Shaping the future of construction dispute resolution in Abu Dhabi
A cultural overhaul is needed to improve the efficiency of dispute resolution tools in the UAE capital and beyond
Can construction disputes be avoided? Lawyers familiar with Abu Dhabi’s building sector think it is possible, but contractors and developers may have to adopt newer ways of doing business to achieve this target.
Whilst once a topic discussed behind closed doors, dispute resolution has, in recent years, taken centrestage in discussions about the global construction industry’s future. Legal firms working in the Middle East have made several construction-focused hires in 2018. Additionally, these companies’ understanding of the construction sector’s nitty-gritty is also growing.
This industry evolution was in full show at Construction Week’s Dispute Resolution Question Time: Abu Dhabi conference, which was held at the Sofitel Abu Dhabi Corniche hotel on 24 October, 2018. A panel comprising some of the UAE’s and the Middle East’s foremost legal experts discussed topics including late payment management, contract claims, arbitration, and alternative dispute resolution mechanisms on the day. Also on the agenda were industry-introspective themes, such as the creation of a construction community that is inherently dispute-averse.
Quantum Global Solutions’ regional director for the UAE, Ian Maund, moderated the panel, which included HKA’s director, Conrad Bromley, and HFW partner, James Harbridge. Antonios Dimitracopoulos, head of arbitration and dispute resolution at BSA Ahmad Bin Hezeem & Associates, and Robert Jackson, regional director at Royal Institution of Chartered Surveyors (Rics), completed the panel of experts lined up for the conference.
The discussion started with a simple question: what causes construction disputes in Abu Dhabi – or even in the Middle East and beyond? HKA’s Bromley said liquidity is among the factors that are leading to disagreements in the construction market, adding that the amount of money in circulation “drives people’s decision-making process”. HFW’s Harbridge, meanwhile, said that the “quantum size” of monetary claims can also lead to disputes if project teams comprise stakeholders that feel they shouldn’t have to pay the high amount. According to Dimitracopoulos, though, some disputes in the construction sector are often “camouflaged in terms of their cause”.
He continued: “I think that on a day-to-day basis, there are two driving factors behind disputes in this part of the world – one is a cultural difference in understanding how an issue, which later becomes a dispute, needs to be handled. The other is to do with the more technical aspects of variations, extensions of time, concepts of prolongation costs, [and] lump sum arrangements that form the technical [...] basis of day-to-day disputes. [This is a] bit far removed from the general sort of presence or absence of liquidity.”
Rics’s Jackson said “it is inevitable that there are going to be issues and disputes in the construction world”, but the processes used to tackle and resolve these disagreements varies, based on the “the state of the market”.
He explained: “When a market is extremely buoyant, we often see a lot of issues that just get left […] or held. You then deal with them at the end of the project, and I think that’s what we’re seeing now in Abu Dhabi. We are starting to see a lot of disputes that occurred over the previous few years coming out of the closet, and they now need to be dealt with. I think that’s what’s driving the current proliferation of the number of disputes.”
The exact number of construction disputes in the UAE capital is difficult to ascertain since, as BSA’s Dimitracopoulos explained, “there are no official public records, either in mediation, arbitration, or litigation”.
“I would say that if the number of registered cases […] is rising, then chances are that the number of construction cases is also rising,” he continued.
HKA’s Bromley, on the other hand, said that the volume of overall disputes “is certainly a relevant” metric, but the figure does not capture ongoing disputes “that don’t make it to the arbitration stage”. The team at HKA, he added, spends “a lot of time working on disputes that don’t quite get to the formal dispute resolution level”.
“It’s certainly a buoyant, busy market at the moment. I don’t think there’s any shortage of disputes, but in a positive way, a lot of them don't make it to arbitration. They’re addressed through party-to-party negotiation or early expert determinations.”
The role of contracts – and contractors
Market growth is good news, but is the construction industry doing enough to efficiently manage and maintain its ongoing expansion? Citing a McKinsey study, Jackson pointed out that productivity improvements remain rare in global building markets, with the current state of supply chain and skills management also in need of an overhaul.
“But the one area that [the study] said will have the greatest impact on improving productivity [is] rewiring the contractual framework, and sadly, I think the way in which our contracts are [drafted] at the moment means most – not all – contractors in Abu Dhabi are set up to fail [and encounter] disputes before the projects have even started,” he continued. “I think this is one of the problems that absolutely needs tackling.”
According to the Rics expert, a typical construction contract-led project around the world tends to be delivered with a budget overrun of 20-40%, based on its initial tendering price. In fact, the tendering process often starts with a view to drive the lowest price possible, and some contractors bid on these schemes with the expectation that “they will recover profitability through claims”, Jackson explained.
“The whole tendering contract setup is there to create disputes […] and that’s the root cause that needs to be changed,” he added. “Until that’s changed, we’re going to see [a] continued proliferation of disputes.”
Quantum’s Maund, as moderator, pointed out that contractors being made to sign up for “unrealistic or downright unachievable programmes” is a problem that needs addressing. “We need to have achievable targets [so we can reach] the goals that we set in the first instance,” he continued.
BSA’s Dimitracopoulos equally sought to empower contractors, stating that “the one factor that is within the control of the contractor” is how they price their services. Contractors must certainly bid competitively, but they must also refrain from undercutting their prices to an extent that eventual profitability is reduced. This situation can lead to contracts breaking past what might already be a slim margin, and eventually culminate in disputes. After all, the “characterisation of something as a dispute” stems from fundamental contractor concerns about loss-making or profit elimination.
Dimitracopoulos continued: “So, the control factor on that is how you price [the bid] and how you compete with others so that you get the job, but [without undercutting] them so much that the slightest thing [...results] in a choked situation, where [the contractor] has no choice but to elevate things to a dispute.”
Liquid gold standard
Carrying forward from the BSA expert’s point, moderator Maund added that contractor competencies are critical to dispute avoidance. Citing the high volume of oil and gas work as a market differentiator in Abu Dhabi, Maund said the demands placed on contractors in the energy sector “should make for a better playing field” in the UAE capital. HKA’s Bromley agreed with this view, adding that the financial and technical demands placed on contractors of oil and gas projects act as quality gatekeepers, which tend to be less stringent in the buildings sector.
“The barriers to entry are far lower on less complicated construction projects – be it a hotel or an apartment block – and there’s really very little to prevent a contractor from coming in and winning a job at a loss, hoping [that they will] recover that loss through the dispute process,” Bromley explained.
The maturity of energy sector clients is a major contributor to the relatively dispute-free nature of the sector, according to Rics’s Jackson, who added: “The number of disputes we see coming from the oil and gas sector is significantly lower than that from the building sector. Oil and gas clients are a bit more mature and they realise that if they want an asset constructed, then it needs to be delivered on programme so that it starts [operating] in the right timeframe. We see a more mature, partnership-led approach on oil and gas projects compared to the real estate sector.
“I think from a contractor’s perspective [in] the real estate building sector, [it is important to be] selective about your clients.”
In recent months, major contractors active in the UAE and beyond have told Construction Week that they are, indeed, embracing selectivity to protect their businesses against market risks. However, it is not enough to be discerning only during the tendering process, and contractors must ensure that they maintain a professional, success-driven relationship with employers during the construction phase as well.
Commenting on how contractors in Abu Dhabi and the GCC can improve construction operations and prevent disputes, Bromley said: “Respect your contract. It’s so common for contractors to try and maintain a friendship-like relationship between themselves and the employer. In effect, they shoot themselves in the foot.
“[The job] is not about making friends; it’s about performing the works in accordance with the specification [mentioned within] the contract. If you have a claim, submit a notice to help yourself [and let] the engineer help you. It’s really of no benefit to anyone if you put your entitlement in a drawer and save it for another day, because time passes and it’s gone.
“That would be my biggest recommendation to any contractor – respect or contract, [and] know your rights. Employ [a skilled lawyer] to help you understand your rights and obligations at the start, and keep records [to] help yourself. It’s easy to do.”
In fact, as Harbridge explained, the “underdeveloped” nature of project designs in the region means contractors must more seriously consider involving lawyers “to iron things out at the front-end”, instead of only involving them if, or when, a dispute occurs.
“You start off with the issue of projects that are under-designed being put out to tender – that’s what everyone in the construction industry tells me is where the problem stems from,” he continued.
“What, if anything, can a contractor do to avoid such a scenario? From a lawyer’s perspective, it does seem to be a very problematic situation because if you don’t bid, you don’t get the work. But if you say ‘we’re not going to bid because we think there’s insufficient tender documentation’, I don’t know where that takes you. Probably not very far.
“I think you do see a lot of contracts where scopes of work are ill-defined, [with] even the wording of who’s going to do what [poorly drafted]. That’s why I’m an advocate of trying to use lawyers at the front-end as much as possible. Dare I say it, the legal spend may well be less because you’re [pre-empting problems],” Harbridge explained.
Contractors must undoubtedly create and maintain cordial relationships with clients and other stakeholders, the panel’s experts explained, but the association must be led by the common goal of successfully completing their projects without delays, within budget, and ideally, without running into disputes. However, this arrangement is a two-way street, and developers must be equally proactive – and receptive of change – to realise these ambitions.
Maund pointed out that Abu Dhabi’s government projects are implemented through “sensible operations”, noting that the competencies of client organisations are crucial to minimising disputes. HKA’s Bromley said employers “have a real ability to make change”, even in the simplest form through the fairer allocation of risk.
Commenting on client tendencies to tweak the standards laid out by International Federation of Consulting Engineers (Fidic), he added: “Why not just stick with Fidic? It’s been drafted by some very intelligent people and is fit for purpose. There’s no need for developers or anyone else to try to amend that to shift this allocation of risk.
“Developers can improve the relationship between the contractor and themselves by opting to allocate that risk fairly. It’s a simple process that can have a big impact, and that’s within their powers. As an extension of that, it would [require] a less cost-based procurement process and make it more value-driven. [This would encourage] some real metrics beyond just who is offering the lowest price, which is usually why we get into the situations wherein the contractor, from Day 1, knows they’re [spending] millions out of their pocket and must thus drive disputes.
“I’m sure as much as they would like to drive that process, contractors are not in the driving seat – developers are. Contract terms are almost unilaterally imposed – I think that’s fair to say. Developers can change that and they can improve the process.”
It is not unfair to assume that this change will require a shift in mindset, and only be achieved over the long term. Harbridge explained that even making the process of dispute resolution easy and efficient will require incentives for developers, especially if they are likely to be the eventual paying party following a contract claim. For instance, timely project completion – especially of revenue-generating assets – is one benefit that developers can expect from the implementation of efficient dispute resolution mechanisms – but it is far from being the only advantage for clients.
“Another incentive for developers to rethink the contractual framework is to [recognise] where their investment is coming from,” Rics’s Jackson said.
“We deal with a lot of institutional investors, and have recently worked with UK Export Finance, which is funding a significant number of projects here in Abu Dhabi and elsewhere in the region. If these investors are funding [local] projects, they want to see them being delivered to an appropriate level of health and safety. [Developers] must be successful at delivering what they are meant to, and when they must do so,” he continued.
“[International] investors are very keen to provide funding to developers that are prepared to embrace more commonsense, collaborative delivery, because it will give those projects more chances to be delivered [as needed]. Even some banks in the region are now advocating a real shift away from this adversarial positioning by clients [and focusing] on collaboration.”
The future of construction dispute resolution
Both traditional and alternative dispute resolution methods – such as negotiation, conciliation, mediation, and arbitration – are finding takers in Abu Dhabi and across the wider Middle East. Of course, each route is accompanied by a specific list of challenges and opportunities, and contractors, as well as developers, must consult experts to ensure that they pick the best option for their legal hurdles. However, as the panel at Dispute Resolution Question Time: Abu Dhabi pointed out, the construction industry must equally focus on the pursuit of cost- and time-efficient dispute resolution avenues.
The panel, which spanned a little over 90 minutes, ended with the same question it started with – can a Middle Eastern construction project ever be completed without a dispute? Experts agreed that this may yet be undoable due to various reasons, which range from the high value of disputed sums to the complexity of typical construction jobs. However, as the legal leaders pointed out, the building sector must primarily focus on elevating dispute resolution to a stage where it becomes a less painful process for construction stakeholders.
“You can always seek to improve upon everything,” Harbridge concluded.
“What’s good is that so many people are [at this event], and I think a lot of people in Abu Dhabi share that appetite to take [dispute resolution] to the next level.”
This article contains excerpts of the panel discussion held during Dispute Resolution Question Time: Abu Dhabi. Visit Construction Week’s Facebook profile to watch the full conversation as it unfolded, and check out event highlights on Construction Week’s Instagram page.