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Alternative dispute resolution mechanisms could benefit construction firms

Legal experts believe alternative dispute resolution mechanisms and adjudication could benefit the Middle East’s construction community, Neha Bhatia reports

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.

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. 

He explains: “The [last] two years have seen an increasing reluctance from employers to discuss and resolve claims, even when there is obvious merit in them.  The reduction in commercial engagement by employers has carried with it an increase in the number of formal claims, and contractors are now commencing arbitration for claims that, in the past, could have been resolved through a negotiated settlement.  

“This, in turn, causes considerable delays in payment, increasing the eventual amounts demanded by contractors and, of course, delaying yet further payments to sub-contractors and suppliers,” Shepherd points out. 

While litigation may appear to be the natural course of action in the event of contract-related disagreements, experts say contractors – and, indeed, all parties involved in a dispute – would do well to consider all options available prior to commencing arbitration. Fernando Ortega, an independent legal consultant based in Dubai, says contractors and developers must “understand the dispute resolution clause in their contract” prior to considering litigation. 

He continues: “The clause will set out where and how a contractor or developer can commence formal dispute resolution proceedings, [which is] usually either through the local courts of the host jurisdiction, or arbitration. The clause will also set out preconditions – if any – to initiating formal dispute resolution, such as mediation or amicable negotiations.”

Additionally, Ortega recommends that contractors operating in a foreign jurisdiction check whether an applicable treaty exists between its home and host countries: “Many GCC countries have entered into bilateral investment treaties (BITs) and multilateral investment treaties (MITs) for the promotion of investment. These treaties may allow a contractor to elevate its claim to international arbitration and bypass the dispute resolution provision contained within their contract, [such as] going to the local courts to resolve [...] claims.” 

Furthermore, Xu says that companies must also consider alternatives to traditional litigation, adding that reliable alternative dispute resolution (ADR) tools are emerging as regional markets and legal systems mature: “Examples of ADR mechanisms include mediation and expert determination, and there are also certain standard-form contracts that contain multi-tiered dispute resolution provisions. For example, parties would [first] have to attempt negotiations and mediation, and it is only after these tracks have failed that parties are entitled to commence arbitration. 

“There are advantages that come with using ADRs such as mediation and expert determination. By their conciliatory nature – as opposed to the generally adversarial nature of litigation and arbitration – these mechanisms tend to help preserve the parties’ relationship. Where a discrete technical issue is involved, it is equally possible to determine the issue fairly quickly and cheaply through expert determination.”

The push for ADR tools, as well as conflict avoidance, is visible not only in the Gulf’s construction market, but across the Middle East. During the launch of its dispute resolution service in Jordan earlier this month, the Royal Institution of Chartered Surveyors (RICS) said it aimed to enhance collaborative delivery in the construction sector, adding that its conflict avoidance panel (CAP) was designed to resolve disagreements early. RICS added that there had been regional interest in the CAP mechanism, and that it would continue to work to introduce the concept across the Middle East.

HSF’s Shepherd says that for contract parties, the “best time” to consider their options is “when the contract is being drafted and the parties are collaborating”, adding: “Agreeing [to] a tiered clause, which requires the parties to try to resolve the dispute before they go to litigation, is generally a very good idea.  The early tiers in the dispute clause must be fast – there is no benefit in spending months on an interim process.  I usually suggest some form of [discussion by] senior managers, [...] requiring executives who have not been involved in the project to meet and try to resolve issues over a period of 14 to 21 days.  

“Another fantastic option is mediation, [and its] process is completely different to adjudication, arbitration, or litigation, as the mediator’s role is not to make a binding decision, but rather to bring the parties together to reach an agreement. The success rate of mediation is very high,” he explains.  

“The third option must be arbitration which, in the Gulf region, is almost always preferred in construction contracts before litigation in the courts.  Arbitration is not fast or cheap, but it allows the parties to appoint an experienced engineer or construction lawyer to decide the case, and the decision can be enforced around the world.”

Legislative support to back dispute resolution options – traditional or otherwise – is critical. Ortega says that while “existing legislation in the region supports dispute resolution by resolving disputes quickly and efficiently while minimising costs,” there is room for improvement in terms of adopting laws that provide “parties, arbitrators, and local courts with guidance, especially with regards to enforcement of an award”. 

Xu says that the regional “perception of arbitration is improving”, adding that the UAE’s development of arbitration laws “would offer greater clarity and certainty about the arbitration procedures and the standing of arbitral awards”.

“The Gulf is a reasonably arbitration-friendly area, and the introduction of Saudi Arabia’s new arbitration law was a real step forward,” Shepherd explains. “The UAE’s new arbitration law is anticipated within the next few months.  However, the Gulf lacks a compulsory quick and inexpensive method of dispute resolution, [and] many nations elsewhere in the world have introduced statutory adjudication for construction cases.  

“This would provide an obligatory mechanism for a quick decision – typically within a period of 28 days or so – on claims.  While the decision of the adjudicator is not final, [and] the claims can still go to court or arbitration, it is binding and enforceable.  The enforceability [...] is key to preserving contractors’ cash flow,” Shepherd adds.

Similarly, Driver Trett’s Smith says that a time- and cost-effective, intermediate mechanism must be developed “to deal with disputes before the parties become too entrenched in their positions, or the dispute becomes too complex”. 

He adds: “Although there are many barriers to its introduction in [the] Middle East [...] some form of adjudication – similar to that [...] in the UK – would be beneficial to all parties. However, to be effective, adjudication ideally would have to be supported by legislation, and not be [just] a creation of the contract.”

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