Dodging the Payment Pitfall

November 20, 2017

undefinedConstruction disputes are on the rise in the region. Peter Anagnostou, Senior Legal Consultant, DLA Piper Middle East LLP explains how to make sure you get paid what you’re owed.

What are the main causes of construction disputes in the GCC?

undefinedThe lack of liquidity in the market due to sustained low oil prices has been a root cause of disputes in the region in recent years. These difficult economic circumstances have led to a rise in project deferrals, cancellations and terminations, all likely to result in claims and disputes. Compromised cash flows stemming from the lack of liquidity have also led to payment issues such as delayed and/or non-payment discussed below. But the most commonly faced risks in the GCC construction sector are more engrained and less impacted by the economic circumstances of the time. These include:

  1. Underdeveloped designs at tender stage;
  2. A failure to properly administer the contracts;
  3. Deferred payment of variations;
  4. Unrealistic completion time-frames;
  5. Funding pressures; and
  6. Parties failing to understand and/or comply with contractual obligations.

There has been a rise in high-profile disputes in the Middle East construction market. How can this be addressed?

While it is true that there are a number of disputes taking place related to high-profile projects in the Middle East, part of the reason for this is the overwhelming number of high-profile construction project taking place in region. In order to address disputes in the region generally, efforts have been made to promote the use of arbitration and alternative courts (eg. DIFC) in the region in order to resolve disputes efficiently. Other efforts have been made at the procurement stage to encourage the use of alternative contractual relationships and a focus on an increasingly efficient procurement process for foreign sector investment through Public Private-Partnerships (PPP) legislation.

What are the challenges that contractors face in terms of payment?

In the Middle East, contractors can frequently experience delayed and/or non-payment by employers in the construction sector, which is said to be a main reason for business failures in the region. Six-month delays in receiving payment have been described as the 'norm', subjecting contractors to financial pressures and compromised cash flows. The problem is exacerbated with multiple causes for delayed payment and claiming payment through litigation can be a lengthy and expensive process.

Employers may also suffer from poor financial management, have unrealistic cash flows or issue excessive change orders and/or variations that make a project commercially unviable when it is too late for a contractor to back out. As a result, the contractor can face significant financial hardship with a compromised cash flow, leading to further difficulties when the contractor is unable to then meet its own obligations under the contract. Project time overruns become likely with either slowing or suspension of the work by the contractor or subcontractor and the relationship between the employer and contractor inevitably can become strained, in a region that places a particular importance on such relationships.

What can contractors do to protect themselves from non-payment?

There are a number of actions that contractors can take in order to protect themselves from non-payment at all stages of the contract. I will be addressing these during my Talk at The Big 5.

Who will benefit the most by attending your Talk?

The issue of non-payment is not unique to the construction industry. However, it would mainly benefit those involved as contractors at any level in the GCC construction industry.

 

Peter Anagnostou, Senior Legal Consultant, DLA Piper Middle East LLP, will give a Business Talk on Day of The Big 5 in Dubai

Summit/Talk: Business Talks

Topic: The Key to Getting Paid in the UAE Construction Market

Time & Date: 12:30 - 13:30, 27 November

Location: Za’abeel Hall 1

Return to Opinion