Who’s Who Legal brings together Rupert Choat of Atkin Chambers, Jaime Gray of Navarro Sologuren Paredes Gray, Phillip Greenham of Minter Ellison, and Ben Cowling, Laura Warren, Mark Blanksby and David McElveney from Clyde & Co to discuss industry trends, volume and type of work, legal market changes and developments for the year ahead.
Clyde & Co,
Clyde & Co,
Clyde & Co,
Clyde & Co,
WWL: What trends have you seen in the construction industry over the past 12 months? What level of new construction activity are you seeing in your jurisdiction? Which types of project are driving the most work?
Jaime Gray: In Peru, construction activity has grown exponentially in recent years. Despite the global economic crisis that has affected other countries, much of the economic growth locally is a result of the boom experienced in various specialised sectors such as mining, energy, transport and infrastructure. We have seen significant micro and macro-economic growth as a result. The International Monetary Fund in its Public Information Notice dated 14 February 2013 commented on the economic situation in Peru as follows:
Strong economic performance and sound macroeconomic management continued in 2012. Economic growth is estimated at 61/3 per cent of gross domestic product (GDP) in 2012, and the economy is near its potential... Economic activity was driven by domestic demand, in particular investment, as the weak external environment is taking a toll on exports and widened the external current account deficit. Inflation declined to 2¾ per cent in December 2012, falling with the inflation target band (1–3 per cent) as the adverse supply shocks unwound after being above the upper limit of the target band during the first ten months of 2012.
As far as construction projects are concerned, those related to transport infrastructure are among the most important mainly because for many years Peru has needed a more efficient public transportation system and better infrastructure to meet the needs of an increasing population and a corresponding rise in the volume of traffic.
Phillip Greenham: Over the past few years the construction of new infrastructure to support the mining industry has been the focus of much of the construction industry. This activity is now declining as that new infrastructure moves into the production phase.
Considerable activity continues in the area of medium and high-rise residential developments. In some cities there is projected to be a doubling of available accommodation over the next few years.
Public infrastructure continues to be the focus of attention. Australia has a very significant backlog of infrastructure modernisation and capacity addition which must be addressed. Transport infrastructure is receiving considerable government funding and modified versions of the public-private partnership model continue to be popular in supporting the delivery of this infrastructure.
Mark Blanksby: From a Dubai perspective, the past 12 months have seen much more positive sentiment in relation to the economy generally, and in relation to the construction sector in particular. Morale in the construction industry was undoubtedly improved in November 2013 when Dubai was awarded the hosting rights for Expo 2020; however, prior to that announcement, it was evident that consultants have been busier preparing master plans for various large community projects, and tenders for greater volumes of infrastructure works than in recent years. We have seen the award of the Dubai Canal Project, the announcement of the Dubai Metro extensions and Phase II of the Al Sufouh tram being considered over the past 12 months. Work has also commenced on the Madinat Jumeirah extension and on theme parks in Dubai and Jebel Ali. This momentum is likely to continue as Dubai seeks to develop its well-established infrastructure prior to Expo 2020, whilst capitalising on the anticipated boost in tourism expected from Qatar’s hosting of the FIFA World Cup in 2022. Activity is anticipated across most construction sectors (with Hotel, Leisure and Retail creating most opportunities), alongside significant infrastructure works such as the building out of Al Maktoum International Airport and the intended Dubai Metro extensions.
David McElveney: In oil-rich Abu Dhabi, while the global economic downturn led to a slowdown in the delivery of some projects, the government has recently affirmed its commitment to key projects and to the continued development of the Emirate as set out in the “2030 Plan”. Over the past year there has been a consolidation of various developers and development projects. The Saadiyat Cultural District is now being developed, and the main contract has been let for the construction of the Louvre Museum – one of several museums to be built in the capital. The real estate market (currently dominated by local UAE-based contractors) has seen one contractor announce, at the beginning of 2014, that it will be building 13 mixed-use towers on Reem Island, 14 residential towers elsewhere in Abu Dhabi, and a five-star hotel on the Abu Dhabi Corniche. On the infrastructure side, a new passenger terminal at Abu Dhabi Airport, the Midfield Terminal, is being constructed capable of handling 20 million passengers a year, while Etihad Rail’s development of a national rail network continues. Given Abu Dhabi’s status as the UAE’s capital, and a key global oil producer, there are always a number of ongoing energy and defence projects as well as Abu Dhabi investments abroad.
Laura Warren: Developments in Qatar’s construction industry over the past 12 months have been interesting. The first of the Doha Metro tunnelling packages were awarded in April 2013 after a protracted period of speculation, together with several large-scale infrastructure projects (particularly roads/bridges) such as the Sharq Crossing. Education, health, leisure, retail and hospitality sectors have also seen a growth in investment as contracts are awarded for facilities, stadia and hotels, for the FIFA World Cup 2022 and in line with the Qatar National Vision 2030. Finally, the FDI sector has seen new consultancy firms, contractors and subcontractors entering the market to bid for new projects and/or mobilise for those awarded.
Ben Cowling: Both the volume and scale of projects in Saudi Arabia continue to be the largest in the GCC – even by global standards, they are huge. Late 2013 saw contracts with a combined value of US$22.5 billion being issued to build the new Riyadh Metro. Jeddah, Mecca (Phase II) and Medina Metros are also expected to follow suit relatively soon. Combined with the Saudi Landbridge Project and Saudi Arabia’s part in the GCC network, the rail sector continues to be a major driver of construction spend. In addition, major real estate and other types of infrastructure remain strong as developers match the population’s demands for improved quality of life. Major legal trends have included increased regulation of foreign-contracting companies, a major campaign to regularise undocumented expatriate labourers, and stricter obligations to employ Saudi nationals under the Nitaqat scheme. Notwithstanding the above, we have witnessed a flood of new international consultancies and contractors entering the market.
Rupert Choat: After many years in the doldrums the UK construction industry is seeing growth. It is led by an increase in house building. The housing market has been bolstered by low interest rates, falling unemployment and the government’s Help to Buy scheme.
A significant amount of construction activity is centred on the London area. London’s flagship project is Crossrail, Europe’s largest construction project. Due to open from 2015-2019, this new rail link across London (from East to West) is estimated to cost about £15 billion.
Other major projects seem to account for a large amount of construction activity. One project that is attracting a lot of controversy is High Speed 2, or HS2 (a fast-rail link from London to Birmingham). Earlier this year the Supreme Court dismissed a judicial review challenging the government’s decision to proceed. It is estimated HS2 will cost £50 billion. The first phase is due to open in 2026, so book those tickets now.
UK-headquartered contractors continue to focus on their domestic market and do relatively little work overseas. That applies, with limited exceptions, to even the largest UK-headquartered contractors, in contrast to many other contractors headquartered elsewhere in Europe and beyond. It is perhaps surprising that, given the pressures on the UK construction industry in the past few years, there has not been more overseas activity by its contractors (although memories linger of many unsuccessful forays abroad in the past). Given where we are now, it seems unlikely that UK-headquartered contractors, as a whole, will seek to expand significantly overseas anytime soon. Meanwhile, contractors that are not headquartered in the UK continue to increase their activity levels in the UK, but not just by acquiring UK contractors.
WWL: Are you seeing high levels of construction-related disputes work in your jurisdiction? How are these disputes being settled – through the courts, arbitration or other alternative dispute resolution methods?
Jaime Gray: Yes, due to the growth of construction activity, there have been high levels of disputes in this sector. Many involve the Peruvian government in respect of public works contracts; however, there are also many construction disputes in the private sector.
The dispute resolution method to be used depends on the regime under which the work is performed. There are two general regimes for contracting works: the first is the private regime where parties entering into the contract are private entities, and the second is the public regime where one of the parties is the Peruvian state.
With regard to the private regime, most disputes are settled through arbitration. It is common practice for parties to submit their disputes to arbitration as they do not have a high level of trust in the decisions made by the courts. However, there are cases of construction contracts in which the parties have not incorporated an arbitration clause and in such situations they must submit their disputes to the judicial courts (unless they negotiate and agree on an arbitration clause after a dispute has arisen). In spite of the above-mentioned, some projects are executed under a contract which includes a dispute board clause (for example, the project known as Modernisation of the Peruvian North Dock).
In the public regime, and solely in respect of contracts carried out under the Public Procurement Law, the only alternative dispute resolution methods permitted are conciliation and arbitration. Still, it is common practice for disputes in public construction contracts to be resolved through arbitration.
In cases where projects are funded by international entities such as JICA or World Bank, the Peruvian state uses the FIDIC form of contract. When this happens, the alternative dispute resolution method is, by default, the dispute board. However, this last method is not broadly employed.
Phillip Greenham: Over the past few years there has been a significant change in attitude to the way in which construction and engineering disputes are handled. There are significantly fewer disputes which find their way into the formal dispute process.
Local arbitration is rarely used for such disputes. This is a contrast to the preferences of a decade or so ago. The courts continue to refine their process with a view to providing an efficient forum for disputes. However there remains more work to be done in this area.
Almost all disputes go through a mediation process at some point. This may be a court or contractually mandated process or a voluntary process. Settlement outcomes through mediation remain high. It is not uncommon for very significant resources to be devoted to the preparation for a mediation.
Dispute boards, whether standing or ad hoc, continue to be the subject of much discussion. Some sectors of the industry are using a dispute board more often than others. There is also considerable variability in the use of boards depending on geography.
The extent to which pressure points arise and parties engage in some arm wrestling over those pressure points has not diminished. But the likelihood of that pressure point finding its way into a court or arbitration process has significantly diminished.
Mark Blanksby: Since the global economic downturn, Dubai has seen a steady volume of construction disputes in part linked to the building projects that took place prior to 2008. As some of the most significant disputes in the region have come to their merits hearing within the last 12 months, however, the volume of disputes has now fallen partly due to matters being resolved, but also due to the lull in construction activity over the last few years. Despite this, however, a number of issues remain in relation to the Nakheel restructuring, while contractors/subcontractors also remain alert to the possibility of resurrecting final account claims as the financial health of paying parties seemingly improves. While we have seen the occasional use of expert determination and mediation to resolve disputes, the resolution of disputes remains largely within the domain of arbitration (with DIAC arbitration predominating).
David McElveney: In Abu Dhabi, high-value construction work over recent years has also created a reasonable amount of disputes work. Particularly where government is involved, disputes tend to be resolved without recourse to arbitration or litigation. Proper preparation and presentation of claims is therefore key. Over the last year specifically, there has been an increase in the number of construction disputes involving main contractors and subcontractors. For those claims proceeding to formal dispute, arbitration tends to be favoured. While ICC and DIAC arbitrations are common, the government’s standard form of contract (and some other contracts) contemplate arbitration in accordance with the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) Rules (a new version of such was introduced on 20 October 2013, and applies to all ADCCAC arbitrations from that date, regardless of when they were commenced).
Laura Warren: Over the past 12 months, Qatar has experienced a steady increase in dispute work in line with an increase in construction generally, and the near completion of packages of works at several large-scale projects. Liquidity issues have forced some disputes into formal procedures, while others are being resolved by way of amicable or alternative means. While resolution via the local courts remains common, an increasing number of disputes are referred to arbitration (predominantly under the rules of the International Chamber of Commerce). We have also seen two new players in the dispute resolution market, in the form of local arbitration institution the Qatar International Centre for Conciliation and Arbitration, and the Qatar International Court and Dispute Resolution Centre. Seemingly, the use of both is gaining momentum, as their centres and rules are incorporated in contract negotiation discussions.
Ben Cowling: Construction-related disputes in Saudi Arabia have continued over the past 12 months; however, it continues to be primarily a transactional market with participants looking forward rather than backward. Disputes that do arise are, on the whole, resolved via international arbitration and local courts. In respect of the latter, current government tender laws require disputes involving major government projects to be referred to local courts (and the government is the largest purchaser of construction services in the Saudi market). That said, arbitration under the 2012 Saudi Arbitration Law is gaining momentum, as local courts continue to make noteworthy decisions supporting the intent of the legislation, and contracts increasingly refer to it in their dispute resolution clauses. We therefore expect Saudi arbitration to become the dominant form of dispute resolution on Saudi construction projects over the coming years.
Rupert Choat: The last few years have seen an increase in international disputes (in which UK-based lawyers are asked to help) but a decrease in domestic construction disputes (for example, the number of 28-day adjudications seems to have fallen by about 30 per cent from a peak in 2008–2009). This decrease seems to be because of the following: (1) reduced construction activity – so fewer projects from which disputes arise; (2) cost concerns – both the cost of pursuing cases and the risk of an opponent’s insolvency, with the result that many claims have either settled more readily than before or been parked; and (3) parties finally learning to avoid dispute resolution proceedings.
Adjudication still seems to resolve more domestic disputes each year (well over 1,000) than litigation and arbitration combined. While it produces only temporarily binding decisions which can be enforced pending any litigation, arbitration or settlement, the results of adjudications continue often to be treated as de facto finally binding. Arbitration remains far less popular than litigation (unless one classifies adjudication as a species of arbitration). There may be an increase in the use of arbitration domestically with increasing court fees and stricter court rules, which include a zero-tolerance approach to missing court deadlines and costs budgeting. The latter entails treating cases as projects that need costs management. Early in the litigation the parties exchange costs estimates which are approved by the court (subject to any adjustments). Parties are then held to their budgets and (again, subject to adjustments), if they win, are unable to recover more than their budgeted costs. Budgets do, however, assist with the costs assessment process. Cases worth more than £10 million are excluded from the mandatory costs budgeting regime (although it may be imposed as a matter of discretion).
Mediation and other forms of ADR continue to be actively promoted, for example by costs sanctions should a party unreasonably refuse – or delay – ADR. One Court of Appeal judge last year suggested that it would not be against the right to a fair trial enshrined in the European Convention on Human Rights for the courts to order parties to try ADR (in contrast to the conventional position whereby litigation is merely stayed to allow for ADR, which may not then happen during the stay). It remains to be seen whether anything will come of this.
WWL: Have you seen a change in the legal market in this area? Are firms looking to increase their construction capabilities, or to pull back from the market? Has there been a high level of lateral moves or merger activity affecting practitioners in this sector?
Jaime Gray: Yes; in recent years, due to the growth in construction activity, Peruvian law firms have placed greater emphasis on the knowledge and practice of alternative dispute resolution methods related to construction. Some law firms have incorporated new construction areas and others have expanded their areas of specialisation in this sector.
It is in response to the need to promote knowledge related to construction law that in early 2013 the Peruvian Society of Construction Law was created with the support of the Society of Construction Law (UK). Incidentally, in April 2014 the Peruvian Society of Construction Law held an annual conference in Lima involving many national and international experts.
But the current reality is that few law firms in Peru actually have specialised knowledge and experience in construction law because, among other reasons, universities have not included construction law as a course of study (although, certainly, some postgraduate courses exist).
Phillip Greenham: The construction industry continues to call for significant support from lawyers. The nature of this support and the way in which it is provided is changing. More partner time is called for. More strategic advice is called for. There is less demand for raw resources and processing power.
More firms are seeking to support the construction market and are establishing or concentrating construction and project expertise. There has been some volatility in the market with partners and others moving from firm to firm. This is perhaps at a higher level than it has been for some years.
The well-known construction law practices remain busy in what is a fast-evolving market. It remains the case that only a small number of firms have a truly dedicated construction law expertise. Most firms house the expertise in a property area or a finance area. It is also the case that few firms offer a centralised commercial and dispute expertise in support of the construction industry.
Construction law subjects are now taught in some universities and this is increasing the focus on construction law as an area of practice.
Mark Blanksby: Overall, I would say the Dubai legal market has remained static over the last 12 months. There have been numerous lateral movements between firms, and between Dubai and Abu Dhabi or Doha, but largely construction legal teams remain the same. There has been no noticeable pulling back, but some smaller teams have expanded their repertoire so as to cover real estate and commercial dispute work (assumingly to supplement a slight drop-off in instructions from within the construction sector). There have been one or two new entrants to the Dubai market so it will be interesting to see what traction these firms obtain as momentum in the economy continues.
David McElveney: The years leading up to the global economic downturn saw a huge influx of international law firms into the Abu Dhabi market. In recent years, however, there appears to have been a retreat by many firms either back to Dubai, or out of the UAE altogether. Of the firms now operating in the market, only a handful have maintained a real construction capability. Likewise, there has been a reduction in the number of international in-house lawyers with construction expertise. It remains to be seen, therefore, whether this situation will continue by following the existing trend, or whether we will see a renewed entry of construction lawyers into the market.
Laura Warren: In Qatar, the legal market has been inundated with new entrants over the last 12 months. With that, we have witnessed lateral movements at all levels between firms. There are now over 30 law firms in the Qatar Financial Centre, servicing what is a relatively small market in the region, and ranging from those with a full construction offering to those with only one or two general practitioners on the ground. With increased competition, an inevitable squeeze on rates has occurred which could result in “casualties” for those who fail to establish a real foothold in the market.
Ben Cowling: Although there have been a handful of new law firms entering the Saudi market over recent years, none of these offer any particular construction focus. Clyde & Co therefore remains the only international law firm with a specialist construction partner resident in the Kingdom. Despite the regulations applying to law firms being somewhat loosened during the last 12 months, most international law firms continue to operate under an associated office structure. As such, relationships with local Saudi partners continue to be critical. However, there have also been some notable and high-profile breakdowns between firms and their Saudi partners in the past year, causing some prominent names to exit the market altogether.
Rupert Choat: The numbers of solicitors, law firms and barristers are stable with a slight trend towards fewer firms, partly as a result of merger activity. There are now about 10,554 solicitors’ firms down from 11,231 two years ago.
There seems to remain a steady demand for construction lawyers.
WWL: What are your predictions for the year ahead? Do you expect to see an increase in commercial projects as the global economy begins to pick up?
Jaime Gray: I believe that in Peru there will continue to be a significant increase in the number and scope of commercial and construction projects. There is a gap in infrastructure in this country that requires the state to invest in, and attract investment in, building projects. I believe the same situation will prevail in other countries around the world as long as the global economy improves over time. The latest economic crisis has seriously weakened many countries and, hence, the process will be slow.
However, the economy will recover and gain momentum and with it an increase in commercial projects, generating a rise in both the number of construction projects and economic dynamism. In addition, the following must be considered: there is no better way to recover from an economic crisis than by generating the necessary investment for the execution of infrastructure projects. Consequently, the more investment in construction projects there is, the faster we will emerge from the global economic crisis.
Phillip Greenham: The year ahead looks bright. The local needs of the economy will generate continuing demand for new infrastructure for a number of years. The turmoil and hesitation of the financial crisis is behind us.
It is the case that governments are being very careful with their budgets. However it is also increasingly the case that expenditure on infrastructure (and borrowing to fund that investment) is regarded as an investment rather than merely taking on more debt.
Australian superannuation funds continue to hold significant funds and the need for the generation of reliable long-term income from this is very significant. Investment in infrastructure is thought to be part of the response to this need. The best way of structuring such investment is still being explored. However, the need and opportunity is great and solutions will be found.
New city office buildings may be subdued for a time as available capacity is absorbed. Public infrastructure will be very active. Mining infrastructure will be more subdued than it has been for some time. The delivery of approved high-rise residential towers will occupy a significant part of the market for the next year or two.
All in all a bright prospect for the industry.
Mark Blanksby: The year ahead looks promising for the Dubai construction sector. The economy has been given a boost by the Expo 2020 announcement, and there is noticeably more liquidity in the market which (together with renewed confidence) ought to see developers and purchasers of property or commercial buildings more able to raise funding. The early beneficiaries are likely to be the engineering, project management and quantity surveying practices that will see increasingly full order books over the next year, leading to a noticeable increase in the award of projects across all sectors. The challenge will ultimately be one of capacity. With a number of contractors and subcontractors having exited the Dubai market since 2008, or significantly scaling back, there will be opportunities for local contractors and new entrants to capitalise on this.
David McElveney: Abu Dhabi’s commitment to continued development, combined with its economic and political wherewithal, should mean that the year ahead will see both continued growth in the development sector, and steady progress with a range of construction projects. We also expect to see the delivery of current and already-announced projects rather than the announcement of new projects.
Laura Warren: In Qatar, the next 12 months should, in theory, show an upward trend in the amount of tenders being awarded and works being commenced (if timelines for future events are to be met). However, the tension in respect of liquidity in the market may cause some investors to look again towards Dubai. Similarly, we would expect an increase in contentious work as some of the major infrastructure projects come online.
Ben Cowling: We have high hopes for the Saudi market in 2014, not least because its projects pipeline continues to be very strong across all sectors. Without doubt, Saudi Arabia will remain a difficult place to do business as the issues that caused consternation over the last year may well be replaced by different issues next year. However, the increasing public demand for infrastructure coupled with the existence of oil-derived government capital to pay for the same go hand in hand to offer a very attractive proposition to those operating in the construction sector.
Rupert Choat: I expect the UK domestic construction industry to continue to grow based on house building growth and major projects (with increased efforts to help SMEs win work on the latter).
While UK contractors continue to focus largely on domestic work, UK-based construction lawyers should continue to see their best prospects in overseas work for non-UK entities.