Court in a trap

As construction disputes rise in markets such as the UAE, complex issues surrounding the structure of the legal and contractual systems are starting to emerge.

A downturn in any market often sees the equivalent upturn in business for lawyers and legal representation. This has been clearly demonstrated in the construction market in the GCC, particularly in places such as Dubai that within two years saw a market peak reduced to a slump.

As best-laid project plans dissolve into a drought in liquidity and a pile of bills, the growth in legal services in the areas of dispute resolution, liability and payment restructuring has grown substantially. Bi-annual statistics from the Dubai International Arbitration Centre found that construction related disputes made up 40 of 186 cases for the first half of 2010.

Stephen Hunt, regional head of construction and engineering at law firm Al Tamimi, told CW this summer that the company had seen a great increase in disputes in Abu Dhabi, and at the beginning of the year made two appointments to its office in the UAE capital.

He says the company is keen to work with contractors – having previously been associated mainly with developers – including those from foreign shores. He added that as the market shifted away from contractors to developers, new norms to contractual agreements will emerge.

The construction industry is facing a “grave challenge in the phenomenon of renegotiating of contracts in difficult circumstances”, according to Kenneth Reisenfeld, a partner in Patton Boggs. Speaking at the Construction Week Conference, Reisenfeld outlined the dramatic pressure that a financial downturn had placed on the relationship between developers and contractors, “with commercial prices down 45% and owners refusing to pay unless contractors take a significant discount”.

He cited research from Proleads, the construction research company, which found 240 projects that had been put on hold. There are additional complications for large scale construction projects, he added, and three key issues make the process of bringing parties to a consensus: the “many ties of commercial relations; a lack of transparency, and a transient workforce”.

Law firms and their clients in Dubai face additional challenges due to the multitude of specific jurisdictions, including the emirate’s civil court and the business-linked Dubai International Financial Centre courts. Lawyers add that clients whose contracts comply with the standards of the International Federation of Consulting Engineers (FIDIC) will face a shock in Dubai: FIDIC contracts are not recognised in the indigenous courts. Further, international contractors may encounter further disadvantages, such as mounting costs from every document requiring a translation from Arabic to English.

However, Reisenfeld added that the UAE, as well as Qatar, were making strides with the use of regional arbitration – one type of procedures that falls under the category of alternative dispute resolution.

Arbitration institutions include the Dubai International Arbitration Centre, the Arbitration Centre associated with the Qatar Chamber of Commerce, and the Abu Dhabi Commission of Conciliation and Arbitration.

"There is a move towards regional arbitration centres being used more and more, with the Dubai and Qatar centres gaining prominence.”

He added that these institutions have “an element of uncertainty”, as they are new and it is unknown as they are relatively new, and it is unsure how the courts will deal with them. However, research from PricewaterhouseCoopers that surveyed executives, and found 86% of respondents were very satisfied with the arbitration, he added.

In a tangle of legal structures in the region, the legal panel at the conference agreed that an increased attention to the initial contract, including where specific clauses will need to be inserted. Steve Garbe, contracts and commercial manager at Faithfull & Gould, said that early discussion around projects and clauses “introduces the problem before it occurs”.

This early analysis is also crucial for payment, whereby greater thoroughness “benefits both parties – and can give certainty to the employer, in terms of cost, and contractors, in terms of income”.

Escrow accounts – where payment between developer and contractor is held in an independent account, and paid to the latter at agreed intervals – will be a key part of future business relationships between developers and contractors to help reduce payment disputes, they added.

“If you look at payments, you will see that the problem here is not the same in Dubai,” said Mohammed Albow, legal counsel at National Holdings.

“In Dubai you have the Real Estate Regulatory Authority (RERA) managing the payments from the escrow account in accordance with the clauses of the contract. So, if a contractor needs to meet a certain stage of construction, and they meet that, then they are paid for that. Abu Dhabi needs the equivalent.”

Paul Taylor, a partner at HBJ Gateley Wareing and moderator of the panel, added that some projects had suffered “that were without escrow accounts.