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GCC: Why is demand for dispute resolution rising?

Industry experts tell Paromita Dey that they have witnessed a rise in the number of regional construction disputes on the back of reduced liquidity and unrealistic schedules

SPECIAL REPORTS, Sectors

The GCC construction sector has seen something of an upward trend, with recent announcements of large-scale real estate projects and an increasing focus on hospitality and tourism. Massive public sector projects are leading the way, including the Dubai Expo 2020 and the 2022 FIFA World Cup in Qatar, followed by huge community projects by private sector developers.

This construction growth almost inevitably brings with it a resultant rise in the number of construction disputes in the region. High project values, unrealistic schedules, ambitious designs, and lack of regard for worker welfare might have also given a push to the already rising number of dispute cases, according to experts.

Daniel Xu, senior legal consultant from DLA Piper, says that the two most important issues behind construction disputes are time and money. The trend in this region for tendering on the basis of incomplete design information causes a recurring problem for projects, he says. “Time claims, in general, relate to delays to progress and completion; money claims relate to variations, additional sums sought over increases to the scope of the works, and costs arising from delays.

“Within the region, the observable trend is for delays driven by design changes and arising from meeting and securing regulatory approvals. Issues related to late or non-payments [are also common, as are] disputes over entitlement to be paid for variations and scope of works.”

Often, the construction schedule faces a variety of problems, including design and variation risks. Two of the major areas of strain on the employer-contractor relationship are the lack of liquidity and the ability to resolve issues on time.

Rachel Ewin, claims director, Faithful+Gould (CTBH division), says: “The lack of timely resolution of issues during the course of the works invariably leads to larger disputes accumulating at the completion of a project, resulting in lengthy litigation. This comes about in many cases due to a failure to properly administer the contract, and failure to comply with contractual obligations by one [or both] parties.

“In addition, we regularly see contractors committing to overly aggressive project durations, which invariably leads to a delay in delivering projects on time, though this is ultimately driven by client demands.

“Another prominent factor is the current lack of liquidity in certain sectors of the market, which is resulting in delayed payments and potential future disputes.”

Industry experts also point out the failure to properly address risk allocation in construction contracts as one of the leading causes of construction disputes in the region. Arash Rajai, managing associate for construction at King & Wood Mallesons, says: “While there are risks associated with all construction projects, whether [due to] a failure of performance in design, in build, or [resulting from] external factors such as issues with procuring government approvals or encountering unforeseen ground conditions, the consideration and allocation of risk at the outset of any project is critical. Employers should carefully consider the party that is ideally suited to assume responsibility and liability for each risk, and cover this sufficiently in the contract.

“Some of the contracts we have seen in the region either fail to address critical risk issues or ambiguity in the contract drafting, which opens the door for an aggrieved party to pursue litigation or arbitration.”

Rajai adds that another factor contributing to disputes on construction projects in the region is a failure to properly administer the provisions of a construction contract.

“The contractual mechanisms built into most construction contracts are designed to address issues with respect to time, money, and quality; failing to apply these contractual provisions will likely deprive a party of its contractual entitlements and adversely affect progress on site,” he notes. “Understanding and operating the provisions in respect of payment, provisional sums, extensions of time, and early warning notices, provides the project with its greatest chance of success and best prospect of avoiding disputes.”

Problems can also arise when there is a lack of records and historical project knowledge. Law firms trying to solve the disputes are often faced with such challenges, Ewin says.

“The main challenges that we have encountered come in the form of a lack of records and prior project knowledge. Pressure is on the parties to complete the works within a specific timescale and, as such, focus is drawn to physical construction works at the detriment of the accurate administration of the project.

“Disputes are, in the main, left to the tail-end of a project, when people and their knowledge have moved on to another site or region. For a claims team to come in at this stage, it is difficult, depending on which side you are representing, to either build or rebut a fully substantial claim or dispute without historical and contemporaneous evidence.”

The construction and infrastructure sectors in the Middle East and, in particular, the UAE, have seen phenomenal growth, with many ongoing projects, strong government support, and massive investment from both public and private enterprises, including foreign direct investment. These large-scale projects require extensive expertise across sectors, and heavy investment on the part of both the developer or employer and the contractors.

Joanne Strain, partner for dispute resolution at King & Wood Mallesons, says: “As a result, it is common to see entities come together in the form of incorporated and unincorporated joint ventures or consortia for the projects. This means, when large projects fall into dispute, they are often complicated from the outset, with issues of correct legal identity, capacity, liability, and accountability, often giving rise to hard-fought jurisdiction battles and issues of enforcement.”

Xu says that the best solution is to engage in the construction process from the beginning, and in the right manner. He says that there are two key components in the parties’ engagement.

“Firstly, the right channels of engagement: the parties need to open effective lines of communication across various levels, from the project and site teams, to the management and decision-making levels. By doing so, the teams on the ground will be able to advise their respective management teams on actual issues encountered on site and, likewise, the respective management teams are better placed to decide on commercial aspects of various issues on site.”

He adds: “The right level of engagement means that parties must make an effort to record in writing important issues such as site instructions and variations.”

Strain agrees, adding: “Early engagement with the project can help avoid disputes, provided the additional time is used wisely, to properly scope and cost the project. The earlier in the project programme that issues are discovered – particularly before commencement on site – the costs of rectification are significantly reduced and, with it, the likelihood of a dispute.”

The decline in the oil prices and the globally challenging economic conditions have necessarily impacted the liquidity in the region, and the funding available to regional governments and private parties for the purpose of construction projects. These tighter budgets can result it an increasingly litigious environment. Meanwhile, cutbacks in funding cause projects to be postponed, cancelled, or subjected to refinancing, also giving rise to a spike in disputes.

Ewin concludes: “Since the financial crisis in 2008, we have seen an increased number of construction disputes. Contractors are increasingly emboldened and more likely to enter into dispute than before, as they realise a significant amount of potential profit is still to be realised on unapproved claims. Clients have also begun to take a more proactive approach to defending claims during the lifecycle of a project.

“There also seems to be an increasing number of disputes being referred to arbitration from legacy projects that were terminated during the 2008 financial crisis, as firms only now have more capital to fund the disputes.”

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