An Overview of Construction Disputes in Bahrain
Dispute Resolution / Bahrain
In this article, we focus on when construction projects go wrong, and the steps which can be taken in resolving disputes between the affected parties.
Law Update: Issue 357 - Retail & Consumer
Hatem ElkatanSenior Associate, Dispute Resolution
Bradley PriceAssociate,Dispute Resolution
Bahrain is making great progress in realising its Economic Vision for 2030. The country’s aspirations in this regard are to shift from an economy dependent on oil wealth, to a diversified, and globally competitive, economy. The government is thus going to great lengths to strengthen the private sector, in order for it to become the driving force behind the diversification of Bahrain’s economy. A consequence of this drive has been considerable growth in a number of industries, notably the construction industry, with a knock-on effect for construction law practitioners. Accordingly, there is the strong likelihood of an exponential increase in the need for dispute resolution in the construction industry.
In this article, our focus is predominantly on when construction projects go wrong, and the steps which can be taken in resolving disputes between the affected parties.
The Construction Contract stands as the cornerstone for any construction project. As such, its importance cannot be underestimated. While there are a number of so called “standard form agreements” which can be utilised by the parties concerned to conclude a construction contract, the most widely used is probably the International Federation of Consulting Engineers standard for contract (“FIDIC”). As a consequence of the frequent use of FIDIC contracts, most construction disputes are referred to arbitration determination. However, it is also possible for disputes to arise which are not subject to arbitration, and these must be considered by the Bahraini civil courts. Both these vehicles for dispute resolution will be discussed below.
Construction disputes adjudicated before Bahrain civil courts will be subject to the legal framework founded upon Bahrain’s Legislative Decree No. 19 of 2001 (the “Civil Code”). The Civil Code forms the bedrock of Bahraini Jurisprudence. It has specific provisions which deal with the interpretation of muqawala, or construction, contracts but unlike the United Kingdom, Bahrain does not have specialised courts which adjudicate construction disputes.
Furthermore, as Bahrain is a civil law jurisdiction, legal precedents are not considered binding. Consequently, the application of the codified laws is applied as interpreted by the presiding Judge, whose discretion must also be exercised in accordance with Sharia Law. This discretion comes most commonly to the fore when the issue of liquidated damages is considered.
Under the common law, when parties agree to liquidated damages when negotiating the construction contract, the sum of damages agreed to cannot later be interrogated. Each party accepts the predetermined liability in the case of a breach.
However, this approach is not necessarily accepted in Bahrain. The Court of Cassation has held that liquidated damages awarded to a party through an arbitral award may not be enforceable, on the basis that the innocent party may not have actually suffered damages equal to the value of liquidated damages.
The decision of the court enforced the discretionary powers of the courts to interrogate not only liquidated damages clauses, but also arbitral awards dealing with such damages. It is therefore not only possible, but probable, that a court can declare a liquidated damages clause totally unenforceable if a party can prove that the party claiming liquidated damages did not actually suffer such damages. The court may also decide to reduce the value of liquidated damages so that it is equivalent to the actual loss suffered.
As stated above, there are no specialised courts dealing with construction disputes. Such a matter can thus be brought before any Judge. In light of this, parties are heavily reliant on expert evidence, prepared by way of an expert report, in order to prove their cases.
Consequently, all Bahrain courts have the jurisdiction to hear construction disputes, unless they are specifically excluded by the parties in the construction contract. In such cases, an alternative method of dispute resolution, such as arbitration, may have been prescribed. However, arbitral awards will still need to be approved and executed by Bahrain Courts if they are to be enforced in Bahrain.
The exclusion of agreements from the jurisdiction of Bahrain courts is governed by the provisions of the Civil and Commercial Procedures Law, as well as the Arbitration Law (to be discussed below).
With the establishment of the Bahrain Chamber for Dispute Resolution (the “BCDR”) certain cases can only be adjudicated by this specialised court. This situation pertains if the case meets one of the following criteria:
the value of the claim exceeds 500,000.000 Bahraini Dinars;
both parties are commercial companies;
one of the parties is a financial institution licensed by the Central bank of Bahrain; or
the dispute is an international commercial dispute.
In addition to the establishment of the BCDR, the Minister of Justice has issued Resolution 117 of 2021. This affords parties the option of agreeing, before filing a claim, to have the dispute adjudicated in English, if the following conditions are satisfied:
the parties agree to the use of English before the courts, prior to the initiation of proceedings;
the agreement is not drafted in Arabic;
the proceedings relate to the enforcement of an arbitral award handed down in English;
the Bahrain courts ordinarily have jurisdiction to hear the dispute (as this is not intended to be a free zone court).
Generally, this will be confined to either Arbitration or Mediation.
Arbitration in Bahrain can be conducted under any of the various arbitral institutions, as is the case in most of the world. However, arbitrations conducted under the laws of Bahrain will be subject to Bahrain’s Arbitration Law. The Arbitration law is for all intents and purposes the UNCITRAL model, which is administered by the BCDR to all arbitrations seated in Bahrain, or by agreement between the parties where the Arbitration Law is applicable.
As Bahrain is a party to the New York Convention, arbitral awards are generally enforced by the courts without the awards being specifically interrogated. However, the courts are at liberty to set aside awards, as seen above, in relation to liquidated damages if the award:
contradicts public policy;
is contrary to good morals;
has been obtained despite procedural irregularities; or
if there was no binding arbitration agreement between the parties.
Further, there has been a practice directive issued to all state owned or operated entities. They are required to insist that all arbitration agreements refer any disputes involving them to the BCDR. The Court of Cassation has ruled that should the arbitration agreement not make the necessary referral to the BCDR, then the validity of the agreement can be attacked. This may result in the award being overturned when attempts are made to enforce the award.
Legislative Decree No. 22 of 2019, otherwise known as the Mediation Law, is applicable to construction disputes in so far as the law covers disputes of a civil and commercial nature.
In terms of the Mediation Law, parties who refer disputes to mediation are able to appoint their own mediator. Alternatively, the parties can apply for the appointment of a certified mediator who is registered with the Ministry of Justice.
Mediation settlement agreements are enforceable under Bahrain’s Mediation Law. However, the Court, should a case be referred to the Court for the enforcement of such settlement, will not review the contents of the settlement. Rather, the Court will merely review the form of the settlement to ensure that all formalities have been met and that the mediation settlement does not violate public order.
Common disputes arising out of construction contractsAs set out above, the common disputes arising out of construction agreements are generally adjudicated in accordance with the Civil Code. However, there are two surprising exceptions to widespread construction law principles. These are the principles of concurrent delay, and the prevention principle, which are not found in Bahrain law.
When faced with issues relating to concurrent delay, and the impact of such circumstances, the courts will rely on the Article 217 of the Civil Code to apply the principle of contributory negligence. In such situations, the courts will consider the appropriate apportionment of liability on each of the parties and will justify their findings as follows:
a party cannot be permitted to exercise a right if the resultant enforcement will achieve an unlawful interest, as per Article 28(b) of the Civil Code; and
if a party cannot take advantage of a mistake which it has made contrary to the principles of good faith, as per Article 87 of the Civil Code.
As Bahrain continues to take steps to realise it Economic Vision 2030, there will continue to be exponential growth within the construction and infrastructure sector. It is thus vital for parties to be cognisant of the effect of the dispute resolution clauses; of the vehicles available to parties to properly protect their rights and interests; and of the risks arising from the forums in which disputes are decided.
For further information,please contact Hatem Elkatan or Bradley Price.
Published in April 2023
