Security of payment

By Dr Jay Palmos

To date, both the public and private sector’s attempts to resolve this problem have failed. Security of Payment (SOP) style legislation has successfully solved this issue in other jurisdictions, and should be considered in Dubai before we lose the best sub-contractors and suppliers to other more reliably paying regions. Just last month, Laing O’Rourke closed its Middle East division of 20 000. The loss of this and other superior-grade contractors signifies that the presently available source of high-quality contractors has diminished.

SOP legislation is an alternative dispute resolution method which originated in the UK with the introduction of the Housing and Construction Regeneration Act 1996. It was an immediate success, virtually eliminating payment-related delays, and similar legislation was quickly enacted in numerous other Commonwealth jurisdictions, including Australia, New Zealand and Ireland. In essence, this legislation establishes a pseudo-judicial body whose sole task is to provide a swift interim resolution to construction payment disputes and keep monies flowing throughout the industry.

Claims are made to this body by an unpaid party to a construction contract along with an application fee. A construction contract, within the context of the Act, is an agreement to supplying goods or services to a construction project. Therefore contractors, sub-contractors, consultants, architects and others who supply services to the industry can pursue a claim under SOP. The costs associated with an application depend upon the complexity of the claim.

However, they are a fraction of the costs associated with traditional construction arbitration/litigation proceedings, which commonly run into the millions of dollars. A simple unpaid material invoice may cost as little as AUD$250 (AED900), whereas a complicated contractual claim would be significantly more. There is no jurisdictional maximum value of a claim under this legislation, and therefore claims can be as large or small as the value of outstanding payments. Notwithstanding the value of the amount in controversy, a final decision is usually returned to the parties within 20 working days of the filing the application for adjudication.
The adjudication decision is legally binding upon both parties, even though it is only an interim solution. The term ‘interim’ in this context means that either party may appeal the adjudicator’s decision to a court of competent jurisdiction if they feel that it is in error. However, irrespective of any subsequent legal proceedings, which may take years to finally resolve, payment to the contractor must be made immediately upon the adjudication, thereby ensuring project cash flow.

In an effort to shore up the construction sector immediately after the global financial crisis (GFC), the government of Dubai instituted the Tayseer scheme. This scheme provides many similar benefits to those offered by SOP legislation, including guarantees that suppliers of materials are paid in a timely manner. However, the purpose of Tayseer is to inject government-backed liquidity into the Dubai market as a means of ensuring that important projects continue rather than addressing the overarching problem. For the vast majority of contractors and suppliers of projects which do not qualify for the scheme, this legislation is of no benefit.

Traditional approaches have been equally unsuccessful. Presently, those with foresight utilise letters of credit, strengthened contractual clauses and early dispute resolution via dispute review boards in an attempt to reduce delays associated with payment defaults. However, these measures have had very limited success in Dubai. Letters of credit have not been adopted by the industry due to the sophistication required to deal with these financial transactions or the risks associated with unfamiliar international banking regulations.

Specialised contract clauses3 have been unsuccessful in ensuring timely payment because a recalcitrant opponent can force expensive and time-consuming arbitration or litigation for enforcement, thereby defeating the benefit. Dispute review boards have been tested in the UAE, most notably by Abu Dhabi’s Aldar Properties, in the early phases of the Al Raha Beach Development, but failed to become a standard remedy4. Finally, the time and expense of any form of arbitration or litigation often dwarves the amount in controversy, and those suffering liquidity constraints rarely have the financial resources required to undertake such an expensive and time consuming endeavour.

Studies show that the MENA region suffers significantly from owners’ financial problems and subsequent issues associated with failure to pay their contractors. These problems are ranked as the single most frequent cause of delay to construction projects in Jordan, Egypt, Saudi Arabia and Lebanon, the second most common in Kuwait and Turkey, and the fourth most common in the UAE. However, it should be noted that the UAE study was undertaken in 2006, and it is likely that, were the data collected today, the issue would probably rank with the other MENA region countries.

His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, has said all projects that have started will go ahead, although some may be delayed for six months to a year.7 This is Dubai’s future being built today. Loss of the best contractors and tradesmen because of payment issues will be the legacy of failure to implement a solution to this important problem. While many countries could benefit from a SOP-type system, none will benefit as much as Dubai.

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