Traditionally, litigation has been the prevailing approach to resolving disputes in the Kingdom of Bahrain. However, the landscape is witnessing a significant shift towards the adoption of alternative dispute resolution (ADR) methods. ADR clauses embedded in commercial contracts have assumed a pivotal role in establishing the framework for handling disputes, whether through traditional litigation or alternative methods such as arbitration or mediation. These clauses enable parties to navigate disputes effectively, facilitating the resolution process while minimizing additional losses and costs. This article aims to explore the utilization of ADR clauses in commercial contracts within the legal framework of Bahrain. By highlighting the importance and benefits of well-drafted ADR clauses, this article further demonstrates their pivotal role in facilitating efficient dispute resolution and reducing costs traditionally associated with litigation.
Delay Claims: Extensions of Time
Delay claims are among the most common claims initiated by Contractors. These arise when a construction project takes longer to complete than the agreed timeframe. Delays may be a result of a host of factors, including but not limited to unexpected site conditions, issues with the required approvals and permits, flawed designs and materials, changes in the scope of work, poor management and administration of the construction site, and more.
In these circumstances, the Contractor may seek an Extension of Time (EOT) pursuant to Clause 8.4 FIDIC to avoid liquidated damages. The Contractor must demonstrate that the delay event will actually delay completion, which may be a result of:
- Delayed Drawings or Instructions (clause 1.9 FIDIC)).
- Delayed access to the Site (clause 2.1 FIDIC).
- Errors in original setting out points and levels of reference (clause 4.7 FIDIC).
- Unforeseeable ground conditions (clause 4.12 FIDIC).
- The discovery of fossils (clause 4.24 FIDIC).
- The Employer delaying or interfering with Tests on Completion (clauses 7.4, 9.2 and 10.3 FIDIC).
- Exceptionally adverse climatic conditions (clause 8.4(c) FIDIC).
- Unforeseeable shortages in personnel or Goods caused by epidemic or government actions (clause 8.4(d) FIDIC).
- Any delay or impediment caused by the Employer (clause 8.4(e) FIDIC).
- A public authority in the host country causing Unforeseeable delay or disruption to the Contractor (clause 8.5 FIDIC).
- The Employer suspending the Works (unless for Contractor default) and/or the Contractor subsequently resuming work (clause 8.9 FIDIC).
- Variations (clause 13.3 FIDIC).
- A change in law (clause 13.7 FIDIC).
- The Contractor suspending Works for non-payment or Employer failing to provide evidence of its financial arrangements (clause 16.1 FIDIC).
- The consequences of Employer's Risks (clause 17.4 FIDIC).
- An event of Force Majeure (clause 19.4(a) FIDIC).
Alternative Dispute Resolution Methods
The government of Bahrain has regulated mediation and the enforcement of mediated settlement agreements through Decree-Law No. 22/2019 on Mediation for Dispute Settlement and Decision No. 126/2019 on the Issuance of the Implementing Regulation of Decree-Law No. 22/2019 on Mediation for Dispute Settlement.
Decree-Law No. 22/2019 establishes a framework for acknowledging and executing mediated settlement agreements, which are treated as legally binding court judgments. Parties involved in court proceedings may request the suspension of the proceedings during the mediation process, and the courts will accommodate the parties by allowing a reasonable amount of time for the mediation to take place.
This law applies to all types of civil and commercial disputes, including those related to contracts, torts, and property. It also outlines the qualifications for mediators, who must be officially registered with the Ministry of Justice, Islamic Affairs, and Waqf (MOJ). The qualifications include requirements related to education, training, and experience. Parties have the freedom to appoint their preferred mediator, or they may seek assistance from the president of the High Civil Court to appoint a certified mediator through the MOJ.
Whereas Decree-Law No. 9/2015 on the Issuance of the Arbitration Law was enacted in July 2015. This law incorporates the UNCITRAL Model Law on International Commercial Arbitration (without amendments), which applies to all arbitration cases in Bahrain, regardless of their domestic or international nature. Additionally, non-Bahraini lawyers are permitted to represent parties involved in arbitrations conducted in Bahrain.
Legal Framework for Commercial Contracts
Commercial contracts are governed by the terms agreed upon by the contracting parties, as stated in Article 2 of Decree-Law No. 7/1987 on the Issuance of the Law of Commerce. This provision grants significant flexibility to the parties, allowing them to determine the specific terms and conditions that will govern their commercial agreements. It is important to note, however, that these mutually agreed terms must align with the requirements outlined in Article 110 of Decree-Law No. 19/2001 on the Issuance of the Bahrain Civil Law.
Article 110 sets the limits for contract conditions, stating that any condition agreed upon by the parties is permissible unless it is prohibited by law, contrary to public policy, or goes against moral principles. This ensures that the agreed terms and conditions do not involve unlawful activities or contravene legal principles. If a dispute arises from a contract that includes such prohibited conditions, it will not be admissible before the courts.
By striking a balance between flexibility and legal compliance, Bahrain's legal framework for commercial contracts promotes the freedom of the parties to determine their contractual terms while safeguarding the integrity of the law and public interest.
Legality of Arbitration Clauses
Bahrain's legal framework, governed by Decree-Law No. 9/2015, intentionally embraces the First Option of Article 7 in the UNCITRAL Model Law. This deliberate decision demonstrates a meticulous and comprehensive approach to defining arbitration agreements. As per Article 7 of the UNCITRAL Model Law, parties can establish an arbitration agreement through an arbitration clause embedded within the underlying contract or through a separate submission agreement. These methods provide the flexibility for parties to mutually agree to resolve specific or all disputes, whether they are contractual or non-contractual, through arbitration.
To ensure the validity of an arbitration agreement, it must be in written form. This requirement can be fulfilled through various means, such as documenting the agreement in written formats, including oral communication, actions, or alternative approaches. Notably, in cases where parties have engaged in electronic communications, where the exchanged information remains easily accessible and holds the potential for future referencing, the written requirement is considered satisfied. Additionally, any reference to a document between the parties that contains an arbitration clause allows for the incorporation of the clause into the contract, further bolstering the validity and enforceability of the arbitration agreement.
Enforceability of ADR Clauses by the Court of Cassation
The enforceability of ADR clauses depends on the clear expression of the parties' will to follow this method. Arbitration is seen as a consensual judicial system where parties choose arbitrators to settle disputes according to the arbitration agreement. The scope of arbitration is determined by the contracting parties and can cover contractual or non-contractual issues, in accordance with the law or principles of justice. As the Bahraini Court of Cassation in Challenges No. 23 and 32 J.Y. 2023 held "The modern trend in commercial legislation has come to see arbitration from the perspective that it is a consensual judicial system, far from the state's judiciary, in which the parties choose arbitrators and entrust them, in accordance with the arbitration agreement – whether conditional or stipulated – with the task of settling disputes that have arisen or that may arise between them, regarding their relationships. Contractual or non-contractual, which may be settled by arbitration, in accordance with the provisions of the law or principles of justice, and a binding ruling is issued to them. The agreement on arbitration is not presumed, but it must be clearly expressed as the will of the opponents to follow this path. It is the will of the contracting parties that creates arbitration and determines its scope in terms of the issues it covers."
The parties have the authority to conclude an arbitration agreement before or after a dispute arises, select arbitrators, determine the timing and location of the arbitration, specify the language
and procedural rules, and choose the applicable law. This process does not require supervision from a permanent arbitration centre or institution. As the Bahraini Court of Cassation in Challenge No. 457 J.Y. 2022 held "[Contracting Parties] conclude the arbitration agreement before or after the dispute arises, choose the members of the arbitration panel, and determine its time. The place of its holding, its language, the procedural rules governing the arbitration dispute, and the law applicable to the subject matter of the dispute, all without being subject to the supervision of a permanent center or permanent institution of arbitration."
Where the arbitrator is an impartial person trusted by the parties involved in the arbitration dispute, with the authority to make binding decisions. This authority is similar to that of a judicial ruling and takes effect immediately upon issuance. As the Bahraini Court of Cassation in Challenge No. 457 J.Y. 2022 held "It is established that the arbitrator is not a party to the arbitration dispute, but rather he is a person who enjoys the trust of the adversaries and their will was directed to granting him the authority to decide what was disputed between them with a ruling that, like judicial rulings, possesses the validity of the ruling as soon as it is issued."
Recent Bahraini Court of Cassation judgments highlight arbitration as an independent system chosen by parties to settle disputes, requiring explicit mutual consent and defining its scope. Parties have the authority to independently form arbitration agreements, including the selection of arbitrators and determination of procedural details, where the decisions are binding. Overall, the clarity and expressed consent of the parties are essential for the effectiveness and validity of ADR clauses, particularly in the context of arbitration.
ADR clauses in commercial contracts offer parties the opportunity to resolve disputes outside of litigation. By incorporating well-drafted ADR clauses into their contracts, parties can benefit from the flexibility, efficiency, and confidentiality offered by these methods. However, it is crucial to ensure that ADR clauses comply with Bahraini laws and are carefully drafted to address the specific needs and circumstances of the parties involved. Professional legal advice should be sought to ensure the enforceability and effectiveness of ADR clauses in commercial contracts in the Kingdom of Bahrain.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.