Arbitrating Construction Disputes

Arbitrating construction disputes is a dense subject. 

Arbitrating construction disputes in Algeria has its peculiarities, which this article will try to outline. 

For those unfamiliar with Algeria, we will first provide an overview of the legal environment of international arbitration in Algeria and the issues involved in construction arbitration in Algeria.

We will then address a recurring issue in Algerian construction arbitration: the question of the law applicable to international construction contracts.

I. Arbitral environment: Can Algeria be considered as offering a favourable framework for international arbitration?

A. Before official recognition, knowledge and use of arbitration in practice in Algeria 
Algeria, like other countries, adopted specific legislation on international arbitration after decades of mistrust of an institution that was suspected of representing the predominance of liberal ideology and had a reputation for favouring the powerful in an unbalanced power relationship with Third World countries.

In the 1960s, international trade was regarded in Algeria as a sovereign/regalian prerogative, in the same way as justice. The Algerian state therefore had a monopoly on foreign trade, and the international economic agents of the time, i.e. the state-owned companies, were forbidden to engage in arbitration because they were considered to be emanations of the state.

Under pressure from foreign companies, and with the inevitable liberalisation of foreign trade, public companies became accustomed to making extensive use, sometimes clandestinely, of the arbitration clause in their international contractual relations.

B. Late introduction of a legal framework but rapid and effective catch up, providing a framework similar to that of Western countries

Although international arbitration already existed in practice, it was only in 1993 that it became fully enshrined in formal law, thus confirming in an appropriate text an already long-standing recognition.

A 2005 law then enshrined recourse to arbitration for the first time in the field of hydrocarbons, and a 2008 law on the new code of civil and administrative procedure definitively confirmed recourse to arbitration.
In terms of bilateral treaties, Algeria has signed a network of investment promotion and protection agreements with several countries, all of which give pride of place to arbitration as a means of settling disputes between investors and host countries.

Algeria has also acceded to several multilateral conventions governing arbitration, including the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958, ratified by Algeria in 1988, and the ICSID Convention on Investment, ratified in 1995.

C. Construction projects in Algeria

Turning specifically to construction arbitration, we know that the construction sector is one of the most prone to disputes. The large-scale operations carried out here involve complex, multi-party contracts whose execution extends over the long term. The growth of the sector, coupled with increasing globalization, often brings together parties from different countries, generating an ever-greater risk of conflict. This is now the biggest sector among those dealt with by the ICC, even ahead of the oil and gas industry.

Algeria is one of the most active construction markets in the region. It is a huge open-air construction site: trans-Saharan road projects linking the North to sub-Saharan markets, the construction of pipelines and gas pipelines also crossing the country from one side to the other, the construction of new towns and futuristic urban centres, all kinds of factories, airports, stations and ports, not to mention gigantic projects in the renewable energies sector.

The multiplication of these regional infrastructures of international scope inevitably leads to an increase in disputes, and to the trivialization of arbitration as a means of settling them.

Interim conclusion
The ICC recently ranked Algeria first in the Mena-Middle East-North Africa zone in terms of the origin of arbitration cases. That is the volume of business. Or the volume of problems (depending on how you look at it).

There are three reasons for this situation, two of which are legal and the third economic.

1-The reform of the public procurement code, which authorized the settlement of public procurement disputes through arbitration.
2-The promulgation of the new Code of Civil and Administrative Procedure, which authorizes legal entities under public law to get involved in arbitration in their economic relations.
3-The economic reason is financial ease, due in particular to a good situation in terms of gas and oil exports, which has led to a boom in public procurement and an increase in both domestic and international contracts.

II. The question of the law applicable to international construction contracts
A recurring question often asked by foreign investors is the question of the law applicable to international construction contracts, i.e. contracts involving at least one foreign element, either because the contracting parties do not have the same nationality or because one of them is acting in a territory other than its seat’s headquarters in order to achieve the purpose of the contract.
This perfectly legitimate question generally stems from:

– the reservations expressed by foreign investors about subjecting the contract to a law that they do not know and of which they are distrustful, and

– the reservations of the Algerian party about venturing into complex, distant legal systems that they consider unfavorable.
Two consequences follow from this: one relating to the applicable law, the other relating to the settlement of disputes.

A. Applicable Law

i. No restriction: autonomy of determination principle
The principle is that the Algerian Civil Code leaves the choice of applicable law to the autonomy of the parties. It follows that the construction of an infrastructure in Algeria by foreign companies gives rise to a contract that may be governed by a law other than Algerian law, provided it is not contrary to public policy or morality.

This freedom of choice of law is not, however, total. It is attenuated and requires the following clarifications:

ii. A nuanced freedom of choice

– The law must have an actual relationship with either the contractors or the contract

The first nuance, set out in the Civil Code, is that the law chosen must have an effective, actual relationship either with the contracting parties or with the contract.

The Algerian legislators wanted to avoid situations where, for example, an Italian company building a highway in Algeria for an Algerian project owner would choose to apply English law to their contract.

If this principle of relationship is not respected, the law offers two alternatives to the parties:
– either the law of the common domicile or the common nationality.
– or, failing that, the law of the place where the contract was concluded.

– Overriding mandatory rules

Secondly, when the contract concerns a construction that takes place in Algeria and is governed by a foreign law, it must not be considered that the foreign law has full jurisdiction.

The choice of a foreign law in the contract can indeed not have the effect of ousting a set of regulations that are compulsory in Algeria – the so-called police laws – such as social and tax laws and, of course, laws that cover construction standards, for example anti-seismic standards.

It is also clear that if equipment has, for example, to be imported temporarily into Algeria to enable the construction contract to be executed, this import will be subject to Algerian customs regulations, even though the contract would be governed by Chinese or German law.

Equally, when the project owner is a legal person under Algerian public law, which often happens in practice in Algeria in international construction contracts, mandatory provisions of Algerian law, drawn from public procurement law, may also apply.

This may seem obvious, but many players in the construction sector are unaware of those aspects when approaching the Algerian market.

– Immovable properties are subject to the law of the location of the property

The third nuance, or “subtlety”, concerns a provision of the Civil Code which states that although the parties are free to choose the law applicable to their contract, “[…] contracts relating to immovable property are subject to the law of the location of the property”.

This third paragraph of Article 18 of the Civil Code, following the first paragraph which affirms the principle of autonomy of will, is disturbing because it seems to contradict the principle of autonomy of will and would therefore require the parties to a construction contract to systematically submit it to Algerian law.

The subtlety lies in the fact that even if the purpose of the construction is to build a building / an immoveable property, one must be careful not to think that the construction contract is a contract relating only to a building, as it also relates to the provision of material and intellectual services (technical, feasibility and engineering studies, maintenance services, etc.), making it possible for the contract to be exempted from Algerian law, if the parties so wish.

B. Settlement of disputes

If the contract is international, it must also be inferred that the disputes to which it may give rise are likely to be settled by international arbitration.

This is an opportunity, since we are talking about Algeria, to make a few remarks:

i. Public procurement

In Algeria, the fact that an international construction contract is subject to public procurement regulations does not preclude the contract from containing an arbitration agreement. What the Public Procurement Code requires is a “dispute settlement clause”, a requirement that leaves room for the possibility of concluding an arbitration clause.

ii. State-owned companies

With regard to public companies (public companies in Algeria remain the providers of the largest number of contracts and the largest construction projects in the country; they are therefore of particular interest to our discussion), their situation is that they can now, since the reform of the Civil and Administrative Procedure Code, get involved in arbitration in two cases:
1) in their economic relations; and
2) in public procurement matters,
which consequently allows them to insert arbitration clauses in their construction contracts.

Conclusion
When the Algerian parties, mainly public companies, express reluctance, and sometimes refusal, to accept the application of a foreign law to a construction project taking place in Algeria, the arbitration clause comes to “save” the contract and gives sufficient assurances to foreign investors to continue the negotiations.

It is indeed practically very difficult to convince the Algerian party that the application of a foreign law is more convenient than Algerian law when the contract is fully performed in Algeria. For the Algerian party, it would not make sense to interpret customs rules or exchange control rules by reference to a foreign law.

Investors are therefore encouraged to accept Algerian law to avoid the confusion that could arise from the competing application of multiple laws, and roadblock situations, but at the same time are advised to ensure that the arbitration clause in the contract will submit disputes to an international arbitration institution.
Local authorities will undoubtedly find it more difficult to accept the application of foreign law than an international arbitration clause.

What makes us different? 
Our team has attained a strong stature in the market as a result of both the depth of its expertise and the strength of its advocacy across all aspects of construction arbitration. Our expertise relies on more than two decades of experience in accompanying major infrastructure clients in all aspects of their project lifecycle, from the early stages of financing, development and design to implementation, construction and close-out.
We have a unique track record in providing legal and strategic guidance and are used to team up with prominent international law firms to provide our clients with seamless support.

Drafted by:  Maya GHELLA
Partner « Construction & Infrastructure, Energy, International Arbitration »