ADR can help to resolve disputes in construction

Jambo List Admin May 11, 2024

by John Mwaura, CEO – Finsco Africa.

Picture this. You are a developer putting up houses and everything is going well—until prices of steel, cement, transport and other costs shoot through the roof and continue rising. You then realise that it is impossible to deliver. Such scenarios are increasing due to disruptions to the real estate sector, creating a fertile ground for litigation between home buyers, sellers and contractors.

The Architectural Association of Kenya’s (AAK) “Status of the Built Environment Report 2023” shows construction costs skyrocketed last year with prices almost doubling from the range of Sh34,650-77,500 to Sh41,600-100,800 by year-end, the surge a result of pricier materials and fuel. The prices of steel reinforcement bars went up by 14.29 per cent and cement 15.38 per cent. A weakening shilling against major currencies inflated import costs.

It is, therefore, understandable why many developers have been hard-pressed to deliver. Buyers have equally not been spared from the high cost of living. For many buyers, a home is the biggest investment in their lifetime, through mainly hard-earned savings and expensive bank loans over the years. But going to court may not be the best approach for a myriad reasons, chief among them cost and time.

Our courts are bogged down with cases, some as old as 40 years. Even if a home buyer won a lawsuit, the judgment might arrive so late their children, who motivated the decision to invest, would be long out of the house. Also, protracted lawsuits are equally detrimental to developers due to the bad publicity they attract, making selling future projects hard

Enter alternative dispute resolution (ADR), more efficient and often producing more amicable solutions. Forms of ADR include mediation and, in contentious cases, court-appointed arbitration. Arbitrators with the relevant expertise often deliver informed judgments, legally binding and prompt.

Options abound for parties to avoid the long expensive litigation route. One way of unlocking the impasse would be for buyers to top up on the purchase. Expecting the developer to deliver under harsh conditions would be unrealistic.

Of course, this option should not be a blank cheque for the developer to add unnecessary costs. They should also show goodwill by equally taking a reasonable reduction in margins, creating a win-win solution for both parties.

The parties can also choose to work out how the same unit can be delivered but with some modifications on size, style or both—such as using more affordable finishings. However, the quality of finishings can be changed but not that of workmanship.

Developers should also begin taking a more proactive approach to avoid such scenarios. One way is working with key suppliers of building materials to deliver at fixed costs. This would shield developers from oscillations in prices of materials.

Kenya also needs more commodity trading companies, which can import and handle large amounts of building materials on behalf of developers or contractors, reducing the overall costs for all players.

Similar arrangements can be made with commercial banks through futures, forward and option contracts for foreign exchange management. Through these forex hedging tools, developers can still import materials without the worry of high costs due to a weakening shilling

Developers can also deploy the Engineering Procurement Construction and Finance (EPCF) model to lock costs at the beginning of the contract and insulate price escalations. New building technologies that cut on time and building material efficiencies, including 3D printing, can alleviate some of the challenges of project cost overrun.

Lastly, there must be continuous communication between the developer and buyers, which enables preservation of relationships.

Mr Mwaura is the CEO of Finsco Africa.

Article Source: nation.africa