Driving Growth in the Construction Industry through Arbitration Finance
There’s a global construction boom happening globally, and disputes are an inevitable reality of the construction sector. Thus, it comes as no surprise that construction arbitrations have consistently been among the most prevalent disputes handled by leading institutions in recent years. In fact, data from 2022 reveals that disputes in the construction and energy sector accounted for 45% of registered cases at the ICC. This is why construction disputes are a perennial key topic at Paris Arbitration Week in March 2024.
Given this, there is increasing interest in arbitration finance from businesses in the sector and the law firms that work with them.
The global construction boom
The high volume of construction disputes can be attributed to several factors. New construction projects present inherent complexity, and this is especially true of major infrastructure projects with government investment. According to a report by Oxford Economics, global construction spend is forecasted to increase by $4.2 trillion over the next 15 years, reaching a total of $13.9 trillion. This growth is fueled by strategic inward investment, manufacturing and mega infrastructure projects, with a focus on decarbonization.
The US, as the second largest construction market globally, is expected to see market growth in this sector supported by initiatives like the US Inflation Reduction Act. Saudi Arabia is also emerging as a transformative force in the construction industry, with ambitious projects and investments including the headline provoking NEOM megacity project aimed at building a smart and sustainable metropolis.
Given the high stakes involved in construction and engineering projects, disputes between project partners and stakeholders are not uncommon. The complexity of these projects, combined with the significant financial investments and competing interests, can lead to disputes that require legal resolution.
The energy transition will lead to decommissioning disputes
Another key driver of future construction disputes will be decommissioning activity around the energy transition. The energy transition has led to a significant increase in decommissioning projects for oil and gas assets that have reached the end of their lifecycles. In the Gulf of Mexico, there is a projected $24.3 billion market available for construction contracts to decommission deepwater structures. Additionally, Southeast Asian offshore fields are expected to require decommissioning worth $30 billion to $100 billion by 2030. In the North Sea, there is an opportunity worth more than £20 billion for decommissioning energy installations over the next decade.
Decommissioning projects come with inherent risks. Each asset is unique, and many oil and gas assets are located in remote or hazardous areas, posing challenges for workers. The execution of decommissioning projects can give rise to various legal risks commonly associated with construction, such as delays, cost overruns, scarcity of skilled labor and health and safety concerns. These factors highlight the complex nature of decommissioning projects and will inevitably lead to more disputes for companies in the construction sector.
Construction companies with meritorious claims can leverage tools like legal finance
Legal finance offers a solution to the challenges faced by contractors and owners in large construction projects, who often encounter budget and time overruns that then lead to costly commercial disputes. These disputes can arise from delayed interim payments, unpaid additional work outside the contract’s scope or funding shortfalls on a project. Various aspects of today’s business climate exacerbate these issues, including sustained global supply chain disruptions, challenges in sourcing materials and labour cost pressures.
Engaging in expensive and risky commercial arbitration can create uncertainty and hinder other business needs. Construction arbitrations are particularly information heavy, oftentimes requiring extensive factual and witness evidence—according to Arcadis’ 2023 Construction Disputes report, the average length of industry disputes in North America last 13.6 months. Legal finance is a crucial tool in international commercial arbitration—even more so for parties engaged in construction disputes—as it removes the cost and duration risk of pursuing meritorious claims from the claimant.
A company with a meritorious claim can pursue that claim without risking the significant upfront cost of hiring lawyers and paying for experts. It can also allow businesses to access some of the working capital tied up in pending disputes by advancing a portion of the expected entitlement for those claims. This enables companies to access funds immediately, rather than waiting for a resolution through settlement or trial, allowing them to put the money to work right away.
Companies in the construction industry often find themselves involved in multiple disputes across several projects, including both affirmative claims and defensive matters. Pursuing and defending numerous high-cost arbitration matters can place a significant burden on a company’s legal expense budget. Portfolio financing offers a solution by moving the cost and risk off companies’ balance sheets. This provides flexibility and more attractive pricing by linking funding to multiple matters on a cross-collateralized basis. Portfolios can be built around an identified pool of matters or on a going-forward basis, and they may include both plaintiff and defense matters. The capital obtained through financing can be used to fund matters within the portfolio or for unrelated corporate purposes.
Ultimately, legal finance offers companies an alternative source of capital to pursue high-value claims and disputes without adding cost or risk to their balance sheets enabling businesses to preserve cash for operations.
Article by Christiane Deniger is a Director with responsibility for assessing and underwriting legal risk as part of Burford’s investment team, focusing on investor-state and international commercial arbitration.
