International contractors and engineering companies bidding for large and complex energy projects in the Middle East generally insist on international arbitration clauses that provide for arbitration in London or Paris. Banks involved in funding such projects also require such clauses.
The current global credit crunch, however, has had a major impact on the Middle Eastern procurement market. Project finance is much more difficult to obtain, and employers are often funding projects themselves without external funding. Two to three years ago, contractors were able to pick and choose projects on which to bid. But now, with many projects being cancelled or scaled down, the pendulum has firmly swung the other way.
The balance of power has shifted in favour of the employer, and contractors are in a weaker position to insist on the usual caps and limitations of liability. Employers may want to subject contracts to the jurisdiction of their local courts or to domestic arbitration, instead of, perhaps, to an ICC or LCIA arbitration in London or Paris.
What should contractors do about this? Should they dig in their heels and insist on the usual international arbitration clause? What about local arbitration centres in the Middle East? Are these a viable alternative? And do bilateral investment treaties and ICSID arbitrations offer protection for contractors operating in the region? What are the current trends?
Are Local Courts an Option?
On the whole, the region's courts tend to be slow. In many instances, too, they lack the relevant expertise to deal with the sort of complex project dispute that may arise on a substantial energy project in the region.
It is often claimed that courts in the region favour the local party, but there is no evidence of this. Local courts regularly deliver judgements in favour of foreign parties. The main difficulties are lack of expertise and delays because the court system is overburdened. Accordingly, in the event of a dispute that has to be dealt with in the courts, contractors might have to wait a long time before being able to enforce their rights. Since employers will know this, commencement (real or threatened) of proceedings may not be much of a deterrent. The answer for contractors is to insist on arbitration because, by virtue of the New York Convention, arbitration awards can be enforced almost everywhere.
There may be a middle way, however. In return for rejecting the jurisdiction of local courts and insisting on arbitration, an attractive option for contractors is to accept the applicability of local laws in the Middle East. The local laws are, on the whole, more favourable to contractors because they seek to balance contractual rights with principles of fairness. This provides an opportunity for contractors to claim their entitlements in circumstances that may not be available to them under English law.
Is Arbitration Accepted in the Region?
It is sometimes suggested that arbitration is not accepted in the Middle East. Not so. Arbitration, or Tahkim, is reported to have been used by the Arabs as early as the seventh century. In many countries, arbitration is therefore part of local custom. Historically, however, there was difficulty with international arbitration because of several arbitration awards in the 1950s and early 1960s that were unfavourable to state governments.
In one of these arbitrations, between Sheikh of Abu Dhabi and the Petroleum Development Company (1951), Lord Asquith said:
If there exists a national law to be applied, it is that of Abu Dhabi. But no such law can reasonably be said to exist. The Sheikh administers a purely discretionary justice with the assistance of the Koran, and it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modern commercial instruments.
Not surprisingly, Arab countries became suspicious that international arbitration would not provide them with a fair means of resolving their disputes and, even today in Saudi Arabia, state entities are forbidden by law from agreeing to arbitration clauses without obtaining government consent. The global trend toward international arbitration and various conventions in favour of international arbitration have, however, substantially eroded hostility to international arbitration and increased its acceptance, as evidenced by the increasing number of local arbitration centres and the growing number of arbitrations in the region, particularly in Dubai.
Local Arbitration Centres: Good Compromise?
Traditionally, arbitration centres across the Middle East have been part of the local chamber of commerce. Their expertise varies considerably and, on the whole, they have not yet built a track record for dealing with the large and complex disputes likely to arise on energy projects where hundreds of millions of dollars may be at stake
While there is movement across the Middle East to reform arbitration laws and to adopt laws based on the United Nations Commission on International Trade Law (UNCITRAL) model, there is still another hurdle to overcome. If arbitration requires assistance from the local courts — for example, where the court's enforcement powers are required in respect to interim measures — then progress, as we have seen, is likely to be slow, affecting the conduct of the arbitration. Despite this, substantial advances have been achieved in international arbitration across the Middle East. The following centres are especially noteworthy:
- The Cairo Regional Centre for International Commercial Arbitration
This is perhaps the most established arbitration centre in the Middle East, with over 30 years’ experience. It attracts many arbitration cases, mainly those connected with Egypt and North Africa.
None of the centres in the Gulf has attracted more cases than the Dubai International Arbitration Centre (DIAC), which has clearly established itself as a leading centre. Approximately 180 new cases were reported to have been registered in the DIAC by August of last year, mainly as a result of the collapse of the real estate market. The DIAC has the advantage of new rules that were published in May 2007 and that are in line with other major arbitration centres around the globe.
- DIFC – LCIA
Dubai's reputation as a regional arbitration centre was further bolstered in February 2008, with the opening of a joint venture between the Dubai International Financial Centre (DIFC) and the London Court of International Arbitration (LCIA). The alliance added LCIA's expertise in administering arbitrations. Yet another boost to the centre’s reputation came with the enactment in October 2008 of the new DIFC Arbitration Law 2008, which enables parties anywhere in the United Arab Emirates and beyond to choose the DIFC as the seat of their arbitration. Thanks to the new law, a DIFC award, once ratified by the DIFC Court, is theoretically enforceable without any opportunity for challenge in the Dubai courts, unlike an arbitral award obtained outside the DIFC. The advantage of a DIFC award is clearly potentially significant.
Despite Dubai's growing reputation as an arbitration centre, it is generally acknowledged that the UAE needs to enact a satisfactory federal arbitration law as soon as possible. A draft law based on the widely accepted UNCITRAL Model Law was circulated for consultation last year, but so far it remains unclear whether the draft will become law. Until the new law is enacted, choosing the DIFC as the seat of arbitration remains the better bet which of course can be combined with, for example, choosing the DIAC to administer the arbitration.
- Other Centres in the Gulf
Arbitration centres are situated throughout the Gulf states. Doha, the capital of Qatar, is home to the Qatar International Conciliation Arbitration Centre. In Bahrain, the newly established Bahrain Chamber for Dispute Resolution has teamed with the American Arbitration Association. And in Abu Dhabi, the Abu Dhabi Commercial Conciliation and Arbitration Centre has been in operation for many years. However, none of these centres in the gulf have as yet the credentials of the LCIA-DIFC or the DIAC centres.
Enforcement of Arbitral Awards
Enforcing arbitration awards in the Middle East may be problematic, particularly in Libya and Yemen, which have not yet acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Even where the New York Convention is in place, most Arab countries will decline enforcement on the basis of its public policy exemption (Article V.2b) if the award contravenes domestic public policy instead of international public policy (Lebanon, Algeria and Tunisia excepted). Enforcement is particularly difficult in Saudi Arabia, where the enforcement of foreign awards will be declined if it is inconsistent with Sharia' law. Very few awards have actually been enforced in Saudi Arabia on the basis of the New York Convention.
If, therefore, there are assets outside the Middle East, the best course is to start enforcement there. If enforcement is to take place in the Middle East, however, in order to increase the chances of successfully enforcing an award, conducting the arbitration and the pleading of claims should be done in a way that, as far as possible, is careful to avoid falling afoul of procedural and substantive local law.
The use of International Centre for Settlement of Investment Disputes (ICSID) standards has expanded rapidly across the region as the number of bilateral investment treaties has increased. Contractors now regularly consider whether they have rights under “bilateral investment treaties” (BITs) before entering into major energy projects in the region. The cases registered at ICSID are indicative of the increasing number of state disputes that have arisen in the Middle East. Egypt, to date, has more cases than any other Arab country.
In assessing possible routes for recovery of entitlements, any existing BITs should be reviewed to see if they might help. The threat of BIT proceedings can often unlock disputes. Not to be forgotten, however, is the fact that a number of countries such as Qatar and Kuwait, where substantial energy projects are being undertaken, have yet to accede to the New York Convention.
Contractors will know from experience that, in complex energy projects, the process of enforcing entitlements should not start with the commencement of proceedings. They should begin considerably earlier, when issues arise during the course of the project. The key in many respects is careful and prudent project management.
Absent an effective deterrent to disputes in the form of proper dispute-resolution machinery, more disputes may arise and resolution may be prolonged. Arbitration is a key means of avoiding disputes and, if amicable resolution cannot be achieved, of achieving an appropriate resolution of a dispute. For arbitration on large energy projects, it is preferable to chose a seat outside the Middle East with a well-established arbitration centre such as the ICC or the LCIA. Choosing a local arbitration centre in the Middle East could be a good compromise, but careful consideration needs to be given to all project circumstances before signing a contract that provides for this.