Construction 2016: Trends

While the global construction industry is beginning to gain pace once more, the after-shocks of the global financial crisis are still being felt by the law firms and practitioners tending to the industry. Cost-conscious, sophisticated clients are the new norm, challenging the legal market to adapt to their needs for globalised advice and price certainty. 

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Construction disputes

One area in which this is being acutely felt is in construction dispute practices; practitioners reported an increasing aversion among clients to commencing proceedings as they look to minimise their legal expenditure. While there may be fewer disputes, lawyers are seeing increased work on the advisory front looking at internal risk management processes and alternative methods of dispute resolution. As one reported, “This has paved the way for more imaginative and creative solutions to contentious issues in construction, and we are exploring new avenues with our clients as they look to optimise on their legal spend.” The method of contracting used by clients has become a focal point, and lawyers continue to see an increased preference for the New Engineering Contract (NEC3), which prioritises early dispute resolution and prevents contracting parties dragging out an issue through to project completion – a major problem that arises with other methods. Furthermore, there has been an increasing use of dispute adjudication boards (DABs) which encapsulate elements of both mediation and arbitration. Reinforced by the Swiss Federal Court’s decision in late 2014 to make DAB adjudication a mandatory step in disputes involving parties bound by FIDIC contracts, DAB adjudication is an area which construction practices continue to explore. 

While some disputes may be avoidable, others are not, and there has been an increase in high-value disputes requiring specialist knowledge, particularly in the energy sector, as volatility in oil prices continues to cause difficulties for projects in energy hubs the world over. During these testing times, disputes with contractors are inevitable, particularly as to whether termination or suspension rights under construction contracts have arisen.

International consultancy Arcadis’ fifth annual study of global construction disputes found that the highest growth was in Asia, where the average figure doubled in 2014 to $85.6 million; this was followed by the Middle East, with an average value of $76.7 million. In the UK, the average value fell to $27 million, while the rest of Europe saw a rise from $27.5 million to $38.3 million.

The figures are very much influenced by the size and complexity of projects in the regions; Asia and the Middle East are seeing bigger, more complex infrastructure projects, which by their nature attract higher numbers of claims for larger sums.

Saudi Arabia and Oman have a lot of contentious work relating to time, cost and quality issues, especially in the area of transport and large infrastructure projects such as high rise towers, hospitals, shopping centres. Practitioners have been heavily involved in many disputes surrounding airports, such as Doha international airport or the new $3.2 billion midfield terminal in Abu Dhabi.

Much of the construction industry’s recovery in the US has been driven by investment into energy, petrochemicals and manufacturing, as well as the residential sector. Disputes value, according to Arcadis’ report, dipped between 2013 and 2014 although the amount of time taken to resolve disputes rose substantially. The main cause of disputes during 2014 was errors and/or omissions in the contract documents, according to the report.

Energy and infrastructure

The focus for construction projects worldwide remains heavily centred in the energy and infrastructure sectors.

According to those we interviewed, the energy sector holds much promise despite the ongoing volatility in oil prices. Many European and US-based practitioners predict increasing activity on the renewable energy front as governments work towards meeting their targets to avoid the worst impacts of climate change. In the UK in particular, the government’s energy policy is to phase out all coal plants by 2025. Gas is seen as central to an energy secure future, along with nuclear and renewables.

There is much infrastructure construction in the emerging markets of South Asia, Middle East and Africa, where development needs are high. In construction, the Middle East and Far East once again came out on top as hubs for such work.

In the Middle East the declining price of oil has put additional pressure on government budgets resulting in a new focus on PPPs. The Dubai PPP law will came into force in November 2015 and will be followed by further resolutions, there has also been a recently introduced PPP law in Kuwait. Furthermore, Saudi is looking at using a shariah-compliant PPP to finance its infrastructure plans, spurred on by the successful implementation in the new $1.2 billion Prince Mohammed bin Abdul-Aziz International Airport terminal in Medina which was constructed by a consortium including Saudi and Turkish contractors under a 25-year build-own-operate agreement. 

In contrast, law firms in Abu Dhabi have seen a slowdown in business, resulting in several firms shutting their offices. (State revenues have been declining due to cheap oil and as a result Abu Dhabi has cut back on all non-essential projects.) Herbert Smith Freehills is refocusing its Middle Eastern presence in Dubai – as is Simmons & Simmons, which closed its Abu Dhabi office after a review. Latham & Watkins also closed its offices in Abu Dhabi and Doha, and is relocating staff to Dubai. Dubai itself remains active with preparations under way for Expo 2020. In total, Dubai expects to see a total investment of 25 billion dirhams in infrastructure-related projects in the run-up to the event, including a water canal, roads, bridges, hotel and residential units.

Promising new regions

There have been notable increases in the amount of development in Africa (such as the need for mixed commercial and residential high-rise properties), and these changes have driven a fair amount of work in the region. This is being pursued heavily by third-party funders who have started to enter the region looking at funding claims, and who commonly come from from Europe, Asia and the Middle East. For a variety of reasons, these discussions have been taking place in Dubai – out of convenience and safety concerns, according to our sources. However, there was hope that as Africa develops more hubs that people are comfortable with, there would likely be greater repositioning of lawyers and experts.

Following the rapid improvement in diplomatic relations between Iran and the West, resulting in international sanctions being lifted, Iran is being cited by many as the “frontier market” of 2016. Iran is expected to benefit from rapid growth and will present many opportunities for construction companies in the form of railways, irrigation networks, petrochemical plants, and hotels.

Legal marketplace developments

The arena of international construction law will necessarily continue to adapt and change, which is both challenging and exciting for market participants. During the past few years we have witnessed the globalisation of law firms as they opt for an “on the ground” presence in regions where their clients are doing business.

In a construction context, this has seen a greater focus on developing resources in Asia and the Middle East.

Our list shows that the USA is still ahead of other countries, with the highest number of leading construction experts. It’s followed by England, Canada and Australia; next on the list is Hong Kong, Singapore, UAE, and China. This is a testament to the maturing markets in the jurisdictions and the great talent on offer to clients.

The leading firm in our research is once again Pinsent Masons, with 26 practitioners singled out for their excellence. The firm’s listings represent seven jurisdictions, demonstrating the global offering of the firm.

Barristers’ set Keating Chambers follows in second place with 19 highly recommended experts, all of whom are located in London but are frequently engaged for international matters, including disputes in the Middle East and Gulf regions and the Asia Pacific region. There are therefore different models of servicing an international client base, both of which can be deemed a great success by our research.

It is possible that relocations will become more frequent as projects start moving to previously unchartered territories; it will be interesting to see if these projects are staffed out of existing offices, or whether new offices will begin springing up. 

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