Gulf construction sector gets its foundation right

Despite the uncertainty in many places of the Middle East, the construction sector has remained resilient. The reason is that there is a real need for infrastructure development.

Saudi Arabia’s economy grew by 1.2 per cent in the first three months and the stimulus plan announced by the government in December has raised hopes that the economy will continue to grow, especially the non-oil economy. Construction for Expo 2020 in Dubai is on track and major works will be completed in October 2019.

Below is a summary of what appears to be the prevailing view by commentators and economists about construction developments in the region. We will also touch upon developments in China and outline the methods for dispute resolution in the industry.

The expected turnaround in construction should continue as the Saudi Vision 2030 is implemented. We note with great interest the “Neom” city project that is planned for Tabuk. Saudi Arabia has started awarding contracts for this $500 billion mega-city and the first section is expected to be completed by 2025.

Other noteworthy projects include the King Abdullah Economic City and Jazan Economic City. As governments look to sustain growth, interest in public-private partnerships (PPP) has increased and many have been struck in Saudi Arabia.

Dispute resolution

The world of construction is moving at different speeds in the Middle East and beyond. Disputes may arise and so it would be helpful to give thought to their conduct. It goes without saying that projects in the Middle East often involve state entities, and therefore local law may be a requirement.

International contractors may prefer to use a governing law with which they are familiar, but must consider the local law in relation to such disputes given local procurement requirements. In this respect, it is positive that the laws of a number of jurisdictions in the Middle East are codified, thereby providing protection for contracting parties.

Arbitration

The use of arbitration as a means of resolving construction disputes remains the most favoured means for large projects in the Middle

East. Obtaining an arbitration award is the not the end of the story and issues of enforcement come into play.

It is a positive indicator that many jurisdictions in the Middle East are members of the New York Convention of 1958, with the exception of Yemen, Libya and Sudan. Iraq is the latest country to accede to the Convention, having joined in 2017.

Various arbitral regimes are being modernised with one of the aims being to satisfactorily resolve any construction disputes that may arise.

One example that is worth mentioning is the recent introduction of the UAE Federal Law on Arbitration in Commercial Disputes (Federal Law No. 6 of 2018). Prior to its introduction, there was no federal law dedicated to governing arbitration in the UAE. The Law is largely based on the Uncitral Model Law and is therefore expected to bolster confidence in the arbitration regime of the UAE.

Its modernisation will be welcomed by business parties, both local and foreign, that wish to arbitrate their disputes within the region, particularly by parties that have contracted with state entities.

Much has been said recently about China’s real estate and construction. The Financial Times has said the sector is expected to decline over the next few years as developers struggle with overcapacity. Having said that, it notes that capacity will grow rapidly even as construction slows, with the number of malls with gross floor areas of more than 10,000 square metres increasing from about 1,000 to more than 1,400 by 2019.

A shift is therefore taking place in China’s construction sector. This will continue with the implementation of the Belt and Road initiative being implemented over much of Asia, and whose members include many countries in the Middle East.

Accordingly, the construction sector in the Middle East, and indeed in China, appears to present a positive picture. The volatility of oil prices has dented many state coffers, but large projects continue as states utilise more of the PPP structures and implement the visions they have developed for their respective countries, a lot of which includes significant amounts of infrastructure development.

The dispute resolution processes, in particular the various arbitral regimes, provide a welcome relief for parties facing complex project disputes.