Construction underway at the $5.5bn Msheireb Downtown redevelopment of central Doha, Qatar, where Carillion ran into serious trouble (Msheireb Properties)

Is the Middle East more prolific in generating disputes?

11 October 2018 | By Deborah Ruff, Julia Kalinina Belcher, and Charles Golsong, of Pillsbury Winthrop Shaw Pittman LLP 0 Comments

Recent analysis of global construction disputes by Arcadis revealed that, for several years, the average value of disputes in the MENA region outstripped those in North America, the UK and Continental Europe.

The difference is stark. In 2017, these values were $91m, $19m, $34m and $29.5m, respectively, making the average value of MENA construction disputes more than double the global average of $43.4m.

Although the value of MENA disputes fluctuated in the last four years, between $56m and $91m, it consistently exceeded the value of disputes in other regions, and the global average.

Does this mean it is inherently riskier to build in the MENA region? Carillion’s former chief executives certainly sought to give the impression that the area is just too risky while under questioning by MPs earlier this year about its £500m Msheireb Downtown redevelopment project in Doha. They blamed the customer, accusing it of changing architects multiple times, issuing thousands of design changes and owing Carillion around £200m, precipitating the company’s collapse in January.

Chief executive Richard Howson told the inquiry he “felt like a bailiff” after going to Doha more than 60 times over six years to plead for payment, all to no avail. (The Qatari developer disputed his version of events.)

It is true that the MENA construction market is more relationship-based than other areas. It is also true that the steep fall in the price of oil from 2014 will have forced clients in the Gulf region in particular to adopt a sudden new rigour in terms of cost. Furthermore, it is reasonable to expect this new pressure to have found expression in disputes.

But other factors underlie Arcadis’ numbers, including the proliferation of mega-projects in the Gulf region, from metro systems and airports to commercial developments and Qatar’s comprehensive build-out for the 2022 World Cup.

As for Carillion’s difficulties, we feel that market inexperience, poor contract drafting and poor contract management are likely to have contributed to the debacle, as well as client behaviour.

For that reason, we advise that companies seeking to work in MENA turn their minds to potential disputes at the outset.

This means, firstly, ensuring that dispute resolution provisions in the agreements are clear, binding and workable. Here, it is crucial to consider how a resolution in your favour can be enforced. What are the possible jurisdictions where the counterpart’s assets are located? How easily can an award or a judgment be enforced there?

Secondly, parties must ensure that they understand their contractual obligations and the allocation of risk, including what happens when the owner is unable to make timely payment. Consider guarantors and/or clear statements of the right to suspend work and/or terminate in defined circumstances.

A well-defined contractual process for design changes is also crucial, as is the allocation of responsibility for any resulting costs and delays. The experience of Carillion shows that negotiating contractor performance bonds that cannot be triggered in the event of a customer’s failure to pay would provide additional protection. In this environment, making an artificially low bid, agreeing tight deadlines in the hope of later adjustments or EOTs, or agreeing to give “blanket” performance guarantees/bonds because they are “standard in the market” is a recipe for potential disaster.

It is also crucial that parties understand contractual dispute requirements, especially any pre-conditions before formal dispute resolution can be initiated, along with the stages and the applicable timelines, to avoid missing limitation periods or delay in proceeding with formal dispute resolution.  

Another notable feature of the MENA construction market is that, at least where prestige projects are concerned, solutions tend to be found without proceeding to an award or judgment. The new Jeddah Airport was completed because the Saudi government was ultimately willing to “step into the shoes” of the main contractor to resolve the issues arising from the latter’s financial problems flowing down the contractual chain and resulting non-payment of the sub-contractors working on the project.

It was reported that the Saudi General Authority of Civil Aviation ultimately paid contractors on behalf of the head contractor following the latter’s reorganisation.

The above does not mean that there is “no point” in engaging in formal dispute resolution, as the Carillion’s former CEO tried to convince a sceptical parliamentary inquiry. Stakeholders in many high-profile developments, especially those backed by the Government, are keen to avoid negative publicity, so a threat of a formal dispute may encourage them to a negotiating table.

Furthermore, arbitration awards can be enforced against assets worldwide, not just in the country where the project is located or where the owner is based.

Once a dispute is likely, being proactive is key: as Arcadis found, being “proactive and exploring new ways to avoid disputes at the onset rather than having to address [in] the middle or [at the] end of a project lifecycle, where costs are at a high and emotions are rampant”, increases the chances of a successful resolution.

Dialogue with the other side as soon as possible, whether through face-to-face negotiations (which Arcadis found to be the most common method of Alternative Dispute Resolution in MENA) or via intermediaries, may help maintain the relationship and prevent dispute escalation.

Interestingly, in MENA, use of a Dispute Adjudication Board entered the top three ADR methods in 2017, perhaps indicating increased recognition of the need to deal with problems early on and quickly.

Arcadis found that “a comparatively low oil price has continued to drive lack of liquidity in the market, resulting in cash flow constraints across the supply chain and an environment where firms are taking a tougher approach to contract entitlements”.

Although oil prices have recovered somewhat from the lows of a couple of years ago, the Arcadis research will likely reflect decisions taken during that period, as well as on-going pressure on government budgets and the effect of escalating costs as projects are delayed.

Research also showed that i) failure to give interim EOTs and/or compensation, ii) contract administration failure and iii) owner-directed changes were the most prevalent causes of disputes in 2017. Factors i) and iii), both new in 2017 as top-ranked causes of disputes, may flow from increased employer determination to closely engage in review of claims, stemming, perhaps, from liquidity concerns.

Does the increase in disputes activity recorded by Arcadis suggest the bottom is about to fall out of the MENA construction market? Probably not. The demise of Carillion and, with it, its projects in Qatar, Saudi Arabia, Egypt, UAE and Oman, which reportedly account for over 35% of the company’s liabilities, while significant, are unlikely to have a substantial effect on one of the largest construction markets in the world.

The types of issues that Carillion faced in its Doha project are not exclusive to the MENA market, they occur on most projects worldwide. Nonetheless, caution should be the watchword in drafting and managing contracts because the stakes are so high.

  • Deborah Ruff, Julia Kalinina Belcher and Charles Golsong are, respectively, Partner, Counsel, and Senior Associate at Pillsbury Winthrop Shaw Pittman LLP

Image: Construction underway at the $5.5bn Msheireb Downtown redevelopment of central Doha, Qatar, where Carillion ran into serious trouble (Msheireb Properties)