In an environment of rapidly rising construction costs and major contracts commonly awarded on a fixed-price basis, it is little wonder that disputes between contract parties are on the rise, particularly in the construction sector.
Project management consultants say they are seeing an increasing number of requests from firms that are losing control of time and cost estimates.
“We are getting a lot more enquiries from clients asking us to help turn around a project that is in dispute,” says Kenneth Linn, regional managing director at capital project consultant HPR.
“Typically, 10 to 15 projects a month are coming to see us and this is a significant increase in this type of enquiry. I would suggest this is because more and more projects are entering the latter stages.”
The project market in the UAE is more mature than in other Gulf states, with a total value of $981m and more than 30 per cent of projects on site.
Dubai is particularly advanced and more projects are reaching the closing stages in the emirate than anywhere else in the Gulf.
But with the number of contract disputes rising as the market matures, Dubai passed a new arbitration law on 1 September.
If successful, the framework could make Dubai the centre for dispute resolution in the region.
The new law is based on an internationally recognised model. The city’s new arbitration centre has been built with the backing of the London Court of International Arbitration (LCIA), essentially using an adapted version of the LCIA rules.
Working in tandem with the LCIA is a shrewd move for Dubai, as writing new rules from scratch would be tough.
Firms already appear keen to test its effectiveness. In mid-September, Kuwait’s Al-Arabiya Real Estate threatened to take UAE developer Sama Dubai to arbitration at the Dubai International Financial Centre (DIFC) over a dispute involving the sale of plots at the Dubai Lagoons project.
Al-Arabiya claims that Sama Dubai stopped it from selling some of its portfolio to Union National Bank, which Al-Arabiya says breaches its contract with Sama. The Dubai developer declined to comment on the dispute.
Arbitration is an alternative to going to court and airing grievances publicly, but it is often more costly. An independent arbitrator, or more often a panel of three arbitrators, will hear a case and make a binding judgement on the parties in dispute.
International standards have evolved to ensure the integrity of the process. Along with those of the LCIA, the most commonly used have been created by the American Association of Arbitrators (AAA) and the International Chamber of Commerce (ICC) in Paris.
“The process itself can be time-consuming,” says Anthony Morgan, forensic services partner at consultant PricewaterhouseCoopers.
“A recent case for a Lebanese local government body and a German contractor was heard in Paris. There were three arbitrators: one Lebanese, one German and one French. The case took four years to reach an award.”
Crucially, the UAE has also signed up to the New York Convention on the Enforcement & Recognition of Foreign Arbitral Awards, which means that, along with 140 other countries, it will recognise and enforce international arbitration awards.
The changes to Dubai’s laws are an important advance, says Michael Black, a specialist in international disputes and one of the architects of the legal framework for the DIFC.
“The previous law was cumbersome and not business friendly,” he says. “The new law marks a new era for arbitration in the Middle East and makes it extremely attractive to international businesses, who can feel much more comfortable with disputes being heard in the region.”
The previous law required an arbitrator’s award to be ratified in the local courts, a step that deterred international firms from including local arbitration clauses in contracts.
Instead, companies chose to go to international centres such as Paris, London or Singapore, where awards could be more easily enforced.
“In the 1970s, the UK reviewed its arbitration law,” says Black. “At the time, the government said it wanted to attract arbitration business to London [from the region]. Now some of this will flow back to the Middle East.”
Although the seat of the arbitration centre is at the DIFC, hearings registered there can be held anywhere in the world.
“The hearing need not be at the seat, you can have the hearings anywhere, but the seat decides which court has overall supervisory responsibility,” says Black.
The DIFC will need to be attractive for both parties in a dispute if it is to be used, and the competition from the established arbitration centres will be tough.
Arbitration is used across all business sectors but is most common in the energy, construction, financial and shipping sectors.
Disputes in these areas have tended to lead to hearings in major financial centres in Europe and the US.
“Arbitration has tended to happen where the best lawyers are, so London, Paris and New York,” says Morgan.
“For example, an international development bank funding a project in the Philippines using, say, a German contractor may choose to have the hearing using the ICC process in London.”
With the new Dubai law in place, dispute experts now expect arbitration clauses to start appearing far more regularly in the Middle East, along with the hearings.
And while the region’s businesses do not have a history of using the arbitration process, the growing number of disputes, particularly in the construction sector, coupled with international businesses’ default use of arbitration clauses in contracts, means this too is likely to change.
“It is only a matter of time,” says Linn. “The nature of the industry is that disputes will arise. People are genuinely losing money.”
According to Morgan, project teams make mistakes on a regular basis. “I meet countless individuals who will say ‘you will never guess what has happened on this project’ and explain what has gone wrong,” says Morgan. “The reality is that I see the same things over and over.”
The most common problem is poor definition of the scope of a contract and a lack of clarity over the project’s objectives.
“There are many examples of when a lack of clear goals of what each party to a contract expected has led to unexpected consequences when the end-product fails to meet stakeholders expectations of time, cost or quality performance,” says Morgan.
“So often, each party has so clear a view of its own goals that little thought is given to ensuring how these goals are integrated with the project delivery processes.
“These outcomes are often played out in courtrooms and in front of arbitration tribunals.”
Poor organisation and management is also a major concern, including confusion over project responsibilities and inadequacies within the organisational structure of the scheme.
HPR’s Linn says a lack of communication between parties can be a real problem in the region. “There needs to be more engagement of the clients to understand exactly what they need,” he says.
“In the Middle East, speed to market is essential. This is not unrealistic but it does mean that parties have to be more involved earlier on. Bringing the contractor in early pays dividends.”
Understanding the risks associated with a project is also critical, says Linn. “Not enough time is spent understanding risk,” he explains.
“Has it been adequately proportioned to those best able to manage it? It is so important to be clear about divisions of responsibility at the front end.”
Poor monitoring of a project is another, often neglected, area that can lead to difficulties.
“Large claims and embarrassing delays at the end of projects would be less frequent if continuous performance measurements and information available to the client were reviewed,” says Morgan.
“Such information is usually in the contractor’s hands all along, and yet even in the electronic age, it is rarely provided, or even asked for.”
Changes to the scope of a contract are also common in the region, which can lead to variations to the original agreement.
“You have to accept change will happen,” says Linn. “Clients want to be able to change their minds.”
However, he points to the third terminal at Dubai International airport as an example of where design changes were managed without a dispute.
The project was originally scheduled to be completed in June 2007 but is now due to be finished before the end of October this year.
“Terminal three is reaching a successful conclusion and an amicable finish,” he says.
“It has run over time, there were design changes but we assisted our clients in managing the issues and everyone understood the big picture. A revised time schedule was agreed to complete the scheme.”
Ultimately, as the market matures, clients are becoming more open to sophisticated contract arrangements, such as partnering and open book contracting, to ensure projects are delivered on time and on budget, and, most importantly, that delays and problems are noticed and dealt with early on.
The wider introduction of mediation and dispute resolution systems is expected to come next. Mediators and dispute-resolution boards can be appointed at the start of a project to deal with issues as they arise.
But although common in other parts of the world, these have not often been used in the region.
The exception is the power sector, where contracts involving global firms such as Germany’s Siemens, France’s Alstom, the US’ GE and Japan’s Mitsui & Company often appoint dispute resolution boards to deal with issues throughout the lifetime of a project, in a bid to manage changes. This ultimately prevents the need for litigation or arbitration at the end of the scheme.
Once multi-million-dollar arbitration hearings begin to be heard in the DIFC and project managers and clients become aware of just how bad things could get, other sectors are likely to follow the power industry’s lead.