Construction dispute resolution key for investors in Dubai and beyond
EXCLUSIVE: Experts say GCC construction must find alternative methods of settling disputes or risk putting off potential spenders
The GCC’s construction sector is often labelled as adversarial. Indeed, frequent late payments and ongoing contractual disputes have come to dominate conversations in recent years, with construction stakeholders, as well as legal experts, citing concerns about risk allocation and the continued use of poorly drafted or inappropriate contracts within the industry.
With assured, steady cash flows being critical for all stakeholders across the supply chain, the prospect of potentially lengthy and costly construction disputes remains a concern. The construction industry needs improved dispute prevention tools and more effective resolution mechanisms. Construction Week’s Business Confidence Survey, published in October 2018, found that 60% of the region’s builders have faced payment delays.
Improvements to alternative dispute resolution (ADR) mechanisms have been made in recent years – particularly in the UAE – as the region’s ongoing bid to resolve conflicts via alternative routes and away from the traditional arbitration and litigation avenues, ramps up.
Parties are now starting to realise that throwing every issue straight into arbitration and litigation just does not make sense.
When ADR mechanisms are not efficient enough to resolve complex disputes, Dubai-based firms turn to a specialised sub-division of Dubai International Financial Centre (DIFC) Courts – the technology and construction division (TCD), which was launched in September 2017. With judges from the DIFC Courts’ bench that have professional experience in construction and technology cases, TCD demonstrates the emirate’s drive to improve its dispute resolution credentials.
The need for more effective, streamlined dispute resolution systems is bolstered by the need for the UAE – and the wider GCC region – to ensure that its investment climate remains as attractive as possible to those looking to invest.
Speaking at the second iteration of Construction Week’s Dispute Resolution Question Time: Dubai event in March, managing director of Europe, the Middle East, and Northern Africa for the Royal Institution of Chartered Surveyors (Rics), Robert Jackson, said: “We need to be delivering projects in an efficient way; sending a message out to the investor community that this market is operating professionally, ethically, and that the projects will be delivered on budget and on time.
“This is why we have not seen a major uptake in public-private partnership (PPP) delivery models or overseas investments coming in – and this is what the GCC needs. Dispute resolution, and the avoidance of issues escalating to the high number of claims that we are seeing, is an absolute must.”
The Construction Week Dispute Resolution event, held at Le Royal Méridien Beach Resort & Spa in Dubai on Wednesday, 20 March, was moderated by HE Justice Shamlan Al Sawalehi of DIFC Courts. Joining Al Sawalehi and Jackson on stage, in front of more than 60 attendees, was partner at Reed Smith, Michelle Nelson, and HKA director, Mark Thomas.
Speaking during the evening’s panel discussion, HE Justice Shamlan said: “It is very important for the English-speaking legal profession – whether that it is advocacy or judiciary – to hear from the market about their views when it comes to dispute resolution.”
He added: “The service of the judiciary can be improved by solving the problem – analysing the problem, and then coming up with a new solution to build and re-build trust in the market in this region when it comes to the issue of dispute resolution.”
Asked to identify one of the main challenges that is present in the Gulf’s construction market, Nelson, a specialist arbitration lawyer with more than 22 years of experience, said: “An issue that we find here in the region is the inability of a party – particularly on the client side – to take responsibility for decision-making internally, and that is to do with accountability issues.
As a dispute resolution lawyer who practices in arbitration, it sounds odd for me to advocate less formal mechanisms. But when parties are entrenched and are at war, it is not healthy for anyone’s business.
“Either on a government level or in the private sector, there is a reluctance to take responsibility for how much a claim is worth, for example. This is because [the decision] could be questioned by peers or outside parties.
“This means that there is no ability to engage with non-binding dispute resolution processes, because that would require taking a decision instead of being told what to do by an outside, third-party entity,” she continued.
The issue of accountability was also discussed by HKA’s Thomas, who stated that, in his experience, one of the most significant factors leading to disputes in the regional construction industry is “the misallocation of risk, generally”.
“Clients often want to offload risk when it is inappropriate to do so, and that results in the risk coming back as a cost premium on projects,” he said.
“There is certainly a place for enlightened engagement between the contractors and the clients about when the risk is best allocated and which entity is best placed to carry the burden and manage the process.”
With this in mind, Jackson moved on to describe the current climate as “very adversarial and very much master-servant contracting”. He added, however, that there are “some good examples of collaborative partnerships in the region, although these are few and far between”.
“If we want to continue to fund our growth in these markets, we need a huge shift in the way we are delivering construction projects. There needs to be a move towards more collaborative delivery models.”
Nelson added: “As a dispute resolution lawyer who practices in arbitration, it sounds odd for me to advocate less formal mechanisms. But when parties are entrenched and are at war, it is not healthy for anyone’s business.
“This takes away management time, with people who should actually be building projects being taken away to be witnesses and remember what they did three or four years ago. There will always be some issues that cannot be resolved,” she added.
“But what we tend to find in major arbitration is that you have a room full of 20 people, for example – including very expensive lawyers, arbitrators, and experts – and you are talking about 30 individual variations that are worth no more than maybe $10,000-$15,000 apiece. It cannot be the best way to deal with issues such as those, to have them decided in that kind of forum.”
Jackson, in leading Rics’ business in Europe, the Middle East, and Africa, said the group advocates “that the resolution of disputes happens as soon as possible after the dispute arises”.
“We have been driving expert determination and early mutual evaluation,” he said. “At least then, the parties get some insight and can make more informed decisions, such as whether they should go to arbitration or litigation, or should settle and accept the claim for a particular amount.”
There is certainly a place for enlightened engagement between the contractors and the clients about when the risk is best allocated and which entity is best placed to carry the burden and manage the process.
He highlighted that any individuals that are acting as expert evaluators must be qualified in the technical nature of the dispute and have the “appropriate dispute resolution skills”.
“Parties are now starting to realise that throwing every issue straight into arbitration and litigation just does not make sense,” he added.
Considerations surrounding various types of contract were addressed by Reed Smith’s Nelson, who said that there are “too many circumstances in which people sign the same old contract, again and again”, adding: “There is a drive to put in the lowest bid, even though you know that you are taking on significant risk; even though you know that you have probably gone so low that your margins are going to be squeezed.”
Building on this point while responding to a question from the audience regarding contracts with unequal risk-weightings, Jackson said: “We are starting to see certain government entities across the GCC deliver contracts in a much fairer and more collaborative way.
“I have seen some examples in Oman, and certainly in Kuwait, where major government entities are now much more transparent. And this gets them good results.”