Middle East countries have become the global leaders in construction-related projects during the past 10 years. In 2007, Gulf Cooperation Council (GCC) countries had more than $1 trillion in construction projects under way, with another $150 billion in projects in the planning stages. Nearly every city in the Middle East boasts numerous "mega" projects, in which the value of each project exceeds $1 billion. According to a 2007 article from the Emirates News Agency, Saudi Arabia alone has launched a $500-billion investment program that will include the construction of new cities over the next 20 years. Furthermore, some owners have had difficulty attracting interest from the contractor market when the contract will be less than $50 million.
Conversely, the Commerce Department reported that construction in the United States for 2007 decreased by 2.6 percent, to a total of $1.161 trillion. Due to this change in status, many American construction companies are turning their attention to the Middle East as domestic opportunities become increasingly scarce.
U.S. companies contemplating construction projects in the Middle East should consider several essential factors. First, individuals and organizations need to be aware of the Foreign Corrupt Practices Act (FCPA), which forbids businesses from bribing public officials. Local custom or tradition does not constitute a defense to allegations that an individual or entity violated the FCPA. This becomes especially sensitive when companies engage in a joint venture with a local firm, which often has ties to a public entity or official.
Another factor to consider is the evolving nature of the differing legal systems in Middle Eastern countries. Both in the U.S. and U.K., the legislative bodies and courts have afforded construction companies with strong guidance concerning which practices are permitted and which are prohibited. Almost every state and federal court has resolved disputes regarding payment provisions, along with cases debating whether or not contractual notice provisions will be enforced as drafted.
By contrast, the judicial systems in the Middle East are still developing, and a relative amount of uncertainty remains regarding the laws in place, as well as how those laws may be applied or interpreted in particular situations.
When projects take a negative turn, the origins of most disputes are strikingly similar to those that occur in the Western Hemisphere. Most disputes concern scope, adequacy of designs, labor, material, and quality of work.
Differences that can best be described as cultural often militate against resorting to formal dispute resolution. Companies have to balance their need to preserve their contractual rights with the disincentives of formal dispute resolution when debating whether to pursue arbitration. Construction companies would be wise to build into their contracts a detailed and incremental dispute resolution mechanism, including project-specific steps and dispute resolution goals that are geared toward embracing negotiation. Simply requiring mediation is often not enough to preserve the relationship between the parties.
When formal dispute resolution is necessary, the majority of international companies are including an arbitration clause in their contracts. Most often, cases are tried through the International Chamber of Commerce (ICC). Typically, the exchange for going to arbitration, especially when dealing with a national company based in the Middle East, is that local law must apply.
There are, however, many competing arbitration forums are emerging throughout the Gulf region. Notably, Middle Eastern countries plan to distance themselves from their traditional arbitration procedures, instead adopting a modern arbitration regime based on the United Nations Commission on International Trade Law's (UNCITRAL) Model Law. One example is the United Arab Emirates, which recently announced it would ratify a new law establishing provisions for domestic and international arbitration. The new law would enforce arbitral awards consistent with international obligations, and provide disputing parties the same options that are currently available in the Western Hemisphere.
Considering the implications of arbitration, along with the jurisdiction in which an award would be enforced, companies should dedicate the necessary time, energy, effort, and resources to carefully negotiate contracts that are tailored to their specific objectives, including recognition of the cultural differences between many Western cultures and the Middle East.
Michael P. Subak is a partner in the construction practice group of Pepper Hamilton LLP, Philadelphia. He can be reached at 215-981-4503 or subakm@pepperlaw.com.
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