Construction 2017: Discussion
Who’s Who Legal brings together Erin Miller Rankin at Freshfields and Andrew Ness at Jones Day to discuss issues facing construction lawyers and their clients in the industry today, including the rise in construction costs, the effects of global political uncertainty and the growing number of sector-related disputes.
Globally, construction costs continue to rise, even as commodities prices have begun to fall. In your jurisdiction, what has been the practical impact of this?
Erin Miller Rankin: With the fall in commodities prices in the Middle East, there has been significant market contraction for infrastructure and construction projects, and a decline in contract awards by government entities. With lower oil prices being the new normal, some entities have been terminating contracts and offering development plans, resulting in some contractors being on the verge of insolvency while others have announced plans to exit the market. There is therefore an increased number of disputes throughout the Middle East, particularly involving government entities. The region has been impacted by the fall in oil prices, with a number of oil majors freezing further petrochemical infrastructure developments. The slump in oil prices has led to the delay of government infrastructure and construction programmes.
Governments have thus sought a more efficient procurement process for foreign sector investment in major development projects through the enactment of Public Private-Partnerships (PPP) legislation. Kuwait and Egypt have already established comprehensive PPP laws, while the full impact of Dubai’s PPP Law (Law No. 22 of 2015), which came into force in November 2015, remains to be seen. Qatar has announced that it will be enacting a PPP legislative framework in early 2017 in order to accelerate development, especially in sport, health, education, and infrastructure.
Despite the downward trend in spending across the region, Dubai has recently announced increases in government infrastructure expenditure in preparation for Dubai Expo 2020, and further investment in utilities and transport is expected.
Andrew Ness: In the United States, inflation has been low and cost levels generally have been very stable for quite some time. Labour costs are only now expected to rise, as the economy has recently approached a level close to full employment after a very protracted recovery from the 2008-2009 recession. However, in construction, skilled trades – especially welders – have long been in short supply, as industrial and energy projects (particularly in areas where numerous large projects are concentrated, such as the Gulf Coast) have kept demand high and wages increasing. Well before the new administration, major construction employers worried about rebuilding the pool of qualified construction workers, with increased emphasis on training programmes to bring more young workers into the labour pool, and projections of increasing labour shortages in years to come.
With the immigration restrictions, actual and promised, coming from the new administration, plus the crackdown on undocumented persons and increased deportations now getting under way, the prospect of severe labour shortages in the construction industry has significantly increased. Recent immigrants and undocumented persons have been, whether acknowledged or not, a key component of the labour pool.
As a result, uncertainty abounds, and the prospect of substantial labour cost inflation due to excessive competition for skilled construction workers is very real. This is not yet reflected in cost indices, but this is something to be watching for in the months to come. The US market is likely to see real changes over the coming year as the result of this confluence of forces.
Do you expect there to be an effect on infrastructure and other construction projects as a result of the political uncertainty in the US, the UK and elsewhere?
Erin Miller Rankin: Political uncertainty in the US and the UK is not expected to have a great impact on infrastructure and construction projects in the UAE and the wider MENA region. Progress made towards the suspension of the economic sanctions in Iran, pursuant to the Joint Comprehensive Plan of Action 2015, is perhaps the one possible exception. Though recent developments have led to some hesitancy from investors, some government entities continue to deepen their energy ties with Iran through oil-and-gas infrastructure investment. Iran remains a market of interest with investment opportunities, particularly in the petrochemical, transportation infrastructure, and mining sectors.
Uncertainty remains as to the implementation of Brexit and the resulting legal framework. This may result in a short-term preference for the predictability of European centres and other foreign arbitral seats, yet we expect London to remain a popular seat for Middle East construction disputes. The UK will remain a party to the New York Convention, and thus resulting arbitral awards will continue to be enforceable across all other Contracting States.
Andrew Ness: Without doubt, the US is now in a time of high uncertainty in many different respects. The new administration has announced a US$1 trillion infrastructure upgrade programme, without providing any details whatever beyond that. This has certainly captured the attention of construction interests nationwide, but whether, when and in what form something like this will come to pass is highly uncertain. Those in a position to shape specific policy proposals are still in the stage of floating trial balloons, such as the transportation secretary very recently stating that road tolls may be part of the answer to financing new projects (The great majority of public roads in the US have historically been free, paid for mainly by gas taxes. A special exemption must be obtained to charge a toll anywhere on the extensive system of interstate highways, for example.)
There has been considerable talk of greatly expanding the use of P3 – public-private partnerships – which have been much slower to catch on in the US than in many countries, as a way of leveraging private investment. Yet in the next breath it is acknowledged that P3 cannot possibly be used to address most of the most pressing infrastructure needs, which are often in rural areas where no reasonable P3 structure can be envisioned. Moreover, those familiar with the requirements for bringing a P3 project to the point of award know that greatly expanding the number of such projects in short order is a huge challenge, and visible on-the-ground improvements will be a long time arriving.
A Republican Congress, full of deficit hawks and others with conservative views on increased government spending, will be pushed hard to enact major tax cuts this year that look likely to expand the deficit significantly. Are they really then going to immediately ramp up infrastructure spending substantially as well? Overall, those in Congress quietly suggesting that enacting any major infrastructure programme is a likely candidate to push back into 2018 seem highly likely to win out, no matter what the administration says.
Regulatory uncertainty is another area of enormous concern. As just one notable example, developers of wind and solar energy projects are wondering whether the regulatory rug will be pulled out from under alternative energy projects in favour of fossil fuel projects that seem near and dear to the hearts of those now in charge at the Department of Energy and other key departments – and of course the Environmental Protection Agency. The administration’s strategy of appointing lifelong opponents of particular agencies to now run them is an effective formula for creating massive uncertainty as to what lies ahead.
How has the global rise in construction disputes affected your practice? Do you see this trend continuing in the future?
Erin Miller Rankin: Construction disputes involving international parties are increasingly significant and complex. Clients therefore require sophisticated legal counsel, able to navigate the thorny legal issues of international construction arbitrations, and possessing both an understanding of local industry practice and knowledge of regional and international jurisdictions. As the market has matured, there is an increasing flight to quality and a greater understanding of the impact choosing appropriate counsel has on the cost and outcome of proceedings.
The increased reliance on joint ventures in construction and infrastructure projects involving a multitude of supplier and subcontractor parties has contributed to this surge in high-value construction disputes, since there are numerous junctures at which a dispute may occur. This trend is likely to persist in the MENA region as joint ventures remain attractive vehicles for shared risk. Furthermore, Dubai will continue in its role as a business hub for Middle East and Africa construction and infrastructure disputes, although other seats with more arbitration-friendly laws may increase in prominence.
Andrew Ness: In the United States, gradual but long-continuing economic expansion has led to increased construction activity, and increased activity means increased potential for disputes. However, the substantial and still increasing transaction costs of formal dispute resolution via litigation or arbitration (lost personnel time as well as legal and consultant fees) have fuelled the greatly increased use of less costly alternative dispute resolution methods, such as mediation and dispute review boards. The effects on construction law practice have largely balanced out – more total disputes perhaps, but a smaller percentage that are not promptly and efficiently resolved.
This trend toward more efficient dispute resolution is by now well established, and doubtless will continue; it is affirmatively good for the construction industry and those who participate in it. The effect on the construction law bar has been significant, although substantially less than the effects that widespread mandatory adjudication has brought to the UK construction bar.
A growing portion of the most complex and significant construction disputes occur in Asia, the Middle East and Australia, and many larger US firms have taken note, expanding their international offerings accordingly into markets often earlier dominated by major UK firms in particular. US construction lawyers are now more internationally attuned than ever before, and this trend will no doubt continue as well. With broad industry experience to bring to bear, efficient case management, and a knack for practical advice in navigating complex situations, all honed by many years of competition within the large US market, US construction lawyers are well positioned to assist those enmeshed in major project issues and disputes worldwide, and winning an increasing share of such engagements.
What do you see being the biggest challenge for construction practitioners in your region in the next few years?
Erin Miller Rankin: One challenge for construction practitioners in the MENA region is managing the sheer scope of large-scale, complex disputes. Construction arbitrations are typically document-heavy, and firms would be advised to work with clients to maintain an efficient document management system. As well, since construction claims depend to a large extent on the technical position adopted by experts, construction practitioners should seek to streamline the process of joint expert conferences and to narrow the issues early. Construction practitioners must manage the expectations of their clients and provide greater education to clients on how to successfully progress a dispute.
A further challenge is the changes made to Article 257 of the UAE Penal Code, pursuant to Decree No. 7 of 2016, which now provides for the temporary imprisonment of arbitrators and experts who are found to have breached the duty of neutrality and integrity. This has led to a wave of resignations from arbitrators and experts in UAE-seated arbitrations. However, members of the legal community are working with the local government authorities to address these issues.
Finally, the power of the DIFC Courts to act as a “conduit jurisdiction” for the enforcement of foreign court judgments and arbitral awards (domestic and foreign) made in onshore Dubai and outside the UAE will likely be limited by the supervisory jurisdiction of the Dubai Judicial Committee. Established pursuant to Dubai Decree No. 19 of 2016, the Committee was created to determine and rule on conflicts of jurisdiction between the onshore Dubai Courts and the DIFC Courts. The Judicial Committee’s recently handed down decisions suggest a curtailing of the DIFC’s role as a “conduit jurisdiction”. However, further decisions are hoped to clarify the position.
Andrew Ness: The greatest challenge for US construction practitioners for many years now, and in the future, is to continue to refine and improve our capabilities to provide both effective and efficient dispute resolution services and transactional/contracts advice and counselling. On the contract drafting side, increased automation and artificial intelligence aids are now on the near horizon, and may well offer opportunities for much improved efficiency and lawyer productivity, without replacing the need for professional judgement and expertise on the key issues.
In dispute resolution, the key is relentless focus on finding the promptest and most efficient means to achieve the client’s business objectives, without more legal procedures and process than necessary. Construction industry clients are increasingly tempted to “do it themselves” on the idea that this is a means to avoid expensive legal fees and cumbersome legal procedures. The lawyers who will be viewed as pre-eminent in the future are those who add value at every step for the client, and leverage the unique skill sets of lawyers to most effective advantage. Words matter, the contents of agreements make a difference, and lawyers are the language experts who best assure that contracts accurately state the agreements reached and cover the issues that need to be addressed to avoid disputes in the future. Construction lawyers have a proactive and positive contribution to make to the smooth functioning of the construction industry, and those who keep their focus on such contributions will prosper.