Contract and claim

dispute management
in the infrastructure
and energy sector
Contents
Be a future-ready leader 4

Role of digitalization 6

Key activities in contract management to benefit from digitization 8

Getting ready for project execution 9

Managing claims 10

Taking stock during the project ‘work-out’ phase 12

How to resolve disputes 14

Leading the way 16

4 Hogan Lovells

Be a future-ready leader
Importance of contract, claim and dispute management

Rapid urbanisation and growing demand mean that the construction industry is one of the largest industry
sectors in the world, consistently poised to outpace the world GDP1. However it is also one of the most
sluggish in terms of adapting to change to match its productivity growth as compared to demand.2

Productivity gap = $1.63 trillion

Global economy
$37/hour
Global construction
sector
$25/hour
Average value added by employees per hour worked1
1
2015 data in real 2005 dollars

This can be attributed to a variety of challenges affecting survey from 2019, the problems of cost and time
the industry productivity, profitability and sustainability. overruns continue to plague the industry with as many
We are witnessing that delivery of projects on time and as 6 out of 10 construction projects failing to meet the
within budget remains a major point of concern for cost and schedule projections.4
both the market players intent on retaining their profit
The global Covid-19 pandemic of 2020 exacerbated this
margins and the contracting parties which need timely
problem, with project suspensions and remobilisations,
delivery of the construction project. Looking at some
not to mention considerable supply-chain delays and
of the more global industry trends of the last 5 years,
reduced availability of on-site manpower, potentially
in 2016, a major survey concluded that large projects
leading to mega disputes. The sub-optimal construction
typically take 20% longer to finish than scheduled and
productivity levels are estimated to result in a loss to
are up to 80% over budget,3 and according to another
the global economy approximating around USD 1.63
trillion annually. A critique heard often is that there
exists a ‘perceived lack of urgency’ in adopting necessary
1 GCP Global/Oxford Economics, Global Construction 2030: A global forecast for changes required to arrest the spread of uncertainty in
the construction industry to 2030.
2 McKinsey, Reinvention Construction through a productivity revolution, February contract disputes.
2017, https://www.mckinsey.com/industries/capital-projects-and-infrastructure/
our-insights/reinventing-construction-through-a-productivity-revolution.
3 McKinsey, Imagining Constructions Digital Future, June 2016, https://www.
mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/ 4 Compass International, Construction Project Cost Overruns, 25 July 2019, https://
imagining-constructions-digital-future. compassinternational.net/construction-project-cost-overruns-part-two/.
Contract and claim dispute management in the infrastructure and energy sector

The top players in the engineering and

construction industry widely considered to
be ‘future-ready’ are the ones implementing
soft controls such as training programs,
formal communication of project status,
organised working statements and
There are several factors contributing to such time importantly, implementation of innovative
and cost overruns. The industry comes with inherent technology. The top 20% are the innovative
risks of activity - both physical and financial, including leaders who are significantly ahead when it
unforeseen risks. There are regulatory compliances comes to governance and controls- and
which need to be periodically checked and maintained most of them have integrated project
comprising labour laws, health and safety, operating management systems. 8
permits or sustainability etc. Complexity increases as
projects expand in scope and size and new technologies
are used. This complexity poses management hurdles in
the form of additional interface requirements between
disputes has increased.7 Although the exact effects still need
the parties and the project teams, staggering amounts of
to be determined The COVID-19 pandemic affected works
documentation, and scheduling and supply errors. The
and had a part to play as companies turned to their contracts
resulting lack of productivity can be analysed from the
for risk management and protection. However, consistent
shrinking profit margins of construction companies.
with past years, other reasons which have been identified
The overall forecast for the industry remains positive. as primary contributors to the inefficiencies and disputes
Governments, recognizing the importance of the include poor contract management such as badly drafted
industry as a powerful driver for economic growth contracts, ignorance by the project managers of the relevant
including increased GDP and employment rates, as well contractual provisions, failures to comply with contractual
as supporting complementary businesses are already requirements and deadlines and insufficient record keeping
providing incentives to create an enabling environment of relevant project documentation. There is also a tendency
to boost the construction sector leading to the scaling up to postpone the resolution of project disputes. In order for
of both the market as well as the market players.5 In this a construction firm to increase chances of market survival
background, with already slim margins, construction firms and productivity, a proactive approach should be adopted
must look to adopt measures to increase productivity and right from the beginning of the project itself. To this end,
maintain profitability, or risk being left behind. a good contract management system implemented at the
Increased complexity of the projects has also led to a earliest ensures that the rights of the parties are protected
noticeable rise in disputes and ‘claim culture’. In 2020, and enforced throughout the project life cycle.
the average value and length of disputes has decreased
5 McKinsey, Reinvention Construction through a productivity revolution, February
slightly to 15 months, however, the overall number of 2017, https://www.mckinsey.com/industries/capital-projects-and-infrastructure/
our-insights/reinventing-construction-through-a-productivity-revolution.
6 Arcadis, Report on Global Construction Disputes 2019, https://www.arcadis.com/
media/5/D/1/%7B5D16141D-B883-4398-BB35-218023E1F4F6%7DRP_GCDR_
AL20190620_Final.pdf.
As per latest reports, the global 7 Arcadis, Report on Global Construction Disputes 2020 Global Construction Disputes
Report 2020, https://www.arcadis.commedia/B/2/3/%7BB233AA1F-3A1A-4F85-B187-
average value of construction DEA56F67365F%7DFinal-2020-GCDR-Report-Spreads-Layout.pdf.

disputes is USD 33 million and the 8 Arcadis, Report on Global Construction Disputes 2019, https://www.arcadis.com/
media/5/D/1/%7B5D16141D-B883-4398-BB35-218023E1F4F6%7DRP_GCDR_
global average length of disputes AL20190620_Final.pdf, and KPMG, Global Construction Survey 2019: The Future-Ready
Index: Leaders and followers in the engineering and construction industry, https://assets.
increased to 17 months.6 kpmg/content/dam/kpmg/xx/pdf/2019/04/global-construction-survey-2019.pdf.
6

Role of digitalization

A golden rule of disputes in major projects is to “cut In short, digital processes can be used to:
through the noise” and present the most compelling
• Create, assign, prioritize tasks
evidence in the simplest manner possible. This not only
makes for a more coherent claim, but also increases the • Immediate notifications
chances of a win! Thus, a key question before companies
• Check real time status of work progress,
now is how to organise their contract management
updates, revisions and plan changes
processes in the most cost efficient way.
• Monitor crew deployment
For instance, if we look at 2020, we can see that critical
infrastructure and construction were classified by most • Update and track compliance checklists
countries as a ‘critical activity’ during the COVID-19 • Maintain updated records, which are easily
pandemic and allowed to continue operations, albeit accessible, of all project related communications
with increased rules and unavoidable disruptions.
Several other projects were suspended due to financial • Upload, create standardized documentation
issues and other woes, and were already, or may be • Claims Management
restarted. This situation only serves to highlight the
importance of going digital as the quantity and quality of It is now accepted that today, a digitalized and
documentation will play a key role in how the disputes efficient project management system is a key driver for
in these projects are resolved. It is imperative that a successful project execution. Use of electronic document
system is adopted which can segregate issues arising management software not only helps streamline the
directly from the pandemic and those not related.   contract processes and maintain a chronology of
The broader learning however, is that for any company events, especially for claim management, it facilitates
to survive and compete long-term, adopting a system early review and filtering and analysis of documents
which enables good contract management should now to prepare the best possible narrative for a party for
be the standard, as opposed to an emergency measure. making or defending a claim. As the leading innovative
law firm in Europe and a standout for its expertise in
This is where the use of digital tools comes in, helping dispute resolution,9 Hogan Lovells offers complete
to create centralized structures which facilitate legal support to contract management and dispute
streamlining of not only the contract but also claim resolution through all of the stages of a project from
management. Used properly, digital tools can help inception to completion. This service is based on use of
with properly archiving project documents, monitoring digital project management tools integrated with legal
of contract provisions and deadlines, as well as functions to craft an effective way forward for contract
standardising project correspondence in line with and claims management in the construction industry.
contractual requirements.

9 Hogan Lovells once again named one of the most innovative law firms in Europe by the Financial times; 13 September 2019; https://www.hoganlovells.com/en/news/
hogan-lovells-once-again-named-one-of-the-most-innovative-law-firms-in-europe-by-the-financial-times.
8 Hogan Lovells

Key activities in contract management to benefit from digitalization

Contract management should ideally start at the negotiating table itself when the project agreement is
being finalised by the parties, and continue till the project is finally completed including settlement of
disputes which arise under the contract. Efficiency in all these stages can be brought about by combining
digitalization and legal expertise.

Concluding contracts of an incomplete or ill-defined contract with vague

A common challenge during contract negotiation and references and generic language which is not specific
drafting can be a lack of coordination between the to the agreement between the parties. Due regard must
different functional teams such as design, finance and also be given to use of industry specific terms and the law
legal. This could pertain to delay in approvals, conflicting applicable to the contract, especially where cross border
positions on timelines or existence of multiple current deals are negotiated.
versions of the contract. Underestimating the importance The involvement of legal professionals can be extremely
of legal contract management at this phase can be beneficial at this stage to fully understand the intricacies
potentially damaging — it is not uncommon for such of the project and build it into the contract, so that the
procedural inefficiencies to result in the signing position of the parties is protected as envisaged.

How can we help:

Negotiating the contract/bid to the best Smart digital archiving of correspondence, drafts
possible extent and other important documents for future
reference and use, if any
Setting clearly defined risk allocation, manageable
timelines and scope of work specific to the project Tailored workshop for project management to
facilitate understanding of key contract terms and
Streamlining processes for contract approvals
processes and making the contract manageable
and easy accessibility to all project teams at one
place. This also reduces versioning errors and
ensures that changes suggested by all team
members are taken into account
Contract and claim dispute management in the infrastructure and energy sector 9

Getting ready for project execution

The execution phase of the project is a crucial phase for team, who may not always be familiar with the specific
contract management. As the work progresses, changes provisions and timelines of the project contract. This can
to the contract must be effected based on real-time lead to unclear demarcation of roles and responsibilities
situations and events during the project implementation. of key personnel and workers involved in the contract.
At this point, all contract documentation should be From a legal perspective, it is important that the project
kept up-to-date and consistent so all parties have a personnel have the legal know-how of the terms of the
common view of potential and agreed changes to avoid contract and any related consequences. We are aware that
the unnecessary errors which often give rise to disputes. in addition to use of current technology, enhancing the
It is common for disputes to arise on the field and technological capabilities of personnel and integrating
correspondence on the same must be duly preserved to innovative processes into the overall project culture have
avoid future complications. This is also the stage when a huge impact on the successful outcomes in any project.
typically, new members are introduced to the project

How can we help:

Workshop contract/claims management for Guideline on how to document claims
personnel involved in project on project level
Legal tailoring of the contract management Providing legal oversight of all important
software tool to the contract which includes correspondence and documentation, which is
standard format for contractual communication, also automatically archived and saved throughout
deadline reminders, creation of templates for project execution
standard notices, and setting up digitalized
channels for approvals and feedback, thus
reducing errors and delays
10 Hogan Lovells

Managing claims

Claims management is an important part of contract management and involves logging of issues,
maintenance of records and claims from the beginning of the dispute itself. Over 2019-2020, it has
emerged, globally, that ‘poorly drafted, incomplete or unsubstantiated claims’ is the number one cause
of construction disputes.

Major challenges in claim management have been non- availability of key personnel involved with
identified as i) collection and retrieval of key information the claim or the project, claims being barred by
and documents ii) knowledge and adherence to contractual or statutory time limitations or generally
contractual and statutory time limits and conditions prolonged negotiations and loss of motivation.
iii) managing claims under foreign law iv) gathering
Proper claims management procedure which combines
key witnesses and experts v) presentation vi) deciding
the benefit of expert legal advice with technology can
whether to settle a claim or initiate formal procedures
help address the challenges outlined above.
such as arbitration or court litigation.
It is evident that claims management involves
To minimize errors, the following key considerations
inculcation of a better understanding of the key
should be kept in mind:
functions of project management at different contract
• Preparation for and seeking opportunities to avoid stages (as outlined earlier) and integrating them.
litigation even prior to the loss emergency response, With a deep rooted understanding of the industry
business resumption and disaster recovery. processes and the working environment, lawyers
especially are equipped with the necessary skills to act
• Gathering information related to the claim – this
as integrators and provide a system which will make
should be an ongoing process. Ensuring thorough,
project and claims management tasks simpler and
detailed and streamlined communication between
time efficient.
the necessary partners and teams and providing
continuous feedback, factoring in issues relating Claim management, at its core, is a legal exercise which
to applicability of foreign law in cross border spans the breadth of a project. Having legal oversight
transactions which often involve application of of claims management is useful in many instances.
different laws from different jurisdictions and For example, companies have to observe more caution
different judicial practices. while communicating with the other party, as all
emails, documents, meetings and exchanges between
• Acting quickly – One of the many reasons why
the parties are open to examination during the dispute
claims fail is because they are not raised at quickly
procedure. There have been countless instances wherein
or at the appropriate time. Once a claim is delayed,
the different teams send separate communications to
it becomes more onerous to pursue and/ or defend
the other party without having consulted with each
the same. This can be attributed to factors such
other, or without knowledge that a dispute has arisen,
as factual distortion over a period of time, oral or
which can have the unintended effect of weakening a
verbal agreements made in urgency on the field,
parties position in a dispute.
Contract and claim dispute management in the infrastructure and energy sector 11

How can we help:

Provision of continuous legal guidance throughout Management of the entire claims

the project, including in case of anticipated or management procedure from the first
actual delay early warning/letter before formal claim
to the resolution
Preventing breach of contractually agreed upon
deadlines for claims As an international law firm we are proficient at
handling cross border matters with ease from
Assessing and providing developed legal opinion at
initial claim to enforcement issues
early stage of the dispute for early resolution of the
dispute or to prevent escalation and minimize costs Post dispute analysis of contract and claims
for the future
In-depth claims analysis including investigation
and appraisal of claims Use of digital tools for document review
12 Hogan Lovells

Taking stock during the project ‘work-out’ phase

A typical ‘work-out phase’ of a project cycle is all about management’s briefing as well as for subsequent briefings
assessment of deliverables, checking whether all if new findings necessitate changes to the chances and
loose- ends are tied-up and getting a final evaluation of risk assessment.
the project. Thus, once the project nears completion, in
this phase the parties often raise claims from disputed
variation orders, time extensions, or open punch list Decision tree analysis diagram:
items. It is also not rare for parties to raise inflated
claims to get leverage in settlement negotiations and to
avoid any potential limitation issues. The downside to
this of course is that a higher gap between the mutual
claims makes it more difficult it is to reach a settlement. Was claim addressed within
Escalation of disputes leads to retention of payments, due time?
and invocation of guarantees which potentially trigger Contractual deadline exceeded
emergency court proceedings. Again, a key driver of this Deadline invalid under German law?
is the improper contract management by the project
parties, disabling them to fully assess the substance of
their claims.
Timeliness is the need of the hour. To be able to
conduct settlement discussion on reliable grounds and
to weight the alternatives to proceed with the dispute,
it is imperative for the project parties to get quickly an
overview on its rights and obligation. To this end, we offer
an Early Case Assessment analysing the legal issues of Deadline validly agreed
highest relevance and give recommendations on how to
proceed. Early Case Assessment is typically conducted Claim €40m
within a few weeks and at modest costs.
A typical Early Case Assessment process commences
Deadline invalid
with identifying and defining the legal hypothesis for
actual and potential claims vis-a- vis the contractual
terms and conditions and available facts. A set of core
documents are selected and examined at this stage to
assess the chances and risks of the case. If required,
initial interviews of key members of the project team
are conducted to assess the facts further. Tools such as
process charts and decision trees may be used to simplify
and visualize the findings, which will be beneficial for the
Contract and claim dispute management in the infrastructure and energy sector 13

How can we help:

Legal overview of key documentation Carrying out an Early Case Assessment of

and correspondence. potential and existing disputes which aids the
claims management process. Based on the
Quick retrieval of past communication and details
assessment, suggestions are made for the way
of the project for negotiation or settlement of clear
forward, including whether or not and with which
cut disputes or minor disputes before the final
objective to negotiate an out-of-court settlement
adjustment or payment.
if advisable and at the same time prepare for
arbitration or court litigation.

Did the employer obstruct the Amount of extra costs in dispute

contractor’s performance?
Obstruction by employer or Contractor: €40m
Contractor had not been ready to  Employer: €0
perform anyway

33.33%
€40m
€40,000,000

70.0% 33.33%
Obstruction by employer €20m
0 €20,000,000

33.33%
50.0% €0
€0
0
30.0%
No obstruction by employer
0

50.0%
0
Summary

Claim €40,000,000
Fictional expected value
Expected litigation costs €2,500,000

Fictional outcome for claimant

Fictional award
Fictional portion of expected litigation costs
Zone of agreement
14 Hogan Lovells

How to resolve disputes

Disputes, whether minor or substantial, can arise at any stage of the project once the contract has been
executed and may relate to i) pre-contractual issues such as bid clauses ii) provisions pertaining to
contract which include disputes regarding payments made under the contract, problems encountered in
execution such as change in ground conditions, unforeseeable events etc., risk allocation provisions and
time extension claims iii) breach of warranty, misrepresentation or negligence claims.

Good project management entails that such disputes Moreover, as the outcome of the dispute tends to turn
are resolved as quickly as possible to limit exposure; on facts, construction disputes are also generally very
however, it is often observed that disputes are evidence heavy and involve scrutiny of vast quantities
postponed for resolution at a later date – this could be of documents ranging from communications, technical
due to lack of understanding of procedure and follow reports, records of plans and schedules etc. For large and
up on claims, or other extraneous issues like change in complicated projects, this can run into tens of thousands
management. The tendency to avoid dispute resolution of pages and renders document review a complicated,
can result in a collective bunch of claims, which end inefficient and exhausting process.
up get escalated to formal dispute resolution processes
For complex cases involving vast quantities of
costing time and effort.
documentation and evidence, digital tools for document
Another aspect to keep in mind is to formulate and recovery are being increasingly utilized to help minimize
figure out the right mechanism for resolution. One time and cost of dispute resolution. Such technology-
can approach the courts; however, the nature of assisted review (TAR) software utilizes machine learning
construction disputes, especially in large and complex algorithms to assess the relevance of a document.
projects, is often very technical and involves application This algorithm is based upon review and ranking of a
of several contractual provisions at the same time. small sample of documents by a lawyer which is analyzed
Thus, in major energy and infrastructure projects, and incorporated by the software. Research on the
disputes usually escalate in stages: parties can choose subject has also revealed that a lawyer only needs to
between a myriad of options such as mediation, review 1.9% of the documents to get better results than
expert determination, adjudication boards and finally, a full manual review.10 As a result important documents
arbitration. It is important to ensure that the forum are reviewed first and are less likely to be missed and
chosen fits the needs of the parties and is appropriate irrelevant documents can be excluded from manual
with regard to the nature and size of the claim to curtail review. Such technology is gaining wider acceptance
prolongation and expenses. even within court of laws as a credible method of
document review.

10 Prof Maura R Grossman and Prof Gordon V Cormack (both University of

Waterloo in Ontario) , (“TAR in eDiscovery Can Be More Effective and More
Efficient Than Manual Review”), Richmond Journal of Law and Technology 2011
Contract and claim dispute management in the infrastructure and energy sector 15

How can we help:

Experience in major infrastructure disputes Technology assisted document review in complex

enabling us to guide you through cases with vast quantities of date to help minimize
time and cost of dispute resolution.
Deep technical understanding to develop the
best possible defense line Tie-ups with leading innovative contract
management softwares with integrated
Extensive network of technical experts
claim management features for a seamless
Assessing risks and chances based on start- to-finish project experience
decision-tree-analyses

Power Plant
#28
16

Leading the way

Broadly, it can be summarized that preventing we advise on and implement advanced technology
inefficiencies in project management and occurrence solutions for the management of information in
of disputes is a three-step process. disputes and investigations. We use our market
knowledge and strong relationships with external
• Adequate contractual framework that envisages
providers to find the best technology option for our
potential events
clients and help control costs.
• Timely risk assessment and allocation
Adopting an innovative technology driven model
• Fostering a more transparent and agile project has multiple benefits such as enhanced productivity,
culture with defined project goals resolution of disputes in a collaborative or timely
manner and lower costs. By combining our industry
Hogan Lovells is a leader in providing support solutions
knowledge and experience with digitalization potential,
on highest professional level with state of the art legal
we can help you address challenges throughout
tools. We have a specialist in-house resource, part of
the life- cycle of a project through project support,
a global firm wide team that can offer cross-border
compliance analysis risk assessment and effective
solutions. Applying our expertise and experience,
dispute management and resolution processes.
Contacts

Dr. Tobias Faber

Partner, Frankfurt
T +49 69 962 36 161
tobias.faber@​hoganlovells.com

Dr. Fabian Bonke, LL.M. (LSE)

Senior Associate, Frankfurt
T +49 69 962 36 161
fabian.bonke@​hoganlovells.com
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Lead legal adviser for the Umm One of the most innovative law
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