Legal abroad: Doing business in Bahrain

Bahrain, population 1.7 million, offers significant opportunities for construction firms given the level of investment in infrastructure by the government, the private sector and the Gulf Cooperation Council (GCC) Development Fund.

It has had few covid restrictions directly affecting its construction industry, and is one of the world’s most highly vaccinated countries. The industry has proven resilient, despite an economic downturn due to the pandemic as Bahrain’s overall economy contracted by 5.4% in 2020. The construction sector is expected to grow by 2.1% this year, after a 0.2% contraction in 2020, according to a report by analytics firm GlobalData. For example, 22 tenders were awarded in Q1 2021 by the Tender Board, worth US$1.6bn, up 23% from Q1 2020.

Funding for infrastructure and construction projects comes from the government, the private sector, and grants from the GCC Development Fund. As the Bahrain government is reliant on oil revenues, the IMF forecast of a significant rise in oil prices in 2021 should lead to further investments in infrastructure, oil and gas, and renewables, in line with Bahrain’s Economic Vision 2030 agenda.

Other key areas of opportunity include social housing and educational, health and social services.

Although Bahrain generally allows 100% foreign ownership of companies, construction is one of the sectors in which there are restrictions on non-Bahraini investment

Although Bahrain generally allows 100% foreign ownership of companies, construction is one of the sectors in which there are restrictions on non-Bahraini investment. Ranking 43rd  in the World Bank’s 2020 Ease of Doing Business Report, it is the second most business-friendly country in the Middle East and North Africa (MENA) region. It ranked 17th out of 190 countries in terms of dealing with construction permits, and only nine procedures are needed to get a construction permit on average, lower than the MENA average of 15.7. The average number of days for approval of a construction permit was 71, compared with a MENA average of 123.6.

Arbitration is overwhelmingly the preferred mode of dispute resolution in construction contracts, and Bahrain was one of the region’s first states to accede (in 1988) to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In contrast to other GCC countries, Bahrain has adopted the UN Model Law in its entirety as governing arbitration. This approach is in line with global best practice and sets Bahrain apart from other GCC countries where, though arbitration laws are substantially based on the Model Law, there are important differences.

While in theory Bahrain’s arbitration regime should provide for little court interference and enforceability of awards, arbitration under this regime is not risk free. Awards can be set aside for a variety of reasons, including where the award conflicts with the public policy of Bahrain. As in other GCC countries, enforcement of arbitral awards can sometimes be difficult. Some foreign contractors have encountered difficulties enforcing awards in the local courts of GCC countries, particularly where the debtor has links to the state. One way to resolve this issue is to agree in advance that the arbitral seat – the procedural law of the arbitration – is a neutral jurisdiction.

Awards can be set aside for a variety of reasons, including where the award conflicts with the public policy of Bahrain

Bahrain’s main arbitral institution is the Bahrain Chamber for Dispute Resolution, which operates in partnership with the American Arbitration Association.

Some contractors and consultants have found that employers in the Middle East tend to favour contracts that provide them with greater powers than would be typical in the UK for an employer. Most construction contracts in the region are FIDIC based, although frequently only in the loosest sense given the often heavily employer-friendly amendments.

Contractors should carefully consider the dispute resolution clauses of their contracts, as well as the law governing the contract and/or any arbitration agreement, and should seek advice on the effects of agreeing to a contract governed by local law.

Finally, as Bahrain and most other countries in the region are civil law jurisdictions, contractors should consider the impact of civil law concepts, in particular good faith, on the negotiation and performance of the contract. In Bahrain specifically, the concept of good faith includes an express obligation to act with “honesty”. A court or arbitral tribunal can also look past a liquidated damages clause and award damages equal to the amounts of loss actually suffered.

Termination for convenience, as well as the assessment of concurrent delays, are areas where Bahraini law can provide different outcomes than in common law jurisdictions. Conversely, some concepts from English law are generally not applicable in the GCC region, such as “without prejudice” discussions. Foreign contractors should take this into account when engaging in settlement negotiations to resolve disputes.

Gerard Moore is a senior associate and Bruno Savoie is an associate in the Dubai office of global law firm Mayer Brown.