Mediation in the Construction Industry of the UAE

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Introduction

Mediation refers to a structured negotiation process managed by an independent third party who is neutral so that the outcome becomes legally binding. Legal provisions governing mediation are usually found in civil procedures codes or in national mediation laws. Mediation is anchored on six major principles: voluntariness of the parties in determining the procedure, selecting the mediators, and final decision-making; confidentiality of the procedure and its outcomes; equality in the mediators relation towards the parties; neutrality in the mediators relation towards the subject matter of a dispute and the mediators recommendations; and enforceability of settlement agreements.

Mediation is not compulsory in The UAE but it is included in many government contracts. It is governed by The UAE Civil Procedure Code, Federal Law No. (11) Of 1992. (Chapter Three) and the UNCITRAL CODE. Mediation in The UAE and most of The Gulf states can be traced to traditional religious and cultural practices that advocated for peace and harmony. The mission of a mediator was to offer a solution that both parties would honor. The use of mediation is on the rise. The CEDR found that the number of mediations disputes it handled rose from 100 cases in 1997 to 700 cases in 2004. Mediation has recorded substantial success rates, as over 80% of the disputes that are voluntarily submitted to mediation are satisfactorily resolved.

There are many legal disputes in the construction industry. Construction projects involve contracts between investors, contractors, and laborers. Legal documents are required to be prepared for regulating the subject matter of the contract, setting the price, the time framework and limit; and other modalities related to the complex construction industry. Parties find themselves entangled in massive legal wrangles involving sub-contracting, delays, and scope of work, costs, and deviations from the project framework, damages, shortfalls, and non-execution.

Disputing parties used to submit their disputes to arbitration but they realized that arbitration is adversarial in nature. Mediation was proposed as a viable alternative and is currently being embraced in the construction industry. This paper seeks to explore the difficulties that may be encountered in enforcing local and international mediation in The UAE and other countries. The paper also recommends specific measures that may be put in place to overcome the challenges.

Effectiveness of Mediation in the Construction Industry

The advantages of using mediation in the construction industry over other dispute resolution mechanisms are that; the mediator is neutral; its speedy as the maximum time limit is 30 days; its less expensive as compared to court procedures or arbitration. In the UAEs construction industry, mediation is preferred because it only takes a few days as compared with the arbitration, which can take up to 2 years. Contractors are also keen to be cooperative and to maintain stable relationships with the employer.

Dubai has established a mediation centre for property and construction disputes to deal with the piling caseload in the property court. The centre was established to resolve hundreds of disputes between developers and investors that ensued after the global economic crisis. More than 500 cases were pending in the property court. Within the month of March 2009, the centre had solved 95 cases.

Mediation is only effective in disputes in the construction industry where parties have been involved in projects together and have established cooperation. This is where there are prospects for working on a project together in the future and parties want to protect their reputation by avoiding publicity. This is where the subject matter of the dispute is more technical than legal. For instance, disputes over quality and quantity where the project is not yet completed and parties would wish the construction to continue. In addition, where parties have failed in negotiating an agreement and where there is no intense hostility between the parties.

Difficulties of Enforcing a Mediation Outcome

The most glaring disadvantage of the mediation process is that the decision is not compelling and binding as is the case with arbitration and litigation. However, this does not wash out its benefits since it still saves on time and money. The mediation outcome is the fruit of a voluntary process and it is expected that parties will fulfill their obligations out of goodwill.

Parties sometimes refrain from enforcing an agreement. This could be due to a shift in position once the mediation is through; change of leadership or ownership of the company; differences in interpretation of a term; currency fluctuations; Impossibility of performance due to natural events and government action; and negative public reaction.

Failure to enforce a settled agreement means that enforcement action must be taken. This defeats the primary goals of mediation such as avoiding delays and preservation of relationships. The degree to which these goals are undermined can be impacted by the enforcement mechanisms available.

Lack of a proper Enforcement Mechanism

UNCITRAL prepared a model law on conciliation to support its increased usage. The UNCITRAL model sough to legislate crucial issues such as the admissibility of certain evidence in subsequent judicial or arbitral proceedings as well as the role of the conciliator in subsequent proceedings and facilitating enforcement of settlement agreements resulting from conciliation.

Article 14 of The UNCITRAL Model law on international commercial Conciliation states that If the parties conclude an agreement settling a dispute, the settlement agreement is binding, and enforceable, (the enacting state may insert a description of the method of enforcing the settlement agreement or refer to provisions governing such enforcement).

The model failed to address the lack of a proper enforcement mechanism. Those who were developing the model had proposed a uniform enforcement mechanism to create a mediation outcome with similar force to an arbitral award but their proposal was rejected.

Harmonization by way of uniform legislation was not viable because of differences in domestic procedural laws of various states The UNICATRL mechanism left the issue of settling on the appropriate mechanism in the hands of local jurisdictions. This has been criticized by legal scholars as the major weakness of the model law.

Argument That the Settlement Agreement is not binding

Defense counsels of parties have usually argued that the mediation agreement is not binding on the parties. They posit their argument on the point that mutual consent is not sufficient to give rise to all material terms necessary to form an enforceable contract. They further argue that abbreviated agreements or memoranda of understanding prepared at the mediation session as a shorthand recording of the terms agreed are not binding agreements.

Courts have recognized the difficulty of formulating a complete and final document in complex mediation cases. Due to this difficulty, courts have a policy of enforcing settlement agreements where all material terms have been agreed upon through mutual settlement. Where the governing law or the court exercising jurisdiction rules that the mediation settlement agreement must be in writing, parties cannot purport to enforce an oral agreement.

Duress and Coercion

As a general principle of the law of contracts, an agreement obtained through the use of force, duress or coercion is not enforceable. Use of duress or coercion is quite common in the construction industry especially in cases of unconscionable bargains where one party has an advantage over the other. The duress or coercion should not be trivial and the court uses its discretion to determine whether the act complained of really amounts to duress.

Courts have enforced settlement agreements despite claims of fraud or coercion in several circumstances. For instance, in a situation where the party claimed that by being denied permission to leave the room, he had been sapped of his free will, and in another case where a party claimed that he had been threatened with prosecution in a bankruptcy court.

Generally, facts said to constitute undue influence in settlement agreements pertaining to the construction industry have been listed down as:

Discussion of the transaction at an unusual or inappropriate time; the consummation of the transaction in an unusual place
insistent demand that the business be finished at once; extreme emphasis on the untoward consequences of delay
use of multiple persuaders by the dominant side against a servient party; absence of third-party advisors to the servant party
Statements that there is no time to consult financial advisers or attorneys

In Desert Line Projects v. Yemen24, The ICSID set aside a settlement agreement in2008 on the basis that it had been reached on grounds of coercion and duress. Desert Line had contracted with Yemen to execute a major road-working project and had been lulled into continuing work by continuous assurances of payment. After a failure by Yemen to pay for a year and a half, Desert Line filed an arbitration demand and an award in its favor was rendered.

Following the award, settlement discussions commenced and Desert Line agreed to accept half the amount awarded. Desert Line commenced a second arbitration in which the tribunal set aside the settlement agreement and reinstated the original award, finding economic duress, based on actions during the negotiation period, which included armed interference and preemptory advice that you better take this deal. The tribunal noted, Economic duress is present in many settlements and cannot be a basis for setting aside an agreement.

Fraud

Fraud is commonly raised by defaulting parties to mediation in the construction industry as a ground for setting aside a settlement. his ends up frustrating the outcome of the mediation process and causes parties to resort to arbitration and litigation. Courts are keen to apply contract rules strictly in deciding the actions that amount to fraud. A material misrepresentation is often cited as sufficient ground to set a settlement agreement aside.

Confidentiality and Party Autonomy

The issues of party autonomy and confidentiality in mediation are a grey area when it comes to enforcement of the settlement agreement. In a jurisdiction where strict confidentiality is applied in mediation, courts refuse to accept evidence relating to fraud in the proceedings on the ground that such disclosure is prevented by the operation of the principle of confidentiality¹⁰. This raises the issue of to what extent the principle of confidentiality should be allowed to operate in the enforcement of a settled agreement.

Enforcement of Foreign Settlement Agreements

Globalization has led to a significant increase in bi-lateral and multi-lateral trade. The construction industry has not been spared. In the United Arab Emirates, for instance, multinationals and international conglomerates play a significant fact in the construction industry. It is very difficult to enforce settlements agreements that are given outside the countrys boundaries. In the United Arab Emirates Articles 36 of Law No. 6 of 1997 states, No contract where Dubai Government or any of its departments is a party shall contain a provision for arbitration outside Dubai courts or any dispute regarding arbitration or its procedures shall be the subject to any laws or rules other than the laws, rules and regulations prevailing in the Dubai Emirates.

The law governing enforcement of mediation at the international level is the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards which provided that arbitration agreements are to prevail over actions in the Court and that they are to be enforced in over one hundred countries throughout the world, including the major trading nations. The UAE Civil Procedure Code, Federal Law No. (11) Of 1992 specifically provides that the rules governing the arbitration are to include Agreements and Conventions relating to Arbitration to which UAE is a party.

The New York convention is outdated in relation to enforcement of mediation agreements because by the time it was formulated only arbitration was envisioned as an enforceable alternative dispute resolution mechanism in international trade. The convention also contains various ambiguities and lawyers from different jurisdictions do not agree on the interpretation of the clauses within the convention. UNCITRAL recommendations as to interpretations of the New York Convention are used as mechanisms for clarifying the meaning of the language of the convention but scholars argue that the recommendations alone are not sufficient.

Recommendations

Sufficient measures need to be put in place to ensure the enforcement of settled mediation agreements. A study in 2009 indicated that Dubai was rapidly losing the best sub-contractors and suppliers to other jurisdictions that are more reliable in delivering payments.

Security of payment (SOP) legislation should be entrenched in mediation settlement agreements. The Housing and Construction Regeneration Act 1996 that governs adjudication proceedings in construction disputes introduced the concept of SOP in the UK. The Act eliminated all delays related to payment and was adopted in other commonwealth jurisdictions such as Ireland, New Zealand and Australia. The Act establishes a quasi-judicial body charged with the task of resolving construction disputes quickly and keeping money flowing in the construction industry.

All the players in the construction industry can claim under the SOP. The more complex a claim is, the higher the cost. Irrespective of any legal proceedings that may ensue afterward, payment must be made to the contractor immediately after the adjudication ensuring a steady cash flow in the construction project.

The non-compulsory and non-binding nature of mediation outcomes reduces the credibility and effectiveness of mediation in the construction industry. Legislation should be enacted to compel enforceability of mediation outcomes similar to that of arbitral awards. The UNCITRAL should be amended to set a uniform enforcement mechanism for all states. In The EU, for instance, Article 6 of The EU Mediation Directive calls upon all members to ensure that it is possible to enforce a written agreement arising from mediation.

The enforcement mechanism of a mediation agreement in the construction industry should not be in the form of a contract as it leaves the enforcement mechanism in the hands of the party leading to highly unsatisfactory results. Instead, the enforcement mechanism of a mediation agreement should be in the form of a judgment. In Colorado, The Colorado International Dispute Resolution Act provides that if a settlement agreement is reduced to writing, the parties or their attorneys may present it to the court and it shall be enforceable as an order of the court.

The mediation agreement can also be enforced in the same manner as an arbitral award. In South Korea, Article 18(3) of the Arbitration rules provides that upon successful mediation, the mediator shall be regarded as an arbitrator and the result o the conciliation shall have the same effect as an arbitral award.

States with enforceable oral settlement agreements should phase out the mechanism since the new trend is towards written agreements. This is the case in all US jurisdictions and in The EU under The EU mediation directive.

The New York Convention should be amended to give effect to mediation as an effective dispute resolution mechanism in international trade. Comprehensive UNCITRAL recommendations on the interpretation of the convention also need to be enacted to clarify the extent of application of the convention in international mediation settlement agreements.

Conclusion

Currently, the rate of increase in mediations in the construction industry is correspondent to an equivalent increase in court litigation proceedings arising out of the mediation. This is watering down the positive effects of the application of mediation. In a review conducted by Professor Coben on cases involving mediation in The United

States in 2006, he came across over 1200 cases concerning enforcement of a settled mediation agreement where issues had been subjected to further litigation.

Mediation is growing at a very high rate and the trend of subsequent litigation needs to be eliminated. Today in The United Arab Emirates, mediation and arbitration centers have grown phenomenally. With the establishment of a mediation centre for the property industry in 2009, disputes subjected to mediation are set to increase. It would be unfortunate if the disputes are then handed over to the property courts, as it would defeat the very purpose of the establishment of a mediation centre. To harmonize The UNICTRAL and achieve a high degree of certainty, states should make as few changes as possible when adopting the model into their domestic legal systems.

References

Khatchadourian, M. (2008). Arbitration and Mediation between Europe and the Gulf.Shiac.2008.PDF File. pp. 1-18.

Shehadeh, N. (n.d). Mediation: An International Review. PDF File. pp. 1-43.

Shehadeh, N. (n.d). The Law Governing ADR. PDF File. pp. 1-32.

Sussman, E. (2002). The Final Step: Issues in Enforcing the Mediation Settlement Agreement. PDF File. pp. 1-24.

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