An in-depth chat with one of the Middle East’s foremost legal experts
In 2014, disputes relating to major Middle East construction projects increased in value to $76.7 million, according to a report released by Arcadis in July of this year. This is the highest value increase in Middle Eastern disputes since 2011 – value fell 31.8% from $112.5 million in 2011 to $76.7 million in 2014 – Arcadis said in the report, entitled: Global Construction Disputes: The Higher the Stakes, the Bigger the Risk.
Overall, the Middle East stood second in the annual report, which looks into the duration, value, common causes and methods of resolution of construction disputes across the globe. It came in just behind Asia, which stood at $85.6 million. In comparison, in North America and the UK, dispute values dipped to $29.6 million and $27 million respectively.
What this indicates is that with the Middle Eastern construction market in full swing and contractors and employers seeing more liquidity in the market, parties that initially parked their losses now have the funds to pursue claims they had put away, says Edward McCluskey, head of Alternative Dispute Resolutions – Middle East at Arcadis, in the report. He forecasts that this trend will continue into 2015, as more parties “have the required liquidity to pursue those claims that were put on ice”.
In light of the situation, Big Project ME sat down with one of the Middle East’s most prominent and preeminent legal experts, Dr Habib Al Mulla, chairman of Baker & McKenzie Habib Al Mulla, to discuss construction law in the UAE and how to ensure the construction industry does not fall into the same legal pitfalls it encountered in the wake of the downturn.
With more than 29 years of experience in UAE law, Dr Al Mulla has been instrumental in shaping many of Dubai’s modern legislative structures. He is the chairman of the Dubai International Arbitration Centre’s (DIAC) Board of Trustees and chairman of the Chartered Institute of Arbitrators’ UAE Committee.
He is often consulted to draft and offer advice on federal and emirate level laws, and perhaps most significantly for Dubai, is responsible for creating the concept of financial free zones in the UAE. He was also the architect of the legal framework establishing the Dubai International Financial Centre, and served as legislative committee chairman of the Dubai Financial Services Authority.
In addition to these achievements and successes, Dr Al Mulla also plays an active role in his practice, where he focuses on litigation and arbitration, serving as lead counsel on numerous UAE and international arbitrations across a variety of sectors, including construction, finance, commerce and maritime. Given the breadth of his knowledge, it is no surprise that he takes a keen and passionate interest in the UAE construction market, and specifically on the legal issues it faces.
“The UAE, when it comes to construction, is a very unique market,” he says, speaking in his offices at Business Bay in Dubai. “There’s a lot of construction going on, and all the big players are on the ground. [But] construction is a very rigid industry, whereby there are certain rules that everyone who is involved in the construction industry – whether it’s an employer, a construction company, a subcontractor or a supplier – has to play within these rules worldwide. It’s a set of standard practices.”
“However, the UAE legal framework, when it comes to construction, has not developed at the same pace, depth and manner in which the construction industry has developed. While we have very advanced construction projects and practices applied in the market, the legal framework is still very basic when it comes to dealing with construction contracts, clauses and disputes.”
While there are provisions in the civil code that deal with construction, Dr Al Mulla points out that the civil code was introduced in 1985, a good 30 years ago, and was modelled on Jordanian and Egyptian civil codes, which themselves go back another 10 or 15 years. With the market having changed so much, it’s unreasonable to expect the civil code to address all aspects of disputes.
In order to compensate for this, the market has addressed the gap through contractual provisions. This is just a stopgap measure, Dr Al Mulla insists, explaining that there are certain mandatory provisions in the law that contractual provisions cannot overcome.
“The issue comes not when you have a classical dispute. The issue comes when you have a technical or more specific dispute. That’s where you’ll see the difficulty of surviving within the legislative framework that exists today,” he asserts.
“I appear before courts and arbitrary tribunals as an expert in the field of construction claims, and I see how parties sometimes struggle to define what a particular clause or article in the law says. Particularly when there’s not much court practice to explain what the provision is, how it can be defined, what the right construction of it is, what are the limitations and how will it work within a contractual framework that the parties have agreed upon.”
While construction firms and developers may have been able to find a way around these obstacles, the rate at which the construction industry in the UAE is growing makes this unfeasible in the long term. Dr Al Mulla recognises this, and says it’s time for the UAE to develop specific construction law.
“I think the UAE, with the size and volume of the construction projects that are going on, would benefit a lot, as an industry and as a country, from having a specialised construction law enacted. If that happens, I think it will support the UAE’s position as a forum of choice for dispute resolution for construction disputes in the wider MENA region.”
Calling for a unified construction law is not new to the industry, with a number of legal experts and even construction industry professionals weighing in on the topic and arguing that it would be of considerable benefit for the industry and the country. However, concerns have been raised about the viability of a unified code, given the differences between emirates.
“That [concern] would have been accepted if it was a different field from construction,” says Dr Al Mullla. “Construction is kind of like a manual that every construction company, every contractor, consultant and supplier knows. The trick is to draft or issue and enact a law that has some flexibility, so that the parties within the application of that law have the ability to choose what suits them better in a particular situation.”
“But of course, if a law of this nature is going to be enacted, then it has to be based on the norms of industry. It has to be based on FDIC. Otherwise, you’re going to have to start from scratch and reinvent the wheel. Then I think it’s better to leave that ambiguity behind and have individual parties agree to fill in the gaps through their contractual arrangements, rather than trying to enforce something that will not be practical.”
Another major issue facing contractors is that when something goes wrong on a construction project, they are often the first ones to be blamed, irrespective of the circumstances. Ultimately, as the company on-site, they are responsible for schedules, processes and planning. When it comes to disputes and arbitration in construction, this often makes them the most vulnerable.
Of course, the major contractors take steps to insulate themselves against charges of this nature, while smaller contractors tend to be involved in projects that don’t expose them so much. Medium contractors, most often local firms, are thus the most exposed to claims and lawsuits on projects, especially larger ones which often have a bearing on the future of a company.
“One of the advantages, or possibly disadvantages, depending on how you look at it, is that it [the industry] isn’t really regulated. So it’s left to parties’ contractual arrangements. When the contractual arrangements are solid, sound and comprehensive, then I think that to a large extent, they’re on the safe side.
“The problem arises when two parties go into a construction project, especially when it’s a big project, with a two-page drafted contract, without any provisions or arrangements going into details. Then, of course, when a dispute arises, you’ll have all sorts of arguments floating between the two parties,” Dr Al Mulla says.
“However, in a scenario where the contractual arrangements are in place, then there should not be any difficulties in asking for work that goes beyond the initial scope of agreement, or if there are variations, for example. There should be a process in place that explains how to claim for these variations, if there’s an extension of time – all of that is properly regulated.
“The cases and issues that I’ve seen are not in fact whether a contractor is entitled to claim variations, or damages, or extension of time. In fact, it’s an issue of proof. That’s where the parties fail to document everything, or to go through the processes in the contract. That’s where the bulk of these issues remain, it’s not whether the parties can or can’t claim, it is more about how they prove that they have the right to claim.”
Perhaps this rather surprising lack of awareness is due to a lack of information available to contractors and even to employers on projects. Dr Al Mulla certainly thinks so, and points a finger in the direction of the UAE’s Contractor Association for a lack of engagement with the industry.
“I think one of the tools that has not been fully utilised is the Contractors’ Association. There is an association for contractors, and there’s also one for engineers, but unfortunately, I’ve not seen either of them be active in a very active construction market. The UAE is one of the most active construction markets since 2002, yet we have not seen that sort of role being played by the Contractors’ Association,” he emphasises.
“They should have done far more work. Maybe because contractors are busy, that could be one reason [the Contractors’ Association has not taken an active role], but the problem is that if you’re busy and you fall into mistakes – these mistakes in construction cost millions, if not hundreds of millions!”
At present, there is ambiguity within the law and the civil code, which can cause problems for contractors down the line. Under the terms of the civil code, both the contractor and the consultant are automatically, jointly and separately, liable for any defect that affects the safety and stability of a building, for up to 10 years starting from the date of handover.
As clear as this may look, Dr Al Mulla explains that there can be disputes over when exactly handover took place, which can cause an issue. Since there are not many precedents to clarify this, contractors are often left in the lurch.
“For the employer, both the contractor and the consultant are responsible. They have the choice of going after both or either. Now, between the contractor and the engineer, they have to sort out whether it was a defect in the design or if it was a defect in the construction itself. That doesn’t affect the employer. He has the right to expect that for 10 years, any defect that threatens the safety and reliability of the building, he will be compensated for, irrespective of who was at fault,” he says.
“Another tricky question here is that the warranty period is 10 years, but when can the employer bring that action? The employer can bring that action within a period of three years from the date he discovers the defect. But that also gives rise to other issues. For example, if you have an employer who notices a defect, then of course he has to go and appoint an expert, and the expert has to go and make a report. And then that report has to prove that the defect affects the safety and stability of the building.
“Now, within the three-year period, when does it click? Is it from the day that the defect was discovered? Some claim so. Or is it from the day that the expert hands in his report? There could be as much as one year between the two dates.
“That’s another issue, and it’s also been raised before tribunals, and it’s been disputed. The prevailing opinion is that it is from the day that the employer knows or becomes aware of the defect, and that it threatens the safety and stability of the building.”
Another legal issue that surfaced in the wake of the downturn was the cancellation of construction contracts. Developers were often forced to halt or cancel projects that were underway, leaving the contractors involved in the project with not many options to recoup the time and money spent.
“The problem arises when you have unilateral or automatic termination. You have issues with both, because under unilateral termination, the law – although it gives effect to the parties’ right to have a contract terminated unilaterally – it makes it subject to the court’s review. So even when you serve notice of the termination, you need a tribunal or a court to confirm that. If the court finds that the termination is justified, it will confirm it from the day it was issued,” Dr Al Mulla explains.
“However, the court may find that it’ll give termination with effect from the date when the award was rendered. So we have a gap, and it depends on when the termination is taking place.
“Now, when it comes to automatic termination, although it says that it’s automatic termination, you still have to have it approved by the court or by an arbitration tribunal. You may include in your contract a clause that says the project will be automatically terminated without the need for a court or a tribunal review, but you still need to give notice.
“The highest level of termination is when you state that it’s an automatic termination, without the need for court approval, without the need to give notice. This is the highest, but it has to be included in the contract in a very explicit manner that is very clear and that there is no dispute about it.”
Despite the laborious and intensive process of going through these steps, the construction legal expert is quick to play down any sense of preference for fast-track courts or tribunals, like the ones seen during the Dubai World cases. Instead, Dr Al Malla prefers to reiterate his call for a dedicated and focused construction legislation to support the industry.
“I am, in principle, against ad-hoc tribunals, because the problem with them is that they distract from the jurisdiction of the courts and from the jurisdiction of the general tribunals. And also, they’re unpredictable and give a sort of uncertainty to all the parties involved. That’s because they don’t know whether their case will go to the original courts as planned, or if they’ll suddenly have a special tribunal that they’ll have to deal with, one that they don’t know what the precedents are or what the history is.”
He does believe, however, that the construction industry would benefit from a forum where they can have some sort of accelerated process to deal with certain issues until the original matter is resolved. He cites the Singapore Arbitration Centre as an example that might work in the UAE.
“I think that when it comes to matters related to payments pending for the contractor, or certain interim measures that need to be taken, instead of having that put in with the original claim and having the whole project on hold until the matter is decided, they can go with a very quick application to one arbitrator, and I think they have a limit of between 30 and 60 days, who can issue an order which is enforceable.
“Although the orders are enforceable, at the final claim all of that will be calculated and recalculated and decided. But at least the project is ongoing and the contractor is going to survive, while the employer can continue with the project. That way, the project is saved, and the parties can continue [working], and the dispute can take its normal course,” he concludes. “But to do that, you either need rules or you need specific litigation that allows this type of process to exist and to give it enforceability.”