The legal community is probably the only professional group clearly growing in numbers in a slow summer for the GCC projects market.
The number of disputes in the sector has probably doubled since the start of 2009. This figure is expected to double again by the end of 2009. Some will be extraordinarily expensive and complex.
There are two main sources for the disputes that have got sectors of the GCC projects market by the throat: money and time. Money is the reason behind most, if not all, of the claims that have arisen in the past 12 months in Dubai.
Private property developers have been hit by the slump in demand for real estate since the summer of 2008. Unable to finance their projects through off-plan sales, they have also found there are no other sources of credit.
The developers stopped paying the builders, who in turn stopped paying the subcontractors and other suppliers. Dubai government-related entities, an undefined group of businesses that probably includes Dubai Holding subsidiaries and Nakheel, face similar problems.
Their projects include some of the world’s most ambitious developments. The money problems elsewhere in the region are less intense. Yet, private sector developers in all GCC states have been obliged to slow or even halt construction work.
Faced by a sudden lack of money, suppliers have no easy options. The systems for enforcing claims against business in the Gulf are generally untested. No lawyer can, with confidence, forecast the outcome of a court case against a debtor. Arbitration is time-consuming and expensive. But simply waiting for the money to come is increasingly unappetising. Amounts owed to construction companies in Dubai alone could amount to at least $2bn. Some of it is overdue by more than six months and that hurts.
The best advice for suppliers up until now has been to wait and see. The cost and uncertainties associated with litigation are enormous. But patience is declining. Some suppliers are beginning to conclude they have no future in the region and might as well formalise their claims. That is why litigators are heading to the Gulf this season.
Time is the second factor. As a growing number of clients and suppliers are beginning to recognise, trying to save time in a major project is the greatest of all false economies. Real estate developers took money from investors on the promise of the early delivery of a property. They appointed contractors before final designs were completed.
Contractors failed to complete even the most rudimentary due diligence before signing deals. Rushing to complete projects, construction businesses cut corners and spent more than planned. It is a depressingly familiar pattern that has led to a growing number of buildings that are incomplete, inefficient or both. Blaming each other for the failures, clients and suppliers are also preparing to go legal in unprecedented numbers.
The advice for those caught up in the nightmare of a failing project is to take a step back and spend time trying to settle disputes amicably. As MEED’s dispute resolution conference in Dubai on 15-16 June was told, the key to the successful completion of a project is a good relationship between the client and supplier. This is more than a matter of money or price.
The optimists say the sharp increase in construction contract disputes is delivering a dose of reality to the GCC construction market. The long-term results could even be beneficial. But this is unlikely to be of much comfort to those having to deal today with the expensive consequences of the errors in the recent past.