Greater understanding needed of what causes construction disputes
To mitigate conflicts in the Middle East’s construction market, the industry must address the causes of disputes
In its 2017 Middle East Construction Disputes Report, Amsterdam-headquartered design and consultancy firm Arcadis ranked “failure to properly administer [contracts]” as the most common cause of disputes in the region in 2016. Second on the list was “poorly drafted, incomplete, and unsubstantiated claims”.
Arcadis pointed out that the findings of its report, in terms of dispute causes, were not new: “This is similar to previous years, and once again demonstrates the need to get the basics right from the very outset of a project.”
The firm went on to state that a study of the claims and dispute market in 2016 showed a third factor: failure of clients, contractors, and subcontractors to either understand or fulfill their contractual obligations.
The firm’s report may be about industry conditions two years ago, but the observations it made about the factors driving conflicts in the region’s construction sector could still be made about the industry at present. Indeed, Simon Longley, a partner at HKA, a construction consultancy services provider, offers a similar observation about the current claims and disputes market.
“Disputes are a product of the way in which construction contracts are procured, usually on a lowest-price basis, with unbalanced risk sharing between the parties,” he says. “Tendering contractors often have little ability to change this dynamic. In consequence, contractors enter into contracts facing huge and uncertain risks.”
According to Longley, when contractors lose money, they will find ways “under the contract” to recover their losses: “That brings us to the next common cause of disputes: poor contract administration.
“All too frequently, contracting parties do not comply with the procedures set out in the contract for the prosecution and resolution of claims. This can be attributed to various reasons, including deliberate intent, ignorance of requirements, avoidance of accountability, and poorly drafted contracts.
“Lastly, construction contracts are getting bigger and more complex, increasing the risks [...] of unexpected problems being encountered and then agreeing which of the parties is culpable – all in all, a heady mix of ingredients that makes disputes in construction so [prevalent].”
They are so pervasive, in fact, that a number of contractors are reportedly considering simply leaving the region altogether. Speaking to Construction Week in March, director of the Middle East for the Royal Institution of Chartered Surveyors, Robert Jackson, said: “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.”
Jackson was one of the panelists at Construction Week’s Dispute Resolution Question Time, an event held in Dubai last month, during which alternative dispute resolution (ADR) mechanisms were put forward as the best option for settling disputes while maintaining the relationships between clients and contractors.
“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,” said Jackson, adding that this hesitation to pursue ADR had resulted in contracts being delivered in an “adversarial manner”.
Offering his take on the issue of ADR, Longley tells Construction Week: “Awareness of alternative dispute resolution mechanisms in the Middle East is there and is growing. What is required is for the international legal fraternity that generally advises and drafts construction contracts for clients to positively advocate the benefits of dispute boards and adjudication as an intermediate step between party discussions and arbitration.
“Change is coming and more contracts are being issued with dispute board provisions in them,” he tells Construction Week.
Despite this optimism, however, Longley notes that parties involved in disputes rarely show a willingness to compromise. “Issues become personal – a matter of principle or a means to leverage a position,” he explains.
“Rather than let a dispute evolve, develop, and suck in executive time, as well as incurring increased costs to the parties, wouldn’t it be better if contracts provided for some sort of independent third-party review of respective positions early in the dispute process to give parties a reality check and potentially provide a basis for amicable settlements?”
Not many contracts provide for this, he adds: “Although it is noted that the 2017 FIDIC (International Federation of Consulting Engineers) forms of contract include, for the first time, provisions for dispute avoidance using the dispute avoidance and adjudication board, [this may be] too late in the process to be truly effective in reducing the number of disputes that go to formal dispute resolution tribunals.”
Regardless of the resolution channels that may be available to the construction industry, Longley emphasises that, at the end of the day, “disputes arise [because of], and are resolved by, people”.
“The most effective dispute resolution tool is for parties to properly and fully apply the contract as drafted, at all times, but this rarely happens. Engineers and employers too often seek to avoid liability by [giving reasons like] ‘time-bar’, lack of substantiation, and concurrent delay, or simply fail to respond to issues at all,” he says, adding: “Recognising this reality, early engagement of independent third-parties to assist with resolving disputes is essential, and dispute adjudication boards and contract adjudication, if used properly, are ideal mechanisms to achieve this.”
He concludes: “It would be good for the future of the construction industry in the Middle East if dispute boards and adjudication became standard features of contracts, since the current dispute mechanism of party discussions then arbitration is a significant inhibitor to disputes being resolved quickly, effectively, inexpensively, and for the good of the projects.”