• The value of construction disputes in the Middle East increased by 87 per cent year-on-year
  • The International Federation of Consulting Engineers (Fidic) plans to update its contracts over the next 18 months to facilitate a more collaborative approach between clients and contractors
  • To date, the unfair allocation of risk from the contractors’ point of view has been driven by clients seeking certainty

As the region rushes to deliver billions of dollars-worth of infrastructure ahead of major events with fixed deadlines, such as the Dubai Expo in 2020 and the Qatar World Cup in 2022, the pressure on construction companies to complete those projects will be immense.

The forms of contract typically used in the region do little to alleviate that pressure. Clients frequently use amended forms of contract 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.

The value of construction disputes in the Middle East increased by 87 per cent year-on-year to reach $76.7m in 2014, according to a report published by Dutch firm Arcadis.

The good news is some relief may be on the way.

Fidic plans to update its contracts over the next 18 months to facilitate a more collaborative approach between clients and contractors. The expectation is that the proposed amendments will be completed in 2016 – Fidic relies on a team of volunteer consultants and lawyers to revise the contracts and no fixed deadline is in place.

“We have got hard projects on the horizon and Fidic saying it will look at standard terms and how to make them proactive in managing risks,” says Jed Savager, partner at the UK’s Pinsent Masons. “In the Middle East, traditionally, there has been a hard allocation of risk, so with the amendment of Fidic forms there might be the opportunity for a bit of a sea change here to follow more wide project management approaches that we are seeing elsewhere.”

The move to update the allocation of risk and more proactive management of contracts will be particularly welcome by contractors working in the Middle East that are frequently expected to accept extra risks from amended forms of contract.

“There is a belief in the construction industry that contracts can allocate risk and parties can get on and build to the contract, and it will all be sorted out at end because the contract will save them,” says Will Marshall, senior associate at Pinsent Masons. “The problem is that with construction projects, it is very difficult to predict the risks, and when they occur it is usually more than one party that has to come up with the solution. The contract may allocate risk to the contractor, but it is very rare for the contractor to have total control and manage and facilitate the solution on its own.“

To date, the unfair allocation of risk from the contractors’ point of view has been driven by clients seeking certainty. “What drives the allocation of risk is a desire from procurers or employers for certainty to the [furthest] extent that is possible, so there is a desire to require the contractor to deliver exactly what is asked for the price and employers attempt to achieve that by allocating much of the risk to the contractor,” says Marshall. “The assumption is that the contractor is the expert and ought to be able to foresee the risks as and when they arise and they have the opportunity to price those risks when they bid for the project. That is what the employers effectively want to be buying, what they expect to be getting. And you see that significant transfer of risk.”

The transfer of risk means the opportunity to avoid dispute is stymied, and the updated forms of Fidic contract are expected to give more latitude to resolving issues before they develop into major problems.

“At the moment there are harsh notice provisions in the Fidic suite and because there is a very firm date for notifying claims or potential claims, you often get the employer adopting quite a rigid approach; ‘you clearly haven’t given notice so we are not obliged to consider your claims any further’,” says Savager. “That sort of approach can quite quickly on big projects lead to an entrenched position, whereas if you had slightly softer drafting around the implications of failure to give notice, a more middle-of-the-road approach may be adopted, rather than at the moment where you have a hard allocation of risk you don’t have the opportunity to get into that dialogue.”

If a softer approach is adopted by clients in the region it could resolve some of the tension building on major projects as they rush to be completed. Some will undoubtedly expect the updated forms of contract to have little impact as clients either ignore them or continue to make amendments reallocating risks.

Nevertheless, Marshall still remains confident there is an opportunity for change: “Our view is that hopefully there will be a catalyst to reassess whether things are being procured in most efficient way and the new Fidic suite might be the catalyst that could lead to that change or at least to a reconsideration of how we go about things in the Middle East.”

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