Typically, the construction sector the world over operates in a toxic litigious environment, characterised by nightmarish cash flow blocks and project delays. In a nutshell, it’s a grim situation for the industry, unless a concrete solution is deployed.
While the construction sector in the UAE has made significant strides in terms of technological advancements, the nagging thorn in the side of the sector is in the form of legal disputes and delayed payments involving millions of dollars.
As Rachel Ewin, Claims Director, CTBH/Faithful+Gould, said: “While innovation has shaped the country’s construction industry in many ways, compared to how it functioned 20 years ago, disputes within the industry are at a record high, both in terms of monetary value and intent of the time taken to resolve them.”
Explaining the basis of her argument, she said that according to statistical data, the cost of disputes in other parts of the world is approximately USD 40 million; in the GCC region, on the other hand, it is USD 80 million, and the time of recovery is around 15 months, which Ewin suggested, is too long.
The language game
One of the crucial triggers of legal disputes is the misunderstanding and use of wrong language used in the contracts. As Ghaleb Abusaa, CEO, GASO, explained, some contracts are drafted with terminologies that may not have a legal standing in the court. “When it comes to the court’s arbitrator, the legal terms written in a contract have a totally different meaning than the actual language used in the court,” he said. “It is, therefore, imperative for contracts to be drafted using the exact legal and technical terms that are used in the court.”
The other trigger is the lack of focus on important areas while signing contracts, said A R Suresh Kumar, General Manager – Projects & Corporate Business Development, Voltas Limited. He said, “I have seen MEP contractors spending more time on technical issues and less time in going through the contractual conditions, which can be dangerous.”
He observed that sometimes, junior engineers from within an organisation are promoted to the post of contract managers and, thus, come to reviewing contracts. Invariably, he said, they end up making a mess, owing to their lack of understanding of the law. One of the best practices, Kumar recommended, would be to hire a legal consultant, who would help the contractor to understand the actual meaning of each clause and section of the contract, before signing the document.
Echoing a similar view, Ewin said: “Contractors and sub-contractors should essentially bring in a legal consultant for a day, depending on the size of the project, to essentially study the contract and, then, decide the time frame and obligations. This would ensure that a realistic timeframe is set and the contractors would stick to the contractual terms.”
She further added that contract administration practices, such as record-keeping, effective communication, timely submissions and cordial relationships, are the keys to avoid any disputes.
Highlighting the importance of carefully studying contracts, Thanos Karvelis, Partner, Galadari Advocates & Legal Consultants, said that although spending more time in understanding the contract can be a costly exercise, it would be more fruitful than entering into disputes at a later stage, which would cost much more in terms of money and time. “Contractors must take enough time to read the contract in advance, spend enough time in negotiating the terms of the contract, make the changes, if necessary, and then sign the document,” he said, “With the use of FIDIC or New Engineering Contract (NEC) in the GCC region, contractors and sub-contractors take it for granted that everything is fine, and do not spend enough time understanding the details of the contract and treat it as a ‘copy-paste’ template.”
Such a practice, Karvelis said, is lethal, owing to the unique features of each building. Even if they are of the same size or are designed by the same consultant, it is imperative to study the contract as carefully as possible in order to avoid any future disputes, he added.
Stressing further on the importance of properly studying contracts, Abusaa said that contractors must not treat contracts as one would treat most terms and conditions of smartphone applications, by merely clicking accept at the end of the screen. He cited a case-in point of a business transaction between an original equipment manufacturer (OEM) in Europe and a Saudi Arabia-based company, where the terms and conditions were accepted by the Saudi company, without carefully studying the fine print clauses mentioned in the contract, which stated that the European company could not be penalised if there was a delay in the delivery of the equipment. However, the OEM could penalise the Saudi company, if there was a delay during the testing and commissioning of the equipment.
Unfortunately for the Saudi company, Abusaa said, there was a six-month delay in delivery by the OEM, and no legal action could be initiated, owing to the fine print clause, which was overlooked.
The legal drama
In the ‘painful’ dictionary of contracts, it is the void in the understanding of clauses, such as ‘pay-if-paid’ and ‘pay when paid’ that causes the confusion among contractors and propels the disputes, explained Karvelis. Simply put, he said the pay-if-paid clause dictates that a general contractor is only required to pay a sub-contractor for a completed project if the general contractor has received the payment from the project owner. However, if the general contractor was never paid for the project, then the sub-contractor does not get paid. In the case of the pay-when-paid clause, he explained, it simply means the main contractor would pay the sub-contractor within sometime after receiving payment from the project owner. He further added that under this clause, the main contractor couldn’t default on payments with the sub-contractor, whether the project owner has released the payments or not.
However, under this clause, Karvelis said, the main contractor can refuse to pay the sub-contractor, until the completion of the project, and the sub-contractor cannot claim the payment directly from the employer, but when the project is completed, there can be no reason to refuse the payment.
Of the two clauses, he added, the risk of sub-contractors not receiving payments is higher under the paid-if-paid clause, owing to the lack of a time frame for issuing of payments.
Karvelis further added that the clauses are not an exercise in semantics, and that contractors need to review and understand them carefully before signing the contract.
Kumar observed that a new trend of ‘catch-all clause’ is being used in contracts, which interprets it as whatever is supposed to be done needs to be executed at all costs, even if one does not possess the knowledge of how to do it. At all costs, he said, one must not also sub-contract the project, if they do not possess the knowledge of the project.
‘Prevention is better than cure’
As Kumar explained, the nature of contractors is such that although one knows how to enter into a contract, but in a significant number of cases, they do not know how to get out of the contract. Therefore, he said, it is vital for contractors to conduct detailed studies of contracts and employ a preventive litigation strategy, as prevention is better than cure.
Highlighting a dispute-preventive strategy, he said: “Contractors need to conduct a SWOT (strengths, weaknesses, opportunities and threats) analysis of the contract. They also need to conduct a reverse pre-qualification risk analysis, which would determine if the main contractor is a litigation-minded person or has a habit of delaying payments. If any of these practices show red-flags, please stay away from the project.”
He further added that if a contractor stays away from risky projects, it does not mean that one has lost a project but rather it translates to money and time being saved.
The human behaviour problem
Kumar emphasised on the need for project managers to acquire interpersonal skills. In his view, 90% of the disputes are caused owing to the lack of such skills. “Invariably in the industry, a project manager is appointed based on his work experience,” he said. “But what face will he have if he doesn’t know how to handle clients or address his staff, or does not know how to troubleshoot disputes.”
Echoing Kumar’s views, Ervin said that the issue of claims and disputes all boils down to people and their behaviour. “We find disputes occurring when one person makes a decision not to pay, or decides to send incomplete information due to time constraints, or has an argument with their partner, comes to work and takes it out on anybody that gets in their way,” she said.
Kumar further advised that contractors must not feel compelled to work under a client’s time frame. He said: “Contractors should go by realistic time frames and must not agree with anything just to get one more project under their portfolio. It has to be a win-win situation for all.”
Role of the government
Generally speaking, in the UAE, the government is taking the initiative of supporting the industry and acting as a catalyst at the same time to strike a balance in the prevailing situation.
Initiatives, such as the Green Building Regulations, are examples of the government’s commitment to driving in the change. However, even in such initiatives, gaps prevail, owing to the lack of an enforcement framework and, at the same time, the lack of quality of expertise in the industry.
As Anwaar Al Shimmari, Director – Design Department, UAE Ministry of Infrastructure Development, said: “We have observed that although consultants emphasise on architectural and structural requirements, they do not have a specialised MEP team engaged in the project. This is crucial because the project and deliverables have to be up to standards and quality for us to showcase the project in other parts of the world.”
Further arguing the case of the lack of quality of expertise, Brian Suggitt, Chairman, Eurovent Middle East, said: “We shouldn’t be looking at how we can shortcut our way to save money and time to do things, because we all get punished for such acts. We cannot wait for the government body to come and enforce regulations, but rather we must have the attitude to do the right thing, which will be beneficial for everyone.”
Agreeing with the issue of the lack of quality expertise, Graeme Sims, Executive Director, Regulator Services Bureau for Electricity and Water (RSB Dubai), pointed out to the problem of over-specification of cooling loads in the District Cooling segment. “No one is really conscious about the fact that a building is being supplied with tonnes of cooling, out of which only 40-50% is being used,” he said. “We have observed that a building is contracted for 900 tonnes of cooling per year, but they never use more than 400 tonnes, and we have dealt with a number of such complaints from building owners and residents.”
He added that by raising the quality standards for the consultants and contractors, the problem might be resolved.
Sims further added that when such cooling loads are specified by contractors, District Cooling operators must challenge the specifications, before supplying cooling services to the buildings, and by doing so, the end-user’s bills would be reduced.
On the issue of regulations, Mario Seneviratne, Managing Director, Green Technologies, suggested that the gap in regulations and enforcement of standards needs to be addressed. “There is no financial penalty for the client to pay if they have improper consultants, or the fact that there is not enough regulation to reverse those bad decisions made at the design process,” he said. “We also don’t have people who can enforce the regulations, and that is where we are falling back.”
Explaining the limitation of regulators, Dr P R Jagannathan, Manager Sustainability, Trakhees, said: “Beyond the post-occupancy period, our regulatory role is reduced to an advisory role, which cannot be legally enforced, but we can try our level best to support the project stakeholders as much as we can.”
He further stressed on the role of Green Building certification consultants, who have a responsibility to support and advise the main contractor and other stakeholders, who are part of the supply chain, to enforce the regulations in making the building green.
However, Dr Jagannathan added, owing to a lack of communication skills, Green Building certification consultants do not make the contractors aware of the basis on which the project permits were issued.
The other challenge, he said, is when Green Building certification consultants are only contracted during the design stage and not during the construction; by doing so, the contractor is not aware of how to implement and enforce the regulations.
Offering a solution to resolve the issue of the Green Building certification consultant, Suggitt suggested that the regulatory body must implement stringent measures, such as the revoking of the certification for consultants who fail to communicate the Green Building Regulations to the stakeholders.
Expressing her concern over other issues related to the industry, Al Shimmari pointed out to the sharing of information between the industry and government regulators. She said: “We depend on market updates for effective enforcement. I want consultants, contractors, suppliers and developers to update us with the latest trends from the field. With such updates coming from the field, we will be able to formulate effective enforcement frameworks.”
Highlighting an initiative being developed by the government, Al Shimmari revealed that the Ministry is in the process of developing a grading system for contractors and consultants, specifically for federal projects, wherein they would be graded on the quality of work and their practices with their fellow collaborators.
Mirroring the opinion of the need for grading systems, Sims shared how RSB Dubai has implemented the energy service company (ESCO) accreditation scheme for energy companies who have qualified personnel on their team, maintain a robust financial status and possess a proven track record of successfully delivering energy saving projects in Dubai.
However, although accreditation systems would boost the industry, the participants in the conference sought a concrete solution for a smooth flow of payments.
By way of suggesting a system, Seneviratne highlighted the property lien framework, followed in Canada, where nobody can sell a property or execute any activity on it until all the payments are cleared.
Stakeholders like V S Chandra Sekhar Reddy, CEO, Elemec Electromechanical, said that enforcement could become stronger if the construction community could self-regulate itself by coming together and developing a simple, workable system with underlying fundamentals.
Can technology come to the rescue?
Considering that conventional payment processes and systems, within the construction industry have failed, can disruptive technologies, such as block chain, be considered a solution for delayed payments?
Offering a simplified explanation of the technology, Sougata Nandi, Founder and CEO, 3e Advisory, said: “We tend to get carried away by ‘fashionable’ terminologies like IoT, Big Data and, now, Block Chain. Simply put, block chain is nothing but a de-centralised database, and it brings in transparency and improves efficiency in projects.”
He added that the technology could play a crucial role during the handing over process of the project to the facility management company, post-completion, owing to the easy and quick access of the information.
Voicing a similar opinion, Khaled Derhalli, Operations Director, Efeco (Arabtec), said the technology would be handy not just during the construction stages but also during the lifecycle of the building. With the data the technology provides, facility management services can be monitored, and the relevant authorities would be updated if the FM personnel were implementing the right measures.
From a construction perspective, Derhalli added that the data available through block chain, track records of the consultants, contractors and developers, would be available, which would play a key role in influencing important project decisions.
Explaining the dynamics of block chain, Nesar Reza Khan, Managing Director, FP Global, said: “Unlike before, a buyer and seller of a property could meet anywhere and conduct a transaction. Information of the property, like the registration and developer’s history would be available at the click of a button. It is tamper-proof, and if anyone were to make changes to the data, all the stakeholders connected would receive an alert.”
In terms of facilitating payments, Khan added: “Typically a developer requires 10% down payment. With block chain connected to your conventional banking system, it is ensured that the payment is blocked. Thus, block chain becomes an intermediary escrow account between a developer, contractor, regulatory authorities and the end-user.”
Further explaining how block chain would improve the payment situation, B S Prashanth, Associate Vice-President, ACBG, Eros Group, said: “With block chain, the middlemen are avoided, so you have the owner participating at every level with the contractors and vendors. So when a contractor completes a job, one needs to verify it and update the system. On doing so, the system automatically releases the funds to the contractor. I believe there is great scope for this platform to evolve, even though this technology is in its natal stages.”
Highlighting a perceived challenge for implementing the technology, Abhay Miglani, Business Development Manager, Armacell, said: “Block chain is still evolving, and it would bring in the transparency aspect and reduce the paperwork at the same time.
“However, the challenge would be to bring all the stakeholders together on the platform, which would include the facility managers, who will play a role in ensuring the drive of sustainability during the lifecycle of the building. Such an integration would contribute to the success of this technology.
With the core of construction disputes decoded, a paradigm shift is the need of the hour in the construction industry, in relation to the drafting of contracts and to payments processes. Taking remedial action is not a choice but a necessity to protect the MEP consultant and contractor community.
As Ewin put it, “it all boils down to people.” Hence, it is a change in mind-set that would usher in a new situation. The speakers believed that simple practices such as reading and understanding of the clauses in contracts, effective communication, self-regulation, stringent and supportive enforcement, proper paperwork, ethical practices, a discernible attitude when getting into contracts and, most importantly, the lopping of lopsided contracts, would aid the effort of reducing the number of disputes and increase the number of opportunities for the industry.