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Thu 11 Jul 2019 02:12 PM

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Liquidity issues fuelling construction disputes in Gulf

Value of Middle East disputes in 2018 down 37% from previous year to $56.7m - report

Liquidity issues fuelling construction disputes in Gulf

A lack of liquidity in the market could trigger substantive disputes across the construction industry, according to Andrew Mackenzie, head of international arbitration (UAE), Baker Mackenzie Habib Al Mulla.

Mackenzie told Arabian Business the lack of liquidity is a ‘significant issue’ in the industry at present, which in turn is driving an increase in disputes.

He said: “Large scale projects are finishing and payments/outstanding claims are falling due. Similar to 2009 and the dispute cycle of 2011/2012, the last few months have seen a marked increase in bond calls across the region. This invariably triggers substantive disputes, as once an attachment (freezing order preventing the call) is granted by the court over the bond, the successful party must commence substantive proceedings within eight days.”

Euan Lloyd, head of construction at Al Tamimi & Company, agreed that liquidity issues were an increasing concern, driven by the fact that it can be difficult to get funding from the banks. However, he said: “Another thing is the demand for construction projects is not as strong as it used to be in terms of residential developments and, in particular, off plan sales. There hasn’t been that cash coming through from off plan buyers.”

“A further economic issue is because the market is competitive, there are a lot of contractors putting down low prices, maybe under-pricing jobs, in order to fill their order book. They’re taking a short-term approach rather than long-term and that can cause problems,” he added.

According to the ninth edition of Arcadis’ Global Construction Disputes report, after two years of seeing faster resolution, in 2018 the average time spent in resolving construction disputes reached a nine-year high of 20 months from 13.5 months the previous year. This was blamed on low liquidity in the market, resulting in delays in paying the disputed amounts.

The report also revealed the average dispute value in 2018 decreased to $56.7 million from $91m in 2017. And it remains almost double the global average ($33m).

Mackenzie said disputes at large infrastructure projects had ‘come to an end’ to a degree, across the Middle East, although he highlighted Kuwait and Saudi Arabia as possible areas where there may be issues in the future.

He said: “Kuwait in the last year has closed a number of large scale infrastructure projects. With projects now closing out, we are now waiting on possible disputes there. This is the same in Saudi Arabia but obviously on a much larger scale.”

Poorly drafted or incomplete and unsubstantiated claims took the top spot in the report as the new most common reason for disputes in the region.

Another new entrant in the top three causes for disputes was owner/contractor/subcontractor failing to understand and/or comply with its contractual obligations, which came in third after failure to properly administer the contract, a cause that’s been in the top three since 2016.

Shawkat Abbas, head of Quantum Contract Solutions, Arcadis Middle East, said: “Poorly drafted or incomplete and unsubstantiated claims, the top common cause for disputes, is telling us that claimants must stick to an evidence-based approach if they want to reach a satisfactory conclusion. Combined with the other two common dispute causes, the industry is confirming the importance of complete understanding of contract administration and claims fundamentals.”

Party-to-party negotiation and arbitration remained as the two most preferred methods of resolving disputes. The report also showed that mediation is returning as a common method of alternative dispute resolution in the Middle East.

Lloyd said he was witnessing a growing trend for resolution before arbitration.

“Disputes do happen but what I’m seeing in an advisory capacity is, you’ve got all the different stakeholders and you explain to them all their options, other than to go to court and arbitration. The desire is more prevalent from everyone to get stuff resolved quickly and cheaply,” he said.

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