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Can alternative dispute resolution tools reduce Middle East construction conflicts?

The state of dispute resolution in the Middle East has made some contractors think twice about doing business here, but alternative forms of resolution provide a silver lining

ANALYSIS, SPECIAL REPORTS, Business, Sectors, Construction, Middle east, Resolution tools

Frequent late payments and contractual disputes have created an environment that the Middle East’s construction contractors appear increasingly concerned about – some are even mulling the prospect of exiting the region to work in markets where the risks and rewards are more evenly balanced.

Naturally, this scenario is worrying, and certainly one that all construction stakeholders would like to avoid.

Regional legal experts have warned that the current state of dispute resolution is further stretching finances for contractors. And in an industry where steady cash flows are a necessity, lengthy and expensive dispute cases are a concern that need to be addressed as soon as possible.

Solutions to disputes, such as mediation and adjudication, are on offer to help contractors and developers find a resolution, and improvements to alternative dispute resolution (ADR) mechanisms have received backing from a number of legal professionals, as well. But to understand why ADR has become an important topic, it is necessary to first understand why so many experts are advocating means of resolution that avoid litigation. Speaking to Construction Week, director of the Middle East for the Royal Institution of Chartered Surveyors (RICS), Robert Jackson, recounted a meeting he held recently with major international contractors that had operations in the Middle East. Jackson said he was told that the situation for contractors had worsened in recent years, adding: “The overall consensus is that things are getting worse, to the point where a lot of [the contractors] were saying their [internationally based] headquarters are suggesting pulling out of the Middle East.

“[Top] contractors potentially pulling out […] is not good for business, and will not attract investment.”

This sentiment was echoed by others that attended Construction Week’s Dispute Resolution Question Time, held at the Le Méridien Beach Resort & Spa in Dubai on Wednesday, 21 March. For instance, senior quantity surveyor at Alemco, Paul Yates, told Construction Week that market risk was among the key factors that led contractors to question their future business operations.

Yates added: “A lot of the major contractors are struggling with their cash positions in the UAE. When […] disputes happen, you can see projects come to a standstill. Previously, maybe contractors would be willing to just see it out on the basis that they could override the cash flow issue through [external] funding, or central funding from a sister or parent company.

“But now, I think, [contractors] are willing to say they will just stop and walk away, because they know it will never get to a dispute position where they feel they can challenge the employer, because there is such a small client base.”

Chris Lyon, also a quantity surveyor from Alemco, a mechanical, electrical and plumbing (MEP) subsidiary of ALEC, added: “We find that, from the contractor’s side, the client requests things to get done immediately, but they don’t understand the impact to the programme [or] to the overall contract values. It impacts the ability to deliver a project on time.”

At the Leaders in Construction UAE Summit held in October 2016, business leaders said there had been a rise in the number of construction-related dispute cases, and warned that contractual and payment issues would continue to increase if they were not addressed. Commenting on how the market had evolved since then, Charles Lilley, partner at Berwin Leighton Paisner (BLP) – one of the four panellists at Construction Week’s Dispute Resolution Question Time – said: “We are seeing as many disputes this year as we have seen in the previous years.”

Another panellist, Jed Savager, partner at Pinsent Masons, said 2016 was “a very busy year” in terms of the number of dispute cases, and that 2017 had “continued that trend”. Managing director of the Middle East for Driver Trett, Lee Barry, added: “The Middle East, historically, has always been subject to a lot of disputes. It slowed down quite a bit a few years back, but it picked up in 2016 and there was quite a bit of traction to go to arbitration.”

RICS’s Jackson, also a panellist, said the regional construction industry was “at a tipping point”. The Dispute Resolution Question Time moderator, Neil Hargreaves, partner at professional services network Deloitte, said that everybody he had spoken to in the industry wanted “to avoid complex, time-consuming, lengthy, expensive arbitration, litigation, and dispute resolution processes”.

Regardless of the numbers, it is clear that local contractors want a solution. There are many mechanisms contractors and clients could utilise to not only minimise litigious dispute cases, but to avoid going through the courts altogether. ADR mechanisms have been raised as the best way to manage disputes in a manner that does not harm relationships between developers and contractors.  This segment comprises all measures that do not involve litigation, with popular mechanisms including mediation, adjudication, conflict avoidance, and expert determination.

Jackson called for greater uptake of ADR in the region: “This is where the industry must go, and we’re seeing some people moving towards embracing alternative means of dispute resolution, but there is still nowhere near enough buy-in from the client side.”

He said that developers in the GCC were “reluctant to adopt” ADR mechanisms for a number of different reasons. Furthermore, the low uptake of ADR had led to contracts being delivered in an “adversarial manner”, causing delays, contract problems, and cost overrun on projects, leading to disputes that ultimately go through formal dispute processes, he said.

Earlier this year, it emerged that Dubai International Financial Centre (DIFC) Court was planning to explore how ADR mechanisms, including mediation and the development of ad-hoc tribunals, could help with large infrastructure and construction development contract dispute cases. In fact, the chief justice of DIFC Courts, Michael Hwang, said during a speech in February that mediation and ad-hoc tribunals could help to “reduce costly and lengthy disputes, and minimise the impact to large-scale, time-sensitive emerging disputes quickly and amicably”.

While the courts had a mandate to explore all dispute resolution mechanisms, Hwang said that it was “now time to pursue the development of other modes of ADR, including, in particular, the world of mediation”, he added.

For times when ADR mechanisms are simply not sufficient to solve a complex dispute, Dubai has introduced another service that can dispense fair justice. This development is the introduction of the Technology and Construction Division (TCD), a specialised sub-division of DIFC Courts, set up to streamline the resolution of complex construction disputes. Launched in September 2017, TCD has judges from the DIFC Courts’ bench with professional experience in construction and technology cases.

Major construction projects in the UAE are sometimes fast-tracked from inception through to completion, creating a pressurised environment where “things can, and do, go wrong”, explained BLP’s Lilley. ADR mechanisms, including conflict avoidance and mediation, can help this process, but the problem with wider adoption is that the client often wants a decision: “[The client] doesn’t always recognise the value of having a third party mediate to give a recommendation. We need to change this mindset,” he said.

“I think we need more legislative help and I think the [construction] industry needs the help.”

Lilley explained that in other countries and legal jurisdictions, statutory adjudication is an option that enables a relatively quick decision to be made on disputes, to resolve them within 28 days.

Dispute resolution cases in the Middle East need a similar “quick fix” solution, Jackson said, adding: “We need something that can take place during the course of the project, not something that you store up until the very end of the project and then fight about for years. We need the cash flow [and...] to keep moving. And I still think the client wants somebody to make a decision, so I think something like adjudication, enforced by law, would work well in this region.”

Ahmed Ejaz, an energy engineer at Dubai-based energy consultancy Taka Solutions, who attended Construction Week’s Dispute Resolution Question Time, said there was a “lack of education” in the sector that was compounded by an “unwillingness to learn, explore, or adhere to contractual requirements”. He agreed with experts that said ADR development was needed in the region, and suggested a clause could be inserted into contracts between clients and contractors stipulating that disputes must go through a reasonable ADR process before being escalated to litigation. He also suggested both parties should “educate themselves about the contractual stipulations, roles, responsibilities, and what they are entitled to and when” to manage disputes and avoid them whenever possible.

Hina Pancholi Rao, the managing director of Expressions FZC, an interior design supplier to high-end hotels including Atlantis, The Palm, said there was a lack of help for small and medium-sized enterprises (SMEs) operating in the GCC: “In my opinion, if large contractors are pulling out of the UAE for lack of clarity on dispute resolution, clearly there is a lot of scope for improvement. Contracts are extremely one-sided, and with no legal help available to SMEs like ours, it is getting increasingly difficult for us to get our voices heard and, correspondingly, we keep getting bullied by our clients, most of whom have all the legal backing they can lay their giant hands on, because of their greater clout.”

Rao added that ADR mechanisms would be useful for smaller outfits such as Expressions FZC. “Mediation would be the best alternative dispute resolution mechanism, considering the highly avoidable cost of other mechanisms like arbitration,” she said.

There seems to be a clear preference for ADR within the market, but the moderator, Deloitte’s Hargreaves, said that the entire industry must think about how to avoid lengthy and costly dispute processes, so that contractors and clients in the GCC retained strong and long-lasting business relationships.

“I think it is very important to consider a formal dispute resolution process,” he said. “By that, I mean how to avoid it in the first place – that is what everybody would rather do. This industry, like any other, is built on the strength of relationships between contractors, employers, sub-contractors, and [other parties]. If one can find a mechanism to resolve a dispute [that] keeps relationships intact, [then] that has got to be a win-win for everybody.”

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