Construction Arbitration in the Middle East
The Middle East is made up of diverse economies and is one of the largest exporters of oil and fastest growing regions in the world. There are ongoing efforts across the Middle East to reduce national dependency on oil and attract international trade. This has seen rapid infrastructure development in many countries across the region as a result of increased capital investment. The large-scale infrastructure investment programmes and the upcoming international events such as Qatar’s 2022 World Cup together with the 2020 Dubai World Expo evidence the magnitude of the construction industry in the Middle East.
Disputes are a common feature of the construction industry typically arising out of time, cost or quality issues. The implications of a construction dispute can be far-reaching and have adverse consequences on, not only the delivery of a construction project, but the economic growth of the region as the failure to resolve such disputes and enforce decisions may lead to a withdrawal of international investment over the long term. This is just one of many reasons why states in the region are keen to establish a comprehensive arbitration framework and successful arbitration centres to deal with such disputes, that are effective, reputable and in line with international standards.
A brief history of arbitration in the Middle East
The notion of deferring to an objective and neutral personality is a recognised dispute resolution custom in the Middle East. Traditionally, Islamic law encourages the use of arbitration (or certainly conciliation) to settle disputes. One well-known story of the Prophet Mohammad’s early life involved him being chosen by feuding tribes, who could not agree on a vital element of the reconstruction of the Ka’aba, to resolve the dispute. The Prophet bridged the gaps between the quarrelling parties by suggesting an original solution that was essentially a win-win for all.
Historically, there has been a reluctance to use arbitration as a form of dispute resolution in the context of trade between the Arab and Western worlds. The 1950s and 1960s saw several international arbitration awards determined against Arab governments in favour of private Western companies. These adverse decisions led to a questioning of the process’s legitimacy and ultimately the Saudi Arabian Council of Ministers and Libyan government refused to accept arbitration as an appropriate forum for any dispute with any ministry or government agency. In Libya, this decision was eventually reversed as the Libyan economy was affected as the value of contracts with Libyan governments dropped to reflect the risk that the contracting parties would not be able to arbitrate. There has also been a number of international arbitration awards in favour of Middle Eastern governments that helped to convince Middle Eastern countries of the effectiveness of arbitration in the context of trade between the Arab and Western worlds. In 1973, the Kuwaiti government obtained a significant arbitral award against a private British firm in relation to the construction of the Kuwaiti airport. The award was enforced in the United Kingdom pursuant to the New York Arbitration Convention (the Convention), following Kuwait’s accession to the Convention in 1978.
In the Middle East, countries are resolving to upgrade their arbitration laws to international best practice standards. This is evidenced by the fact that most Middle Eastern countries have adopted the Convention. Jordan and Syria were among the first countries to adopt the Convention, which came into effect in 1959. Since then, Kuwait became a contracting party in 1978, Bahrain in 1988, Saudi Arabia in 1994, Oman in 1999, Iran in 2001 and, more recently, Qatar in 2002 and the United Arab Emirates in 2006. Iraq, Libya and Yemen are among a few countries that are not signatories to the Convention. Further, Middle East states are increasingly adopting the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (the Model Law) in arbitration centres throughout the region. The Model Law was drafted by UNCITRAL with a view to assisting countries seeking to improve their laws in such a way as to ensure the best possible procedures for commercial arbitration.
The nature of construction disputes
The nature of construction disputes tends to be technical and complex and generally requires an expert to determine the issues in question. The past decade has seen a huge number of significant infrastructure projects being implemented around the region. The Middle East is currently hosting a substantial number of complex construction projects to complement its growth and development. The construction industry’s growth rate is expected to remain positive, as a result of increased government expenditure on developing infrastructure and industrial construction in the region.
This is very apparent when looking at the individual countries. Saudi Arabia’s population is rapidly growing. According to Central Intelligence Unit’s World Factbook, nearly 30 per cent of its population is currently under the age of 15. This surge in youth has led the government to accelerate investment in education and infrastructure in an effort to ensure jobs for the growing population and improve the high unemployment rates. Saudi Arabia is in the process of implementing some of the world’s most ambitious infrastructure projects such as the US$20 billion Riyadh metro. The metro project alone is expected to create about 15,000 jobs in Saudi Arabia.
Qatar’s economic policy focuses on sustaining Qatar’s non-associated natural gas reserves and increase private and foreign investment in non-energy sectors. The success of Qatar’s 2022 World Cup bid has augmented huge infrastructure projects such as Qatar’s metro system, light-rail system, the construction of a new port and sporting infrastructure.
In the UAE, Abu Dhabi and Dubai alone are currently undergoing six ‘mega’ infrastructure projects worth over US$55 billion to deal with the rapid population growth in the emirates, to prepare for hosting the Expo 2020 and to position the UAE as an international shipping and aviation hub.
In Oman, strong construction growth has been driven by the development of transportation mega projects, with road upgrades facilitating the flow of traffic from the Sohar Industrial Port along the Batinah highway to Muscat and the railway project increasing the scope for producers and manufacturers to expand their presence.
A large proportion of these Middle Eastern projects were initiated prior to the global financial crisis and reinvigorated in response to the Arab Spring in 2011. The number and value of construction disputes in the Middle East are increasing to reflect the growing investments and also the economic landscape, such as the developments in oil price, the change in the geopolitical landscape, the increase in foreign direct investments into the economy, the increase in cross-border activity, the legacy effects of bids priced soon after the 2008/2009 financial crisis and a rising global cost base. Consequently, a significant number of Middle Eastern countries have been busy updating and enhancing their laws and regulations on arbitration to effectively handle the rising number and value of construction disputes.
Construction disputes typically arise over time, cost, scope of work or quality issues. Construction contracts, particularly those based on standard forms such as the International Federation of Consulting Engineers, are generally voluminous and there are often issues arising from the interpretation of the various documents forming part of the contract. Disputes over the scope of work of the contract, represented by the plans and specifications (as modified or amended), are some of the most significant areas of dispute on a construction project. The documents can often be interpreted differently, particularly if the description of work in the engagement documents is unclear or ambiguous or when the plans or specifications provided by the employer are contradictory to the actual site specifications. Usually, the employer would provide an implied warranty that the plans or specifications are accurate and developable. However, the contract will also often include exclusions to the warranty. The extent of these warranty exclusions will often be the subject matter of a dispute.
The scope of work between a contractor and subcontractor is also a common topic of dispute. Often, the contractor will engage a subcontractor to bid on a particular scope of work without specifying in detail the parameters applicable to that scope of work. Terms such as ‘back to back’ are often used, which are not as effective as clearly specifying the actual obligations on the subcontractor. The subcontractor bid may exclude works anticipated by the contractor and this may lead to disputes. Likewise, change orders and extra work or out-of-scope work can lead to disputes over whether or not the contractor or subcontractor is entitled to extra time and costs.
Construction disputes also often arise as to whether work was completed in accordance with the agreed specification and expected quality. Each party to the contract may have a different view on whether the quality is acceptable, particularly in international contracts where standards may greatly differ. Other common causes of construction disputes typically involve speed, ineffectiveness of management control of any subcontractors, delays, and management of spending.
Typically, contract provisions allow the employer to terminate the contract for a material breach of the contract by the contractor or insolvency. The contractor, whether provided in the contract or not, can generally terminate if the employer is in material breach of any of its contractual obligations, the most obvious of which is failure to pay.
The importance of arbitration to resolve construction disputes
Where construction disputes occur, parties are increasingly turning to arbitration for resolution. The flexibility of arbitration, as well as its speed, efficiency and confidentiality, has made it an attractive method of dispute resolution to parties performing contracts with an international element in the Middle East. Construction work in the Middle East is predominantly procured by the government from global contractors and engineering companies (who often partner with local contractors). These global players prefer the use of international governing law and jurisdiction clauses and arbitration clauses in their contracts to allow any disputes to be heard by arbitration centres with which they are more familiar. Typically, the preferred arbitration centres are London, Paris, Hong Kong and Singapore owing to their reputation and recognition for an established formal legal infrastructure, the neutrality and impartiality of the legal system, the national arbitration law and track record for enforcing agreements to arbitrate and arbitral awards. Conversely, the employer (often the government agent for construction contracts) will generally prefer or be restricted (for example, under local procurement or tender laws) to using its local court system or domestic arbitration to resolve disputes.
The use of a local arbitration centre, however, is now increasingly being adopted as a middle ground, where law and public policy permits. However, owing to the confidential nature of arbitration, there is little public record to evidence this seeming upward trend.
In Saudi Arabia, contractors involved in private sector projects can negotiate all aspects of the contract. However, for public works contracts, the government entity clients are generally required to use the Saudi government’s standard form contracts. The Government Tenders and Procurement Law (the Procurement Law) governs almost all construction projects involving the government and does not allow for any alterations or waivers. The Procurement Law requires an ad hoc committee to be formed to hear any dispute either where a contractor believes that a government body has either breached the terms of a contract or a government body believes that a contractor has breached the terms of a contract, performed the contract defectively or engaged in fraud, deceit or manipulation. Either party has the right to appeal the committee’s ruling to the Board of Grievances within 60 days of the decision but any appeal decision is final. Owing to these requirements, disputes between a government entity and a private construction company could not be subject to arbitration in Saudi Arabia unless there is a specific approval by the Council of Ministers.
In the UAE, pursuant to article 203 of Federal Law No. 11 of 1992 (the Civil Procedural Law) it is permissible for contracting parties to refer any dispute between them to one or more arbitrators. However, the generally accepted position for resolving construction disputes involving a government entity is to do so through the local court system. In Iraq, however, the use of arbitration in relation to government contracts has been explicitly endorsed under article 11 of Regulation No. 1 of 2008 Regulations for Implementing Government Contracts.
Whilst there is no systematic reporting of arbitration cases in the Middle East, there are a number of GCC states reporting an upward trend in the use of local arbitration centres for the settlement of international construction disputes.
Arbitration centres in the region
The earlier period of reluctance by Middle East countries to use Western arbitration centres to resolve disputes has contributed to the development of arbitral systems in the region. Now, as the enthusiasm for Middle East countries to be used as a platform for international trade increases, some arbitration centres have been growing in line with international standards. The Middle East now offers a wide range of regional options for arbitration that include the following.
Arbitration in the UAE is governed by articles 203 to 218 of the Civil Procedure Law. Under the Civil Procedure Law contracting parties are permitted to refer any dispute concerning the implementation of a specified contract to one or more arbitrators. The UAE increasingly favours arbitration as a suitable mechanism for alternative dispute resolution (ADR) and is home to the following arbitration centres.
The Abu Dhabi Commercial, Conciliation and Arbitration Centre (ADCCAC) was inaugurated in 1993 and oversees a number of construction disputes for Abu Dhabi-based parties. Since early 2007, construction contracts by the Abu Dhabi government have provided for disputes to be referred first to an ad hoc dispute adjudication board, in line with International Federation of Consulting Engineers (FIDIC) forms, and then to ADCCAC arbitration. In October 2013, the ADCCAC implemented new procedural regulations for the conduct of arbitration. The new ADCCAC Regulations introduced good modern arbitration practice to the ADCCAC arbitration process in an effort to encourage more parties to consider the ADCCAC as a forum for ADR.
Dubai International Arbitration Centre (DIAC) was established in May 2003, as a successor to the Centre for Commercial Conciliation and Arbitration. The DIAC has in place its own Arbitration Rules acting as an appointed authority under the UNCITRAL Arbitration Rules and is now one of the busiest arbitration centres in the Middle East for construction disputes. In 2006, the UAE acceded to the Convention and in 2007 DIAC implemented its revised Arbitration Rules to bring the centre up to international standards.
The most recent addition to the forums available to handle construction disputes in the region is the DIFC-LCIA, which was officially founded in 2008. DIFC-LCIA is a branch of the London Commercial Arbitration Centre (LCIA) and it follows the LCIA rules very closely. As at 6 December 2015, the DIFC-LCIA had around 30 open arbitration or other ADR proceedings.
The Dubai International Financial Centre (DIFC) is an autonomous common law jurisdiction, empowered by Federal Law No. 8 of 2004 to enact its own regulatory and legal framework for all civil matters. The DIFC Arbitration Law No.1 of 2008 is based upon the Model Law. The DIFC is an opt-in jurisdiction which does not require parties to have any ‘connection’ with the DIFC in order to refer an arbitration to its jurisdiction. Anyone, from any jurisdiction, can opt for the DIFC as an arbitration seat. Pursuant to the Judicial Authority Law (Law No. 12 of 2004), DIFC awards, once ratified by the DIFC courts are enforceable by the Dubai courts. Once the award is ratified by Dubai courts it can also be enforced in the GCC under the 1995 Protocol on the Enforcement of Judgments Letters Rogatory, and Judicial Notices issued by the Courts of the Member States of the Arab Gulf Co-operation Council for enforcement. The DIFC/LCIA centre is fast becoming a popular choice for resolving construction disputes in the UAE. The DIFC-LCIA Rules will shortly be updated to reflect changes and improvements contained in the 2014 LCIA Rules.
The adoption of arbitration as a forum for resolving construction disputes is also growing in Qatar. Nonetheless, Qatar is yet to implement a comprehensive arbitration law. A draft law has been in circulation for over a year and is expected to come into force in the coming months (the Draft Qatari Law). The Draft Qatari Law is based largely on the Model Law and is meant to replace the existing provisions under articles 190-210 of the Civil and Commercial Procedure Law No. 13 of 1990 (the Civil and Commercial Procedure Law), which currently govern arbitration in Qatar.
Qatar International Centre for Conciliation and Arbitration (QICCA)
QICCA was established in May 2012 and is now more frequently being adopted as a forum for the resolution of disputes arising from construction contracts. Generally, parties are free to agree to an arbitration process in a construction contract.
In addition, the Qatar financial centre has its own arbitration rules and regulations under the jurisdiction of the Qatar International Court and Dispute Resolution Centre, a wholly separate jurisdiction to the state of Qatar in its own right although at present of limited significance in the context of construction arbitrations.
On paper, Iraq has established three arbitration centres in Baghdad, Basrah and Najaf. Arbitration has been recognised as a mode for dispute resolution under the Iraqi Civil Procedure Code since 1956, and was modernised in 1969 when the present Civil Procedure Code came into force. When compared to other Arab countries, this early legal development was hardly surprising as the British-backed monarchy that ruled Iraq during the 1920s to 1958 was interested in modernising Iraq’s legal system.
However, in the early 1970s when the Ba’ath Party came to rule Iraq, a shift took place after the regime started consolidating powers domestically. This stymied earlier efforts to reform Iraq’s interactions with foreign investors. Despite a construction boom throughout the 1970s, arbitration continued to dwindle in the background as Iraqi judges tended to interfere in arbitrations based on ‘public policy’ grounds. The anti-arbitration sentiment permeated commercial relationships, particularly in government-backed projects involving foreign contractors. Unreliability and uncertainty became synonymous with arbitration.
In 2006, the first democratically elected Iraqi parliament enacted the Investment Law to attract foreign investment, which recognised arbitration as a mode for resolving commercial disputes. However, it was not restricted to Iraqi arbitration, which in practice resulted in further desertion of the local arbitration centres as foreign entities resorted to more developed institutions. Today, only Najaf’s arbitration centre is somewhat active. While the arbitration centres in Baghdad and Basrah continue to exist on record, they are not really utilised.
Saudi Centre for Commercial Arbitration
Last year, Saudi Arabia’s first commercial arbitration centre was formed to handle local and international commercial and civil disputes. The centre is currently drafting its own rules of arbitration. Historically, arbitration in Saudi Arabia has been under-utilised as a method of dispute resolution. The new centre represents Saudi Arabia’s efforts to provide a forum for arbitration locally and worldwide. However, under local law, government bodies are restricted from using arbitration as a means of dispute resolution.
Other arbitration centres in the Middle East include the following:
- the Bahrain Chamber for Dispute Resolution;
- the Cairo Regional Centre for International Commercial Arbitration;
- the GCC Commercial Arbitration Centre;
- the International Islamic Centre for Reconciliation and Arbitration;
- the Istanbul Chamber of Commerce Arbitration Centre;
- the International Court of Arbitration;
- the Lebanese Arbitration Centre;
- the Tehran Regional Arbitration Centre; and
- the Yemen Centre for Conciliation and Arbitration.
Enforcement of construction arbitration awards
Critical to the choice of the appropriate arbitration centre for any construction contract should be the consideration of the enforceability of any arbitration award sought. Parties may choose to use a particular arbitration centre if it has intelligence that the respondent holds assets in a particular jurisdiction. This is because a local arbitration award should be more straightforward to enforce by the courts of its home country. If it is not possible or preferable to arbitrate in the country where the respondent holds assets, the Convention can be relied upon for enforcement.
The Convention mainly establishes the principle that a properly made arbitration award in one member country must be binding and enforceable in another member country, unless the award can be rejected on the basis of certain grounds for refusal of enforcement, which are narrowly defined in the Convention. Under article V(2)(b) of the Convention, the enforcement of an arbitral award may be refused if ‘the recognition or enforcement of the award would be contrary to the public policy of that country.’
The parameters of what a country regards as ‘public policy’ can be wide and are often a challenge. In Saudi Arabia, an arbitration agreement or award is upheld provided that it is not contrary to the principles of shariah law. Such a limitation falls within the ‘public policy’ exception, but the key lies in the way such an exception is applied. In addition, Saudi judges have had wide discretion to issue rulings according to their own interpretation of shariah law, and the judiciary has long resisted the codification of laws or the reliance on precedent when making rulings.
In the UAE, articles 235 and 236 of the Civil Procedures Law confirm that arbitral awards can be enforced in the UAE, provided a number of conditions are met. These conditions include procedural issues such as the proper notification and representation of the parties before the arbitral tribunal that issues the decision in the foreign country and procedural irregularities. In 2004, the UAE’s Court of Cassation overturned an arbitration award in the Bechtel1case, on the grounds that the witnesses had not been properly sworn in. UAE courts may also refuse the enforcement of a foreign arbitral award if it contradicts a previous judgment already issued by a UAE court (article 235(e) of the Civil Procedures Law) or if it includes elements that contradict public policy or morals. Article 3 of the UAE Civil Code, Federal Law No. (5) of 1985 provides that public policy considerations should include ‘rules relating to personal status such as marriage, inheritance, descent, and rules concerning governance, freedom of commerce, trading in wealth, rules of personal property and provisions and foundations on which the society is based in a way that do not violate final decisions and major principles of Islamic shariah.
In 2012, Qatar’s Court of Cassation ruled on the necessity for arbitral awards to be rendered in the name of His Highness The Emir of Qatar. This ruling set aside an arbitral award by the QICCA based on several legal texts including article 63 of the Qatari Constitution, which states that ‘Judicial Authority shall be vested in the Courts in the manner prescribed in this Constitution and Judgments shall be issued in the name of the Emir’ and article 69 of the Civil and Commercial Procedure Law that provides that ‘Judgments are issued and executed in the name of His Highness the Emir of the State of Qatar.’ The court proceeded to analyse some of the legal provisions that govern arbitration in particular (articles 190-210 of the Civil and Commercial Procedure Law) and where the Arabic text of the law makes no distinction between the terms ‘award’ and ‘judgment’. This controversial ruling has been criticised by arbitration practitioners in Qatar and has raised several concerns including whether the enforcement in Qatar of foreign arbitral awards rendered by arbitrators abroad may reject the idea to render an award in the name of a foreign head of state. Consideration should therefore be given to whether this mandatory requirement could form part of the law of arbitration in Qatar. In between June 2012 and August 2013, a small number of other arbitral awards had simply been set aside for the same reason by lower Qatari courts following the same rationale as the Court of Cassation. However, the Court of Cassation in Qatar recently clarified its previous decision and decided that international arbitral awards issued by arbitration institutions such as the ICC are considered foreign arbitral awards and thus enforceable in the Qatari courts without the need for them to be issued under the name of His Highness the Emir.
Iraq, alongside Libya and Yemen, is one of three Arab countries that have not ratified the Convention. Thus, direct enforcement of a foreign arbitral award in Iraq is problematic as the Civil Procedure Code is silent on its enforcement mechanism. Various Iraqi political figures have expressed reservations about Iraq becoming a member of the Convention owing to fears around legacy claims, which could have arisen during the previous regime’s era, and are likely to be revived upon accession to the Convention. Foreign investors and practitioners welcomed a breakthrough in 2011 when the Iraqi Court of Cassation reconsidered its long-standing position to recognise the status of international commercial arbitral awards.
There are also indirect ways through which foreign arbitral awards can be enforced in Iraq. Recent court decisions are showing positive development, particularly in instances where the arbitral award originated from, or was enforced in, a country that is a member of the Riyadh Convention on Judicial Cooperation. In principle, this development now provides the construction industry with an arguable enforcement recourse via domestic courts that was not historically accessible. Nonetheless, a comprehensive statutory framework remains lacking. Until Iraq joins the rest of the world by acceding to the Convention, and more efforts and investment are directed to re-establishing existing arbitration centres, Iraq will remain an unfavourable forum for the resolution and enforcement of arbitration awards.
Jordan ratified the Convention in 1980. The Jordanian Parliament overhauled the arbitration law in 2001 to be more in line with the UNCITRAL Model law. While domestic arbitration, including enforcement of local arbitral awards, is governed by the Arbitration Law of 2001, enforcement of foreign arbitral awards is, however, governed by the procedure contained in the Enforcement of Foreign Judgments Law of 1952. This is because the decree that ratified the Convention has not expressly displaced the Enforcement of Foreign Judgments Law 1952, which governs the enforcement of foreign arbitral awards and foreign judgments.
Not surprisingly, arbitration developments continue to take place across the region owing to the evolving role of arbitration in the Middle East. The reforms are not directed specifically at the construction sector but would apply generally across all sectors. The developments are anticipated to open up arbitration as the preferred dispute resolution tool across the Middle East for all disputes.
In Qatar, the Draft Qatari Law is expected to introduce numerous positive changes and new concepts to the existing arbitration provisions. As currently drafted, the Draft Qatari Law unambiguously states that the decision to submit disputes to arbitration is solely that of the parties and the agreement to arbitrate may be documented in a separate stand-alone agreement or a clause contained in the contract. The Draft Qatari Law also suggests that the arbitration agreement could be evidenced through correspondence in paper or electronic form. This should put an end to any arguments that an arbitration clause in a contract is not sufficiently clear to satisfy the requirements of article 190 of the Civil and Commercial Procedure Law and that an agreement for arbitration should be a separate signed agreement. It may also eventually open up the possibility for parties to opt in, by agreement, to using arbitration as a method to resolve construction disputes where it was not envisaged when the contract was originally entered into. Where there is a valid arbitration agreement, the local courts are obligated not to accept jurisdiction over a dispute which the parties previously agreed should be resolved by arbitration. It is clear, however, that the Draft Qatari Law grants the court controlling power of the legitimacy and enforceability of such arbitration agreements but the courts are limited to this review because if the agreement is valid, the courts must honour it. Nevertheless, if such a claim was raised before a national court, this would not stop the arbitration proceedings from being commenced or continued.
There is also a draft UAE Federal Arbitration Law (the UAE Draft Law) that has been in circulation since 2006 with the latest draft being issued by the UAE Ministry of Economy in 2013. The UAE Draft Law intends to replace articles 203 to 218 of the Civil Procedure Code and introduce a modern legislative framework for arbitration in the UAE, in line with the UNCITRAL Model law. The UAE Draft Law includes an intention to provide that no arbitration order is issued without verifying that it is not ‘in conflict with a ruling on subject of dispute passed by any UAE court of law’. Construed broadly, it may be interpreted to mean that an arbitration award may be prevented from being issued in a construction dispute where the nature of that dispute has already been tested by any UAE court of law. However, construed narrowly, it may only apply when dealing with the same cause of action between the same parties.
There are also rumours that influential Iraqi politicians are more likely to consider signing the Convention after 2020 as it becomes more challenging to enforce legacy-based claims in Iraq due to the statute of limitation.
Arbitration centres in the Middle East are growing in significance and are being used increasingly in construction disputes. This is reflective of the developments in legislation setting the framework for arbitrations and enforcement of awards and encouraging government bodies in the Middle East to use arbitration as a method of dispute resolution. Global construction companies are increasingly getting more comfortable dealing with disputes in the region as the arbitration centres embed international standards. This is a positive step, contributing to developing market confidence of the international business community and encourages foreign direct investment. This is critical for countries in the Middle East to diversify their economies.
The authors would like to thank Muhammad Anam Saleem (Saudi Arabia) and Al-Anoud M Al-Mosleh (Qatar) for their contributions to this article.
- Int’l Betchel v Dep’t of Civil Aviation of the Gov’t of Dubai, Dubai Court of Cassation, petition No. 503/2003, ruling dated 15 May 2003.