Disputes in modular construction

The types of disputes which could arise in modular or offsite construction projects

There has been a recent push by the UK government towards implementing a greater proportion of offsite or modular construction methods to counteract the housing crisis, labour shortages and environmental issues. It can service a wide range of building types such as schools, hospitals and flats and it is hailed as improving the speed, quality, cost and sustainability of construction. It is especially useful for construction operations in remote locations or in adverse weather conditions.

Despite the recent push, offsite construction has the potential for unique disputes, on which the law and standard form contracts have not yet fully evolved, leaving developers and contractors with potential exposure. Further work is needed from the UK Government to supplement its offsite construction strategy.

Potential disputes

Despite the recognised benefits of offsite construction, these do not translate to a reduction of disputes. In fact, disputes can be significant for modular construction due to its distinct and complicated nature. Many of the standard form of construction contracts (e.g., JCT/SBCC, NEC, FIDIC) are not designed with offsite construction at the forefront and will require bespoke amendments to adequately protect the parties.

In the absence of bespoke amendments, there is potential for certain disputes to arise. One example might relate to the ownership of raw materials and completed prefabricated components held by the manufacturer offsite. Unless provision is made for the developer to own these materials and components upon payment, rather than upon delivery as is the default Scots law position, then disputes may arise if the manufacturer goes into liquidation or if the developer attempts to set off sums owed by the manufacturer in lieu of payment for the materials or components.

The causal factors giving rise to disputes in offsite construction are unique. One type of dispute more prevalent in projects using offsite construction, is parties commencing a project with an incomplete design, which would not necessarily cause such an issue in traditional construction. Another cause is interfacing defects, which can arise from both from modular-modular interfacing, or from modular-onsite interfacing. In order to avoid this type of dispute, parties need to ensure that each design incorporates achievable tolerances to ensure that all components fit together as intended.

Equally, modular construction disputes may arise from the same causes as on-site construction, such as design or workmanship/manufacture related, time and delay, variations, defective specifications, contractual interpretation, termination, negligence, and collaboration with other trades. As with traditional construction, delay and payment disputes are common in offsite construction.

This leads to the question of whether payment disputes involving offsite construction will always be dealt with in the same way as traditional construction, where adjudication is available as a swift resolution to disputes keeping cash flow moving. However offsite construction will not always fit within the definition of a construction contract under sections 104 and 105 of the Housing Grants, Construction and Regeneration Act 1996. This would mean the Scheme(s) for Construction Contracts Regulations 1998 would not imply the right to adjudication into a contract where it is not specified.

The foregoing issue could cause issues in adjudications. If a contractor refuses to pay an offsite sub-contractor and it raises adjudication proceedings, the contractor could argue that offsite construction is manufacturing and not a construction operation under the 1996 Act. If successful, the Adjudicator would have no jurisdiction to hear the dispute and the sub-contractor could be forced to litigate. This may come as a surprise to those more familiar with working in a traditional construction setting. If the UK Government is pushing for the construction industry to increase the use of offsite construction, then new legislation is required to deal with the unique relationships which arise.

In conclusion offsite construction is here to stay, but the forms of contract used need some amendment to minimise the risk of disputes arising and to ensure consistent dispute resolution mechanisms.