by Conrad Egbert
With the market having fallen 40% until now, many clients, contractors and suppliers across the region have begun to renegotiate contracts. CW talks to some of the top experts in the industry to find out what they think about the trend. Last week, CW discovered that City of Arabia – the Ilyas & Mustafa Galadari owned US $3 billion development – is currently renegotiating certain contracts.
According to the company, a shortlist of two consultancy firms have been drawn up, one of which will replace the original lead consultant P&T Architects. Along with this, the company is also renegotiating a few construction contracts.
After speaking to a few more people within the industry, it quickly became evident that this was just the tip of the iceberg and that renegotiations are the order of the day.
While some of the industry felt it was the best option in a difficult market, a part of it felt it was ‘unfair’ and it undervalued the legal strength of contracts in the region.
“It is the normal thing to do,” said City of Arabia project director Alex Vacha, when asked why he was renegotiating. “How can you expect us to keep on paying prices that don’t make sense in the current market? Everyone knows how over-inflated the market was two years ago, so a correction had to come; raw material prices were out of control earlier and because that’s changed now, construction costs have corrected drastically.”
Steel and concrete prices plunged last year due to the economic slowdown.
The price of steel plummeted almost 45% while concrete rates declined 15% according to a report issued last week by the Statistics Centre Abu Dhabi.
Steel products were the worst affected in the construction material sector falling from around $1100 per tonne in 2008 to about $550 per tonne in 2009.
Region wide trend
The renegotiation fever isn’t restricted to the UAE alone, but has spread across the region including neighbouring Oman.
“Why would you keep paying old and over-inflated rates in a new and corrected market?” asks Mish’al Moosa, managing director for the Muscat-based Dar Al Zain project, who has also recently completed successful renegotiations with sub contractors and suppliers.
“Renegotiation is the way forward, if you ask me,” says Moosa. “It is an essential tool to kick-start the region’s economy. Renegotiations can help bring some sanity back into the market and save many companies from potentially going bankrupt, due to having previously signed ridiculous contracts under pressure.”
Moosa added that many of his suppliers offered to reduce their prices on their own, but he did come across a few who did not want to renegotiate.
“Some people are greedy at the end of the day and to be honest, we don’t want to work with people like that. After the renegotiations, we gave back all the savings made to our customers in the form of reduced prices, which eventually, is good for the market.”
Philippe Dessoy, general manager of Six Construct.
What the law says
The obvious question that comes to mind then is if one is within their rights to renegotiate a contract?
Moosa says he was. “It depends on the agreement. For us it was in our contract that we could renegotiate if there was a drastic change in construction costs.”
But Sachin Kerur, partner at law firm Pinsent Masons in Dubai says that such provisions in contracts are a rarity and the only way to be on the right side of the law in the absence of such a provision, is if both parties agree to a renegotiation.
“Only if both parties agree to renegotiate and draw up with a new contract, will it be within the law. If either of the parties does not agree, it could turn into a dispute.”
Everyone is not as vehement as Moosa when it comes to renegotiations. Philippe Dessoy, general manager of Six Construct wasn’t all for it, but agreed that it did have more benefits than drawbacks in the current situation.
“The good side is that at least you can expect to start getting paid after renegotiating a contract. Certain clients, who have chosen not to renegotiate, haven’t paid us up till now and those that we have renegotiated with, have begun to filter in some money.
But despite some clear advantages, Dessoy also pointed out the dangers that could come with renegotiation.
“It’s not ideal and certainly not fair to renegotiate a contract because, in effect, you’re breaking it. And that beats the whole point of signing a contract – protecting your right to get paid on what was agreed is why contracts are signed in the first place.”
Asking a rather interesting question, Arabtec CEO Thomas Barry says: “Would clients be happy to renegotiate if the market is flipped and prices sky rocket again? We’ve been through such a situation in the past and to be very honest, we had to deal with it on our own; we didn’t get the opportunity to renegotiate when we were facing tough times.”
But he also said that if the economy would benefit from the process it would be a road worth exploring.
“At the end of the day, we have to see the bottom line. Profit isn’t a bad word and if everyone is still making their margins, then its better to actively reposition contracts, rather than just sit and wait for something or nothing to happen.”
And like Barry says, if the end result is movement in the market, maybe renegotiations could prove to be the best option to aid an ailing construction sector. Money could begin exchanging hands again and companies would begin receiving payments that are due.
Renegotiation – Pros & Cons
Creates overall better value
Kick starts business
Brings down inflation
Reduces confidence in the market
Reduces trust between clients and suppliers
Undervalues the legal strength of contracts in the region