Raising Counter-Claims in Construction Disputes

With the high level of construction activity taking place in Oman, it is unsurprising that construction disputes sometimes arise.  Because of the size, complexity, and large amounts of money often at stake, many construction disputes require the meticulous attention of legal advisors.

One key aspect of construction disputes that is often overlooked is the potential for a party to raise counter-claims against the initiating party.  For instance, if a general contractor terminates a subcontractor, the subcontractor may bring certain legal claims against the general contractor, such as for costs incurred or work forgone.  However, if the subcontractor brings such a claim, the general contractor itself may have a wide range of counter-claims that it can raise against the subcontractor in a judicial forum, such as for costs incurred as a result of shoddy work or regulatory violations.

Counterclaims may be raised in many types of disputes, but when it comes to construction disputes they often must be raised in accordance with a unique set of procedures.

As readers familiar with the construction sector may know, many construction contracts – for example, the oft-used Oman Standard Conditions of July 1981 (Third Edition) - contain a clause which states that any dispute will be settled by arbitration.  This arbitration clause usually states that, before any arbitration can take place, it is a mandatory requirement that “any dispute or difference of any kind whatsoever” must be referred to the project’s engineer for a decision.  In many Omani construction contracts, the arbitration clause further states that the engineer must give his written decision “within a period of ninety days after being requested by either party to do so….”  It is only after compliance with this step involving the engineer that a party can commence an actual arbitration proceeding.

The type of arbitration clause described above is simple and non-controversial from a claimant's perspective.  Clearly, the claimant should request a decision from the engineer as regards all the claims which the claimant wants to make against the counter-party.

However, the counter-party may not realize that it too should request a decision from the engineer as regards all the counter-claims it would wish to make against the claimant.  Failing to do this could give rise to difficulties for the counter-party when it responds to the claimant's statement of claim during the arbitration proceedings.  In its reply, the counter-party may wish to raise counter-claims.  However, when the counter-party does so, the claimant then may retaliate by arguing that the counter-party has fallen foul of the procedural requirement in the contract’s arbitration clause for obtaining a written decision from the project engineer in relation to any dispute or difference.  The claimant may assert that the arbitral panel has no capacity to hear the counter-claims because the engineer first must make a written decision on those counter-claims before they can form part of the subject matter of the arbitration proceedings.

Accordingly, we strongly advise our clients, who may wish to assert counter-claims in the arbitration, to  seek first an engineer's decision as regards all of those counter-claims.  In this way, we can negate the claimant's ability to argue in the arbitration that the arbitral panel cannot hear, or adjudicate upon, such counter-claims.