Disputes are a common feature of the construction sector and can potentially have far-reaching impact on the project in the form of costs, delayed completion and opportunity costs.
Construction disputes are primarily technical in nature. They may arise during the execution of the project or post the project's completion. More often than not, if the dispute is not resolved quickly and efficiently it has a cascading effect on the project and leads to inefficiencies like cost overrun and time overrun for the owner and cash flow issues for the contractor. The most common causes of disputes in construction projects are 2
- Omission and errors in the contract documents; Differing and unexpected site conditions;
- Failure of the owner, contractor and/or sub-contractor to understand or comply with the contractual obligations;
- Failure to properly administer the contract; Poorly drafted, incomplete, delayed and/or unsubstantiated claims;
- A biased Engineer or Project Manager; and
- Insufficiency of FEED (Front End Engineering Design) in case the contractor is doing detailed engineering and execution only. 3
The construction sector has made significant progress in the past few decades in developing cost-effective and expedient modes of dispute resolution. We intend to discuss here the various methods available for settling disputes between the parties.
Construction contracts typically have a structured dispute resolution clause to account for various kinds of disputes that may arise in the lifecycle of a project, differing in size, nature and complexity. There are three primary techniques to resolve disputes – negotiations, non-adjudicatory third party intervention and adjudicatory dispute resolution which are discussed below in more detail:
- Negotiation is a widely used mode of dispute resolution which
features in most standard arbitration clauses, for example:
"Any disputes arising out of this Agreement shall be endeavored to be settled amicably by the Parties. However, if the Parties are unable to amicably settle the disputes within 30 (Thirty) days, the disputes shall be resolved by way arbitration. Thus, in most dispute resolution clauses, negotiation is a pre-requisite for the parties to commence arbitration or litigation. This ensures that insignificant as well as some significant matters get settled without being escalated unnecessarily to a formal dispute resolution process.
- Non-adjudicatory third party intervention is a form of dispute resolution where a neutral third party assists the parties in resolving their disputes. The process may be facilitative (for example, mediation, where the mediator only supports the negotiation process, but does not make any recommendations to the parties) or evaluative (for example, conciliation, where the conciliator makes recommendations and actively advises the parties in the negotiations). In the event the parties reach an agreement in conciliation, such agreement may be captured in a signed settlement agreement which under the Arbitration and Conciliation Act 1996 Arbitration Act is a final and binding agreement having the same effect as an arbitral award. However, as a practice, mediation and conciliation are still in their nascency in India and need to be further advocated.
- Adjudicatory dispute resolution is in fact the most popular form of dispute resolution in the construction sector and has developed significantly the world over. Disputes in a construction contract have two very specific characteristics – (1) they are technical in nature; (2) unless resolved quickly and efficiently, they may have a cascading impact on the project. To address these issues, parties have the option to choose from a broad range of dispute resolution mechanisms which include, primarily: Dispute Boards, Expert Determination, Litigation or Arbitration. Dispute Boards and Expert Determination are in most cases used as an interim mechanism for resolving disputes which may arise during the execution of the project. In addition to the same, the contract will ideally provide for either, litigation and arbitration, to resolve disputes finally.
Arbitration is a form of dispute resolution which is used as an efficient, confidential and generally cheaper alternative to litigation, especially in India, where the perception is that the judicial system has become an unattractive forum for dispute resolution due to inordinate delays 4It allows parties a large degree of flexibility and control on the process of dispute resolution and the freedom to choose a tribunal with the skill-set and specialised knowledge required to give a just and fair award. This is an important factor for construction contracts where technical knowledge is, more often than not, essential for dispute resolution. There are divergent views about arbitration necessarily being more cost effective than litigation but the speed of the process often overrides the scepticism regarding costs. It may be noteworthy to point out that in most jurisdiction the court fees are paid on an ad-valorem basis which may turn out to be equally costly.
The arbitration regime in India has recently been over-hauled by the Arbitration and Conciliation (Amendment) Act, 2015 which has come into force with effect from 23 October 2015. The changes in law that are expected to make arbitration proceedings in India more effective, especially for the construction sector, are discussed below:
- For most matters under the Arbitration Act with respect to international commercial arbitration taking place in India, the relevant Court is now the Commercial Division of the High Court. For example, applications for interim measures and applications for setting aside an award of the arbitral tribunal will now lie to the High Court exercising territorial jurisdiction in the matter. 5
- The powers of the arbitral tribunal have been increased especially with respect to grant of interim measures which shall now be deemed to be an order of the Court for all purposes. 6Thus, if the contractor wants to either prevent the owner from unlawfully enchasing the bank guarantees or compel him to make interim payments notwithstanding the existence of a dispute, such request for interim measure can be made to the tribunal if arbitration has commenced. However, enforcement of the interim order of the arbitral tribunal may still be a challenge. The powers of the courts with respect to grant of interim measures has not been taken away and even after constitution of the arbitral tribunal the court can pass interim orders where it is shown that an application to the tribunal would not be effective.7
- The arbitration should be completed within a period of 12 (Twelve) months from the appointment of the tribunal or a further extended period of 6 (Six) months with the consent of the parties. Any further extension can only be granted by the Court. This ensures that the dispute is not prolonged indefinitely and can resolved economically.8The construction sector should benefit from this provision because projects in dispute will not remain suspended/halted for very long.
- The amendment has introduced a comprehensive regime for costs based on the general rule that the unsuccessful party shall be ordered to pay the costs of the successful party.9This will prevent unnecessary and bogus claims from delaying the project.
- There are very limited grounds for challenging an award of the tribunal and such applications need to be decided by Courts within 1 (One) year. The scope of challenging an award on the grounds that it violates the public policy of India which had been left open to interpretation under the old act have now been clearly explained thereby limiting court intervention. Furthermore, the unsuccessful party, here too, will be subject to costs. This change is expected to have a very positive impact on the construction sector because it will prevent unnecessary and prolonged litigation to delay the enforcement of an arbitral award.
- The amendment to the Arbitration Act has introduced a new schedule which details the fee that an ad-hoc arbitral tribunal should charge for resolution of disputes. Since most arbitration clauses in construction contracts are ad-hoc in nature, this change promises to reduce the cost of arbitration significantly. Thus, ad-hoc arbitration in India has become potentially more economical that foreign institutional arbitration.
Once a domestic arbitral award attains finality (on expiry of the time period allowed for challenging an award or by virtue of an unsuccessful challenge), the award can be enforced in the same manner as if it were a decree of the Court and is final and binding on the parties.
The arbitration regime with respect to recognition and enforcement of foreign awards in India has also become more streamlined because the challenge of a foreign award on the basis that it violates the public policy of India has been limited to the following grounds: (1) the award was induced or affected by fraud or corruption; (2) the award contravenes the fundamental policy of Indian law (however, there shall be no review on merits to ascertain this); and (3) the award conflicts with the basic notions of morality or justice. The application for enforcement now lies with the appropriate High Court.
Thus the impetus given to arbitration in India (both with respect to domestic arbitration awards and foreign awards) with the new amendment ensures that it remains the preferred mode of dispute resolution in the construction sector.
The concept of dispute boards originated in the US and was popularized by the 1999 FIDIC standard form of contracts. It is an increasingly common mode of dispute resolution in construction contracts which are used in combination with arbitration clauses to resolve time-sensitive disputes which arise during the execution of the contract.
A Dispute Board may be set up on the commencement of the project or when a dispute arises. The appointment of the members of the Dispute Board is by the agreement of the Parties. The Dispute Board may sit periodically to acquaint itself with the site conditions and the progress of the work and performs two essential functions: (1) quick resolution of disputes; and (2) preventing disputes which can be resolved by simple discussions and negotiations. Subject to the terms of the agreement between the parties, the decision of the Dispute Boards is binding unless it is challenged in a subsequent dispute resolution process (either arbitration or litigation).
However, certain large Indian corporates have developed a differing practice. Their standard contracts provide that resolution of disputes by a Dispute Board shall be an alternative to arbitration. The members of the Dispute Board shall be nominated by one Party and the decision by the Dispute Board shall be final and binding. The amendment to the Arbitration Act brings about a fresh and welcome change to the legality of such contractual provisions, particularly where one party can choose the arbitrator, more often than not, from amongst its own employees leading to considerable bias. While the parties can still choose a dispute resolution clause where the dispute shall be adjudicated by a Dispute Board instead of arbitration, the Arbitration Act now provides that employees/directors of parties shall be ineligible for appointment as arbitrators.
Another mode of dispute resolution which can be used in combination with either arbitration or litigation is Expert Determination. This is a novel mode of dispute resolution ideally suited to variation claims or claims for extra work. It essentially allows a technical expert to decide disputes which arise during the execution of the contract and give a quick and binding decision. The parties can decide by agreement whether or not the decision of the expert can be challenged in a subsequent, final dispute resolution process (either arbitration or litigation). In any case, Expert Determination allows disputes to be readily adjudicated in the first instance thereby preventing delays in the project and avoiding cash-crunch.
Thus, parties have a suite of dispute resolution mechanisms available to them and the construction contract should be drafted to best address the needs of the projects.
It is pertinent to mention herein that litigation is no longer an unattractive option for dispute resolution in light of the recently enacted Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (Commercial Courts Act) which came into force with effect from 23 October 2015.
The aim of the Commercial Courts Act is to simplify and speed-up the adjudication process with respect to commercial disputes where the value of the disputed subject matter is Rs. 1 crore (Rs. 10 million) or more. In line with this objective, the act provides for – (1) constitution of Commercial Courts in all states and Commercial Division and Commercial Appellate Division in the High Courts; and (2) amendments to the Civil Procedure Code of India to fix time-lines for conclusion of the case. For example, under the new act the court must hold a case management hearing to frame issues and establish time-lines and should further pronounce judgements within 90 (Ninety) days from the conclusion of arguments.
Thus, an attempt has been made to re-vamp the Indian judicial system and ensure disposal of cases fairly, expeditiously and at a reasonable cost to the parties. However, in light of the concurrent amendments to the arbitration regime, the latter still is a more effective mechanism for dispute resolution in the construction sector although it is certainly advisable that arbitration be used in combination with other mechanisms to make it more successful. For example, the FIDIC standard form of contract 1999 provide for the establishment of a Dispute Adjudication Board and negotiations as part of the process in combination with arbitration for resolution of disputes
Thus, the ideal approach to resolve disputes in the construction sector would be to have a dispute resolution system in place which is both preventive and adjudicatory in nature and use the following strategies to resolve dispute: avoidance, negotiation, collaboration and adjudication. The dispute resolution system incorporated in the contract should be tailored to suit the requirements of the project and meet the expectations of the parties. It should be sufficiently comprehensive in nature and cost effective, addressing the different kinds of disputes that may arise and should provide for early intervention and timely redressal.
A system designed in such a way would allow parties the flexibility to choose the most appropriate mechanism to resolve the dispute and will prevent one party from holding the other ransom. Hence, careful consideration should be given to the potential disputes and the method of resolving them.
Having analysed the preferred modes of dispute resolution available to the construction sector, it is emphasised that an exhaustive dispute resolution system for construction contracts will necessarily be multi-tiered and care should be taken to ensure that it is well drafted and not a source of further dispute.
1 Sudip Mullick is a Partner, Yigal Gabriel is an Associate Partner and Niharika Dhall is an Associate with the Construction Practice at Khaitan & Co.
2 Global Construction Disputes Report 2015, Published by Arcadis Construction Claims Consulting.
3 Author's view.
4 Law Commission Report No. 253, January 2015.
5 Amendment to Section 2(1)(e) of the Arbitration Act.
6 Amendment to Section 17 of the Arbitration Act.
7 Amendment to Section 9 of the Arbitration Act.
8 Insertion of new Section 29A in the Arbitration Act.
9 Insertion of new Section 31A in the Arbitration Act.
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