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Wed 24 Nov 2010 12:00 AM

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Security of payment

Hill International delay claims managing consultant Dr Jay Palmos looks at the issue of project delays due to failure to pay contractors and suppliers for completed work.

Security of payment

To date, both the public and private sector’s attempts to resolve
this problem have failed. Security of Payment (SOP) style legislation has successfully
solved this issue in other jurisdictions, and should be considered in Dubai before we lose the best
sub-contractors and suppliers to other more reliably paying regions. Just last month,
Laing O’Rourke closed its Middle East division
of 20 000. The loss of this and other superior-grade contractors signifies that
the presently available source of high-quality contractors has diminished.

SOP legislation is an alternative dispute resolution method which
originated in the UK
with the introduction of the Housing and Construction Regeneration Act 1996. It
was an immediate success, virtually eliminating payment-related delays, and similar
legislation was quickly enacted in numerous other Commonwealth jurisdictions, including
Australia, New Zealand and Ireland. In essence, this legislation
establishes a pseudo-judicial body whose sole task is to provide a swift interim
resolution to construction payment disputes and keep monies flowing throughout the

Claims are made to this body by an unpaid party to a construction
contract along with an application fee. A construction contract, within the context
of the Act, is an agreement to supplying goods or services to a construction project.
Therefore contractors, sub-contractors, consultants, architects and others who supply
services to the industry can pursue a claim under SOP. The costs associated with
an application depend upon the complexity of the claim.

However, they are a fraction of the costs associated with traditional
construction arbitration/litigation proceedings, which commonly run into the millions
of dollars. A simple unpaid material invoice may cost as little as AUD$250 (AED900),
whereas a complicated contractual claim would be significantly more. There is no
jurisdictional maximum value of a claim under this legislation, and therefore claims
can be as large or small as the value of outstanding payments. Notwithstanding the
value of the amount in controversy, a final decision is usually returned to the
parties within 20 working days of the filing the application for adjudication.

The adjudication decision is legally binding upon both parties,
even though it is only an interim solution. The term ‘interim’ in this context means
that either party may appeal the adjudicator’s decision to a court of competent
jurisdiction if they feel that it is in error. However, irrespective of any subsequent
legal proceedings, which may take years to finally resolve, payment to the contractor
must be made immediately upon the adjudication, thereby ensuring project cash flow.

In an effort to shore up the construction sector immediately
after the global financial crisis (GFC), the government of Dubai instituted the Tayseer scheme. This scheme
provides many similar benefits to those offered by SOP legislation, including guarantees
that suppliers of materials are paid in a timely manner. However, the purpose of
Tayseer is to inject government-backed liquidity into the Dubai market as a means of ensuring that important
projects continue rather than addressing the overarching problem. For the vast majority
of contractors and suppliers of projects which do not qualify for the scheme, this
legislation is of no benefit.

Traditional approaches have been equally unsuccessful. Presently,
those with foresight utilise letters of credit, strengthened contractual clauses
and early dispute resolution via dispute review boards in an attempt to reduce delays
associated with payment defaults. However, these measures have had very limited
success in Dubai.
Letters of credit have not been adopted by the industry due to the sophistication
required to deal with these financial transactions or the risks associated with
unfamiliar international banking regulations.

Specialised contract clauses3 have been unsuccessful in ensuring
timely payment because a recalcitrant opponent can force expensive and time-consuming
arbitration or litigation for enforcement, thereby defeating the benefit. Dispute
review boards have been tested in the UAE, most notably by Abu Dhabi’s Aldar Properties, in the early phases
of the Al Raha Beach Development, but failed to become a standard remedy4. Finally,
the time and expense of any form of arbitration or litigation often dwarves the
amount in controversy, and those suffering liquidity constraints rarely have the
financial resources required to undertake such an expensive and time consuming endeavour.

Studies show that the MENA region suffers significantly from
owners’ financial problems and subsequent issues associated with failure to pay
their contractors. These problems are ranked as the single most frequent cause of
delay to construction projects in Jordan,
Egypt, Saudi Arabia and Lebanon,
the second most common in Kuwait
and Turkey,
and the fourth most common in the UAE. However, it should be noted that the UAE
study was undertaken in 2006, and it is likely that, were the data collected today,
the issue would probably rank with the other MENA region countries.

His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President
and Prime Minister of the UAE and Ruler of Dubai, has said all projects that have
started will go ahead, although some may be delayed for six months to a year.7 This
is Dubai’s future
being built today. Loss of the best contractors and tradesmen because of payment
issues will be the legacy of failure to implement a solution to this important problem.
While many countries could benefit from a SOP-type system, none will benefit as
much as Dubai.

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Aziz karim 9 years ago

The article summarizes the problems being faced, but no suggested solutions or ideas are given to help professionals in their daily business related to construction disputes, due to delay in payments...
Aziz karim, FRICS