Value of construction disputes up 38% the Middle East in 2020: Arcadis

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“Aside from impacts of COVID-19 – restricted labour movement and supply chains delays – Arabtec’s insolvency could have contributed to the increase”

Areport released by Arcadis has revealed that the Middle East recorded an increase in the cost of construction disputes in 2020, while the time taken to resolve such disputes decreased.

The average value of disputes in the Middle East increased from $62mn in 2019 to $86mn in 2020, while the length of disputes decreased from 17 months in 2019 to 15.5 months in 2020.

The Global Construction Disputes Report is an annual study from Arcadis that examines the common causes of construction disputes, the average duration and value of disputes, and the preferred methods of alternative dispute resolution.

The data, featured in Arcadis’ 11th annual ‘Global Construction Disputes Report 2021: The road to early resolution’, illustrates the industry-wide ripple effects of the COVID-19 pandemic based on feedback from survey respondents, global construction disputes Arcadis handled in 2020 and opinions from industry experts.

While trends in the value and length of disputes varied from region to region, all regions surveyed saw an increase in “mega disputes” related to bigger capital programs and private projects.

Notably, more than 60% of survey respondents globally encountered project impacts due to COVID-19.

The $86mn average value of construction disputes in the Middle East is a 38% increase from 2019. This is the second consecutive year of increase in average dispute values since the region recorded a sharp decline in 2018 from a record high of $91mn.

Aside from the significant impacts of the COVID-19 pandemic, which restricted the movement of labour and caused delays in supply chains, Arabtec’s insolvency and the progression of KSA’s gigaprojects could have also contributed to this increase.

In addition, clients’ greater interest in litigation and arbitration funding has led them to be more open to pursuing disputes which is a turnaround from their reluctance due to low liquidity in the market observed in recent years.

Average dispute resolution length, on the other hand, continues to follow a downward trend. From an average of 20 months in 2018, the length of dispute resolution has gone down from 17 months in 2019 to 15.5 months in 2020.

This decrease may be attributed to the parties’ collaborative approach to enable successful dispute resolution and their preference to avoid a ‘wait-and-see approach’ when they believe they have a strong case coupled with their need to maintain cashflow.

The most common cause of disputes in the region was owner/contractor/subcontractor failing to understand and/or comply with its contractual obligations, which is a new entrant in the 2020 ranking.

Our survey participants believe that the parties uncertainty surrounding their contractual obligations, in particular where standard forms of contract are heavily amended, is a factor that cumulates into a dispute.

Respondents further advised that almost 55% of the time the project manager’s or engineer’s conduct was the root cause of the dispute, mainly in relation to the administration of the contract.

In terms of the most common alternative dispute resolution methods in the Middle East, the 2020 data remained the same for two years, with party to party negotiation continuing to be ranked number 1, reflecting the culture of negotiation that is prominent in the region.

The head of Contract Solutions at Arcadis United Kingdom, Gary Kitt, who acts as a quantum expert in arbitration and expert determination proceedings and chairs Dispute Adjudication Boards in the Middle East region, said: “As the Middle East is seeing a quicker recovery from the pandemic, the construction sector will be at the forefront of helping build infrastructure and other projects that will revitalise economies.

“To enable this progression, it is vital that the value of disputes does not continue to rise within the region so that critical projects can move forward as part of national visions. The fact that owner/contractor/subcontractor failing to understand and/or comply with its contractual obligations was the top cause for disputes within the region, it is essential that project participants employ experienced contract administration staff, who have a good understanding of contract obligations and how to correctly implement them according to the contract conditions.”

The associate director in Contract Solutions at Arcadis Middle East, Paul Mullen, added: “Undoubtedly, 2020 has been a challenging year, and the issues related to the COVID-19 pandemic are expected to continue throughout 2021. However, our survey also tells us that despite the challenges, the collaborative approach of the parties is reducing the duration of disputes relating to COVID-19.

“In relation to the increased value of disputes and the number one cause reported in 2020, avoiding heavily amended standard forms of contracts and subsequent imbalance of the risks may assist with reducing the value of disputes attributable to this cause moving forward.”

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