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Contractual lessons for the Middle East construction industry after the 2008 crisis

Value of regional disputes rose by 88% in 2015

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After the 2008 global crisis sparked high-value disputes over stalled and cancelled projects in the Middle East, caution right from the contractual phase has been the only way forward. Seven years later, despite paying attention to the devil in the detail, disputes are touching uncomfortable levels once again. The Global Construction Disputes Report 2015 by Arcadis indicates that the Middle East has seen disputes rise 88%, from $40.9 million in 2013 to $76.7 million in 2014.

In terms of value, the UAE stood out, recording disputes in the millions of dollars. Saudi Arabia also gained momentum, but in terms of increase in the number of disputes, it was Qatar that caught the eye.

Claims and legal experts have long stressed that most disputes arise from a lack of clearly defined deliverables and duties. One way of clearing the fog is through a clearly defined contract.

“We normally don’t get involved with disputes between consultants and developers, and focus instead on the contractors and developers, because that’s where the disputes generally are,” declares Allon Hill, partner at EC Harris. “What we’ve done is identify the five main causes for dispute in this region, the biggest and number one cause being failure to administer the contract.”

“Early on, clients are happy to invest in resources such as ourselves for pre-contractual advice. But when that phase is over and procurements have finished, nomination of a contractor is done and a project has gone live, the investment to administer those contracts doesn’t exist as much as it should. Developers then try to make do with administering contracts, which ultimately fails nearly on all instances,” he says.

Hill highlights that failure to properly administer a contract is an issue that extends to consultants as well. “With consultants, it goes back to the quality of the document again, the contractual agreement that the consultant is under and whether they themselves as a consultant have administered their own contract correctly with the ultimate client. The professional agreement or services agreement with a consultant must be administered with the same integrity as a contractor does.”

At the other end of the table, David Merritt, senior vice president and managing director of Middle East and Africa at Hill International, gives another two reasons. In his opinion, the rise in disputes can also be attributed to the non-payment or severely delayed payment of fees, and disputes over drawings and designs that lead to variations in jobs.

“There’s pressure to get started on-site here, so a lot of developers sell projects off-plan. The project is sometimes started on just a conceptual design, which isn’t uncommon, and then the consultant is brought on board later, which is problematic. Normally, when architects get involved at the initial stage, they come out with an outline design or a conceptual design and plan cost based on that. It all depends on what’s driving a developer’s priorities, which is normally quality, price and time. Time is more often given greater preference, and as a result quality suffers.”

From a legal standpoint, Saif Al Shamsi, founder of The Legal Group, agrees that while disputes involving consultants are minimal, they are mostly due to non-payment or late payment of fees. He also voices a few strong views of his own.

“Other factors that might lead to a dispute is the misinterpretation of cost, which is normally controlled during tendering. Another thing is the consultant should allow himself enough time to work on the design, because in many cases the consultant becomes very ambitious and wants to finish the design sooner than it normally takes, and that could pose a problem at a later stage.”

Al Shamsi points out that one way to tackle the failure to administer a contract is to engage an independent and fair cost consulting firm. “During tendering, it’s always better to bring on board an independent cost consultant to prepare the tender and the condition of contract.”

“Cost consultation is not often the consultant’s field, so it is better to get a cost consultant on board early on so that he can prepare the best conditions for the contract and the best documents. Since a cost consultant is required to be present pre- and post-contract, it would be best to keep them in the loop while administering a contract as well.”

Clearly, tackling problems at the contractual phase and addressing unspecified administration, and proper cost management can minimise dispute cases. But what are the big mistakes a consultant makes while negotiating a contract in the first place?

Hill says, “The two big errors we’ve noticed is setting unrealistic time scales for the start and end dates for a projects. We’re also seeing adverse commercial terms being signed by both parties that aren’t workable.”

“The commercial terms cover payment obligation and notices under the contract. What we don’t see in this region is any standard conditions of contract anymore. They are generally bespoke conditions from the employer’s side and they are adverse towards other parties, whether it is the consultant or contractor or vendor. Because of the market and the crisis, we are still seeing contractors, vendors and consultants signing up to those conditions and not seeking independent advice externally on their own.”

In Al Shamsi’s opinion, paying closer attention to even a few microscopic terms can go a long way towards fool proofing a contract. “The scope of work has to be detailed throughout the contract. There should be separate design stages, with a proper time frame for each one to avoid falling into default. The next would be to safeguard fees by insisting that they have intellectual property transferred to the developer only after payment.

The consultant should define the deliverables for each phase so that there isn’t any confusion and anticipation on the part of the client.”

Merritt agrees that insisting on advance payments in a contract is especially important in the Middle East, explaining that payment terms aren’t particularly onerous in the region. “As claims experts, what we look for are 30-day payment terms that need a submitted invoice, after which it takes 30 days more to get paid. What some employers may try to do is get you to put your invoice in and say that in 60 days you will get paid. As a consultant, you should be reducing your exposure so that you’re not working too far behind on your payments.”

“The use of bonds can be particularly useful too, and it’s normally the employer who asks for bonds from a consultant or contractor, but maybe consultants can also ask for parent company guarantees in return.”

“Another clause worthwhile including is mediation, so that at the first sign of a dispute you have a mediator who comes in and helps parties facilitate a settlement, which is quite effective.”

Renegotiating a contract is an alluring thought for many consultants, developers and contractors, especially after the meltdown in 2008. Unfortunately, not everyone is contractually or legally obliged to do so, as pointed out by Al Shamsi, Merritt and Hill. In fact, the UAE Civil Code states that parties to a valid contract may only alter it in certain limited circumstances.

Merritt explains: “There has to be a very good reason to renegotiate an existing contract that was probably signed only a few years ago. If it were contracts that were negotiated at the time of the crisis, then those contracts should be revisited and renegotiated. But the ones that were signed a few years ago are still valid, so whether the consultant likes it or not, they are still bound by those terms.”

With the threat of another slowdown imminent in the not-so-distant future, learning from 2008 is essential. Hill says, “Try and stay away from having provisions that aren’t conclusive. In the pre-contract stage what we’re trying to introduce is setting key dates, mile stones and flow charts so that everyone is clear on what they have to do.”

Al Shamsi advises, “The consultant should have in his contract clauses for suspension of work, how to treat it and what his dues should be during this period. There should also be an understanding that if the consultant is asked to slow down his work, there should be a separate fee structure in place. And my advice, if in the occasion a project is stalled for more than a year is that the consultant should pull out. These terms are important.”

Merritt puts it down to the basics of ensuring “good housekeeping”. “You’ve got to keep an eye on your cash flow and not let the developer get too far behind on payments. Maintaining advance payments will help with good relations too.”

“If we are anticipating another bubble burst, I think people have learned lessons from before. I don’t think you should sign up for a contract that has fixed prices, but instead you could perhaps sign up for a two-year contract with an increase of rates every year at an annual percentage.

“Practise good housekeeping too, and make sure that your invoices are in on time, and basically look after your cash.”

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