Who’s Who Legal brings together two leading figures, Colin Ong (Dr Colin Ong Legal Services, Brunei) and Don Gavin (Akerman, US), to discuss emerging domestic trends, the construction sector’s possible resurgence as a result of improving economic conditions and other key issues affecting the legal market.
Colin Ong: With the implementation date of the ASEAN Economic Community (AEC) set for 31 December 2015, it would be useful to discuss construction trends throughout ASEAN and to see what the experienced large contractors think. ASEAN integration via the AEC should boost foreign direct investment in lower per capita income countries but this also means that domestic construction sectors must increase competitiveness to both survive and capitalise. Yes, I do expect to see an increase in such projects involving government-commissioned venues over the next few years. Countries in the ASEAN region have robust economies and no major instability issues. So long as this trend continues, and there is no radical change in the internal stability of the region, one would expect that governments would commission more ventures and are likely to encourage partnering with investors who are specialised in BOO projects in certain sectors (eg, hospitals, toll bridges and roads). This is more likely to happen with countries that have either large populations or underdeveloped infrastructure.
Don Gavin: In the United States public infrastructure construction lags far behind the need to replace ageing facilities and to add and enlarge projects needed to address growth and economic vitality. The Congress of the United States has for some time simply extended the Highway Trust Fund, rather than take on the politically difficult task of raising taxes on fuel to pay for increased spending to meet existing needs which simply go unaddressed unless identified as dangerous or unavoidable. Consequently there is little real growth in the traditional publicly advertised design/bid/build area of public construction. The federal government has been struggling to rein in budget deficits, which is restraining federal construction. Military construction is decreasing as the United States’ role in Iraq has become very limited, and its presence in Afghanistan is coming to a close. Covert expenditures tend not to generate significant legal disputes by their very nature. State and local governments are almost always legally required to balance their budget expenditures with actual income, and tax revenue has only recently begun to recover from the years of the financial crisis – and only in some states. The one bright area of growth has been public private partnerships, where funding is provided by the private sector, based on receipt of revenue from tolls or user fees. Given the need to complete these projects within a financially feasible budget, and the fact that most are design-build by members of the private consortium, construction disputes are minimised. Many have a dispute resolution or adjudication board for alternative dispute resolution during the project, avoiding expensive and extended litigation or even arbitrations.
Colin Ong: No, I do not see this happening in countries such as Brunei, or other ASEAN countries, for a while. Adjudication would only work well in countries like Singapore, which has a very developed, independent, efficient and transparent judicial system. Such values would then permeate into ADR systems in the country including adjudication and arbitration. There is also a need for experienced neutral adjudicators as, given the tight time constraints, adjudication is often seen to dispense rough justice. The responding party is usually only given a very short time to prepare a defence to claims brought against them. Introduction of adjudication in other countries in ASEAN, whose construction industries are not that well developed or prepared, may cause serious effects that could escalate the costs of the construction industry. In the course of a project, a number of adjudicator decisions may accumulate and all may have to be finally resolved by arbitration. Mistaken decisions have to be honoured pending an arbitration, and this can cause cash-flow problems. With the AEC coming up, one can expect that more regional contractor players will go to the countries which have lesser red tape and fewer legal procedures to undertake before reaching a final conclusion.
Don Gavin: Unlike in the United Kingdom, Australia and Malaysia, adjudication legislation is unlikely to be adopted soon either by the Congress of the United States or by most states. Generally, remedies yielding a decision as opposed to a negotiated settlement other than arbitration or dispute resolution or adjudication boards agreed to by contract, have been resisted in the United States. The Federal Arbitration Act, and the arbitration acts that have been adopted in every state, are strongly enforced by applicable courts except in the area of consumers, where some pull-back has been forthcoming. Arbitration in the United States offers far more rights and time to the contractual parties than statutory adjudication, but the number of construction arbitrations has decreased in recent years. The growth of outside funding of arbitration and even litigation can potentially raise ethical issues, but pressure to restrict legal fees is more likely, and this may tend to commoditise the services being provided, with a lessening of quality and advocacy. What is affecting the nature of legal services is the prevalence of clients with a great reluctance to invest in dispute resolution, whether arbitration or litigation, and who are very restrictive in the pursuit of affirmative claims, spending money only when necessary in “bet the company” disputes, or in defending against criminal or regulatory attacks on their ability to do business brought under statutes such as the Foreign Corrupt Practices Act and the False Claims Act where there is an increase in enforcement at present. Risk reduction is a major corporate goal. The preference is for low-cost, speedy alternative dispute resolution such as mediation. Thus, contracting parties might find adjudication acceptable, but their outside lawyers may not.
Colin Ong: In the case of ASEAN countries, one would say that the housing and infrastructure sectors are experiencing the most construction activity. The driving forces behind these trends is a continued increase in population growth in countries where majorities are from religions that do not believe in birth control; also, the fact that many such countries like Brunei and its immediate neighbours are now trying to diversify away from hydro-carbon industries into other sectors. There also seems to be a trend for demand for second homes and housing that is closer to the Brunei-Malaysia border as there is a very healthy flow of traffic and movement of people across the borders during the weekend. This has been triggered by both the steady devaluation of the Malaysian currency and also by the fact that the majority of Bruneians enjoy travelling to Malaysia, which has more relaxed laws for entertainment and dining.
Don Gavin: Despite the fall in crude oil prices, significant new construction is commencing and continuing in the United States in conversion of natural gas to liquids, processing of related components, new pipelines, and gas-fired electricity production facilities as well as alternative energy facilities for wind and solar. The United States has not experienced the same impact as Australia from the drop in natural resource commodity prices. Nevertheless, industries such as steel production have been negatively impacted by the glut of steel imported from China reflecting the worldwide drop in demand. Some other industrial construction is increasing as manufacturers are finally beginning to add to and upgrade facilities after a long period of static activity. These include new automobile assembly plants for European and Asian manufacturers in southern states. In areas such as Dade County, Florida (Miami), which had been hard hit by the economic downturn, there is a building boom in residential, commercial and public facilities, much of which is fuelled by capital from Latin America. Individual cities such as New York, Los Angeles, San Francisco and Washington, DC, continue to experience substantial growth. New port facilities to accommodate the larger ships which are going to travel through the enlarged Panama Canal are being constructed along the east and south coasts of the United States. In general, single-family home construction starts have increased somewhat, reflecting the recovery in the residential housing market.
Colin Ong: It is true that one is seeing a trend where clients seem to prefer entering into a relationship with a single main contractor who can provide one single point of contact and responsibility for the management and delivery of a construction project. It is certainly the case in most ASEAN countries now that the current philosophy is now to achieve projects which give better value for money, and the idea that simplifying the supply chain would result in such an end result is driving single prime contracts. It has not had much impact on my practice as I tend to act as lead counsel for both law firms acting for contractors and also for state-owned companies within the ASEAN. If anything, it has been quite beneficial to my practice as I tend to act on larger projects, and the trend towards single prime contractors has reduced the competition from smaller law firms, who tend to have been brought in by smaller sub-contractors.
Don Gavin: Multiple prime contracts are usually avoided by most owners except in public construction in states such as New Jersey, where statutory requirements mandate a form of multiple prime contracts. It has generally been recognised that a single point of responsibility reduces costs and provides for a more focused risk allocation. There is an increase in the use of building information management (BIM) contracting, particularly in construction requiring a high degree of trade coordination such as hospitals. The outcome of using BIM, if properly implemented, has been to reduce conflicts in crowded spaces for various systems whether they be structural, electrical, mechanical or information technology. This is also likely to reduce legal work arising out of such conflicts. Also, from a perspective of limiting legal work, the insistence by certain clients on the use of fixed fees can change the character of the legal work being provided: while likely reducing legal costs, it may also limit the quality and advocacy of the work. What is increasing is the use of design-build construction for building work and engineer procure and construct (EPC) for industrial and energy construction, both of which shift decision-making from owners to contractors, and in theory reduce disputes.