsuits between contractors and developers could damage future relationships and have a negative impact on construction as a whole, especially if ‘hard management’ of contracts becomes the norm.
‘With projects that started in better economic conditions coming to an end and fewer tenants to occupy the buildings, there will be a big increase in this kind of dispute during the year,’ Lindy Patterson, partner at corporate and commercial law firm Dundas & Wilson, told the Financial Times.
Liquidated damages cases usually cost contractors about £10,000 for every week the project goes beyond schedule, and Ms Patterson estimated about 10 per cent of all building contracts lead to such disputes. However, she said 2010 would probably bring far more cases.
Her prediction was echoed by the Construction Products Association, which said it expected an increase in contractual disputes as output is likely to decrease by 3 per cent during the next 12 months.
In June 2009, the AJ reported a sharp rise in the number of firms going to law to recover unpaid fees being caused by the recession hitting clients’ cashflow.