Following the news of Abu Dhabi’s $1bn Reem Mall being delayed by two years, Tom Duncan and Charles Pacey of Mayer Brown take a look at why project delays happen and how to mitigate for them
It has been reported that Abu Dhabi’s $1 billion Reem Mall has been delayed by two years to 2020, with design issues and delays in receiving approvals cited as the cause. There is always a risk of issues arising on large projects in the Middle East (and elsewhere), but this risk is becoming more prevalent in the second half of this decade. There are a number of reasons for this, and a number of ways to try to mitigate it.
1. Funding Gaps
As a result of the sustained slump in oil prices, state funds are under greater pressure and projects that were intended to be state-funded may end up being shelved unless alternative funding can be found. This alternative funding might in part come from the private sector, such as through a public-private partnership (PPP).
If this option is pursued, some delay is likely, but ensuring that the construction documents – when negotiated and agreed at the outset – are in a form acceptable to most lenders should enable revised funding structures and alternative lenders to be put in place without needing to renegotiate the existing documents.
This underlines the importance of the careful selection of internationally recognised forms of contract (for example, FIDIC) tailored to suit the needs of the project, and making sure that the construction documents are freely assignable by way of security among lenders.
2. Design Development
Difficulties encountered at the design development stage, particularly for high value and complex projects, are not peculiar to the Middle East. Nevertheless, given the high concentration of large projects in the Middle East, they can be one of the key reasons for project delay. On many contracts, the programme pressures exist from the start, but spending time at the very early stages of the project developing the design can avoid unexpected surprises during the construction phase and mitigate the risk of protracted disputes.
One option is the use of pre-construction services agreements, so as to involve the various stakeholders in the design process from an early stage to produce a design that is practically achievable within the constraints of the project budget and programme.
3. Changes in Law
As the construction industry in the Middle East matures, so too do the local laws in its constituent jurisdictions. This is particularly the case, for example, with respect to local laws relating to building standards and safety, which can change quickly. This can require complex changes to project design and implementation, leading to delays and disputes.
This risk can be mitigated if the parties make sure that responsibility for compliance with such changes in local law, and who should bear the cost and time implications of such compliance, is clearly allocated in advance and reflects a realistic appraisal of the likely impact of the change on the budget and programme.
Some changes which may have a relatively small impact are likely to be more appropriate risks for the contractor; others which materially increase the costs of performing the works and are outside of the contractor’s control are not. While negotiating away all risk at the outset may be perceived to be the optimal outcome, an unrealistic risk assignment often leads to relationships breaking down, threatening the delivery of the project.
4. Obtaining Statutory Approvals
Delays can occur to projects in attempting to obtain the necessary permissions and approvals required to commence the construction phase. Much is to be gained in recognising the Middle East as a series of culturally, administratively and legally distinct countries, rather than as a homogeneous bloc.
For international contractors not embedded in the local market, it is advisable to engage professionals from an early stage that are familiar with local customs and what is required to obtain the necessary permissions and approvals in the particular country where the construction project is taking place.
5. Conducting Disputes
Of course, delays do not only lead to disputes – disputes can be a cause of delay. When contracts are negotiated, thought needs to be given to the appropriate governing law and which court or tribunal will have jurisdiction over the dispute. If state entities are involved in a project then local law may be a requirement.
International contractors may prefer to use a governing law with which they are familiar; this may be acceptable to the owners, but even if it is not, the laws of a number of jurisdictions in the Middle East are clearly codified and provide protection for contracting parties. Indeed, they may be more favourable to contractors, given the principles of good faith that exist. Therefore, the more important question is likely to be who is going to decide the dispute.
The use of international arbitration remains the most favoured means for large projects in the region, and a number of arbitral institutions can be selected to oversee the dispute, with the ICC and LCIA remaining the most popular.
However, in the Gulf region the Dubai International Arbitration Centre is also an option, with rules which are generally in line with the other international bodies. The other advantage of arbitration is that awards are now generally enforceable across the region pursuant to the New York Convention.
Finally, the use of an interim dispute resolution mechanism can allow the temporary resolution of disputes so that projects can continue. Most internationally recognised contracts now include forms of interim dispute resolution, for example the Dispute Adjudication Board process in FIDIC.