In Brief:
- The UAE construction sector is increasingly considering the utilisation of the courts as a viable alternative to arbitration due to improvements in litigation processes and dissatisfaction with perceived time and cost inefficiencies in arbitration.
- Court litigation is gaining appeal for its time efficiency, cost-effectiveness, and improving expertise, despite some challenges like subject-matter expertise, language barriers and limited cost recovery.
- While arbitration retains advantages in subject-matter expertise, parties are exploring hybrid solutions such as the DIFC Courts for specialized and balanced dispute resolution.
Over the past three decades, the UAE construction industry has undoubtedly played a key role in the growth of the UAE. What was once an ambitious vision has, in a relatively short space of time, become reality, transforming the UAE into a global hub for transport, tourism, commerce and industry. As a result of this rapid development, the UAE construction market has experienced a “coming of age” in the last few years. This change in dynamics has affected construction professionals in multiple ways and this article focuses on changes in construction disputes in particular. Traditionally, arbitration has been the forum of choice for construction disputes across the globe. This has been particularly true in the UAE as developers, contractors and subcontractors alike have tended to contract out of the local onshore court system.
Rightly or wrongly, a common perception in the industry was that the local courts may have lacked the specialist expertise required to handle the complexities of a construction dispute, and that the overall process was slower than arbitration.
However, recent trends suggest a shift in the balance: a growing disenchantment with arbitration in the construction industry, coupled with significant improvements in the local litigation landscape appear to have fostered an increased willingness to engage with the local court process.
Statistics from the Abu Dhabi Courts for instance show that in 2022, nearly 27% of all registered cases related to the construction sector. By contrast, DIAC’s annual reports showed a drop in the proportion of construction arbitrations it administered from 49% of its caseload in 2022 to 40% in 2023.
We believe that three key factors have played a pivotal role in this change of attitude: (1) time efficiency, (2) cost efficiency, and (3) specialist expertise.
Time efficiency
Any textbook on arbitration invariably claims that the primary advantages of arbitration when contrasted with litigation include its speed and the flexibility of its rules. Most arbitration practitioners, however, will likely concede that speed, in particular, is not the first word that springs to mind when describing arbitration in the UAE.
In our experience, parties to arbitrations are increasingly taking advantage of the “flexibility” of the process to manipulate and prolong arbitrations. One might think that respondents, wanting to evade or delay liability, are particularly to blame for this phenomenon; but claimants are also guilty of such abuses, often in order to gain more time for their experts to prepare reports.
Arbitral Tribunals are often reluctant to do much about these delays in order to avoid any possibility of their awards being set aside at a later stage as a consequence of one party alleging unfairness.
Again, in our experience, an average construction arbitration takes two to three years to run its course (without considering related enforcement, ratification or annulment proceedings). In the words of one arbitrator, the arbitration now often takes longer than the construction of the project itself.
By contrast, in recent years the UAE has made significant efforts to improve the quality and efficiency of court proceedings.
An average case before the Dubai Courts takes twelve to eighteen months from filing the First Instance Claim to the issuance of the Court of Cassation judgment. In Abu Dhabi, timelines are even shorter with a case on average taking nine to twelve months (through all three levels of court).
Enforcement proceedings can typically be commenced as soon as the Court of Appeal has issued its judgment, although in some cases the Court of Cassation may suspend enforcement until it has considered the issues brought before it.
Litigation, therefore, now has an advantage over arbitration when it comes to speed of proceedings.
Arbitral institutions are, however, aware of this challenge and the adoption of expedited rules enables streamlined proceedings in certain circumstances.
Specialist expertise
Civil law jurisdictions such as the UAE tend to lack specialist construction courts like those in the UK, Singapore and Australia. Accordingly, arbitration has generally been regarded as the more appropriate forum for construction disputes given their highly technical nature.
The ability to appoint professionals with a technical background and/or with long-standing experience in construction law is an invaluable feature of arbitration, particularly when considering large and / or complex project disputes.
The possibility for each party to engage their own expert witnesses is also generally viewed as preferable to the unilateral appointment of a single expert or panel by the court itself, particularly where more than one discipline is required (delay and quantum will generally be contentious issues). The drawback, of course, is that the more experts are appointed and involved, the longer the process is likely to take. There would also be a commensurate increase in costs.
Although there are no specialist construction judges or courts in the UAE, the generalist courts have steadily developed their expertise in the construction industry due to the ever-increasing volume of precedents in construction-related disputes.
Likewise, the quality of court-appointed experts has steadily improved with the new generation of professionals being more familiar with the standards and practical realities of large construction projects. It must be said, however, that on occasion, the drive for time and cost efficiency can come at the expense of the robustness of an expert report. Experts are typically given a set timeframe in which to prepare their reports irrespective of the scale of the project meaning that the larger the project, the more difficult it is for them to ensure thoroughness. Expert fees are also set by the Court and tend to be considerably lower than an expert’s fees in arbitration, which is something of a double-edged sword: on the one hand, this reduces cost but may adversely affect the thoroughness of the report.
Additionally, proceedings before the courts are exclusively in Arabic, while arbitration offers the parties freedom within the relevant contract clause to select the language of proceedings. Construction disputes are particularly document heavy, and these documents tend to be in English and meanings sometimes get lost in translation. It is advisable for any party wishing to resort to the courts for a construction dispute to retain a strong bilingual team of lawyers to ensure consistency and quality of translations.
Overall, despite significant advances in the know-how and expertise of local courts, arbitration retains an advantage when it comes to subject-matter specialism in the construction sector.
Cost efficiency
Arbitration is sometimes said to be cheaper than court litigation. However, this notion appears to stem from common law jurisdictions such as the United States where trials involve considerably more time and costs than court proceedings in civil law systems.
The construction industry has become acutely aware of the cost of arbitration which has, in our opinion, been the main factor in its relative decrease in popularity.
Established international arbitration centres tend to levy higher arbitration fees than regional and local arbitration centres; however, centres invariably calculate their costs (including the arbitrators’ fees) either on a time spent basis or by reference to a percentage of the amount in dispute, with no cap. This can result in parties spending considerable amounts on arbitration costs (before taking into account legal fees).
By contrast, court fees in the UAE are indexed to the value of the dispute; subject to a relatively low cap. The costs for a case before the Dubai Court of First Instance for example are capped at AED 40,000. It would be unusual for a party to spend more than AED 120,000 in court costs across all three levels of jurisdiction and enforcement proceedings.
The shorter timelines of court proceedings relative to arbitration also means that legal fees tend to be considerably lower.
The potential recovery of costs is, however, a key advantage of arbitration; whereas, in the courts, the losing party is typically only obliged to pay nominal legal costs of the successful party, in the range of AED 1,000 to AED 2,000. Therefore, parties should be aware that they will not recover their legal fees in a local court litigation which should be factored into decisions.
Arbitral tribunals on the other hand (provided there is provision to do so under the arbitration agreement or applicable arbitration rules) conduct a thorough review of costs and apportion them between the parties based on a number of factors, often resulting in the prevailing party being able to recover a significant portion of their costs.
The relative attractiveness of arbitration versus litigation therefore depends on a party’s attitude to paying lower costs upfront which will not be recovered, as opposed to paying more significant costs upfront with the potential to recover these costs in due course.
Conclusion
While arbitration remains the preferred method of resolving construction disputes in the UAE, the increase in quality and sophistication of the local courts, coupled with time and cost considerations, is making construction litigation an increasingly attractive option.
Even in the case of large scale complex projects, a dispute may be relatively straightforward and of modest value making arbitration unnecessarily cumbersome and expensive. In such instances, a claimant may wish to consider the option of court litigation despite the existence of an arbitration clause. If the adverse party agrees to court proceedings or does not promptly raise an objection on the basis of the existence of an arbitration clause, the arbitration process may be bypassed altogether.
It has been suggested that parties to construction contracts should include multi-jurisdictional dispute clauses in their agreements, allowing them to resort to either arbitration or litigation either in general or depending on the type of dispute that arises. However, recent case law from the Dubai Court of Cassation suggests that such clauses may not be enforceable in the UAE, particularly when they allow one party a choice of multiple forums whilst the other is restricted to only one. The likely result of including such a clause is that the arbitration agreement will be struck down and any dispute will, by default, be heard in the courts.
Finally, construction professionals may wish to consider inserting DIFC Court or ADGM Court provisions into their contracts. This solution provides a middle-ground which combines some of the advantages of arbitration and the local courts: for example, the DIFC courts host a specialist construction division, where proceedings are in the English language and tend to be faster than in arbitration, and costs tend to be somewhere between the two and are recoverable. One consideration to bear in mind when opting for such provisions is that the pleadings in DIFC Courts are public in nature although, if requested, names can be redacted.