Contracts must be fair to all if prices rise far beyond reason

Industry needs to have proper dispute resolution clauses inserted at the time of formulating the contract

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By  Eudore Chand Published  March 17, 2004

Vis-a-vis|~|cama2.jpg|~|Jeremy Cama ... A lot is at stake|~|It was early afternoon and the office on the 7th floor of Al Khaleej Centre was hushed. But it was the deceptive quietness of people busy at their desks with having too much to do and too little time

In walks Jeremy Cama, new country manager of Berrymans Lace Mawer, legal consultants and specialists in the construction sector.

He is courteous and polite, but with the distracted air of a man who has not yet switched off the high-intensity thought-process regarding the job he has just left waiting at his desk.
But in a few seconds and without losing a stitch, Cama is full attention rapidly translating his focus to the new job at hand.

In a wide-ranging interview with Construction Week’s editor Eudore Chand, Cama felt strongly that the solution to the construction industry’s traditional woes, was the inclusion of proper dispute resolution clauses right at the time of formulating the contract.

CW: You must have found out that dispute resolution is a historic problem in the UAE construction sector. How can it be dealt with to any level of general satisfaction?

Cama: As lawyers, we feel that this problem should be dealt with right at the inception of the contract. If you can deal with it at that stage, that is, you allow for re-pricing of the contract in an equitable style if price increases take place beyond a reasonable and specified amount or percentage, it will be a balanced contract. When formulating a contract, care should be taken to allow for sensible redistribution of risk.

CW: If it were that easy, why have contracts not been done this way before?

Cama: The environment here not been conducive to that type of arrangement. But, do we need to have bankruptcies or a major failure or some commercial catastrophe to happen before realisation comes in that something needs to be done?

CW: Cannot legal and other advisors play a role in bringing about this kind of change in the way the construction industry operates in this market?

Cama: It is a challenge to lawyers specialising in construction. If a client wished to address this issue, he would turn to lawyers to set the conditions for equitable distribution of future or perceived risk among various parties to the contract. This problem needs to be dealt with, and one way it could be done is that the industry itself comes to the same conclusion that there is a requirement to have a mechanism in place to deal with such issues. Nobody wants a dispute. No one wants a project to get delayed or stopped. There is too much to lose and it is just not worth taking the risk. It is in everybody’s best interests to think of these issues at the tender stage.

CW: What other advice do you have for the construction sector in terms of finding solutions to some of its more popular problems? Should the government step in and enforce regulations?

Cama: I think that the market should be more grown up about its issues and should be courageous enough to deal with them. In terms of intervention, I don’t think that markets generally favour systematic intervention by governments. This inevitably leads to greater distortions. The best is to leave it to the markets-driven mechanism of supply and demand.

CW: In the present circumstances when the price of basic raw materials like steel are surging, how would this work?

Cama: It was known from previously that a steel crunch was coming. Articles had been written about it. Steel company shares were going up, boosted by the demand for their company products. People knew that China was sucking up steel and would continue to suck up a lot more. The market knew all this. Under such circumstances, market solutions are potentially interesting. Contractors knew the crunch was coming and, for example, could have bought forward. I heard that the London Metals Exchange is working on contracting that has to do with buying of steel futures.

CW: But does that kind of sophistication exist in this market?

Cama: The commodity market here is not developed where contractors can hedge. The markets here do not allow for the hedging process to take place externally to a contract. Risk here falls directly on the contractor and this creates problems.

CW: So, what can be done to solve the sector’s problems?

Cama: The market here does not have appropriate mechanisms in place. As I mentioned, unilateral government action is unlikely. Also, multilateral, bilateral or regional solutions through government agencies, too, are unlikely. Therefore, the only mechanism left is an equitable distribution of risk at the time the contract is entered into.||**||Clients are in a relatively stronger position|~||~||~|CW: What do you think is the current situation in the market?

Cama: We are hearing that a number of contractors and subcontractors are struggling to get paid, at times not getting anything at all. This situation may even be driving the problems in the labour market, driving these unfortunate people to present their case at the Ministry of Labour and Social Affairs. This is regrettable.

CW: What is the situation of the project owners or developers?

Cama: Employers are in a relatively stronger position. The issue in the market is that of withholding payments. Sometimes it is correct to withhold payment if the work is not done properly or is late. But when the engineers have certified the work, then not paying up is a breach of contract.

CW: What can contractors do in such a situation?

Cama: There are remedies that contractors can take. In the UAE, the vast majority of construction contracts are led with an arbitration clause. The courts recognise that as a means of resolving disputes through a tribunal here or abroad.

CW: But aren’t delays also a problem?
Cama: It can be a long and slow process and unfortunately, not inexpensive. The process can take some time, especially in complex cases, where it can take as much as a year or two to get a dispute heard by an arbitrator and a decision to be handed down. It becomes worse if the decision is not accepted and has to go to UAE courts because at that point the courts can reopen the whole case. In the interest of justice, it is not ideal to have a system that results in protracted delays in getting a decision and getting it enforced.
Sometimes a lot is at stake. But sometimes it is better to settle as soon as is possible. We advise an amicable and commercially acceptable settlement ahead of arbitration. But that always does not happen, especially if a case is complex and the parties are in an entrenched position.

CW: What other legal avenue are possible?

Cama: There is talk of the ‘adjudication procedure’ that provides for solution prior to full-blown arbitration. An adjudicator is appointed at the inception of the contract to deal with any disputes as they come up during the life of the contract. This can be final and binding. In the industry, there is now recognition that adjudication exists in other jurisdictions. People are talking about it. Whether it is introduced in the UAE is a moot point. Here it is not statutorily backed.

CW: What is your overall view of the construction sector in the region and the UAE?

Cama: My perspective would have to come from where I’ve been operating, and that is South East Asia. I have been here for two or three months as country manager and what I have picked up from employers and contractors here, breaks down into similar and typical types of contractual issues of civil projects. I have worked in Malaysia, Singapore, Indonesia, Vietnam and Hong Kong and I have observed that wherever a significant amount of English style influence has been brought to bear on the way in which projects are contracted, issues and problems are similar.

CW: What is most common in this part of the world?

Cama: I have often confronted here the issue relating to extension of time by contractors and issues relating to variations, where employers have varied the design. In both cases, contractors have to bear additional cost. The issue then is ‘how much, if at all, must be paid ‘. Issues are more germane to payment and to certification of payments. In South East Asia, my experience was that people did get paid. Here there is marked reluctance to pay on time. This inevitably has consequences downstream and raises issues where the parties involved, require legal advice. That seems to be a major issue.

CW: Why the problem?

Cama: Cash flow is king in projects. To sustain a project, you have to maintain cash flow from start to finish. The issue is that in some cases, this is not happening, sometimes for good reasons and sometimes for not so good reasons.

CW: Could you tell us a bit about your company?

Cama: Berryman Lace Mawer is a firm of specialist lawyers and is more than 100 years old. It has its headquarters in UK. It covers Gulf operations out of Dubai, where it has been for the past ten years. We also have an associate office in Abu Dhabi. My arrival here is in anticipation to move our expertise in advising on construction-related matters. This area has a lot of infrastructure projects and we think we can play a part in all sectors or in target areas such as oil and gas, roads, rail or utilities.

For the benefit of readers of Construction Week, Berryman Lace Mawer has agreed to provide its views on various issues concerning the construction sector in the form of advisory articles.||**||

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