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Tue 3 Sep 2019 12:04 PM

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Opinion: The shifting sands of construction in the Middle East

Average value of disputes in the in the Middle East revealed two interesting finding that show a change taking place in the construction market in the region

Opinion: The shifting sands of construction in the Middle East
The Middle East remains an attractive market for construction companies

A recent report by Arcadis (Global Construction Disputes Report, 2019) examined the state of construction in the Middle East.

Two important findings it highlighted was that in 2018 the average value of disputes in the region dropped to $57 million from $91 million in 2017.  It further found that the average length of time needed to resolve a dispute increased to 20 months, compared to 13.5 months in 2017.  This is despite the fact that the total volume of construction disputes was about the same in 2018 and 2017.

These two findings are interesting to study further because they demonstrate the current shift taking place in the construction market in the region.

Drop in the average value of disputes

The most likely reason for the drop in value of construction disputes could relate to the increased use by construction parties of FIDIC form contracts in the region.

The FIDIC process supports the early resolution of claims through a dispute adjudication board and one particular feature of this is that it is a prerequisite to a party commencing arbitration.

The resulting effect is that some disagreements do not progress to full-blown disputes, reducing the overall value of disputes that do. The increased use of the FIDIC process is a welcome development illustrating the maturity of construction parties to resolve disputes promptly and efficiently, removing the need to commence either litigation or arbitration.

Factors affecting the time to resolve disputes

There are a number of factors affecting why disputes in the region are now taking longer to resolve.

The availability and increased workload of tribunals (of which there is a limited pool of experts in the construction field) is one factor.  Other factors include the complexity of disputes and parties' conduct during the proceedings.  For instance, if there are increased applications for interim measures, this will draw out the process.

A number of parties are also known for deploying dilatory tactics to complicate and delay the resolution of disputes.  While there are effective ways of dealing with such dilatory tactics, they require the involvement of sophisticated dispute resolution lawyers.

A party's preference for a binding decision to resolve a dispute means it is more likely to refer claims to a formal dispute process such as arbitration proceedings, which will result in a binding award that is directly enforceable in the Middle East and in many jurisdictions around the globe.  However, this may sometimes take 2 years (or more) to obtain.

In addition, issues relating to payments and cash flow on projects also lead to disputes, and this is particularly apparent in times of low liquidity in the market, where issues of cash flow on the projects will impact on the employer's ability to pay the contractor.  This low liquidity has been partly created by the drop in oil prices that has continued since 2014, which has affected major Middle Eastern oil producing countries.

It is therefore not surprising that construction parties will attempt to claw back as much money as possible through claims and implement strategies to delay payment day, which has the consequent effect of increasing the time to resolve disputes.

Issues to consider when contracting in the Middle East

The Arcadis report outlines the following as the cause of disputes in the Middle East:

  1. Poorly drafted or incomplete and unsubstantiated claims;
  2. A failure to properly administer the contract
  3. Owner/contractor/subcontractor failing to understand and/or comply with its contractual obligations.

It is worth noting that points (1) and (3) are new to the list for 2018.

Contract management is therefore crucial to mitigating risks and reducing the number of disputes through early resolution under standard forms such as FIDIC should be considered.

However, other potential options to deal with disputes exist such as party-to-party negotiation, arbitration and mediation, which, as the Arcadis report highlights, are the most common in the Middle East.

It is always best and most cost effective for contractual parties to seek to resolve any dispute through negotiation. If such efforts are unsuccessful, the report rightly confirms that arbitration is the 'go to' alternative dispute resolution method.  This is not cheap but construction parties are attracted to a neutral forum within which they can obtain an arbitral award enforceable under the New York Convention.

With the exception of Yemen, Libya and Sudan, all jurisdictions in the Middle East are parties to the New York Convention. There are also two regional treaties which govern the enforcement of arbitration awards between member states: the Riyadh Arab Agreement for Judicial Cooperation 1983 and the GCC Convention for the Execution of Judgments, Delegations and Judicial Notifications 1996.

Adapt to protect investments

The Arcadis report has illustrated the shift that has been taking place in the Middle Eastern construction market.

Construction companies need to consider these changes and other potential issues and adapt to make sure their investments are successful or any disputes are resolved in the most effective manner.

Despite this, the Middle East remains an attractive market for construction companies and we expect this to continue.

Raid Abu-Manneh, Partner, Head of International Arbitration in London and global co-Head of International Arbitration (London); Alain Farhad, Partner and Head of International Arbitration (Dubai); Ali Auda, Associate (London), all at Mayer Brown

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