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Alternative dispute resolution mechanisms could benefit construction firms

by Neha Bhatia on Nov 18, 2017

Poor contract formation can lead to disputes in the regional construction sector, experts say.
Poor contract formation can lead to disputes in the regional construction sector, experts say.

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Backed by an increasing desire for efficient project delivery, the Gulf’s construction sector has witnessed a steady rise in the adoption of professional advisory services this year.

As construction costs mount amid reduced market fluidity, professional advisors – especially those trained in dispute resolution – are taking on a greater role in the region.

The 2017 Middle East Construction Disputes Report, an annual study published by Arcadis this May, examined the most common causes of dispute on construction projects, the average duration and value of construction disputes, and the method of resolution most commonly deployed.

According to the study, the average length of time needed to resolve a dispute in the Middle East fell to 13.7 months in the past year. The figure was 10% lower than corresponding values for the two previous years, and was less than the global average. The average value of a construction dispute also decreased, from $82m in 2015 to $56m in 2016, with proper contract administration being pointed out as the single biggest factor that would help to reduce the number of future disputes.

Andrew Smith, operational director and Abu Dhabi office manager at Driver Trett, agrees that poorly drafted contracts can cause disputes in a typical regional construction setup. 

While a variety of causes have been noted to cause disputes, the factors recurring most frequently include “the failure to properly administer the contract, incomplete and unsubstantiated claims, and incomplete or ambiguous designs” by employers, Smith says, adding: “Poor contract administration takes many forms, but a common example is the approval of materials and shop drawings with multiple iterations – and over prolonged periods – before final approval is obtained. 

“This issue typically results from ambiguous design and leads to the project being designed through shop drawings and material submittals.” 

Additionally, Smith explains, “time and cash constraints” are among the notable drivers of incomplete and unsubstantiated claims, which may also arise from “the use of inexperienced staff to prepare the claims, [...] poor and inadequate records, and unrealistic expectations leading to a gap [...] that cannot be negotiated”. Daniel Xu, construction and engineering disputes lawyer at King & Wood Mallesons (KWM), agrees with this view, adding that most construction disputes revolve around issues related to time – including delays – or money. 

He says: “On the money aspect of disputes, we are seeing disputes between the parties due to non-payment and during the closing-off and finalisation of the project’s final account. Time- or delay-related issues [...] are driven by evolving designs, changes in specifications, and increases in work scope.  

“Increasingly, we are also seeing queries concerning the allocation of costs arising from value-added tax (VAT), especially for projects that are ongoing based on contracts that had been negotiated a while back.”

Moreover, the level of employer engagement is a deciding factor in terms of contending with contractor claims, as well as the manner in which subsequent disputes may be resolved. Craig C Shepherd, head of contentious construction and infrastructure, and partner at Herbert Smith Freehills (HSF), says that while contractor claims for additional time and money “have always been the main source of construction disputes”, employers’ behaviour towards claims is also reshaping how contractors view disputes, and related arbitration.