Ahead of GAR Live Abu Dhabi next week, we look back on a session at last year's event which offered a twist on the usual construction arbitration panel, inspired by its Middle Eastern locale.
The Middle East is known for construction disputes - inevitably, perhaps, given the scale of building taking place. What makes less sense is why more isn’t being done by local project partners to quell those incidents. To either stop them occurring, or at least reduce their scale. Yet techniques that are popular in other parts of the world – especially Dispute Adjudication Boards – haven’t caught on.
Why? And is it something that, with a few adjustments, could be changed? After all, the region’s other big industry, oil and gas, appears able to bring big projects to conclusion without the same need for monumental score-settling at the end (though there are signs this too may be changing). So, are there lessons from other industries that Middle Eastern construction could learn?
At GAR Live Abu Dhabi 2017, Philip Capper, of White & Case, and a panel of four speakers - Nael Bunni, of 39 Essex Chambers, Ziad Obeid, of Obeid Law Firm, Thomas Wilson, of Squire Patton Boggs and Julian Haslam-Jones, a Senior Commercial Engineer at Amec Foster Wheeler endeavoured to get to the bottom of the conundrum.
En route they discussed:
- Why general building projects have a different dynamic to those in oil and gas,
- The limits of drafting and the usefulness of standard forms,
- The importance of mentality when problems arise, particularly on the employer’s side,
- Obstacles to Dispute Boards in the Middle East,
- How to solve the problem of disputes when multi-tiered dispute resolution clauses are in place, and
- What the UK courts did, both to ensure that “adjudication” when introduced was effective, and in the same stroke to guarantee it was never used.
The lively discussion also featured a number of anecdotes, including one about a project where “everything that could go wrong did go wrong” but nevertheless the final account was settled within four hours, and how the Channel Tunnel in the end depended on “one man and one man only”.
The conference took place at the Abu Dhabi Global Market Building, on 22 February 2017.
The following is an edited transcript of the discussion. It has four parts:
1: How to draft in order to avoid disputes
2: How to achieve early settlement of disputes, or avoid arbitration
3: Good intentions and problems with the implementation
4: Audience questions
Phillip Capper: The purpose of this panel is to see how we can avoid construction disputes. That could be quite a challenge, not least in this region. Our first topic is seeing how we may draft in order to avoid disputes. In our second topic, we’ll look at the performance of the construction or infrastructure contracts, and how we might achieve early settlement of disputes or, at least, avoid arbitration. And then, because arbitration still happens, our last topic is headed “good intentions and problems with the implementation”.
- How to draft in order to avoid disputes
Nael Bunni: I would like to start with the fact that construction contracts have very specific features and characteristics. I can think of a dozen straightaway, but two of the most important, which distinguish a construction contract from many other types of contract, are the following: The first is that the contract is quite detailed. It includes most of the risks that the parties are exposed to, but also sets out the remedies that could be taken by either party if a breach occurs. Not only that, the contract divides these risks and distinguishes one from the other, and to whom that risk belongs.
Phillip Capper: Nael, what are the big risks and why is construction more prone to them?
Nael Bunni: The big risks are defective design, defective material and defective workmanship: many arbitrations relate to these risks. Beyond that, there are a multitude of risks beginning with the commencement of the project, such as where the site, or a part of it, has not been handed over on time, to the end of the project when the contractor doesn’t complete on time. These risks produce problems that relate to, or demand, the involvement of specialists who would be required to deal specifically with the complicated issues of causation and calculations on prolongation, delays and disruptions.
Phillip Capper: Ziad, you were going to say more about the sort of major potential risks?
Ziad Obeid: In terms of how to avoid construction disputes, it’s a very challenging task. In terms of drafting, I will focus on the issue of back-to-back contracts and how, if you have sub-contract agreements, to make sure that you are incorporating provisions of the main contract into the sub-contract, and it is done in an efficient way; and, specifically, with particular attention to the dispute resolution mechanism.
We see a lot of clauses drafted with the simple incorporation of, for example, Clause 67 in the old FIDIC in a sub-contract. Then you have questions about who’s the engineer under the sub-contract and suddenly this creates a lot of problems during the execution of the project. The other area to pay attention to is when making specific amendments to the way the general conditions would operate. Again, very careful drafting required here.
The point I want to focus on is clauses where the intention is to solve disputes at the early stages by creating a mechanism for sole expert determination that is then followed by arbitration. However, when some clauses are drafted, they suggest that there is a choice between either referring a dispute to expert determination or to arbitration. If the clause is not worded carefully – because often the test in these clauses is that a purely technical dispute would be referred to expert determination – clauses sometimes provide that this would be final and binding. Alternatively, you would then refer the dispute to arbitration. If the clause is not worded carefully this might lead to a risk of conflicting forums and disputes as to what is the proper characterisation of the dispute. So, again, that’s something to pay attention to.
Phillip Capper: I had a case some years ago involving the design and construction of a railway where those who drafted the contract had provided for reserved disputes. This is a clause which was not applicable to all disputes, but that certain disputes would be taken down a different pathway. I think, perhaps because it had been developed initially from a project finance perspective, the reserve disputes were all those that were concerned with money claims. Just think about that for a moment. The reserved disputes were supposed to go to court – all the other disputes would go to arbitration – but the concept that you could identify those which were only concerned with money claims in our kind of industry makes that difficult.
In this area of risks my experience suggests that the civil and building side of the construction industry often sees not only a sort of coalition of contractors coming together as a new team, but often doing work for an employer which is not that experienced in major procurement and that creates more difficulties. My sense is that in oil and gas some of those issues are not so bad because you have very experienced owners of the procurement process, and they very often have their own expertise; the industry that serves them is also very much more aligned to the objectives. Julian, tell us about it.
Julian Haslam-Jones: I agree with what you were saying generally, but there are occasions where procurement issues will come into disputes in the oil and gas industry. We’re talking about avoiding arbitration here. One of the fundamental things is that the parties are very clear about what risks each party is taking, especially in the oil and gas industry. A typical model is complete the front-end engineering design (FEED) and then to tender on an Engineering, Procurement and Construction (EPC) basis. The endorsement of the FEED is fundamental in a lot of disputes because the contractor is coming in, he’s tendering against the FEED and, normally, in a tender process, it has to endorse the FEED. Then, technically, it’s very difficult to quantify all those risks. So, one of the fundamental things in avoiding arbitration is to manage that process and to make sure – and there are different mechanisms to do it – that endorsement of the FEED is managed by the parties so that it’s clear, once you have the contract signed, the risk that the contractor’s taken and the risk that the employer has taken.
Phillip Capper: That’s all very well so long as the engineers are talking to the lawyers, and vice versa.
Julian Haslam-Jones: Absolutely.
Phillip Capper: We’ve seen so many cases where the specification documents have been drafted by the technical team and the conditions of contract by the legal team. I’ve sat through arbitrations where, in the oil and gas context, the best of intentions on the technical side have not matched up with the rather ambitious provisions in the conditions of contract.
Julian Haslam-Jones: I would agree. What can happen is that the legal department will look at the terms and conditions, the engineers will do the scope of works, the health and safety department will look at HSE and the quality guys will look at the quality document. But, often in organisations, no one’s starting from the top document and going through every document to ensure they all match up together; that there aren’t any contradictions and ambiguities.
Phillip Capper: Tom, do you have a comment on the risk question before I go on to the use of standard forms?
Thomas Wilson: I think you hit on a key issue, particularly in this region, when you address the difference between civil engineering and general building works, versus the oil and gas sector. Most of my experiences are in the former. One element we must keep in mind is that dispute resolution is part of an overall procurement matrix, and that that matrix is driven by the employer in all respects, and the employer is driven by its needs – sometimes, but not always, economic. In the oil and gas sector, the employer is going to own and operate a facility for a very long period of time and seek to maximise the profit from that facility. That makes that sector fundamentally different from the Middle East’s infrastructure and general buildings sector. In general, and certainly in Dubai and the UAE, the asset has already been sold before it’s built so it’s off-plan sales. The goal is ultimately to deliver within a timeframe sufficient to assure that the developer doesn’t default on the contract with investors. There’s not a long-term lifecycle concern driving the developer. Most of our infrastructure here is operated by governments’ traditional public works regimes where again the goal is to deliver a service, but the efficiency of that service does not override the drive for a low cost. So, it’s more of a cost versus a value assessment. I think those drivers frame the entire procurement process and the differences we see in different industries, as well as the willingness to address dispute and dispute avoidance in contracts and through alternative methods.
Phillip Capper: Nael, is FIDIC the answer to all of this?
Nael Bunni: That’s a very difficult question to answer but, in my view, the FIDIC Suite of Contracts is really an international set of different contract forms and although the original FIDIC Red Book started in 1957 as a contract with a common law background it changed from one edition to another to become more and more applicable to different systems of law. For example, many common law principles were replaced by more appropriate expressions and so “liquidated damages” became “delay damages”; or “frustration” was changed to “force majeure”. In 1987 and later in 1999, FIDIC took a very wide step to look at its background, changing it from its origin of a common law system to a more international outlook. However, sometimes they went too far. For example, adopting force majeure was, in my view, wrong because force majeure is part of the law of the jurisdiction and, of course, each jurisdiction defines it differently. So, to include it in a standard form of contract was wrong and that proved to be the case and so, the forthcoming second edition of the 1999 documents will replace force majeure and change it to what is more appropriate: exceptional risks. In trying to be more international or to issue internationalised documents, FIDIC went too far in that instance towards the civil law and has now retreated to a more neutral way of thinking.
However, the FIDIC Suite of contracts is a balanced set. As you know, FIDIC in its Suite of Contracts has various types of contract. There is the Red Book, which is a contract based on a design carried out by the employer, or on his behalf. There is the Yellow Book, which basically has the contractor designing. Of course, even when the contractor designs, the original design starts with the Employer’s Requirements so that the conceptual design always starts there, but design becomes the contractor’s responsibility under the Yellow Book and goes on to do the final detailed design. Then there is the Silver Book, which is and EPC contract (Engineer/Procure/Construct) and is more amenable to the private partnership type of contract. The Red Book is a well balanced contract but the risk shifts in part from the employer to the contractor as you move to the Yellow Book and shifts further towards the contractor when you choose the Silver Book.
Phillip Capper: It’s interesting that the FIDIC form really does hit key points which are not dealt with well in bespoke contracts. One example I’ve seen recently is where the provisions on taking over – we’re all familiar with projects around the world where effectively the employer is using the project, but there’s no sign of a takeover certificate anywhere – and FIDIC is well drafted on that. You have a deeming provision from a legal point of view which leads to a takeover regardless of the absence of a certificate. But then you get other questions, such as: if there is an entitlement to a variation order and it’s not been granted, does the claimant have to go through the Clause 20 claims procedure; or is that entitlement direct and can one go straight to the dispute adjudication board?
I would like to hear from Julian as to whether it is his sense that the oil and gas contracts go about this differently. I am convinced that, if we’re going to avoid disputes in construction, two things will have to happen: one is there’s going to have to be much better attention to the drafting of the performance requirements or the specifications, which is not the lawyers at all; and, secondly, there’s got to be far better attention to the proper management of the contract by the employer’s team during the works. You can have the best drafting in the world but, if there’s a mentality to say, “no, no, no” to every issue raised by the contractor, there’s going to be a very long arbitration at the end in any event. Julian, is there a difference in standard forms from your experience?
Julian Haslam-Jones: In my experience in the oil and gas industry, most of the contracts I’ve dealt with have been bespoke and it’s been rare that I’ve seen something like CRINE/LOGIC used. I think standard forms are the way forward personally, but it’s important that if you’re dealing with a business and you’re trying to say, “look, I really think you should introduce a standard form”, that the business understands the obligations that are set up. I’ve seen companies introduce standard forms, whether it’s FIDIC, JCT in traditional construction or CRINE/LOGIC in oil and gas, but they haven’t as a business said: “Okay we’re going to use these standard forms for contracting now. It’s got these types of obligations, even simple things like signing up to payment terms that the finance department cannot meet”, and this all leads to disputes and processes having to be entered into. So, I think standard forms are good, but the business that’s taking them on really needs to understand the obligations and manage that. Otherwise it’s pointless.
Phillip Capper: I’d like to hear from Nael about what’s been happening with dispute avoidance and then Tom will take us through a transition into our second topic, which is avoiding arbitrations.
Nael Bunni: The different FIDIC Forms of contract have a multi-tier dispute resolution process and, if you look at the way in which that process is structured, certainly in the 1999 document, you first of all have a disagreement. Something happens where the parties disagree on and then, when that disagreement is not resolved by discussion or negotiation, you go onto what’s known as a claim. A claim is simply an assertion of a right and, if the claim doesn’t get resolved, then it manifests itself into a dispute. Now, the dispute is a claim that is rejected, and the rejection is rejected. This is set out in Clauses 2.5, 3.5 and 20 in a step by step procedure. So, the idea of the dispute review board that FIDIC adopted – and really adopted it from the American practice– was that the engineer, as you know traditionally, didn’t give a recommendation, he gave a decision. FIDIC decided that the review board should be changed from a dispute review board to a dispute adjudication board, or DAB. This means that when the engineer gives a determination under clause 3.5, that determination is not a recommendation but a decision in its own right. Then, if the decision is challenged, it goes to amicable dispute resolution and then arbitration.
So, there is that step of referring a dispute to a DAB, which originally started as a decision-making process, then found itself of great benefit in trying to avoid the dispute by involving the DAB in giving an opinion and if not accepted, then a decision. That proved to be extremely helpful. Now, if I may bring in the second edition of the FIDIC documents which are hoped to be published later this year. These have been enlarged to make avoidance of disputes the main reason for the DAB. The idea is not only that you can ask the DAB to give an opinion which can resolve the dispute, but it [requires] the DAB, the board or, in some cases, one person as the DAB, to intervene and say: “Hey, this is going to lead to something wrong, a conflict.” It’s caught at the stage when the disagreement is blowing up; catch it then, stop it from developing into a claim and subsequently a dispute. That’s where I see the DAB as being extremely useful and I’ve acted in many cases where such a disagreement was stopped before it became a claim and develop into a dispute.
Phillip Capper: We’re going to come back to that topic. Tom, I know you’ve something to say on the transition question.
2. How to achieve early settlement of disputes, or avoid arbitration
Thomas Wilson: This is a topic dear to my heart which I have studied since coming to the UAE nine years ago. In my practice in the US, the dispute resolution work I did was overwhelmingly involved in acting for clients before dispute boards in mediations and in other ADR mechanisms. Formal litigation and arbitration in the construction industry in 2007, 2008 and even before was relatively rare in the US. Since coming here, I have been a proponent of the use of dispute boards to help avoid disputes and the uptake has been miserable, as we know. So, I’ve reflected a lot on why that is the case. I have a dissertation here by a quantity surveyor named Lindsay Brown who wrote “Dispute Resolution in the UAE, the Potential for Dispute Boards” in 2013. It’s quite illuminating and identifies some of the reasons why dispute boards aren’t being used here – some I agree with, some of which I don’t. The reasons advanced for the difficulties dispute boards are having gaining acceptance in the Middle East are not unique to the region. The same hurdles were faced in the US and other regions where dispute boards are used quite regularly. A key one is what Ms Brown refers to as commercial control: employers want to retain commercial control over their projects; they don’t want to cede that to a third party in the nature of a dispute board. Contractors don’t like to use dispute boards because they add an extra cost to the project that they feel they’re going to have to shoulder, and a further hurdle between a claim and an ultimate resolution.
Both of these elements were prevalent in the US market as well. I can assure you that the Departments of Transportation of the US don’t want to give up commercial control over their projects; they don’t want to give contractors an easier path to a claim or increase the cost of their projects. I think the difficulty we face in this region with dispute boards is a lack of education as to what a board is and what it’s intended to do. Nael touched on this earlier with the distinction between a DAB which provides a decision, a determination – in other words a loss of commercial control – and a DAB sitting in a review circumstance which provides a recommendation and assists the parties reach a resolution of their claim with expert guidance. The US tradition is only for the latter. US dispute boards do not typically give decisions; they don’t decide disputes. They simply help parties reach a reasonable resolution of a dispute at an early stage. That enables the employer to maintain commercial control – the employer of course can decide not to go along with the recommendation of the dispute review board and occasionally does – but it doesn’t give up control over the project.
I think what has happened since FIDIC’s introduction of dispute adjudication boards in the 1999 forms and the passage of the Housing and Grants Act in the UK – which added adjudication in some ways similar to the dispute board concept that has been sold in the Middle East – has skewed too far towards another decision-making step, another potential loss of commercial control, and not closely enough to the advice of people like Dr Bunni or Phillip Capper, who can be involved in a project and assist the parties in reaching resolutions of disputes for their own good and for the project. I’d like to see – and am heartened by – the recent new additions to the ICC dispute board rules, as well as the changes in FIDIC. I’m heartened by the refocus internationally of the dispute board concept, of the concept of avoidance of disputes, rather than simply deciding disputes at an earlier stage. I think that will help us in the region.
Phillip Capper: One of the motivations that played on those who recommended what became statutory adjudication in the UK – and that has spread to Australia, Singapore and elsewhere – was that it had been battle-tested on the Channel Tunnel. If you ever find yourself in that part of the world and wonder why there is this magnificently successful civil engineering project, it is the result of one man and one man only. He was chairman of what today we would call the DAB. And that’s not just me saying that. The head of the contractor consortium, Jack Lemley, said that, and why is it? Because without the discipline of an immediately accessible and rapidly moving DAB, there would not have been the sanction potential to bring Eurotunnel to its senses and keep the project moving. That was a project which was on a knife edge throughout as to whether it would ever succeed. So, there are examples of where the DAB can play a very significant role in bringing the project back on track.
Ziad Obeid: To pick up on what Nael and Thomas said about arbitration coming to overcome the inefficiency of litigation and then came dispute boards to overcome the mounting costs of construction arbitration. Obviously, I don’t think we’re there yet, and this is not simply for the reasons just mentioned. We’re also seeing that a lot of standing boards are not being implemented at the beginning of the project and some dispute boards are mutating into pseudo-arbitrations, with extensive involvement of counsel from each side. In my view, if correctly implemented, dispute boards can have an overwhelmingly positive impact on the relationship of the contracting parties, as well as the project’s completion time and costs. I think the solution is a return to the original philosophy of the dispute boards as a standing body to resolve disputes or issues, as and when they arise, and only in exceptional circumstances to render a decision on a particular matter.
If implemented properly, it could be a very efficient tool. For example, a lot of people refer to the China hydro plant where 40 disputes were referred to dispute boards and none afterwards went to arbitration. In terms of management, there are a number of innovative ways where we can first incorporate effective contract management, but also during the execution of the project. The role of the employer, the employer’s teams and the engineer is crucial. There are a number of techniques called partnering – it’s mainly a North American technique – basically to establish a non-adversarial relationship and regular workshops and monitoring, starting with a kick-off meeting at the beginning of the project to identify the responsibilities of each party, and the clauses that could potentially constitute impediments to recoveries, mechanism for notifications, etc.
There’s another method called the Decision Tree Analysis, which consists of exchanging key personnel hierarchies in the decision-making process at the very start of the project. It creates familiarity with one’s counterparts to ensure that there are proper incentives for the resolution of the issues and for each individual in the organisation to know exactly to whom they need to talk to get a point resolved. Some people have tried to implement what they call alliancing – an Australian concept based on a trust model – which is beyond the traditional separation of relationships and responsibilities. At the beginning of the project, they create a key project team to make sure they know all the way through the process and can discuss concerns and resolve issues in a business-like fashion with unanimity.
Phillip Capper: All of these discussions assume various things. One assumption is that the employer has a budget large enough to pay for the works that the employer is asking for. Another is that the contractor consortium is aligned, first of all in its balance sheets such that they can meet these responsibilities and, more important, in their style of working. You can have a consortium where you’ve got one contractor wanting to charge ahead, work at risk, convinced they’re going to be paid at the end; and another contractor from another continent who will not move without clarity as to variation orders and so on. So, there are a lot of behaviours that make our structures somewhat unrealistic. But, Julian, tell us about oil and gas from the alliancing perspective and also one of our questions was real-life examples of stopping a dispute in its tracks.
Julian Haslam-Jones: Well, on the point of a real-life example of stopping a dispute in its tracks, I’ll refer to a project I worked on from start to finish. It wasn’t in this region and everything that could go wrong on that job did go wrong. The contractor was late mobilising; there were a huge amount of design changes; a sub-contractor went insolvent; there were massive fabrication issues; there were issues with the installation of the equipment. But, believe it or not, when it came to the end, the final account was settled within four hours and the reason was there wasn’t a dispute board involved. It was the parties working together. What happened was that the employer and contractor teams would sit around the table every three to four months and say: “Okay, we have a volume of changes that have happened, and want to make an agreement that is full and final for this period of time.” The job took three years, but they did that consistently and it meant at the end nothing could be opened up again. We weren’t talking about changes or variations from three years ago. The time and cost factor had been dealt with in block sizes, and that is why there was no dispute despite massive problems between the parties. I thought it was a good example of not using a dispute board, but of parties working together rather than letting the issues build up. A big issue in oil and gas is that projects go on for a period of time, so you can have a project that might go for two, three or four years. If you don’t deal with disputes in a timely manner, if you get to the end of that project and you’re talking about things from four years ago, it’s very difficult for the parties to get a fair and reasonable decision, especially if the record keeping hasn’t been good and the administration hasn’t set out what the issue is.
Thomas Wilson: Phillip, you mentioned that this conversation is set against the background of a number of assumptions and the ones you’ve identified as examples are assumptions that one can’t count on in this region. I believe there’s a further assumption: that absent some amicable intervention, the claim will move to a dispute resolution process, be resolved and that there will then be an award or court judgment that can reliably be enforced within a reasonable time. That assumption was available in the US even when dispute boards rose into use, and I’d say it was an assumption one could rely on in the UK and other jurisdictions in which dispute boards have been used effectively. That is, unfortunately, not an assumption we can rely on in the UAE or the region.
Contractors here will settle valid claims at a much greater discount compared to other places because they have come to expect that the process of taking a claim through arbitration and then the challenge process in the courts and enforcement is going to be a six, eight, maybe ten-year process and, on substantial projects, it is. The value of money over that period decreases greatly so the net present value of the settlement is far lower. If that changes, I believe we’ll see greater use of alternative dispute resolution methodologies because employers will not have that unknown working in their favour.
Phillip Capper: That’s one of the reasons why I said earlier that the DAB on the Channel Tunnel was so effective. One of the most remarkable instances was because of the difficulty of moving the claims process forward, the DAB awarded – we’re going back a long time now but these were very large sums of money – £50 million sterling interim funding per month. That was, if you like, an award by the DAB just to keep things going; it was enforceable and was enforced. You spoke about alliancing, Julian, but should people be clothing themselves with claims experts in all directions?
Julian Haslam-Jones: I don’t think so, no. Practically speaking, it’s good to have an expertise in-house and, whether it’s on the employer’s side or the contactor’s side, I think one of the expertise in claims is extension of time. My experience is that when there are discussions about whether there are disputes, the quantum side is often straightforward. Dealing with time, with the extension of time, with prolongation, dealing with disruption, in particular, is challenging and organisations need that expertise. It’s very unusual to have that type of skill set within an organisation, but it’s a fundamental part of any variation within a contract that the time side is very important.
Phillip Capper: Thank you. Ziad?
Ziad Obeid: Just a brief comment on what Thomas said. I agree with what you’re saying about the challenge proceedings that might take years even if you get to the award. One thing – and this is also the role of arbitrators – is to make sure that they can put a high rate of interest in their awards. I can tell you of one case where you can get up to 12% in rates of interest and that is a significant return. The other side would just say, “okay we’d better settle now as opposed to fighting it in the courts.” Certainly, this is an issue in the region.
Phillip Capper: Well let’s turn to our third topic then which is headed “good intentions and problems with implementation”.
Nael Bunni: Phillip, may I comment before you move on?
Phillip Capper: Please.
Nael Bunni: It’s important to point out that one of the presumed reasons for not using DABs is cost. That’s really a fantasy. It’s absolutely wrong because the cost of a DAB is much less than one single arbitration that may result if the DAB is not there and doesn’t intervene. You should consider the DAB as insurance. How much would you pay for insurance? The project has to be insured under Clauses 17 to 19 of the FIDIC Forms of contract. Now, add a small bit of insurance for the DAB and you can see the benefits that you get. In my view, the non-use of DABs goes back to the consulting engineer. He’s appointed to advise the client and doesn’t really want to bring in someone on top of his role to advise.
3: Good intentions and problems with the implementation
Phillip Capper: We’re looking at so many different situations here because we all have experience of DABs which have been immensely successful as very responsive instruments to defuse the development of concerns and to offer, as Tom said, wise advice. When it’s done well, it works very, very well. We also all have experience of projects where the DAB has not been properly appointed, or not appointed at all. The DAB takes an immensely long time, sometimes because the parties themselves, as Ziad said, have converted the process into effective arbitrations. We’ve all seen this happen. It’s not as its designed to be, but the ingenuity of humankind leads to these outcomes.
When disputes arise, the real questions are not so much the techniques available as what the objectives of the parties are. Once one knows the objectives of the parties, then the question is what resources they have to meet those objectives. And very often there’s a dispute because there is a mismatch between the available or desired objectives, and the available resources to meet those objectives.
Let’s just look at some of these issues when the process fails. There’s an increasing interest around the world in the interface between DABs and arbitration. Nael is not responsible for – but has nevertheless given his name to – the so-called Bunni Gap. It’s nothing that Nael created, he just wisely pointed out a then-problem with the FIDIC drafting – and it’s not just FIDIC, it’s a generalised problem.
Lawyers think they know how to draft the contract: “All disputes arising between the parties in relation to this contract shall first be referred to …” – insert whatever it’s going to be – “… and, if not resolved by that step shall be settled by ICC arbitration, seated in Dubai.” What happens if the first step is a decision-making board? A DAB? You get a decision; it’s in favour of the contractor, but the employer doesn’t pay. What happens next? Because the contract says all disputes shall first go to a DAB, off you go around again. A properly drafted contract has to have a way out of the Bunni Gap. The non-respect of the first step can’t be a dispute that goes back to the first step otherwise you disappear in an endless loop. Various court decisions touching this interface between dispute boards and arbitration are appearing from Singapore, Switzerland and England, and I think we will see more of it. But I would be interested to pause to see whether Tom and Ziad have comments on this problem: that even when we set out with good drafting, once you get to the dispute stage, the best intentions don’t carry through.
Thomas Wilson: If the largest drafting problem we had on projects in the Middle East were the Bunni Gap, we’d be very happy. Unfortunately, in the civil infrastructure and general building side of the business, most contracts are drafted as part of a tender package put out to competitive bid, and they’re drafted by a project management consultant or a consulting engineer who’s put the package together. I would say that maybe 25-40% of the arbitrations I see start from the basis of, if not a pathological clause, at least a defective clause. We spend a good deal of time at the outset trying to craft a way to save the arbitration despite the clause. One example is the one you mentioned earlier where there’s a requirement to put the dispute to conciliation, mediation or a dispute board and nothing has been done; it’s viewed as a jurisdictional issue for a tribunal.
I would suggest the way to resolve that is that contractors need to push employers to ensure that those clauses are effectively drafted. It’s not so difficult. Go to a form clause, whether from the Chartered Institute or FIDIC or ICC or anybody else, and just use a form clause, if nothing else. It’s shocking to meet the number of contract drafters who don’t do that and then leave us with the mess.
Phillip Capper: You’re absolutely right and the solutions are out there when you’re dealing with a particular relationship, for example between the employer and the main contractor. It gets very difficult if your plan is to make sense of the first and second sub-contract layers, or if there’s some other relationship with the employer. Once you try to provide for integration up and down the chain, while allowing for anything other than an absolutely vanilla-plain final dispute resolution by arbitration or whatever it may be, it gets very difficult. Ziad?
Ziad Obeid: Certainly, I would focus more on the reality of certain projects, drawing a distinction between the two types of DABs. Many of you will be aware that in the 1999 FIDIC contracts, the Red Book provides for a standing dispute board to be implemented at the beginning of the project, whereas the Yellow and Silver Books provide for an ad hoc DAB, which would be constituted to decide a particular dispute. Now, two issues arose: one is obviously whether the referral to a DAB is a mandatory precondition to arbitration; and, flowing from that, the question of whether there are exceptions and in what circumstances can the parties bypass that precondition. For the first question, the simple answer is yes; it is a mandatory precondition. Tribunals that have addressed this issue, which is consistent with a number of Swiss and English Court decisions. But there is a major exception.
Phillip Capper: Ziad, let’s just pause on that. You said mandatory precondition. Do you have a view as to whether that means it’s a jurisdictional sine qua non or, as our American friends have decided in the BG case, that it’s a question of timing. It’s not whether; it’s when. And more interesting, can you cure it by starting a DAB process after you’ve started the arbitration, or must it come before? Yes, it’s mandatory in a contractual sense, but what does that mean in terms of jurisdiction or not jurisdiction?
Ziad Obeid: First of all, it is mandatory in a sense, but there are exceptions. On the question that you just asked, there have been varying practices by tribunals in relation to the issue. Some tribunals consider it a jurisdictional issue, simply dismissing the case. Others consider it an issue of admissibility: that it’s premature to refer the dispute to arbitration. We have seen decisions as well where tribunals have decided to stay the procedures and then told the party to just try to go through the process. I think the reasoning given by a tribunal in those circumstances was strengthened by the fact that they thought it unlikely that a party would be happy with the decision of the DAB, such that they would anyway find themselves before that tribunal. And the last point is, obviously, the applicable law.
Nael Bunni: Is it the law of the arbitration as an aspect of jurisdiction, or the law of the contract?
Ziad Obeid: Absolutely, and this brings the question of these prerequisites to arbitration. What is the law governing these procedures? There were a few cases where they have confirmed that it should be the law applicable to the arbitration agreement, but that is not necessarily the law governing the contract: the substantive law.
Phillip Capper: Let’s keep in mind we may have at least three laws around here. For sure, we’ve got two and they’re typically different. Globally, you would normally find that the law governing the merits of the dispute may well be different from the law governing the validity and thus the arbitration itself. In this region that may actually be the same two laws. Very rarely – but it can happen – the law governing the agreement to arbitrate could be different than the law governing the arbitration itself. That’s come to prominence in a couple of recent English decisions, for example.
Ziad Obeid: Obviously there’s a parallel, but it’s not necessarily the same thing. This issue has also been addressed in the context of investment arbitration where often you have a cooling-off period, but the parties proceed to arbitration without actually maintaining that. Now, obviously the nature of that precondition is not necessarily the same as a formal DAB, but we have a lot of decisions by tribunals on that particular point. The second issue I wanted to discuss is the exception and that’s where we have some uncertainty – or, at least, not a uniform body of decision – in relation to when a party can bypass the DAB. The source of the difficulty is Clause 20.8, sub-clause 20.8 in the FIDIC which provides that, where there is no DAB in place – whether by reason of the expiry of the DAB appointment or otherwise – and with some practitioners trying to construe “or otherwise” as a licence to ...
Phillip Capper: … those two little words “or otherwise” have ensured a lot of lawyers’ children are well educated.
Ziad Obeid: We won’t go through the cases now, but there’s a fairly clear view as to the circumstances in which a party is being obstructive or intransigent. In actually agreeing to a DAB, there’s still an issue as to whether the signature of the DAA and some conflict as to whether a DAB is validly constituted when the DAA assign or there is no requirement for the DAA to be assigned. That is certainly an issue in practice and the reason we’re seeing it is because a lot of contracting parties do not really believe that the DAB would help them resolve any issues, so they don’t implement them when they should have.
Phillip Capper: Let’s pause and just see if there are comments and questions from the floor.
Nael Bunni: In the meantime, may I mention something relating to the Gap? And that is that FIDIC made a mistake in the 1999 Red Book and didn’t include one of the two possible scenarios that should be included in Clause 20.7. FIDIC admitted that mistake in a memorandum published in April 2014 and that memorandum really should be studied very carefully. If you’re going to use the 1999 Red Book, you must make sure that you look at the memorandum of 2014 in order to correct the wording of Clause 20.7 of the 1999 Red Book.
4: Audience questions
Phillip Capper: Michael?
Michael Schneider: Just a brief observation concerning the types of disputes. I think there’s a big difference between the industries. You mentioned the oil and gas and civil engineering. Civil engineering is a one-off project and a contractor has to get his money on that project. In oil and gas there’s traditionally a long-standing relationship, mainly with the client. The big oil companies have engineering departments; they know what they’re talking about. There was traditionally a symbiotic relationship where the employer knew what the contractor was doing and wanted the contractor to get on with it, especially in the North Sea. That changed with two things: new players, often government-controlled with a different mentality who didn’t have the same type of industry; and, secondly, the entry of the banks.
The banks have a totally different mentality. They are not thinking of the working of the project and the relationship. They look at the financial things. That was a big change and has had a great impact on how disputes are handled. Now the question, specifically for DABs, is what do you do if you have arbitration rules like the ICC – where you have terms of reference which exclude later claims – and you have an arbitration that starts during the project and when claims are still in the pipeline? Can you have a reservation? Can the tribunal regulate the steps that have to be taken through the DAB or the engineer or adjudication, or can you say that, once a dispute about claims is in arbitration, you forget about the preliminary reference?
Phillip Capper: Two observations. First of all, I agree with Michael that there are enormously different dynamics in the different sectors. I would add two other illustrations of these different frameworks. We speak of civil engineering infrastructure projects. There’s still a major question as to whether that’s, as Tom mentioned, a capital works project. In other words, is it a publicly-funded sovereign debt piece of work which was true, for example, of the project for the Olympics in London in 2012, and is also true of the Crossrail rail network being built under London? Or is it a Special Purpose Vehicle structure through some form of public/private partnership or project finance arrangement, which was very fashionable before those projects? In those parts of the world where this kind of SPV arrangement works, it doesn’t have to be a public/private partnership; it may well be an arrangement set up to finance, for example, the procurement of a new power plant. There, you get very different dynamics because the SPV company and its shareholders – which is inextricably linked to the supply chain, but isn’t the supply chain – generates all kinds of different dynamics which I think are very awkward.
If I may respond to Michael’s second question: what you do when you’ve got an arbitration running and still some claims on the project is very difficult. Not least because a first reading of some contracts would lead you to think that you must have been through these previous steps before you commence the arbitration – and “commence” under ICC terms would mean the request for arbitration, not the terms of reference. On the other hand, since it may only be a question of admissibility, as with the BG case, then it’s a question of timing. What does it matter if you haven’t got to the terms of reference you may as well bring everything in, and there are examples where arbitral tribunals have waited to allow that step to be cured. I don’t see any problem with the idea of reservations. Agreement cures all but, if there isn’t agreement I think, particularly in the ICC context, there’s great powers for the tribunal because we all know that the tribunal has the power, having regard to where the processes reach under the ICC rules, to allow further claims.
Shamlan Al Sawalehi: This is Shamlan Al Sawalehi, resident judge at the DIFC Court. I’m attending today to explore what could be done from the judiciary perspective. We also have distinguished judges from the Ministry of Justice attending this session. The question is to avoid construction disputes in future. Is the problem to do with the legal framework or the legal principles where the judiciary across the border is not clear about what the contractor has to avoid when they draft the contract? Or is this something beyond the legal industry that has more to do with the construction business itself?
So, the question has two parts. The first part: is there anything the judiciary or a court can do in this region? If yes. how can we develop judgments in this field so that the construction business can be more certain and avoids disputes in the future. Now, I’m guessing that the arbitration practice in the UK, which is the leading jurisdiction, has very clear judgments, but there are still a lot of disputes going around. So, to avoid construction disputes, is it the legal framework, the decisions of the court or that business does not understand what is coming next? Or is it more about business culture and the nature of the construction business?
Phillip Capper: Let me answer, if I may, briefly the first part. Why is adjudication of construction disputes – by adjudication I mean the equivalent of DABs, the statutory form of adjudication – so effective in the United Kingdom? The answer is because you don’t need to do it. What on earth do I mean? It is massively effective because you don’t do it. Why don’t you do it? Because when it was created the judges said: “We’ll have special sessions on Friday mornings; we won’t have the normal rule book; we won’t have the normal times; we will make a judge available on a Friday morning. You have an urgent question to do with this adjudication business? We’ll see your application immediately.” And then they gave a couple of judgments that said that, if the adjudicator says X, X it is; enforceable for sure. What if X is even arithmetically wrong and you can see in the decision that it’s wrong? Tough! X is X. You follow the decision. You can come back to the courts months and years later.
So the judges made statutory adjudication effective because they gave absolute clarity to its efficiency and made themselves available at the beginning to solve any issue. Within months everyone knew that if you argued the issue and went to adjudication you were wasting your time because the correct party would win and the courts would uphold it. So you wouldn’t even go into the adjudication. Adjudication becomes effective as a sort of threat or sanction which pushes the resolution of the dispute back on to the parties. But, Tom, I’m sure you’ve got a comment too.
Thomas Wilson: Yes, thank you Phillip and thank you for the excellent question. My comment is that the construction industry is hard; it’s capital intensive; it creates something from nothing; and it takes a long time to do it with a lot of interfaces. So, a number of the problems with disputes in the construction industry are industry-specific. That said, can I return to what I said at the outset, which is that we have to view this holistically. The procurement structure, the contract drafting, the dispute resolution methodologies, all of that, are developed against a backdrop of the legal framework within which they exist. The first thing I ask when someone calls me with a claim or a potential dispute is what’s your dispute resolution mechanism, what’s the governing law, what’s the seat of the arbitration, if it is arbitration. That’s not because I want to race to an arbitration, but it’s because that’s where the buck stops to quote Harry Truman. We know, if nothing else is done to prevent this, that’s where things will end. And it is with that knowledge that one assesses the reliability of that default process and that defines the leverage that the parties have – or at least substantial levers in the leverage structure – during the negotiation of the resolution of the dispute.
The thing that the legal structure within the UAE can do – and the most important thing right now to change the unknowns within that structure – is to promulgate the promised new arbitration law. The arbitration law with which we deal now and the multi-tiered process through which awards go in the courts provide a great deal of uncertainty, and are used as leverage against contractors with valid claims. Secondly, having practised here for nine years, more fulsome education of the bench, especially at the Court of First Instance level, as to the arbitration law and as to how awards should be dealt with would be immensely helpful. I find, typically, that by the time an award gets to the Court of Cassation, it usually comes out right as to under the existing law, whether it should be enforced, annulled or set aside, but often at First Instance level the decisions are wrong and they are reversed at Appeal or Cassation.
Phillip Capper: We’re out of time so I’m going to pause for a brief concluding remark from Ziad.
Ziad Obeid: To summarise, we have discussed how to avoid disputes when drafting your contract. The reality is that we know that there’s a lot of competitive bidding, and often underbidding, in certain projects. Contracts are sometimes drafted in an unbalanced way and it is inevitable in construction and major infrastructure projects that there are extraneous issues. Sometimes the concept is not ready if it’s a design build. Sometimes the contractor is not ready. Sometimes even the employer is not ready. No matter how well your contract is drafted, these issues are going to happen, and the contractor and employer will face them on the project. That is why it is key to have mechanisms like dispute boards to actually help during the execution of the projects to find a solution; and the underlying assumption is that both the employer’s team and the contractor’s team have to approach this with an open mind. If there’s a change or an issue, each party should recognise and take the responsibility for it. And if there’s a body that is there to cater for that context during the project, then, yes, we can avoid disputes.
Finally, I think a lot needs to be done in terms of training with industry-specific expertise because it is often the case that, even before an arbitration starts, some parties would go to the courts for the appointment of an expert just to preserve the status quo. Then we find ourselves in situations where the expert admissions have been extended beyond what they should be. I think judges really have to have a grasp of the nuances of construction in context, which is extremely important when it comes later to enforcing and streamlining the process.
Phillip Capper: So, it just remains for me to express my thanks to Nael Bunni, Ziad Obeid, Tom Wilson and Julian Haslam-Jones for this first session. Thank you all very much indeed.
GAR Live Abu Dhabi was held on 22 February 2017 at the Abu Dhabi Global Market Building. It was sponsored by Abu Dhabi Global Market, Shearman & Sterling, Freshfields Bruckhaus Deringer, Berwin Leighton Paisner and BDO.