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UAE Construction Law Briefing:
What Next? A Legal Perspective on theFuture of Contracting in the UAE
29 November 2011 - Dubai30 November 2011 - Abu Dhabi
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UAE Construction Law Briefing:
What Next? A Legal Perspective on theFuture of Contracting in the UAE
Chau Ee Lee – +971 (0)4 709 6316 – [email protected] Amai – +971 (0)2 418 5725 – [email protected]
Tarek Abdalla – +971 (0)2 418 5733 – [email protected]
Vincent Rowan – +44 (0)20 3116 3772 – [email protected]
Gordon Bell - +44 (0)20 3116 3765 – [email protected]
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UAE Construction Law Briefing:
What Next? A Legal Perspective on theFuture of Contracting in the UAE
Arash Amai, Partner
Abu Dhabi
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Contract Procurement
Tendering
Due Diligence
Risk Assessment
Contracting
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Pre-qualification
It is important to start with the right group:
prior similar experience
local experience/contacts/content
reputation
sufficient resources/capacity (people, equipment, etc) location of resources
ability to assume and manage risk
financial strength/capacity
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Tendering
Bids will only be as good as the information
provided and requested in the RFP/ITT Scope of services/Specification (Employer’s
requirement)
Form of agreement/contract
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Tendering
Tender process
Bargaining position
Responsive bids
Due diligence
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Tender process
Consider complete picture – technical, commercial
and legal issues impact upon each other Question and answer opportunities are very
important tactically
Keep it simple and help tick the boxes
Bid to evaluation criteria
How responsive is responsive
Interview
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Bargaining Position
Many legal issues will be “grey”
The strength of technical and commercial positionmay dictate the flexibility on legal risk issues
Establishing a legal risk strategy early in the bidprocess will allow time to develop and implement
tactics what are the deal breakers?
what is the desired risk profile?
is it desirable to discuss concerns with theEmployer?
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Responsive Bids
Evaluation criteria – technical, commercial & legal
A compliant bid usually required – risk ofdisqualification
Consider tactically
amending schedule rather than “Conditions”
adding to the draft Contract rather than changingit
point out provisions that do not work or make nosense and invite Employer to amend
point out contract terms which are very (notmarginally) onerous
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Due Diligence
Employer’s team and experience
Payment
There are legal risks which no company should ever take. Forexample
fixed price for uncertain scope
dependence on third parties to contract
unlimited liability
disproportionate penalties e.g. no payment for work done
on termination ineffective legal enforcement
Establish a formal legal risk procedure to check
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Standard Forms of Contract
Problems
incorporation by reference – “the contract will be based on FIDIC”
selection of wrong form
services
construction only
supply only
design and build
EPC
project specific
usually need to work with other legal documents andcontracts which are not compatible with the standard form
choice of governing law can change intended meaning
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Contracting
Hurry up and slow down – avoiding letters ofcommencement
Conform the agreement/contract
Get all ancillary documentation signed, e.g. sub-consultant/sub-contractor warranties, funder’s directagreements
Get all requisite documentation e.g. advancepayment and performance bonds, insurance, etc.
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Contracting
Start the way you want to proceed
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UAE Construction Law Briefing:
What Next? A Legal Perspective on theFuture of Contracting in the UAE
Recurring Contractual IssuesTarek Abdalla, Partner
Abu Dhabi
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Introduction
Uncertainty regarding viability and/or funding
for project
Payment issues
Role and attitude of Engineer/Employer’sRepresentative
Suspension/Termination
Project delays and programming
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Payment/Funding Issues
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Payment/Funding
Uncertainty regarding viability and funding
for projects is biggest issue in this market
Manifested in delinquency of payment tocontractors and consultants
Manifested in suspensions and termination
Basis of most claims in this market
Strategies for dealing with these issues fromboth a Employer and Contractor perspective
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Payment
FIDIC sub-clause 2.4 requires the Employer following requestfrom the Contractor to submit:
“reasonable evidence that financial arrangements have been made and are being maintained which will enable the Employer to pay the contract price . . .”; and
“If the Employer intends to make any material change to his
financial arrangements, the Employer shall give notice to the Contractor with detailed particulars.”
Frequently deleted by Employers, e.g., Abu Dhabi standard
Failure to provide such evidence can be basis for suspension,
slow rate of progress and termination
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Payment
FIDIC Payment Mechanism set forth in
Article 14 of 1999 Red Book
Payment due upon certification byEngineer
Interest upon delayed payment
Refusal to certify or pay certified amounts
can be basis to reduce rate of work,suspend or terminate
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Payment
Variation and Claims
many provisions require notice to be givenboth for additional time or money
during disputes or funding issues,compliance with all provisions will likely bechallenged
time bar of Article 20.1 likely to be invoked
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Payment
Article 20.1
Applies to “any extension of the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract”
Requires notice to be given “as soon as reasonably practicable, and not later than 28 days after the Contractor
became aware, or should have become aware of, the event or circumstance.”
If notice not given within 28 days, then no extension of timeand no additional payment due
Requires contractor to keep contemporaneous records tosupport claim
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Payment
Article 20.1
commentators and Courts have found Article 20.1to be a condition precedent to a claim
commentators have observed that such noticesare in addition to the other requirements for
similar notices parties have attempted to argue that the
provisions of Article 20.1 are unenforceable as
matter of law
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Duties of Engineer/Employer’sRepresentative
The Engineer under FIDIC Red Book 1999 Edition
Sub-Clause 3.1– “The Employer shall appoint the Engineer who shall carry out the duties assigned to him in the Contract. . . . .
If the Engineer is required to obtain the approval of the
Employer before exercising a specified authority, the requirements shall be as stated in the Particular Conditions.
Any limitations on Engineer’s authority must be in ParticularConditions
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Duties of Engineer/Employer’sRepresentative
1999 Version of FIDIC Red Book Eliminated Requirement ofEngineer “Impartiality”
“Whenever carrying out duties or exercising authority,specified in or implied by the Contract, the Engineer shall be deemed to act for the Employer.”
Still required to be fair
“…the Engineer shall consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.”
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Duties of Engineer and Employer’sRepresentative
Duty of Good Faith Under UAE Law
“The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of
good faith.
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Suspension and Termination
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Suspension
No express right to suspend works under UAE Civil Code
Article 247 provides some limited comfort as it states that aparty may refuse to continue its obligations (i.e. carrying outof the works) if the other party is not performing itsobligations (i.e. payment).
risk in relying solely on Article 247 in suspending work is the
employer could seek to terminate the contract on the basisof the contractor’s performance breach
Under FIDIC
Contractor and Employer’s Right to Suspend
Effect of Suspension
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Suspension
Engineer’s Right
engineer has right to suspend all or part ofwork
no obligation to give reason for suspension
contractor obligated to store and secure workagainst damage, loss and deterioration
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Suspension
Consequences of Engineer’s Suspension
contractor shall be entitled to Extension of Time
contractor shall be entitled to costs of suspension
preserving work
resumption of work profits on such costs
Contractor entitled to payment for plant andmaterial not delivered to site
if Suspension more that 28 days; and
if plant and material marked for employer
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Suspension
Effect of prolonged suspension
If greater than 84 days, contractor may request rightto proceed
If no authorization to proceed issued within 28 days
of request treat as omission for the part of works suspended;
or
treat as termination if suspension affects all ofworks
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Suspension
Contractor right to suspend/slow rate of
progress failure to certify payment
failure to provide evidence of financial
arrangements failure to make payment
Notice of at least 21 days
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Suspension
Contractor entitlement upon suspension
extension of Time
costs of suspension
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Termination
Employer’s right to terminate under FIDIC for
default failure to comply with a notice to correct
failure to provide or extend performance
security contractor fails to proceed with the work
contractor fails to remedy defective work
insolvency
bribery
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Termination
Employer’s Termination for Default
very high risk decision
nearly always the subject of dispute
must insure proper basis and properprocedure
significant damages if arbitrator or court
determine decision incorrect or notexecuted properly
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Termination
Termination for Convenience
employer has right to terminate for anyreason
under FIDIC, employer cannot terminateto perform the work himself or by others
this provision frequently amended
pay for work performed, commitmentsmade and cost of termination
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Termination
Termination by Contractor
failure to give financial assurances failure to issue a payment certificate
failure to make certified payment
“Employer substantially fails to perform his obligations under the Contract”
prolonged suspension
insolvency
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Termination
Termination by Contractor
can be a high-risk option
must be adequate contractual and legalbasis
must be done properly
potentially significant damages if basis
inadequate or procedures defective
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Suspension and Termination
Important Strategic Consideration for Both Employer
and Contractor Employer—how to address changed economic
conditions and/or unsatisfactory performance
suspend part/all of work omission of work
terminate for convenience
terminate for default suspend or terminate by agreement
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Suspension and Termination
Important strategic consideration for contractor
when dealing with non-payment and/or otheremployer default
when/how to request financial assurance
whether/when to suspend or slow rate of progress
what to suspend and/or slow rate of progress
whether/when to give notice of termination
basis for any notice of termination political overlay
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Suspension and Termination
Obtain advice on strategic issues
employer--dealing with changed economicconditions
contractor--deciding upon non-payment or
other default strategy drafting notices
will be an important exhibit in any subsequent
challenge must comply with appropriate provisions or
could be deemed a breach
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Effect of Delays
Pressure to keep schedules short
Likelihood of culpable overrun increases
For contractors and vendors, actual damages,extended labour material and equipment costs,inefficiency costs, extended overheads
For employers, liquidated damages, loss of profit,construction costs
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EOT Provisions
If completion is late for reasons other than owner’s
fault, then contractor is liable for damages, unless the delay is caused by an event for which an EOT
is available, or
time is “at large”
To achieve a more balanced risk allocation, mostcontracts allow the contractor an EOT for a range ofdelaying events
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EOT Clause - Example
FIDIC 1999 “Red Book”
i. a Variation . . . or other substantial change in the quantity of an item of work included in the Contract;
ii. a cause of delay giving an entitlement to extension of time under a Sub-Clause of these Conditions;
iii. exceptionally adverse climatic Conditions;
iv. Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions, or
v. any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s personnel, or
the Employer’s other contractor’s on the Site.
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Assessing the EOT Entitlement
Assessment made by the Engineer based on his knowledgeand information provided by contractor
“EOT must be fair and reasonable” – courts suggest contractadministrator should
apply the contract
make a logical analysis of the impact calculate the time taken up by the relevant events
If improperly or unfairly addressed then time can be deemed“at-large”
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Assessing the EOT Entitlement
Compare and contrast
Engineer making assessment during projectbefore the full effects of the delay realised (i.e.speculative), and
Court / Arbitrator after-the-fact with the benefit ofknowing what actually happened
Will affect the method of acceptable programmeanalysis
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Assessing the EOT Entitlement
Various approaches used by programming specialists
Theoretical methods global impact method
net impact method
as-planned impacted method as-planned but for method
as built but for method/the collapsed as-built
method/simulated as built method May be appropriate for an EOT claim during project
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Assessing the EOT Entitlement
Practical methods
time impact analysis as built v as planned
windows/snap shot or update method
Should be used when presenting claim to court orarbitrator whenever possible
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UAE Construction Law Briefing:What Next? A Legal Perspective on the
Future of Contracting in the UAE
Project Management – how can project management be better
designed to address, reduce and remove issues as they ariseduring construction?
Vince Rowan, Partner
London
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Context – Contract v Project Management
Contract Management and Project Management – possible
distinction between these two terms Recent experience in the Gulf – increasing emphasis on the
former type of management
Is the increased reliance on the contract the cause of or thesolution to claims and disputes?
Is this approach to managing projects here to stay and why?
What might be the practical consequences of this shift?
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Context – Contract v Project Management
How should owners, contractors and consultants prepare for
the next phase of projects in the Region? What are the potential challenges and implications for
Government and Government linked projects? Change inmind set and attitudes
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Context - Contract Management
Unless and until the Industry suffers from another phase of
“irrational over exuberance” (and the ability to do a deal andmove on), greater awareness of and reliance on the contractis here to stay
Why? Because the industry is now set up to require it so:
Traditional contracts (FIDIC et al) demand it
New contracts (ECC et al) demand it
Cost plus contracts demand it
Partnering contracts demand it
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Context - Contract Management
ADR demands it
Protocols (SCL/AACE et al) recommend it
Greater regulation and project oversight demands it
Lawyers, consultants, industry associations et al advise it
Increasingly the Gulf is no longer immune to these trendsand pressures, given it’s importance it will/should be at thecentre of how they evolve
The Gulf is at the heart of the projects industry and shouldembrace how projects can be best delivered
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Recent Experience in the Gulf
Have projects in the Gulf been awarded and built (and
suspended/terminated!) using sophisticated contracts butwithout embracing the attitudes and principles designed tounderpin them?
Situation best avoided, but if this has happened, how might
that also justify greater care and emphasis on contractmanagement?
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Recent Experience in the Gulf Further factors that only serve to emphasise the need for
change and better contract management:
design readiness – design review process/scope creep
role of Engineer/Certifier – short/late payment
pricing realism – impact on claims
schedule realism – time claims/penalties
project importance/viability – work/payment linkage
financial stability of owners/contractor – work/paymentlinkage
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Implications for Contract Management No honeymoon period, awareness from the start and remain
consistent
Achieve that fine balance between project and contractmanagement, never one without the other
Holistic approach – roles for technical, commercial, legalpersonnel, risks of hiring at the ‘body shop’
Scheduling – greater investment in and real use, not simplyprogramming knowledge
Greater need for innovation and consistency indocumentation – play to the (future) gallery
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Implications for Contract Management Greater sensitivity in project review and consequential
decisions to make changes both internally and with
contracting counterpart Often leading to a more pro-active stance on need for
contract change and amendment (supplementalagreements)
Systematic project close-out review and transfer ofknowledge to future projects
Realism – awareness and steps to ‘nudge’ contracts and
their management in your favour
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Implications for Contract Management Internationally the drift is to increasingly rely on and expect
better and more sophisticated contract management, in both
the short and long term: claims processes
ADR processes, (DAB, Adjudication etc.)
arbitration
Front loading of effort to secure resolution of claims/disputesand best prepare for dispute processes
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Use of ADR in the Gulf
Will there be a move towards greater use of ADR, such as(‘formal’) mediation and adjudication in the Gulf?
If so, by whom, by when and to what extent?
Will the Gulf maintain a different approach on ADR to theone eventually taken in e.g. Hong Kong, the UK, Singaporeand Australia?
Be careful for what you wish for – frustrations and abuses ofADR
To what extent will it matter, as far as contract management
is concerned, if the Gulf contracts and the attitudes towardstheir execution largely remain unchanged?
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Some Conclusions
Which ever way the Industry heads (status quo maintained,use of new contracts, use of ADR etc.) – better and real
contract management is required
Change in attitudes and project delivery will take time, andmay never happen if the Industry does not discuss and
challenge the current status quo Beyond poor project/contract selection, insufficient and/or
poor contract management has caused or contributed tocurrent climate of claims and disputes
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UAE Construction Law Briefing:What Next? A Legal Perspective on the
Future of Contracting in the UAE
Gordon Bell, Partner
London
Di R l i /A bi i
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How well has the arbitration process servedthe industry?
Is there need for change?
Dispute Resolution/Arbitration
St t t f F t (1)
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Large construction projects can be thesource of disputes
In difficult economic times, the number ofdisputes increase and the sums involved getlarger
Contractors and consultants are not simplydealing with backlog of claims but trying to
get paid undisputed sums due
Statements of Fact (1)
St t t f F t (2)
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As a direct consequence of the financialcrisis, and the claims that followed for non
payment, contract terminations, projectdelays, bond calls, there has been a hugeincrease in the number of formal disputes in
the UAE, most of which have been referredto arbitration
Statements of Fact (2)
Q ti
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Has the arbitration process proven to be,using a construction term, “fit for purpose”?
Does the industry have confidence in thearbitration process and those who administerit?
Or are there changes that could be made toimprove the arbitration of construction
disputes in the UAE?
Questions
Claims v Disputes
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Claims v Disputes
Most construction contracts provide for claims underthe contract, for example:
variations time – including delay and disruption
money – sometimes linked to time but not always
Not all claims turn into disputes
Many employers will recognise a good claim and willbe willing to negotiate; almost all employers will
recognise a bad claim and reject it
Claims and Dispute Resolution
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Resolution by inattention or a withdrawal of theclaim
Resolution by payment or an extension of time
Resolution by a a third party
the Engineer
dispute boards
mediation
litigation
arbitration
Claims and Dispute Resolution
Alternative Dispute Resolution (ADR)
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Contract may require ADR – alternative to what?
Methods include:
senior managers
mediation/conciliation
expert determination
dispute review boards
dispute adjudication boards
Tiered system (but costly and time consuming)
Alternative Dispute Resolution (ADR)
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Alternative Dispute Resolution
Advantages
speed cost
convenience
confidentiality
Disadvantages
perceived weakness cost
timing
limitation periods
Litigation
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Default position
Court proceedings
Local courts
Appeal courts
Legal systems
Judges/experts
Cost
Time
Enforcing judgments
Litigation
Arbitration
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A simple definition:
A method of private , binding , enforceable dispute
resolution which may be chosen by parties as an alternative to litigation before national courts
The autonomy of the parties is crucial
For some industries, and for some companies,
arbitration has become the chosen method for theresolution of international disputes
Arbitration is the most common form of disputeresolution in the UAE for construction projects
Arbitration
Why Arbitrate?
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The perceived advantages of International Arbitration
speed
cost
confidentiality
neutrality
expertise/competence of the Tribunal
enforcement
Why Arbitrate?
Arbitration in the UAE
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Arbitration has long been established in the MiddleEast
Economic growth in the region
UAE’s liberal approach to foreign investment
Signatory to the New York Convention
What is (still) missing is clear legislation (UAE Codehas limited provisions)
New law “coming soon”
Even without it, (some) awards are being enforced
Arbitration in the UAE
What Rules Govern the Arbitration?
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The Choices
Ad Hoc (as opposed to institutional)
UNCITRAL
The Institutions
ICC (founded in Paris in 1923)
LCIA (founded in 1892 as the London Court of
Arbitration)
regional centres (Singapore, Switzerland, Stockholm,Beirut, Dubai etc)
DIAC/DIFC-LCIA/ADCCAC
DIAC has more than 500 open cases (20% construction)
What Rules Govern the Arbitration?
Choosing the Right Arbitrators
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Sole or multiple
Independence
Impartiality
Experience
as an arbitrator
in the relevant law
in the relevant subject matter
Languages
Availability
Choosing the Right Arbitrators
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Cost Effective Arbitration (1)
The biggest problem for arbitration – and the reasonit may not be fit for purpose is that it is no longer
cost effective
This is not a problem with the UAE alone; it is aglobal problem
ICC Report
Conferences/Seminars
Cost Effective Arbitration (2)
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Sole v multiple arbitrators
Pleadings
Document management
Experts
Factual witnesses
Closing submissions
Timing of awards
( )
Conclusions
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Fit for purpose?
Changes – law
Changes – institutions
Changes – courts
Changes – arbitrators
Changes – lawyers
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UAE Construction Law Briefing:What Next? A Legal Perspective on the
Future of Contracting in the UAE
Questions?