DRQT 2019: The region's top lawyers discuss construction disputes
The GCC’s top legal experts returned to Abu Dhabi to get the root causes of construction claims
Dispute resolution in construction, which is not new to the Middle East, is increasing in the region despite the understanding that adversarial action is lengthy, costly, and has a corrosive effect on project delivery and realisation.
The concern caused by incessant payment delays, inadequate settlements, and growing timeframes for the recovery of cash in the construction industry has been further aggravated by low liquidity in the Middle East market and increasingly competitive bids leading to lower profit margins.
The root causes of construction claims and disputes, methods to avoid and resolve conflicts, as well as alternative dispute resolution (ADR) mechanisms and arbitration laws were placed under the scanner at Construction Week’s Dispute Resolution Question Time: Abu Dhabi 2019 event held on 22 October, 2019, at the Sofitel Abu Dhabi Corniche hotel.
More than 60 developers, contractors, lawyers, consultants, and construction experts gathered to listen to the discussions moderated by Jed Savager, partner at Pinsent Masons, comprising key panellists, including Antonios Dimitracopoulos, partner and head of arbitration and dispute resolution at BSA Ahmad Bin Hezeem & Associates; Julian Haslam-Jones, director at HKA; and James Harbridge, partner at HFW.
Root of the problem
The GCC’s top lawyers began proceedings by delving into the main causes of claims and construction disputes in the region.
They pointed to ambiguous contracts for complex projects; under-designed projects going to tender; unclear termination clauses; poorly-drafted and uncertified claims; imbalance in risk allocation; unresolved variations; and a lack of time to put in a good bid.
Commenting on the prime reasons leading to construction disputes, Dimitracopoulos said: “For a dispute to arise, I think you need a fertile ground, first of all. In my experience, the fertile ground is usually found in the contract itself – some poorly-drafted clauses, some heavily slanted contracts in favour of one party, or even some commercial agreements within the contracts that offer very narrow anticipated profit margins for contractors. That means that the contract is very fragile – commercially and financially. Anything that may not go as planned will now have more chances of elevating itself into a dispute, and possibly, legal action. The contracts and the profit margins are the bedrock, or the fertile ground, for disputes.”
Shedding light on the context under which disputes arise in the Middle East, Haslam-Jones said that the type of projects going out to tender in the region are quite complex by nature. He stated that the construction market is going through a tough period, which is creating an atmosphere of competitive bids and tight deadlines – factors that have become common causes for disputes.
Haslam-Jones added: “I think that sometimes, the way parties agree to allocate risk is just not practical. If you have poor contract administration, then that can be a problem. If you don’t keep your records properly, that can lead to disputes, as well. Above all, I believe robust and credible claims will help parties resolve an issue.”
The panellists also spoke about the seeds of discord being sown when clients bid or price under-designed projects.
Harbridge said: “If the responsibility to undertake the detailed design gets shifted to you, obviously that’s going to have a cost and a delay impact. Some contractors also have the tendency to take on a detailed design without putting in a notice or flagging it up at an early stage in the contract. They start doing something they were never supposed to do, and then 12-18 months later they begin to consider that they have a claim after they have done all the design. You will make your life easier if you adhere to the contractual notice provisions.”
Variations and changes
Speaking about an issue closely linked with disputes, Haslam-Jones referred to variations and changes not being dealt with in a timely manner.
He said: “Unresolved variations lead to the contractors doing the extra work but not receiving payment for it, and then they enter into a cash-flow problem. This is why it’s important for parties to deal with the variations in the early stages and try, and resolve as many items of the variations as possible.”
There are times when there could be key dispute-causing elements that are difficult to resolve during the project, but these can be split into different elements or resolve certain elements before others,” Haslam-Jones added.
The panellists also presented a picture of the cultural, commercial, and financial aspects that require a contractor to cope with variations and changes rather than ruffle the feathers of clients or employers.
Speaking about a “courageous” way of dealing with this, Dimitracopoulos said: “You actually have to have preallocated funds for a potential arbitration during the contract. It is a courageous move in the sense that it transcends the culture. But one also needs to have the funds in order to do that whilst at the same time deploying the budgeted funds to actually execute the project. It is a difficult task to juggle, however, it capitalises on the huge leverage a contractor would have while he’s still needed in the project.”
The top legal experts in the region emphasised the need for credible claims based on transparent and well-kept records. They reiterated the need to get legal advice during the project rather than after delivery; and shared insights on receving certified payment for completed work to avoid delays.
Commenting on the need for timely advice, HKA’s Haslam-Jones said: “When you do get into these situations where you are struggling, and you feel that you haven’t been paid on time, and you feel that there is an issue – you need to get advice early on.”
HFW’s Harbridge added: “Taking advice early does pay off – the type of issue you can look at is whether you have the legal right to suspend the work – I think that’s also something worth exploring.”
Once the project is completed the dispute tends to become academic, as far as the developer or the employer is concerned, because the project has been fulfilled. The claims are then viewed as leftovers of the project, as the main purpose has been satisfied. This is why the onus is on contractors to treat every claim as a smaller version of an arbitration, and therefore, deal with it on time with the contractual compliance that it deserves, so that the claim can be taken seriously and the developer will not be able to simply brush it off,” Dimitracopoulos added.
The panel also debated the role of the contract administrator - the engineer - who looks at the claims raised by the contractors, given that this engineer is employed by the developer to discharge that function, which requires the engineer to weigh the contractor’s claim against the developer in a fair and unbiased manner.
Addressing the issue, Haslam-Jones said: “It is critical that the engineer, or the professional advisor to the developer, try and stay impartial to get to the bottom of the issue proactively. It is definitely an issue and it does lead to disputes. Now, if the contractor’s claim is not robust, or credible, it will play into the hands of the engineer employed by the developer, but if you set out a concise claim, with good records, that is realistic, it can force them into a position where it is very difficult to ignore it, and they are forced to take it to the employer.”
The lawyers also agreed on the need to be careful with the tone of the claim, from a cultural aspect, to ensure that it is neither aggressive nor controversial and is aimed towards resolution rather than arbitration, irrespective of cash-flow issues.
Furthermore, the discussions focused on new arbitration laws; and highlighted the benefits of mediation and alternative dispute resolution mechanisms, which help stakeholders resolve disputes despite notions of a lack of enforceability.
Harbridge said: “Now, with the new arbitration law, given that it’s allowing interim awards, we might also see some courageous contractors saying, ‘you know what, I’m going to take you to arbitration right now’ on a specific issue, while the project is still ongoing. We’re so used to arbitration happening years after the cessation of the project, so it will be interesting to see what would happen if someone started to say, ‘you know what, I’m only six months in but I’m already going to go to arbitration’ based on a specific point.”
Commenting on the importance of mediation and alternative dispute resolution mechanisms, Haslam-Jones said: “The key aspect is that parties buy into it, and that can be a challenge at times. But what we’re seeing is that it is becoming more common, and it has certainly increased in the last two years. Now, this could be because parties don’t want to spend big amounts on litigation or arbitration and this could be a cheaper alternative. Yet, alternative dispute resolution is what parties are turning to.”
Dimitracopoulos concluded: “I’ve experienced dispute adjudication boards (DAB) and expert determinations in Abu Dhabi. I find mediation a very useful tool in instances of a gentleman’s disagreement, not in instances where there’s a straightforward lack of liquidity, non-payment of certified amounts, and issues like that, where there’s hardly any point to mediate, but rather a dire urgency for an enforceable decision. But, in instances where there is commercial interests, or interpretational disagreements, I think mediation could be useful.”
The Dispute Resolution Question Time event was supported by Construction Week’s official claims partner, HKA; gold sponsors, HFW and BSA Ahmad Bin Hezeem & Associates; training partner RICS; and legal partner Reed Smith.