Industry Insight No.6: Dispute resolution options in the Middle East
Construction analysis: Sarah Schütte of Schutte Consulting Limited explores dispute resolution options in the Middle East (ME) and looks at the growth of alternative dispute resolution (ADR).
The Chartered Institute of Arbitrators (of which I am an Associate) is considering opening a branch of its network in Qatar. This is symbolic, demonstrating that ADR is gaining in popularity in the ME. The enthusiasm for ADR appears to be driven by two key factors:
the continued growth inconstruction and infrastructure projects in the region (notwithstanding the recent fall in oil prices),and
new or improved local ADR laws
For many years, arbitration has been the dispute resolution (DR) method of choice in the ME, based on the UNCITRAL Model Law on International Commercial Arbitration. Its popularity has been largely due to confidentiality, which local courts cannot offer, and to its international application.
Where is international arbitration practised in the ME? International arbitration is practised in much of the region. For example:
the DIFCLCIA centre in Dubai is well established as a neutral arbitration territory (and is in the process of broadening its functions beyond arbitration)
Bahrain’s Arbitration Act came into force in July 2015
Qatar is launching a new commercial arbitration law, aimed squarely at being a ME seat of choice
What changes have taken place in relation to ADR in the ME? Several ME countries have expanded the options for resolving disputes by introducing or improving local ADR laws.There are two main reasons for this:
a desire to appeal to the international organisations, which tend to deliver the region’s major or mega projects—while a ‘local’ organisation is usually the employer or sponsor of the project, the delivery partners are often international contractors
the need for a cushion of support—projects in the ME are often on a mind-blowing scale. The breadth of nationalities working together to deliver infrastructure to benefit millions of people is impressive.
Both of these factors drive the need to collaborate on issues which will inevitably arise, including in dispute resolution. As such, new ADR decision-making bodies, which can offer something different from local court or international arbitration proceedings, provide a new dimension to DR in the region.
For example, the new Dispute Resolution Boards (DRBs) and the planned ‘Q Construct’ scheme (akin to UK construction adjudication) in Qatar have both arisen as a result of World Cup infrastructure projects, inspired by the positive London Olympics experience of this type of DR arrangement. They make decisions upon request, which are contractually binding on the parties unless otherwise challenged.
What about facilitative ADR? This is another popular DR option. An ADR facilitating body differs from an ADR decision-making body, because it does not make decisions. Rather, it assists the parties to resolve the issue themselves. The most widely known type of facilitative ADR is mediation, which is increasing in popularity.
For example, in 2006 Jordan introduced judicial mediation, which aims to steer disputes away from the courts. Mediation centres have also opened in Lebanon and Egypt. A regionwide guide entitled ‘Model Law on Conciliation for the Arab League’ was published in 2009.
These developments are resoundingly supported by non ME centred organisations. They symbolise a concentrated effortto integrate external business partners, and to give confidence to those operating or working in the ME, where challenges can be greater given the variety of nationality, language, culture and business practice. What is the current trend for construction contract drafting in relation to ADR in the ME? Many construction contracts require the parties to take these steps when a dispute arises:
negotiate first in good faith, possibly at multi-tier level (eg project manager, project director, senior executive)— the vast majority of issues can be resolved here
thereafter, attempt ADR (usually mediation or adjudication)—statistically, ADR solves the majority of the remaining issues
finally, a tiny number of stubborn issues have to be resolved via a formal process (international arbitration or court), which may or may not permit one or more appeals
This tiered approach is progressive and encourages the parties to make an active effort.
All types of construction and engineering projects can benefit from this approach. However, it is particularly useful in the arena of major and mega projects. There are three main reasons why:
unforeseen or unallocated risks are often technically complex, but require swift resolution in order to maintain momentum of completion of project milestones
in terms of governance and reporting of project progress, there tend to be multiple stakeholders, each of which has different interests and drivers
major and mega projects deliver infrastructure or other crucial services for public benefit—performance and longevity of product life are key requirements, so the main driver is to find the technical solution to minimise the downtime of operational assets.
How do stakeholders influence the choice of DR in mega and major construction and engineering projects?
Stakeholders often influence the choice of DR in the following ways:
funders/investors are pushing for a non-confrontational approach to DR by demanding tiered clauses incontracts in order to avoid delay to the works and thus preserve planned income streams and value of theirinvestment
insurers want to see committed commercial engagement in resolving issues, in order to minimise the amount they pay out in claims
project parties (also the insureds) want to resolve things quickly to keep focussed on delivery, avoid premium hike and keep the financial books ‘clean’
Thus every party’s objective is to resolve issues expeditiously and economically while the build continues unaffected.
What does this mean for the choice of construction and engineering contracts available?
In truth, any contract, whether based on a standard form or completely bespoke, can be drafted to set out a DR procedure which is appropriate for the parties, the project and the location. But there is no real need for completely bespoke contracting, as two standard forms are particularly suitable:
FIDIC contracts, which have longevity in the international market (and which have the support of the World Bank, which is helpful to global infrastructure public-facing contracts), and
the NEC3 contract suite, whose philosophy is based on collaboration and dispute avoidance by using contract processes to drive resolution ‘as you go along’.
Is there a role for DRBs, Dispute Avoidance Boards (DAB) or a combined board? Yes, most definitely. One alternative forum of interest for major and mega construction and engineering projects, where technical and legal views can usefully come together, is the DRB, the DAB or a combined board. The choice is twofold: a ‘standing board’ from the off or an ‘ad hoc board’ which congregates as needed. There are pros and cons of each. The apparent financial saving of having an adhoc board could be undone by its lack of contextual knowledge, which could hinder its ability to close out disputes early—the standing board would be wellpositioned to do this as it would be on top of the issues. In either case, the cost of any DRB or DAB is a very small percentage of the project costs—and pays for itself many times over.
What’s the view in the ME? ME practitioners understandably say: ADR is nothing new, we have been practising it in our culture for millennia. The December 2014 Jordan-Saudi-Egypt-Qatar mediation is an excellent example, and only one of many, which take place discreetly. There is great cultural emphasis on amicable resolution of issues, and preservation of business relations, so the coupling of these traits with tiered DRP and sensible risk management practice provides a recipe for success.
How could a non ME centred organisation approach risk management in the region? Such an organisation would be well advised to set up a local team on the ground, to ensure presence and local foundation. The local team plays a vital role—its members are the ‘eyes and ears’ of the project, and their identification, assessment and management of risks are key tasks to the project’s daytoday success. The local team could adopt a twophased approach, for example:
• first, it should carefully review the project risks (legal, financial, resource, management etc) and ensure they are allocated appropriately in the contract • secondly, it should explain the proposed arrangement to the organisation’s chief risk manager, so they are satisfied from an overall corporate perspective. For example, there is often a single project insurance policy in place for international, multiparty, major or mega projects in the ME, which will cover all the project parties.
However, if there is not, then the chief risk manager should take advice from the organisation’s insurance brokers (who themselves will likely (sensibly) take local jurisdiction advice) to ensure all necessary coverage is in place, including a fronting insurer if needed.
What will be the benefit to the ME of modernising and expanding the DR options available for construction and engineering projects? The ME’s drive to embrace ADR in varying forms is welcomed, and the development of standard provisions is overdue. It is a forwardthinking region, not afraid to invest in modernisation, which is a stabilising influence at a time when investment is uncertain due to the low price of oil and ongoing political issues. As such, taking these measures will help to maintain the flow of projects in the region, which in turn will increase the attraction of the ME to organisations, which can adapt to the changing conditions.
Next month’s Industry Insight will compare and contrast the popular JCT and NEC forms of contract.
This article was first published on Lexis®PSL Construction on 9 March 2016.