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20 Sep 2021

"Top tips" for the effective management of construction disputes in the Middle East

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The construction industry, within the Middle East, has seen a significant rise in both the value and volume of disputes that have arisen following the events of the past 18 months, which will continue to cause further repercussions within the market.

Construction disputes are well known to be particularly difficult to resolve due to the complex nature of both the legal and technical issues at play.  As such, we summarise in this briefing some 'top tips' that a party should bear in mind when managing disputes during the lifecycle of a construction project in an effort to shorten the resolution period as well as the costs associated with such disputes. 

Introduction

What are the common causes of construction disputes?

The COVID-19 pandemic continues to have a major impact on the construction industry in the Middle East. From workforce restrictions, increased health and safety requirements, claims for extensions of time and additional payment and the suspension of works, the pandemic has further strained industry profit margins as well as caused cash-flow difficulties and significant time and cost overruns. The mounting financial losses felt by various stakeholders within the industry has inevitably led to an upward trend in construction disputes in the GCC region. The challenging industry environment is highlighted by the recent insolvency of key industry players, the repercussions of which will significantly impact supply chains and the wider market.

For the purposes of avoiding disputes, it is essential for project management teams to identify and pre-empt any possible issues at the earliest opportunity in a project life cycle. 

Construction disputes may arise due to the following:

  • Delays to the progress of works;
  • Cash-flow issues and non-payment of certified sums; 
  • Quality of the construction;
  • Lack of understanding of contractual scope and obligations; 
  • Poor site conditions; and
  • Interpretation of contractual provisions.

During the project

Top tips to prevent disputes from arising

Compliance with contractual notification requirements 

  • If there is a delay to a project for which the contractor is not culpable, it is important for the contractor to comply with the notice provisions when issuing a notice under the contract in order to establish an entitlement to an extension of time and/or additional payment.
  • Most contracts stipulate how the notice should be issued and the prescribed time period in which it should be issued by. In some standard form contracts, such as FIDIC, failure to serve a delay notice or compensation notice in time may be fatal to establishing an entitlement to an extension of time and/or additional payment.

Mitigation

  • Contractors typically have a contractual duty to mitigate the delays on the project to ensure the extent of any delay is properly managed and carefully minimised.
  • Alternative working methods and innovative programming are reasonable steps that contractors may take for the purposes of mitigating any delay to the project.
  • Contractors should record in detail the mitigation measures it has adopted, particularly in circumstances where an extension of time and /or additional payment is sought from the employer.

Ensuring programmes are realistic and allow for possible delays/disruptions 

  • Having a detailed and realistic programme is important when mitigating and accommodating project risks, including delays and variations to the original scope of works. 
  • Often, the key elements of a project programme include realistic milestones and completion date, enough float to accommodate project risks and budgets management. Should these key elements not exist, the likeliness of a dispute arising is increased. 
  • Project managers should have a clear understanding of the specific risk events that could affect the project's success and how to proactively manage those. Appropriate budgets and monetary allowance for such project risks should be carefully assessed.

Record keeping

  • Detailed project record-keeping is essential throughout the lifecycle of the project for the purposes of substantiating any subsequent entitlement to an extension of time and/or additional payment and assist the Employer's Representative/Engineer when making its determinations of any claims under the contract. These records would also prove useful in the event of any subsequent formal dispute resolution proceedings.
  • The records would include: 
     
    -the baseline programmes together with the as-built programmes to form the basis of a robust delay analysis;
    -records detailing the status of the works at regular intervals;
    -records of the out of scope / additional works to be executed including the relevant materials and quantities together with details of any abortive works undertaken; and 
    -details of the amount of labour on site and the amount of output achieved in respect of the different work fronts throughout the lifecycle of the project.  

Settlement 

  • Where there is an issue in dispute on the project, a party should attempt to resolve such a dispute amicably by complying with the steps set out in the dispute resolution clause under the construction contract including any contractual notification requirements as mentioned above. 
  • Any settlement agreed between the parties should be recorded in a formal settlement agreement. We would strongly suggest that both parties seek legal advice in respect of the same.
  • It should be noted that the concept of 'Without Prejudice' communications is not recognised by many civil law jurisdictions, including the local "onshore" UAE courts and arbitrations seated in the mainland. Parties should therefore seek advice on this concept if they are unsure of how it may operate in practice, and prior to engaging in settlement discussions.

Alternative methods of dispute resolution

Most construction contracts have a series of steps that must be taken to resolve a dispute arising out of it, or in connection with the contract, before resulting in the commencement of arbitral or court proceedings. These may be expressed in mandatory or optional terms. 

When considering the mechanisms for dispute resolution, the parties should be guided by the costs and time that will be incurred, as well as the binding or non-binding nature of the applicable mechanism and whether it will result in a mutual resolution being reached.

Negotiation: The main advantage of negotiation is that parties will save substantial costs and time if they can resolve their dispute amicably between themselves, which is often why some dispute resolution clauses obligate the parties to negotiate for a specified period before resulting to arbitration.

Mediation: This is a negotiation facilitated by a neutral, third-party mediator (usually a senior lawyer or industry expert). While the mediator helps to facilitate a resolution, he/she does not make a decision on the dispute itself. Successful mediations usually result in the parties signing a settlement agreement "in the room" once the mediation has concluded.

Expert determination: This is a confidential procedure for the parties to submit their dispute to one or more experts who will make a determination on the matter, which, unless the parties agree otherwise, is binding. This mechanism is attractive for parties looking for a faster and less expensive way of resolving their dispute.

Arbitration: Arbitration is generally the most common mechanism for dispute resolution in the construction industry. It is a process for resolving disputes privately through the determination of an independent and neutral arbitration tribunal, who will issue a final and binding award. In the UAE, parties will usually opt for institutional arbitration, such as DIFC-LCIA or DIAC, as opposed to ad-hoc arbitration. 
 

Effective management of formal proceedings

Assembling your best team

  • It may be several years before a judgement or arbitral award is issued for a construction dispute and a party's employees will therefore incur a significant amount of time in assisting their lawyers with their case.
  • It is important for a party to assemble an internal team that had commercial involvement in the project for the purposes of assisting with the dispute, with organisation and communication being the driving factors, as well as a consideration into the current workload of each team member. 
  • Employees that were involved in the events that gave rise to the dispute may later leave the company, which can impact heavily on the factual circumstances of the case. A company should therefore prepare well in advance of an employee's departure to ensure that the matter is properly handed over.

Record keeping

  • It is important to keep records of all documentation made in connection with the dispute, including any key considerations and justifications of commercial actions/decisions and communications both internally and externally.
  • Any internal procedures should therefore be altered to ensure that such documentation is not removed from the company's internal files and is secured. Construction disputes are document heavy, which means that organisation and filing of the same is of paramount importance. 

Managing the budget 

  • We recommend that a costs budget is prepared at the start of any formal proceedings by setting out the estimated legal and expert costs in respect of each stage and ensuring that such costs are properly controlled and overseen to prevent any later surprises. 
  • The parties will often be under a duty to act efficiently so as to incur reasonable costs that are relative to the size and nature of the dispute. A costs budget will therefore assist a party in ensuring such an outcome is achieved.

Third party funding ("TPF")

  • This involves a party (sometimes referred to as a “litigation funder” or “arbitration funder”), who is not involved in the dispute, agreeing to fund some or all of a party’s legal costs in return for a proportion of any damages awarded and recovered by the funded party.
  • Generally, TPF will only be available to a claimant or a respondent with a counterclaim. The main benefit is that it is a convenient finance structure allowing funds that would otherwise be incurred in the arbitration to be allocated to parts of the business. 
  • There has been a growing appetite for TPF in the Middle East due to the rise in high-value disputes and changes to the enforcement landscape. There are however many factors influencing a funder's decision to fund a dispute. For more information, click here to view our article on 'Third party funding in international arbitration'. 

Potential factual witnesses

  • The use of factual witnesses should be considered early on so that those witnesses can make the necessary arrangements to be available in the time leading up to the filing of the witness statements and the hearing.
  • It is important to select a witness that knows the facts of the case and is suitable for testifying. Some considerations therefore include the language skills of the witness (where applicable), familiarity of the project, expression, experience and availability. Credibility and persuasiveness are also key factors that will assist in getting across a party's case.

Experts

  • Given the complex and technical nature of construction disputes, expert evidence is usually required.
  • In the local UAE courts, judges usually instruct an expert to investigate the matter and prepare a report. It is uncommon for parties to appoint their own experts and a court-appointed expert is used in most cases.
  • In other forums, such as arbitration or the DIFC Courts, parties usually appoint their own experts. 
  • It is important for an expert to be appointed as early as possible in order for a party to have a strong understanding of its prospects of success and so that the expert has ample time to review the relevant documentation and understand the claim. 

Conclusion

Our market leading dispute resolution team is on hand to assist parties with any construction disputes arising from the earliest stages of the Project and after completion, whether that results in settlement or an award/judgment being issued. We will help you ensure that there is a clear strategy from the beginning, which is suited to your particular objectives and needs. 
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KEY CONTACT

Nicholas Sharratt

Nicholas Sharratt
Partner

T:  +971 4407 3908 M:  +971 52 929 2265 Email Nicholas | Vcard Office:  Dubai

Michael Hartley

Michael Hartley
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T:  +971 4 407 3925 M:  Email Michael | Vcard Office:  Dubai

Caroline Hibberd

Caroline Hibberd
Senior associate

T:  +971 504 850 852 M:  Email Caroline | Vcard Office:  Dubai

Samantha Martin

Samantha Martin
Associate

T:  +971 4407 3940 M:  +971 50 808 9521 Email Samantha | Vcard Office:  Dubai