This month’s contract question comes from a company considering work in Dubai, and wondering about the differences in construction contract legislation. Mark Watson explains.
Our company is thinking of starting work in Dubai. What is the legal and contractual structure like, will we need to retrain and learn FIDIC? How different is the contractual and commercial landscape in the Middle East?
Construction and development remain significant features of the economic landscape in the Middle East and Gulf Cooperation Council (GCC). As you might expect, workers and companies from around the world are drawn to this vibrant and rapidly changing region. They come to work and experience projects that might not be happening elsewhere.
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However, after the honeymoon period, construction companies and teams soon discover distinct differences in performing construction projects in the Middle East compared to projects ‘back home’.
These distinct differences often, if not always, turn on matters of cultural customs. If not properly understood, the same differences can result in construction projects experiencing time and cost overruns. In turn, these become expensive disputes to resolve.
The cost of ignorance
The costs around construction disputes are laid bare in the Dubai International Arbitration Centre’s 2023 report. With over AED 5.5bn (£1.14bn) in new disputes registered in the region, a notable 67% of the total value stemmed from the construction value chain. A large proportion of those (40%) specifically originated from disputes relating to construction contracts.
The adage ‘prevention is better than cure’ is apt for the construction sector in the Gulf. Yet, we still find companies entering the sector, struggling to adopt a proactive approach to understanding:
- Local customs.
- How standard form contracts interact with the law.
- Common contractual and commercial pinch points.
The common thread is often a lack of access to suitably experienced mentors. Finding people who possess a strong understanding of regional customs relating to the principles of contract management is extremely important when negotiating and executing construction projects.
Customs
One of the most important rules when doing business in the region is to understand the business style of the person you will be engaging with on your projects.
Building relationships, rooted in respect for family values and friendship, is a vital part of business interaction. In the construction sector, the contract is often viewed as a secondary tool, referred to as a last resort. Therefore, it’s common for claims related to time extensions or payments to be resolved through negotiation, often near project completion, rather than strict adherence to contractual procedures.
While intense, negotiation is often a lot less aggressive and more conciliatory. But do not expect to get the full value of your claim, and be prepare to make concessions.
How contracts interact with the law
Standard contracts, particularly those written for other jurisdictions, and those not designed for ‘civil code’ jurisdictions, frequently see conflicts with local laws. As an example, time bars in standard form contracts may not always be upheld by the local law.
Western engineers may rely on a time-bar clause to reject a contractor’s claim, or a contractor may similarly reject a subcontractor’s claim. Unfortunately, in our war stories, the reliance on the time bars stated within the contract was not upheld.
This stems from the fact that prescriptive periods are dispersed across multiple pieces of legislation, varying by jurisdiction, rather than consolidated in a single statutory source as in some other countries.
Common trouble points
In our experience, the most common trouble point is the failure to balance culture and the legal requirement.
To overcome this, we recommend the following:
- Don’t copy and paste contractual clauses commonly used in Western construction contracts which you are more familiar with, because they may not be enforceable in the Middle East.
- Implement a robust contract administration focus on all projects.
- Be prepared to negotiate but prepare your construction claims as you would a referral to adjudication/arbitration.
- Trigger the dispute resolution clauses early to avoid delays in closing out your construction claims.
Engage with local culture and adapt
Reducing dispute risk and encouraging fair and effective resolution of disputes requires a multifaceted and balanced approach. You should:
- Implement a robust soft skills business interaction programme.
- Place that alongside a hard skills construction contract administration programme.
- Establish a proactive dispute resolution strategy.
Understanding the commonly used forms is important, particularly the FIDIC form. FIDIC (or amended versions of it) is by far the most common contract in use regionally.
However, developing a range of skills and engaging with the regional culture will be key to success.
Ensure continual learning, with a focus on staying informed and adapting to the fast-changing construction landscape. This will assist you in being able to respond to new challenges effectively, as and when they do arise.
Mark Watson is managing director at DeSimone Consulting Engineering.
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