Construction 2019: Trends & Conclusions

On the face of it, it would appear that the tale of the global construction market is one of old versus new. The “old” are the traditional western markets of Europe and the US, where fewer new construction projects are starting. The “new”, by contrast, is characterised by change and breakneck-speed development: markets in the Middle East and Asia have seen colossal state-sponsored projects proliferate at an accelerated rate in the last five years. China’s Belt and Road Initiative (BRI) has turbo-charged construction projects across four continents, while in the Middle East, law firms continue to set up offices in order to take part in the construction boom seen in the UAE, Saudi Arabia and Qatar. That is not to say, however, that all is well in the world of the “new”. With the BRI turning five years old in 2018, the projects that sprang from it are now reaching completion, and disputes arising from them abound. Meanwhile, in the Middle East, there are cash-flow issues surrounding projects, and an explosion of arbitration proceedings to resolve construction disputes. Finally, as with many sectors, technological innovation continues relentlessly in construction practice as well as those who provide legal advice, with exciting developments in imaging and design software, as well as blockchain implementation.

Belt and Road Reaches Maturity

Since its unveiling in 2013 by Xi Jinping, China’s immense transcontinental BRI has sought to improve infrastructure in order to foster increased trade and political cooperation between 65 countries, who between them account for 30 per cent of global GDP and 62 per cent of the global population, according to estimates by the World Bank. Under the aegis of the BRI, high-speed rail projects, power plants and ports have sprung up across Africa, Asia and Europe in order to forge new silk roads over land and sea. The achievements and problems of the BRI have been well documented elsewhere, but what is certain is China’s growing political and economic power in these regions, with one source stating that “it is the objective of China to work their way around the world”. However, China’s economy has begun to show signs of slowdown, with weakening industrial production, profits and revenue in 2018. Furthermore, the trade wars of 2018, largely instigated by the USA, appear to be impacting the economy, with a reduction in exported goods and services from China, as well as GDP and consumer spending. Due to this economic slowdown, practitioners we spoke to noted that there is increased criticism of the BRI. The slowdown has also given rise to a proliferation of disputes regarding BRI projects. As one interviewee told us: “In a tight market of tight margins, contractors have to get their money back or they turn to arbitration. More termination disputes is a noticeable trend.” Not all construction claims can be attributed to the economic downturn, with some practitioners highlighting that “with the Belt and Road Initiative four to five years matured, we are now beginning to see disputes arising from its construction projects”. A combination of a more challenging economy and the natural maturation of BRI projects has therefore facilitated a boom in dispute resolution demand: “Belt and Road claims are very big right now,” said one lawyer.

Dispute Resolution in the Desert

In the Middle East, the construction market continues to be highly active, with lawyers in the region reporting that “a lot of the real estate and civil infrastructure is pushing on at great pace”. Such is the level of construction activity in the region that law firms have continued to take advantage of demand with “a migration to the Middle East as markets have hardened elsewhere”. Market commentators note that it is “now the American firms investing very heavily in the market, with firms consolidating their offices into the UAE and into Dubai specifically”. It would, however, be misleading to cast the Middle East as an Eden for construction. Many of those interviewed highlighted several factors impacting projects in the region. For one, the dramatic drop in oil prices from $86 in September 2018 to $51 in December 2018 seems to have caused a policy shift and now “as the oil price continues to fluctuate, it is affecting the amount of investment that takes place”, as one source put it. In countries whose economies are reliant on oil exports, this has introduced limitations to construction projects. For example, in Saudi Arabia “there are restrictions on the amount of money” allocated to such projects. Furthermore, interviewees reported that “the treasury has slowed down payments, which has led to disputes; cash flow, frankly, is one of the big causes of disputes”. The region has also not escaped the ravages of geopolitical issues. One commentator stated that “the trade war is affecting material prices and adding to inflation in the market”, and practitioners also report the difficulties clients are having completing projects in Qatar, due to a blockade by its neighbours: Saudi Arabia, the UAE, Bahrain and Egypt. As a result of these factors, legal professionals are seeing “an increase in formal disputes”, especially arbitration proceedings. Such is the demand that those in the market report that there is a need for “faster methods of dispute resolution. The region can’t cope with the way things are now, and it will move towards UK-style adjudication system” for construction matters. There has also been an observable shift in how dispute resolution is approached in the market, which is in line with observations from other jurisdictions like the UK and US. Practitioners are “seeing a lot more pre-emptive analysis work before an arbitration tribunal to analyse the viability of a case – especially from the owner side.” This is especially prevalent in a region with so many large infrastructure projects being carried out: “When the arbitration is looking likely to happen ... they want an understanding before committing.”

The March of Technology

It is not a surprise to report that technological advancements now pervade the already highly technical construction industry. Firms in the field have confirmed that they “have seen uptick in requests for expertise in technology and new technologies coming into construction” from clients. Building Information Modelling, now increasingly established, allows real time distribution of designs, and intelligent 3D modelling of projects before breaking ground, which makes the design process more efficient by reducing conflicts between parties. It seems that blockchain technology has also seen some implementation in the construction sector, with law firms seeing “more and more clients coming to them for the implantation of this technology”. For example, firms are being tasked with “creating a legal framework to implement blockchain technology to make supply chains more efficient”. It is hoped blockchain technology will aid in the creation of “a system that verifies transactions and movement of material automatically” during construction projects.

Conclusion

Construction projects in China and the Middle East continue apace, with firms relocating and investing in these markets to take advantage of demand. Despite this, it is evident that the construction projects associated with these regions have not proceeded unscathed by global economic trends. As a result of factors such as economic slowdown and decreased commodities prices, interviewees observe that “we will likely continue to see an increase in formal disputes” emerging from these projects. Legal practitioners are adapting to keep pace with technological developments, learning how they can be best implemented in a construction project and determining how they intersect with the law. There will certainly be no shortage of work among legal practitioners specialising in construction for the foreseeable future.

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