Legal Briefing

Middle East Construction in 2009: an annus horribilis

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UAE | 01 February 2010

Based in Dubai, Habib Al Mulla & Company has witnessed first hand the worst effects of the 2009 financial crisis. The Dubai construction market has suffered more than most and the number of construction cases through the Dubai International Arbitration Centre (DIAC) has tripled over the course of 2009. The launch of the DIFC LCIA Arbitration Centre (DIFC LCIA) could not have come at a better time although, inevitably, the take up of cases has been slow at the new centre.

The Dubai International Financial Centre (DIFC) has founded its own arbitration centre in co-operation with the London Court of International Arbitration (LCIA). The DIFC LCIA promotes a set of rules closely modeled on the rules of arbitration of the LCIA, which in turn follow the UN Commission on International Trade Law model law. There has been some serious doctrinal criticism with regard to the enforceability of arbitration awards rendered by the DIFC LCIA, but such discussion can be saved for a future issue. It is also worth noting that Dubai is still awaiting the long-anticipated arbitration law that should come into force this year.

LEGISLATIVE MEASURES

In an immature real estate system, such as Dubai, strong legislation is required to provide the market with some stability and structure. Unfortunately, the Dubai Land Department (DLD), the Real Estate Regulation Agency (RERA) and, latterly, the government of Dubai have all taken measures aimed at protecting the market and stabilising the economy, with some of these measures criticised as being:

  1. Unfairly biased towards developers.
  2. In contradiction of the essence of the judicial system and the separation of powers doctrine in the UAE. It is argued that governmental bodies, such as RERA and the DLD, are playing the role of judge in predetermining the level of damages and the mode of payment of the same. This is a clear infringement of articles 389 and 390 of the UAE Civil Code, which provide that damages shall be assessed by the parties or, in the absence of agreement, by the judge.
  3. In breach of the Civil Code. For example, Law No 13 of 2008 as amended by Law No 9 of 2009 restricts the right of termination of a property sale to the developer in the event of non payment by the investors of any of their installments. In most scenarios, payment plans are based on predetermined dates (not construction linked). Many developers continue to demand payment in line with the payment plan notwithstanding the fact that construction of the project on site has stalled or, in many cases, not started. This is arguably in contradiction with theexceptio non adimplenti contractus doctrine, which is embodied in articles 247 and 272 of the UAE Civil Code. In terms of the doctrine, either of the contracting parties may refrain from executing its obligations in the event that the other contracting party fails to perform its contractual obligations.

There is no doubt that the government issued the aforementioned laws and regulations in an attempt to alleviate the effects of the credit crisis on the real estate and construction sector, on which Dubai is heavily reliant. It was clearly an attempt to remedy the fallout between sellers, developers, contractors, purchasers and end users. It is worth bearing in mind, however, that the speed with which Dubai experienced the boom (and indeed the bust) could not reasonably have been legislated for.

POSITIVE OUTLOOK

Looking to the positives, we have seen recent ‘investment’ by Abu Dhabi in the Dubai real estate sector that has, at least, supplied some liquidity to the market. That is not to say that Abu Dhabi has not been affected by the crisis, but several strategic infrastructure projects have protected the market generally. The Yas Island project and particularly the Grand Prix circuit have been in the world spotlight for some time and have received favourable reviews, not least because Jenson Button and Ross Brawn won the drivers’ and constructors’ crowns respectively at Abu Dhabi in November.

Over and above this, Masdar City, the world’s first carbon-neutral, zero-waste city, is progressing at pace. At the end of 2009 the Abu Dhabi government awarded contracts worth AED75bn for the construction of four nuclear power plants. The design, build, operation and maintainance contracts have been awarded to a South Korean/American consortium, and will provide a further fillip to the UAE construction industry.

The Gulf Co-operation Council region as a whole has performed relatively well during the 2009 crisis. The Saudi Arabia real estate sector has been described as recession proof in some circles. Growth figures of 5-7% are projected until 2012. In 2009 real estate investment reached in excess of US$330bn and is expected to grow further in 2010. There is an estimated requirement for 1.5 million new homes by 2015 to cater for the expanding population. 750 million sq m of industrial land has been set aside for development. Internationals are moving in en masse, as evidenced by the participation of some 38 countries at the 2009 Saudi Build conference. This is in stark contrast to the Cityscape exhibitions in both Abu Dhabi and Dubai, where exhibitor and visitor numbers dropped drastically, year on year.

Another regional power, again backed by hydrocarbon resources, is Qatar. A structured diversification programme and population growth has insulated the construction sector. The population of 1.5 million has risen by 100% since 2003. Qatar has set aside huge budgets for infrastructure projects, such as the light rail network and Doha International Airport. The construction industry is undoubtedly facing challenges, but such infrastructure projects should push the sector onwards and upwards in 2010 and beyond.

DISPUTES

The downturn has inevitably led to an increase in the number of disputes. DIAC has witnessed an exponential increase in the number of arbitration claims. The level and frequency of disputes has led to calls for alternative dispute resolution mechanisms, as well as closer inspection of the contracts being used.

Parties to disputes are looking forfast-track methods of dispute resolution. Statutory forms of adjudication have been generally well received in several jurisdictions and certainly the major infrastructure projects in the region should consider the appointment of contractual dispute adjudication or resolution boards. There are some encouraging signs on this front and boards are expected to become more commonplace, particularly on the major infrastructure projects. The recent reforms introduced to the Housing Grants, Construction and Regeneration Act 1996 in the UK highlight the lack of clear construction rules in the UAE.

The UAE Civil Code does provide some guidance on construction law matters but further rules are required, particularly in relation to payment provisions and the right to suspend works. It could be argued that articles 247 and 879 of the Civil Code, when taken together, allow a contractor to suspend works for non-payment. Article 247 (the exceptio doctrine) may entitle a contractor to cease performance where they have not received payment. Article 879 specifically entitles a contractor to withhold the property where they have not received payment. It is not liable for deterioration to the property during this time. Therefore, while general principles can be used to good effect, some clarification would be helpful. It is not clear, for example, whether the contractor is entitled to an extension of time during this period, or who is responsible for security of the site. Does deterioration of the property include vandalism that could have been prevented by taking reasonable security measures?

MEDIATION

In an attempt, presumably, to ease the pressure on Dubai courts, a mediation process has been established that came into effect from 28 June 2009. The Centre for Amicable Settlement of Disputes has been established pursuant to Law No 16 of 2009. The Centre is attached to the Dubai courts and is competent to hear disputes to promote amicable settlement before referral to the Dubai Court of First Instance (CFI). The aim is to provide quick resolution of disputes as the law states that settlement shall be achieved within one month of appearance of the parties before the Centre. In the event that a settlement is achieved, the parties shall execute a settlement agreement reflecting the terms and conditions of their settlement. Cases may only be referred to the Dubai CFI following a reference by the Centre. This offers some hope in relation to construction disputes where there is no arbitration agreement, but for the time being mediation remains an uncomfortable fit with Middle Eastern culture.

The real positive of the increase in disputes has been a closer examination of construction contracts. The Federation Internationale Des Ingenieurs-Conseils (FIDIC) rainbow suite, remains the standard form contract of choice in the Middle East. During the boom times, insufficient attention was paid to the minutiae of contracts leading to major difficulties when, inevitably, disputes arose. This has paved the way for the consideration of alternative standard forms, but it seems that as long as government contracts are based on FIDIC then the private sector will follow suit. It appears, however, that more attention will be paid to the special conditions of contract and perhaps more variety will be seen in the dispute resolution clauses.

In summary, while 2009 has indeed been an annus horribilis for the construction industry in Dubai, infrastructure and renewable energy projects in the region will support the sector and underpin a growth period for 2010, with alternative forms of dispute resolution continuing to evolve.