Contract disputes rise despite improved legal avenues

25 August 2015
Average time to resolve construction contract disputes has increased; arbitration still the preferred form of contract resolution over court actions

Across the region there has been a steady increase in contract disputes in the construction industry, which rose 87 per cent year-on-year to reach $76.7m in 2014, according to a report published by Dutch firm Arcadis.

While this is a significant rise from the $40.9m recorded in 2013, it is still far short of the $112.5m of disputes recorded in 2011, as the shock of the global financial crisis continued to affect the region’s real estate markets.

According to the report, the average time taken to resolve disputes in the region rose to 15.1 months in 2014, from just under 12 months in 2013. The increasing length of disputes was not confined to the Middle East, with other regions of the world also recording a lengthening of the resolution process. The exception was Asia, where the average dispute duration decreased by two months.

Key fact

The average time taken to resolve disputes in the region rose to 15.1 months in 2014, from just under 12 months in 2013

Source: Arcadis

The length and frequency of disputes will worry governments trying to push through large-scale infrastructure, real estate and transport schemes ahead of major events, such as Dubai’s Expo 2020, Qatar’s 2022 football World Cup, and urban redevelopments in Saudi Arabia.

Arcadis’ report found most disputes in the region stem from a failure to properly administer contracts and claims, as well as issues surrounding project managers and engineering firms.

The fall of oil prices over the past year has also meant the budgets of many state-backed schemes are becoming increasingly tight, with the procurement process getting much more competitive in recent months as contractors and clients look to better manage projects.

No room for ambiguity

Oliver Johnson, a claims consultant at US-based Hill International, says specificity is key to sound contracts.

“When administering the contract, [firms] need to make sure of no ambiguity,” he says. “I see a lot of bespoke contracts where it is possible the contract administrator has simply taken amendments from previous projects and imported them into his own, giving little regard to the correct application for the contract at hand.

“This has the potential to cause ambiguity and often leaving contracts reliant on the precedence of clauses, should a dispute arise.”

Companies have been pricing jobs in ways that put pressure on the projects, and from there we see disputes

Robert Blundell, Holman Fenwick Willan

Market conditions have also played a role in the increasing number of contract disputes. As oil prices continue to put pressure on government and private schemes across the region, the contractor market is finding itself setting low prices while taking advantage of increased work off the back of major regional events, infrastructure and transport schemes.

“As a result of a longer-term downturn, companies have been pricing jobs in ways that put pressure on the projects, and from there we see disputes. We end up in a funny situation where the market is picking up but companies have priced things so low that often contracts are drafted with an element of dispute ready,” says Robert Blundell, partner at UK-based law firm Holman Fenwick Willan.

“Contractors who have been desperate for too long have been pricing too low. It almost becomes a game, because many clients know that this is what the contractor market is doing at the moment to make up for lost business.”

Contract templates

The forms of contract typically used in the region do little to alleviate that pressure. Clients frequently use amended templates prepared by bodies such as the International Federation of Consulting Engineers (Fidic) that reallocate risks and make it difficult for problems to be resolved, should they occur.

Fidic plans to update its contracts to facilitate a more collaborative relationship between clients and contractors. The expectation is that the proposed amendments will be completed in 2016, but Fidic relies on a team of volunteer consultants and lawyers to revise its contracts and no fixed deadline is in place.

Top five causes of construction contract disputes in the Middle East
2014 rankCause of dispute2013 rank
1A failure to properly administer the contract1
2Poorly drafted or incomplete and unsubstantiated claimsNew
3A biased project manager or engineerNew
4 =Failure to make interim awards on extensions of time and compensationNew
4 =An unrealistic contract completion date being defined at tender stage5
Source: Arcadis

There have been calls for more localised contract templates and Fidic-like guidelines. However, experts insist contracts should be drafted with the philosophy that no two contracts are ever the same. The success of a project can rely on company lawyers’ experiences working in the area and knowing how to apportion the potential risks accordingly.

“I believe there is little use for contract providers such as Fidic to produce locally tailored contracts because either way, each project and each contract will require its own amendments. It is down to your contract administrator to ensure a robust contract is drafted,” says Johnson.

Nevertheless, the move to update the allocation of risk and promote a more proactive management of contracts will be particularly welcome by contractors working in the region who are frequently expected to accept extra risks from amended forms of contract.

Language and culture

The language used in claims notifications and contracts can also increase the number of disputes.

“From my experience, and particularly evident in this region, companies often use subjective, emotive language within correspondence, notifications and claims preparation,” says Johnson. “It is important that despite trying to portray their position as best as possible, an objective approach is essential, detailing their contractual entitlement to the dispute at hand, and not getting swept away with unnecessary rhetoric that could in fact tarnish relationships between the parties.”

Cultural sensitivities have meant that a large number of contract and construction disputes find themselves being resolved through arbitration, with local courts and those in Dubai International Financial Centre (DIFC) being considered as secondary options.

“Despite the DIFC being available to use for a while, it is possible that on large-scale, complex projects, the DIFC courts might be considered untested by the parties, whether being so or not,” says Johnson. “Furthermore, arbitration remains attractive not only because awards are enforceable internationally, but because it is a private dispute resolution process so, in theory, there is no publicity, unlike the court actions, and reputations can be protected.”

Arbitration preference

The DIFC’s popularity is set to rise as its courts continue to witness an influx of credible judges conducting business under English law. Despite this, Blundell expects most companies will continue to prefer arbitration.

“When companies are working with government entities there is no doubt they will be sceptical of pursing a dispute through the public procedures in court, for, among the obvious reasons, obtaining future work,” says Johnson.

“Companies are often reluctant to issue claims in an attempt to maintain reputations and relationships. However, when done so applying the correct methodology, expertise and presentation, the recipient can often be receptive to resolve the disputes amicably.”

Moreover, it is becoming evident that many of the large procurement bodies in the region, which are dominated by the oil and gas sector, are becoming shrewder in the way they issue contracts.

“They are starting to understand that [appointing] the lowest bidders often means that the contract will be disputed through arbitration at some point. They are much better at managing these things,” says Blundell.

Many within the industry have told MEED that an improved talent pool means either disputes are better managed or contracts are drafted in much clearer ways. This, in turn, leaving room for smooth arbitration processes and easier out-of-court settlements. Despite this, disputes are still on the rise.

As the region starts witnessing a surge in major state contracts surrounding major events and city developments, construction will prove difficult for some contractors, who may find previous complex disputes have strained relationships and reputations with some of the region’s biggest government bodies.

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