The construction industry continues to be in flux as it grapples with the effects of Covid-19, global supply chain and labor shortages, drastic inflation and the Russia-Ukraine war. Therefore, it is hardly surprising that the industry accounts for a significant portion of disputes across major global arbitration centers.
For example, in 2020, 20% of the ICC’s caseload came from the construction industry, driven largely by an increase in contractual and force majeure disputes.1 In addition to representing a significant number of disputes, construction claims are becoming larger and more complex than ever before, with many involving damages well above $50 million.
This trend is expected to continue for several years, and as it becomes harder to finance new and existing global projects, parties dependent on the success of these projects are likely to turn to arbitration to recover lost capital. Below, we provide construction arbitration snapshots of major regions and outline why legal finance is increasingly relevant to the industry.
Source: ICSID 2021 caseload statistics
North and Latin America: Increased infrastructure investment and bigger construction disputes
The construction industry continues to account for a growing percentage of arbitration claims in North America; in 2021, construction disputes were 16.5% of ICSID’s total caseload.2 As US supply and demand for oil, gas and energy production ramp up following a stall in 2020, the country’s infrastructure will continue to pose a growing challenge. An API study suggests that $1.3 trillion in investments will be needed to maintain and revamp US energy infrastructure through 2034.3 This significant level of investment will inevitably mean an increase in disputes related to infrastructure construction, particularly given ongoing global shortages and a challenging economy.
Similarly, Latin America, which has grown to be a major construction hub, is also expected to see a growth in construction and infrastructure disputes. In 2020, 15.8% of ICC arbitrations originated from Latin America and the Caribbean, overtaking North America (10.8%), with Mexico and Brazil continuing to be the most represented nations in the region.
Notably, the scale of projects in the region has rapidly increased; over the last few decades, several multi-billion-dollar “giga projects”4 with regional contractors and foreign investors have been built in Brazil, Mexico, Chile and Panama.5 Latin America also continues to face difficulties following several years of recession, drops in commodity prices, labor shortages and delays in ongoing domestic and international projects due to union strikes.
Arbitration continues to be the preferred way to resolve disputes in both North and Latin America. As construction contractors and project owners cope with operational and economic pressures, they are less likely to engage in costly and time-consuming litigation. As arbitration costs increase, we can expect more companies to turn to alternative solutions to finance arbitrations.
Europe: War will have an outsized impact on the construction industry
Europe continues to dominate the international arbitration space; European parties represented close to 40% of the total party population in the ICC in 2020, and also saw the sharpest increase in the overall value of construction disputes. In 2021, the average value of European construction disputes was $57.5 million, up from $25.5 million in 2019.6
Source: 2022 Global Construction Disputes Report
European countries face many of the same issues seen in other geographies7—in addition to the current major challenge brought on by the Russia-Ukraine war. The largest infrastructure production centers—France, Germany, Austria and the Netherlands—have all reported that up to 30% of construction firms within their countries have had to limit production of building materials due to equipment and core material shortages. With Russia supplying 30% of the region’s oil,8 35% of its natural gas and the majority of the metals required for infrastructure, we can expect shortages to worsen in the region, leading to disruptions and turmoil for companies dependent on the success and completion of major projects. The problem has already begun to play out: The EU expects construction output to shrink to 1.5% and 1.2%9 in 2023 and 2024 respectively, on top of an already projected decrease of 2.5% in 2022.
In our experience, Spanish and English construction companies facing insolvency continue to have portfolios of construction disputes representing significant potential recoveries. After facing a decline of 4.1%10 in 2021, Spanish construction companies remain in recovery mode, and many are pursuing disputes to stave off insolvency. One famous example includes Abengoa, a Spanish infrastructure group that declared bankruptcy in 2017. The organization recovered millions of dollars as it turned to disputes to recover its lost value, including $37 million from Instalaciones Inabensa, S.A. v. Kenya Electricity Transmission Company, a dispute involving one of its subsidiaries11. High-value damages claims from disputes provide an important source of capital to construction companies struggling to stay afloat at a time when the industry faces exorbitant raw material and equipment price hikes, among other challenges.
MENA region: Leading in magnitude of construction disputes
Source: 2022 Global Construction Disputes Report
The MENA region is home to the world’s largest infrastructure projects as well as some of its highest value disputes. The value of construction disputes in the MENA region jumped to an average of $90.4 million in 2021—up from $86 million in 2020 and $62 million in 2019, with the highest value dispute valued around $1 billion. MENA parties are also increasingly involved with disputes in leading arbitral institutes; 19% of the parties involved in ICC cases in 2020 came from the Middle East and Africa.
Real estate and building projects account for majority of these disputes, with the UAE at the center of many “mega disputes” involving large-scale infrastructure projects in the country. An example is WCT Holdings Berhad and Arabtec Construction LLC v. Maydan Group LLC, which saw a settlement award of $197.7 million (AED 726.5 million) in resolution of a contractual dispute between the two parties. In North Africa, the extractive industry accounts for a majority of construction disputes. One example of this is in Vale S.A. v. BSG Resources Limited, in which the London Court of International Arbitration (LCIA) awarded $2 billion over findings of corruption in an iron-ore mining project in Guinea. This remains one of the largest commercial awards ever made and, as the MENA region faces external pressures similar to those seen in Europe and the Americas, we can expect the number of high-value disputes to grow.
As many of these projects involve multiple foreign based parties, arbitration is the preferred method of dispute resolution in the region. This is reflected in the growing importance of the Dubai International Arbitration Centre (DIAC) as the preferred venue for Middle Eastern construction disputes. As of February 2022, DIAC approved revised arbitration rules, which are expected to be in line with the ICC and LCIA, making it easier for foreign parties to navigate arbitration procedures in the region.12 Similar to the 2021 ICC rules, the new DIAC rules have adopted language specifically related to third-party funding, indicating the growing use of legal finance in the region.
Legal finance provides certainty to construction companies facing global economic insecurity
Source: 2022 Global Construction Disputes Report
Construction contractors and project owners are already at a disadvantage when it comes to recovering lost capital; their success relies heavily on the completion of their projects, which can be delayed by a myriad of reasons and suffer from a lack of available capital. Given the costs and duration involved with litigation, it is unsurprising that arbitration remains the preferred method of resolving construction disputes.
However, arbitration has also become more costly and takes much longer to resolve. According to the 2022 Global Construction Disputes Report, the average time to resolve disputes in North America rose by 18% in 2021. Construction arbitrations are unique in that they are information heavy, oftentimes requiring extensive factual and witness evidence, and parties can expect to pay millions in disputes involving high-value awards.
Legal finance remains 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 to a third-party financier. Legal finance provides construction claimants with immediate capital to pursue their high value claims or to accelerate or “monetize” a portion of the expected damages for their pending matters. Capital is always provided on a non-recourse basis, which means that if the dispute is resolved unsuccessfully, the claimant owes no portion of the capital back to the legal finance provider.
Therefore, legal finance allows claimants to pursue high value disputes while continuing to operate their businesses, without drawing from their own financial resources. It adds certainty around budgets, either by removing the uncertainty of cost and duration risk associated with paying lawyers, or by “locking in” a minimum recovery in a monetization arrangement—or both, in scenarios in which a construction company finances a portfolio of matters.
Leading arbitral institutions across the world have adopted third-party funding framework in their rules, signifying the growing use of legal finance as part and parcel of the arbitration process. Arbitral tribunals are increasingly allowing parties to recover funding costs under “other” or “legal costs.” One recent example of this is in Tenke Fungurume Mining S.A. v. Katanga Constracting Services S.A.S., in which an ICC tribunal issued an award that included $1.7 million in funding costs that the claimant had obtained to offset its legal fees. This makes using arbitration financing a win-win scenario for the claimants involved: If the dispute resolves unsuccessfully, claimants are not required to pay back the money provided to them. If the case resolves in their favor, claimants could potentially recover the financier’s proceeds under legal costs.
Legal financiers can provide the expertise needed in major construction disputes
Given the inherent riskiness of construction arbitrations, claimants often benefit from partnering with a legal finance provider with deep expertise in high-risk construction disputes. Finance providers can provide insights on a variety of aspects crucial to a successful outcome, including case strategy, arbitrator selection, budget consultation and judgement enforceability. Burford performs in-house due diligence on every potential claim, allowing claimants to benefit from additional insights into their case regardless of whether the legal finance arrangement moves forward.
The construction industry is likely to remain in flux in the upcoming years, and legal finance will serve as an essential tool for parties in construction disputes. At a time of uncertainty, legal finance can add certainty around legal budgets and remove risk from the business. At a time when capital must be preserved for other business needs, legal finance can remove arbitration costs, conserving working capital, and unlock the value of pending arbitration assets. Given this, legal leaders in the construction sector will be well served to build relationships with leading providers of arbitration finance.
Christiane Deniger is a Senior Vice President with responsibility for assessing and underwriting legal risk as part of Burford’s investment team. Prior to joining Burford, Ms. Deniger was a Senior Case Assessor and Principal at Calunius Capital. She is also a contributing author to various publications on international arbitration and third-party financing.
Joe Durkin is a Senior Vice President in Burford’s asset recovery business and is based in Dubai. Prior to joining Burford, Mr. Durkin worked as an Investment Manager at LCM Finance, where he was responsible for leading the organization’s origination strategy across the MENA region.
Apoorva Patel is a Vice President with responsibility for assessing and underwriting legal risk in international arbitration matters as part of Burford’s investment team. Prior to joining Burford, Mr. Patel was a litigator at leading global law firms, most recently as Counsel in WilmerHale’s international arbitration and international litigation practices.
1 “ICC Dispute Resolution 2020 Statistics,” International Chamber of Commerce, https://nyiac.org/wp-content/uploads/2021/09/ICC-Dispute-Resolution-2020-Statistics.pdf
2 “ICSID Releases 2021 Caseload Statistics,” International Centre for Settlement of Investment Disputes, February 07, 2022, https://icsid.worldbank.org/news-and-events/comunicados/icsid-releases-2021-caseload-statistics/
3 Bob Braxon, “Why Energy Infrastructure Is At The Center Of Disputes,” BDO, https://www.bdo.com/getattachment/a4fc8d70-20dd-46b9-891d-fe6bcc828bb6/attachment.aspx?NR_Energy-Disputes_Insight_8-18_WEB.pdf
4 James Doe, Christian Leathley and Noe Minamikata, “Inside Arbitration: The Rise Of Giga Projects In Latin America,” Herbert Smith Freehills, February 07, 2019, https://www.herbertsmithfreehills.com/latest-thinking/inside-arbitration-the-rise-of-giga-projects-in-latin-america.
5 “China is Building Big in Latin America, Here's Why,” Latin Post, November 20, 2019, https://www.latinpost.com/articles/142647/20191120/chinas-large-scale-construction-projects-in-latin-america.htm
6 “2022 Global Construction Disputes Report,” Acardis, https://images.connect.arcadis.com/Web/Arcadis/%7Bcb063f2c-be31-410c-9807-d7a9bf16f666%7D_2022_Global_Construction_Disputes_Report_-_Successfully_navigating_through_turbulent_times.pdf
7 Maurice Van Sante, “EU Construction Outlook: Contractors’ optimism rising despite building material shortages,” ING, https://think.ing.com/articles/eu-construction-outlook-optimism-among-contractors-despite-increasing-building-material-shortage#a6
8 Keith A Boyette, “How the Russia-Ukraine War Could Impact the Construction Industry,” Roofing Magazine, May 31, 2022, https://roofingmagazine.com/how-the-russia-ukraine-war-could-impact-the-construction-industry/
9 Euan Reaper, “War in Ukraine: assessing the impact on European construction,” Turner & Townsend, April 11, 2022, https://www.turnerandtownsend.com/en/perspectives/war-in-ukraine-assessing-the-impact-on-european-construction/
10 “Spain Construction Market/Industry Report 2022,” Business Wire, May 19, 2022, https://www.businesswire.com/news/home/20220519005869/en/Spain-Construction-MarketIndustry-Report-2022
11 “Abengoa gets a favorable award of an arbitration proceedings in Kenya,” Abengoa, August 28, 2019, https://www.abengoa.com/
12 Soraya Corm-Bakhos, “DIAC 2022 Rules of Arbitration: A Modernised Set of Rules for a New Era” Kluwer Arbitration Blog, March 21, 2022 http://arbitrationblog.kluwerarbitration.com/2022/03/21/diac-2022-rules-of-arbitration-a-modernised-set-of-rules-for-a-new-era/