Dubai has recently seen record numbers of construction-related court cases and arbitrations and its arbitral institutions should now prepare for a second wave before the year-end, writes HENRY QUINLAN*.
DUBAI has not escaped the widespread effects of the global economic downturn, which has had a wide impact on the construction sector, largely due to the enormous number and scope of projects in the emirate.
Liquidity has been one of the main casualties of the downturn which, together with falling property values, has put both developers and contractors under significant financial pressure.
According to the Kuwait Financial Centre, as much as 30 per cent, or $249 billion worth of projects across the GCC have been cancelled or postponed in recent months, and more than 90 per cent of the cancelled projects were based in Dubai. The obvious after-effect of this has been an increase in construction-related disputes, as contractors and subcontractors seek payment for work undertaken or in relation to contracts that have been de-scoped, suspended or cancelled.
One of the main beneficiaries of this increased volume of disputes is the Dubai International Arbitration Centre (DIAC), which has reported a dramatic increase in its caseload (and reportedly has recruited additional staff to assist in dealing with that caseload), having received over 180 requests for arbitration so far this year, which is already a significant increase on the total it received in the whole of last year.
Around 80 per cent of these disputes are reported to be construction-related and the total sums claimed are in the region of $5 billion. This equates to an average claim of almost $28 million, which is significant, though it should be borne in mind that this figure may be thrown out by singular large value claims, and the size of claim does not always correlate to the sums awarded or recovered.
Possible second wave
Although there has been a substantial increase in claims, there have not been as many as expected. As reported in the results of a recent survey of businesses operating in the construction industry carried out by Norton Rose (Middle East) in May, although 72 per cent of the respondents said their contracts provided for arbitration, 38 per cent of the respondents confirmed they were experiencing more contractual disputes as a result of the financial crisis but not one reported that it was involved in any arbitration proceedings.
This may in part be due to the prevailing business culture in the region for seeking to first negotiate and settle disputes in private and without the need for formal proceedings. Indeed, this step is regularly formalised in the dispute resolution provisions contained in contractual documentation used in the Middle East. Moreover, parties will always be aware of the potential downsides of commencing proceedings, such as the impact it may have on counterparty relations, and whether the counterparty has sufficient assets at the time from which they will be able to recover sums due or to successfully enforce a judgment or arbitral award. Parties wishing to retain relationships and move matters forward may seek to settle matters at a discount on the basis of future opportunities in the region.
However, this approach may not be acceptable or appropriate for some parties. If liquidity remains tight and there is no suitable short-term new business on which to focus, as time goes by, firms may face increasing financial pressure to take action to recover monies owed. Similarly, as the financial year-end approaches for many, companies that have not made provision in their accounts for these debts on the basis of anticipated recovery are likely to have to consider whether this approach is appropriate without having to take more formal steps to recover the debt. Auditors, in particular, will want to see evidence of the recoverability of the debt, which may include consideration of what action is being taken to secure payment and/or a legal opinion on the prospects of recovery before agreeing to the company’s accounting treatment of the debts and their level of provisioning. Further write-downs may have knock-on effects, such as impacts on covenants contained in companies’ financing agreements and (in the worse case scenario) on whether the entity is a going concern.
It is at times like these, when parties find themselves initiating the dispute resolution provisions in their contracts that any flaws in the drafting of such provisions often come to light. Short-form documentation and dispute resolution provisions may have been acceptable to many parties when new projects were plentiful and the sector was highly profitable, but issues may be exposed as disputes arise.
Whether those issues relate to problems caused in the drafting of the dispute resolution mechanisms — which may enable the counterparty to delay, challenge or otherwise obstruct the escalation of a dispute to formal proceedings — or otherwise relate to issues arising from the choice of forum for formal dispute resolution, parties are likely to start looking for ways to prevent these issues occurring in future.
Courts and arbitral institutions that deliver an efficient and effective service in this present period will no doubt reap the rewards by being used and recommended by companies in the future. Conversely, if institutions do not deliver for the construction sector, the industry may start to look elsewhere for the swift resolution of their disputes.
Potential beneficiaries of any shortfall in the more established institutions include the arbitration centres launched recently in the region (such as the DIFC-LCIA) and those proposed to be launched in the near future (such as the BCDR-AAA in Bahrain). Backed by world-class, tried and tested arbitral institutions based in London and New York respectively, these institutions are too new to benefit fully from the present wave of disputes, but are likely to be well placed to form part of companies’ future dispute resolution policies.