The cost of construction disputes in the Middle East

Earlier this year, global design consultancy firm Arcadis issued its Global Construction Disputes Report. The report has generated discussion in the region, noting that the Middle East now heads the list for the average value of disputes ($82m), swapping places with Asia ($67m). While in this article I offer some observations on the figures, I had no involvement in their collation.

It is to the credit of those who conduct dispute resolution in the Middle East that, on these figures, they do not head the list so far as the average length of dispute is concerned. In that regard, the average period taken between the formalisation of a dispute under the contract and the time of settlement or conclusion of the hearing, the Middle East ranks third of the five regions identified, the balance of which are North America, the UK and Continental Europe. With an average of 15.2 months, the resolution of disputes is significantly faster than in Asia (19.5 months) and beats the stated global average of 15.5 months.

Allied with discussion about the increase in value of disputes, it has been suggested that the cost of resolving those disputes is similarly increasing. This article considers those issues and offers suggestions as to why this might be the case.

The Increased Value of Disputes

There are many factors which contribute to determining the size of a dispute. The most obvious are the size and nature of the project. All things being equal, parties are less likely to generate a $50m dispute on a $10m project than on a $1bn project. When one is considering major projects, the Middle East is rightly admired for the engineering and architectural prowess evident in so many of the projects with which readers will be familiar.

While larger value projects are more likely to generate disputes of a significant value, this is of course only one of the driving factors. Given that a dispute, at its most basic level, is a failure to agree, this highlights the importance of the relationship between the parties. When considering construction and engineering disputes, it must be recognised that any large project has a number of stakeholders. Beyond the employer and the contractor, there are subcontractors for work and materials and supply chains. In addition to those charged with building the project, there are those responsible for its design and supervision. Standing behind all of this are those providing the finance needed to turn aspirations into concrete reality.

Whilst attempts are frequently made to combine the various contributing elements into fewer responsible parties, whether by design and build contracts, PFI schemes or EPC contracts or otherwise, the nature of the individual disciplines and their necessity to satisfactory completion of the project remains.

The global survey identified failure to properly administer the contract as the most common cause of disputes in the areas surveyed. This ranking was unchanged from the previous year. Those who conduct dispute resolution in the Middle East will not be surprised to see contract administration looming large as a cause of dispute.

There are a number of reasons for this. However, one aspect of the region is the relationship which often exists between those administering a contract and the employer who pays their fees. It is frequently argued in arbitrations concerning projects in the Middle East that the consultant team administering the contract did not act fairly and independently as between the employer and others, usually the contractor.

In other regions, particularly those where common law has an influence, arbitrators and courts tend to consider such allegations at best tangential to the central issue and at worst little more than an attempt to stir sympathy in the minds of those hearing the dispute. The reason for such an approach is that the ultimate question for the tribunal is one of resolving the proper rights and entitlements of the parties before it.

That decision has been placed by the parties in the hands of their chosen tribunal and, to a large extent, the independence or otherwise of those administering the contract is very much a secondary condition to deciding the issue of entitlement.

In the Middle East, parties frequently have recourse to criticisms of those administering the contract, not just for any perceived tactical benefit in arousing sympathy in the tribunal as to how they were treated, but also with a view to specific relief.

The concepts of good faith and mutuality of obligations, which are of such importance in the codified legal structure in the region, frequently provide a contractor with an avenue of recovery that in other legal systems might be denied.

While figures are not provided for the comparative average cost of disputes, there is clearly a relationship between cost and the length a dispute takes to be resolved. On analysis and in my experience, people should be slow to criticise those charged with resolving disputes in the Middle East for the costs of such resolution. Again, there are a number of reasons for that view. Most obviously, if it is accepted that, all other things being equal, large value disputes on average take longer to resolve than small value disputes, the Middle East has a very good story to tell.

It has the largest disputes but, as noted above, facilitates the resolution of those disputes in a shorter period than other regions, indeed even better the average length of all the regions considered by the aforementioned report.

However, one must be careful about drawing too much comfort from headline figures which are, by their nature, a combination of many inputs. First, the fact that a dispute is related to a major project in the Middle East does not necessarily mean that the resolution of that dispute will take place there or, if so, that regional law or procedure will invariably apply.

As has been said on many occasions, the contract is the law of the parties and it is for them to specify applicable substantive and procedural law as well as the seat of any dispute resolution process.

In those circumstances, it is perhaps more helpful to look at things which contribute to the cost of resolving disputes in the region, in addition to the inevitable cost consequence of high value disputes with the numerous stakeholders to which I have already referred.

It is again to the region’s credit that it recognises the concerns parties have – that prosecuting a dispute resolution process may well impose particular procedural requirements which, if not met, could render a hard-won award a nullity. This article is not the place to discuss this issue in detail or to highlight the work of the DIFC Court and similar institutions in addressing such concerns. However there remains a perceived need for everyone involved in the formal resolution process to make sure material steps, in particular evidence gathering, are undertaken with all parties on the ground in the region, which has the very real potential to add to costs.

Another area which experience suggests is a particular cause of concern in construction and engineering disputes is the inability to resolve issues by sample. The attraction of taking sample items to reflect a far greater number of similar disputes on a large project is obvious. However, doing so runs the risk of challenge on the basis that any resolution of the totality based on sample is unenforceable.

Again, while perceptions differ, as do views on the merits of such an argument, what cannot be denied is that it remains a real concern. In turn this, naturally, leads to a disinclination in any dispute resolution tribunal to adopt a course that might ultimately prove a well-intentioned but fruitless shortcut.

Further, given the nature and extent of disputes in the Middle East, it has a clear attraction to those providing dispute resolution services. As with other dispute resolution centres, those service providers come from all over the world. Nevertheless, too often a tribunal has insufficient experience or lacks proper assistance as to the operation of the applicable legal codes. It remains common for disputing parties to be directed to provide specific expert evidence on applicable law.

Such directions, by their nature, invite cross-examination and re-examination. Given the numerous issues of law which any significant dispute entails, this has the potential to add significantly to the length of any formal dispute resolution hearing and to costs due to the requirement for additional experts. Thankfully, the market quickly identifies those with the necessary experience required to prosecute and determine significant construction disputes, in contrast to those who merely profess such expertise.

In conclusion, the resolution of engineering and construction disputes in the Middle East faces many of the same challenges as in all major regions. The vision and foresight of those charged with delivering world recognised architectural engineering and infrastructure projects carry with them the seeds of significant value disputes.

Further, the adoption of often innovative and ground-breaking techniques has the potential for vigorous expert debate. It is to the credit of those responsible for providing dispute resolution services that the biggest disputes do not result in the longest dispute resolution process.

The region, like every international arbitration centre, has its supporters and detractors. However, what the Middle East can be particularly proud of is that the nature of the projects is such that it will continue to attract the brightest and best worldwide to deliver those projects. Where disputes need independent resolution, their clients can be assured that a similar level of advice and representation exists to assist that resolution.


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