Building for battle: Navigating construction disputes in the defence sector

From nuclear submarine construction to cyber infrastructure and drone technology, defence-related construction projects are growing in scale, complexity and ambition. 

Yet the disputes that arise in this sector are marked by a number of features that distinguish them from disputes in the civil construction world. Contracting parties should be alive to those specificities and should consider procurement strategies and contractual mechanisms that are adapted to the particularities of the sector. 

Geopolitical tensions and the global growth of the defence construction sector

Defence construction spans a wide range of project types, ranging from military training establishments and logistics facilities to naval shipbuilding and vessel upgrade programmes, and from digital/cyber systems to drone and space technology. What unites them is a distinctive strategic and operational backdrop. Contractors will generally enter into direct contractual relations with governments to deliver projects that are key for ensuring national security, making the timely and efficient delivery of those projects also an issue of national significance. Defence construction projects often also involve complex interfaces between public entities and providers of novel and rapidly developing technology, requiring a high degree of project and contract management to ensure that the latest technological advances can be incorporated into project specifications. There is also the rapidly changing political and geopolitical landscape, which can impact the scale and scope of these projects at any time during development.

Despite – or perhaps because of – the complexities and high stakes of these projects, defence projects have traditionally generated fewer formal disputes than their civil counterparts. The relational nature of the sector, with a relatively small pool of government-approved contractors, long-standing relationships and high barriers to entry through security clearance requirements, has historically meant that disagreements are managed quietly rather than litigated publicly. Participants on both sides of the contractual relationship have strong incentives to preserve those relationships. For a contractor, losing security clearance or damaging its reputation with a government client can be existential. On the other hand, a government risks jeopardising its ability to deliver on crucial defence commitments if it finds itself in dispute with its key (or only) supplier of a particular defence deliverable.

This dynamic is beginning to change, however. Defence budgets around the world are increasing in the context of increased geopolitical tensions and ongoing conflicts, with global military expenditure reaching US$ 2.9 trillion in 2025 (amounting to 2.5% of global GDP) following its 11th consecutive year of growth. The Asia-Pacific region has been a significant driver of that growth: Japan announced a landmark increase of its defence budget to 2% of GDP through to 2027, South Korea has committed to sustained increases in defence expenditure, and Australia's AUKUS-related commitments have triggered a significant uplift in naval construction spending. In that context, we observe new contractors entering the market, timelines for delivery tightening, and governments becoming more assertive in enforcing their contractual rights and demonstrating value for money.

Norway offers a telling example. Recent years have seen the Norwegian Ministry of Defence pursue significant damages claims through the courts, including disputes arising from a frigate collision and a helicopter contract termination – both of which ultimately settled, but only after substantial litigation in the public domain. In the Asia-Pacific, similar dynamics are emerging: Indonesia has seen defence contract termination disputes, Australia's Naval Shipbuilding Programme has seen well-publicised contractual disputes and programme restructuring, including the termination of the Attack-class submarine contract with Naval Group and the associated multi-million-dollar settlement. 

As more entrants join the market and higher margins make counterclaims more attractive to pursue, we see a clear direction of travel across the market towards a greater potential for formal disputes.

The first-of-a-kind problem

The issue should also be seen in the context of rapidly developing technology. Many defence construction projects involve novel or first-of-a-kind technology, and this creates a particular vulnerability to disputes around delay and cost overrun. A shipbuilding programme spanning a decade may see armament specifications, radar systems and digital architecture evolve beyond recognition before the final vessel is complete. Cyber and AI infrastructure, along with drone technology – all growing areas of defence construction – present similar challenges: technology that was state-of-the-art at contract signature may be obsolete by practical completion. This is particularly acute in the Asia-Pacific, where some countries are investing heavily in autonomous systems and AI-enabled defence platforms that push the boundaries of existing technology.

Performance-based specifications, which are common in the defence sector, deliberately leave detailed design to be developed over time. The result is that scope uncertainty is almost baked in from the outset: contractors agree to deliver projects whose precise contours will only emerge through an iterative design process over many years. Where a contract provides for sequential delivery of multiple vessels or aircraft (as is often the case), that uncertainty is compounded as designs evolve over the lifetime of the contract.

This is fertile ground for disputes. Variation claims proliferate as designs change, and long lead times for specialist components – often sourced from a single approved supplier – create programme risk that can be difficult to allocate contractually. Interface risk is also heightened where construction activity interacts with live operations – for example, where existing military bases, vessels or vehicles are upgraded to retrofit new systems, hardware or software. And in an increasingly volatile geopolitical environment, supply chains that were fit for purpose yesterday may not be tomorrow, as sanctions regimes and shifting alliances disrupt the availability of critical components and drive the domestication of supply chains (where possible) across the UK, Asia-Pacific and beyond. The AUKUS partnership exemplifies this challenge: the trilateral arrangement requires the establishment of new industrial supply chains across Australia, the UK and the US, with complex technology transfer arrangements and export control regimes that add further layers of contractual and regulatory risk.

The public sector dimension

Defence contracts frequently operate within specialised government contracting frameworks that introduce additional layers of complexity. In the UK, the Single Source Contract Regulations 2014 govern a significant proportion of defence procurement, and impose obligations around cost reporting, transparency and rates of allowed profit for contractors. Pain/gain share mechanisms and periodic cost reconciliation are also characteristic features of the single-source procurement regime in the UK. These create a discipline around cost management and, if operated correctly, can provide a more structured forum for resolving cost-related disagreements before they escalate.

Risk allocation under government-form contracts also differs markedly from standard commercial construction. Governments are simultaneously a contracting party and – in many jurisdictions – the gatekeeper to disclosure of classified information. Where specifications, technical data or even contractual terms are classified, a contractor's ability to advance its case in formal dispute resolution proceedings may be constrained. In some jurisdictions, declassification requires a decision at the highest level of government – in Norway, for example, an application must go before the King in Council, making disclosure an issue with a political overlay rather than simply a legal one. Similar constraints arise in the Asia-Pacific region. For example, in Malaysia, Prime Ministerial approval was required for declassifying information in the context of the review of the Littoral Combat Ship programme. Cross-border defence programmes, such as AUKUS, also add a further complex dimension, as classified information may be subject to the national security laws of multiple jurisdictions simultaneously which then have to be navigated by those in the supply chain.

The practical consequences for dispute resolution are significant. Experts must obtain security clearance; legal teams may be restricted in size and composition; procedures need to be in place for safeguarding classified documents and ensuring that only those with the requisite clearance can access them. In one case known to the Herbert Smith Freehills Kramer (HSF Kramer) team, arbitrators were required to visit a single law firm's premises to read hard-copy documents, making submissions from memory without reproducing the content. In another, proceedings were delayed while the legal team – lawyers, experts and arbitrators – underwent security vetting, and arrangements had to be made for secure data hosting. Giving advance consideration to issues of confidentiality and security clearance from the perspective of all relevant stakeholders is therefore key to running construction defence disputes effectively. If not managed correctly, these factors can fundamentally reshape the economics and viability of formal dispute resolution.

Managing disputes across the contract lifecycle

Given these pressures, parties to defence contracts have strong incentives to manage disagreements proactively rather than allowing them to crystallise into formal claims. Several mechanisms are particularly worthy of note.

Conclusion

Defence construction disputes are not just construction disputes with a national security component. They raise numerous distinct issues with specific considerations around classified information constraints, government contracting frameworks and relational dynamics – all of which derive from the security factors inherent to defence projects. As defence spending grows and new entrants join the market, we see scope for an increasing volume and complexity of defence construction-related disputes. An understanding of the legal and procedural challenges unique to defence-related construction disputes – and the ways in which parties to a defence construction contract can anticipate these – is crucial both for participants in the sector and their legal advisers.