ARBITRATION IN CONSTRUCTION INDUSRTY
The construction projects volume is growing rapidly all around the globe majorly in countries like India, China and US. This industry is contributing much towards the GDP of the country because this industry is linked with other industries involving people with various skills. In this article I have laid my emphasis on the benefits of arbitration over litigation since the need of the hour is the speedy disposal of the cases. None of the nations can afford the cases related to the construction industry become stagnant since it would lead to a stagnant economy, The reasons and causes for the disputes are numerous. In India, Arbitration is governed by the Arbitration and Conciliation Act 1996 which has been amended in the year 2005. The amendment has led to a remarkable development in the adjudication of construction related disputes. The Construction Industry Development Council, India (CIDC) in collaboration with the Singapore International Arbitration Centre (SIAC) has set up an Arbitration Centre, “The Construction Industry Arbitration Council”, with an objective of providing an institutional mechanism for resolution of construction and infrastructure related disputes. A recent development by the Cabinet Committee on economic affairs regarding approval of certain initiatives by the NITI Aayog has been welcomed. Lastly, a comparative study of states like US and UK shows us the growing inclination towards arbitration for resolving a construction dispute. Every nation look towards developing its nation and that can never be achieved with a stagnant or declining GDP and this problem can only be resolved by speedy and efficient disposal of construction disputes.
ARBITRATION IN CONSTRUCTION INDUSRTY
The Price Water Houses Coopers (PwC) has sponsored a new report namely Global Construction 2030 which forecasts that the volume of construction output will grow by 85% to $15.5 trillion worldwide by 2030, with three countries, China, US and India , leading the way and accounting for 57% of all global growth. The construction market in India will grow almost twice as fast as China to 2030, providing a new engine of global growth in emerging markets. India’s urban population is expected to grow by a staggering 165 million by 2030, swelling Delhi by 10.4 million people to become the world’s second largest city.1 The
Construction sector has been contributing around 8 per cent to the nation’s GDP (at constant prices) in the last five years (2006–07 to 2010–11). GDP from Construction at factor cost (at constant prices) increased to 3.85 lakh crore (7.9 per cent of the total GDP) in 2010–11 from 284798 crore (8 per cent of the total GDP) in 2006–07.2 Forecasts for the market size of construction industry for the Twelfth Plan period indicate that that the aggregate output of the industry during the period 2012–13 to 2016–2017 is likely to be 52.31 lakh crores increasing from 7.67 lakh crores in 2012–13 to 13.59 lakh crores in 2016–17.3 These figures show us that the Indian construction industry is a vital indicator of growth and development as it creates job opportunities and increases production capacity in the country. The sector is labour-intensive and including indirect jobs, provides employment to more than 35 million people.4 The construction industry has noticeably played a very significant role in the development of nations but it since every action has a reaction, this industry has been witnessing commercial disputes as well. The construction projects now-a-days have become very complex. They include a hierarchy of people and a numerous number of individuals involving with different skills and expertise. The activity of so many numbers of individuals is more likely to cause the inevitability of certain disputes and disagreements since it involves trade in various trade and profession. The construction industry is one of the fastest growing Construction Industry Internationally and the second largest employer in India.5 An analysis of the 1174 projects at the end of September 2016 shows that 333 projects were running behind their original schedule. The time overrun in these projects ranges from 1-261 months.
Global Construction 2030- a global forecast for the construction industry to 2030 by Pricewaterhouse Coopers
Twelfth Five Year Plan (2012–2017) Economic Sectors, Volume II, Chapter 19,”Other Priority Sectors”
“COUNTRY REPORT INDIA” Construction Industry Development Council, 21st Asia Construct Conference, 24th November 2016-25th November 2016, Tokyo, Japan.
The cost overrun in the delayed projects has resulted 20.95% increase in original cost. The anticipated cost for all delayed projects together is 6, 47,487.80 crore.6 Thus it can be reasonably presumed that time overrun would lead to conflict and which shall ultimately lead to disputes. Thus it is vitally important and exigent to elucidate the quandary in order to resolve the construction related disputes efficiently and economically
There are basically two modes for adjudicating any dispute namely litigation in the courts of justice, b) arbitration. DRBs and arbitrations are most commonly used in construction disputes. Invariably every construction contract has an arbitration clause. DRBs have also become common especially after the World Bank made it mandatory in all high value contracts funded by them. Arbitrations are considered essential in India due to the inordinate time taken in normal civil litigation (anything from 20-25 years) for ordinary civil matters to reach resolution (through various stages of appeals etc). Arbitrations got a boost when India adopted a modern pro arbitration statute in January, 1996 based on the Model Law. 7 The most favoured mode of dispute resolution in the construction industry is arbitration for three fundamental reasons: (a) efficiency of time; (b) confidentiality; and (c) control over the process of dispute resolution.8 Construction is the second largest economic activity next to agriculture. Broadly construction can be classified into 3 segments – Infrastructure, Industrial and Real Estate. The importance of smooth functioning of this industry cannot be overstated as construction projects are the cutting edge of development and provide industrial and social infrastructure.9 Dispute being a very common phenomenon is such industry, it is very important to have proper dispute resolution mechanism in place to prevent and resolve disputes. Successful implementation depends largely on carrying out the constituent tasks in a proper sequence, and deploying the resources to the best advantage. All measures like land acquisition, funding position, law and order problems should be taken care, well in advance before commencing the project so that the disputes at later stage can be avoided. Many projects suffer from inadequacies in project formulation and implementation, leading to time and cost overruns, and affect the viability of the projects. In addition, improper organisation due to lack of coordination, communication, and effective management result in disputes and hamper the overall progress. To prevent disputes, a systematic study is required at the
Annual Report, 2016-17, Contribution of different sectors to Gross Value Added in 2015-16, Government of India Ministry of Statistics and Programme Implementation
Sumeet Kachwaha, ADR in Construction India, IBA International Construction Projects Committee
Dispute Resolution in the Construction Industry, Sudip Mullick, Partner, Yigal Gabriel, Associate Partner and Niharika Dhall, Associate with the Construction Law and Disputes Practice at Khaitan ; Co.
Benefits of Institutional Arbitration and their role in Construction Industry, Article by CA. Rajkumar S Adukia
beginning of the project in all aspects and a detailed procedure is to be adopted related to the projects.10
There can be several disputes occurring in the construction industry. They can be a) Construction Related Causes of Dispute, b) Financial/Economical Causes of Disputes, c) Management Related Causes of Disputes, d) Contract Related Causes of Disputes.11 The factors contributing to a dispute can be many namely Errors in drawings, Defective specifications, Improper Contracting practices such as Contract familiarity/client contracting procedures, Bid development errors such as Estimating error Payment and budget, Performance, Delay and time, Lack of Quality, Lack of Administration process , Misunderstandings between client, contractor, owner etc., Unpredictability, Unrealistic expectations by parties, Ambiguous contract documents, Poor communications between project participants, Lack of team spirit, Failure of participants to deal promptly with changes, unexpected outcomes, Bid review of contracting officers, Faulty negotiation procedure of contracting officers, Knowledge of local statues of contracting officers, Scheduling of contracting officers, Change order of project management procedure, Pre-award design review of project management procedure, Pre-construction conference proceedings of management procedure, Quality assurance of project management procedure, Faulty Scheduling of site management process, Improper Project management procedures, Lack of quality control.12
The global economy has created an environment in which construction firms are forced to bid for projects at or below minimum profit levels. At the same time, owners are demanding contractors to execute complex projects without incorporating the details in contract documents. This has placed an additional burden on the individual contractor to construct increasingly sophisticated projects with limited capital resources and with lower quality. Under these circumstances, it is not surprising that the number of disputes within the construction industry continues to increase at an alarming rate.13
The process of arbitration being privates, informal, quick, less expensive and the procedure being less formal as compared to litigation along with the process of arbitration even has a limited evidence process as compared to the complex litigation process makes it more
“A REVIEW ON CAUSES OF DISPUTES IN CONSTRUCTION INDUSTRY”, International Journal Of Advanced Research In Engineering, Science And Management, ISSN : 2394-1766
preferable when it comes down to chose between the two process. With an objective of providing an institutional mechanism for resolution of construction and infrastructure related disputes, the Construction Industry Development Council, India (CIDC) in collaboration with the Singapore International Arbitration Centre (SIAC) has set up an Arbitration Centre in India called the Construction Industry Arbitration Council (CIAC). CIAC is a Registered Society with its headquarters in New Delhi. The Council was inaugurated on 15th November 2006 by then Hon’ble President of India, Dr. APJ Abdul Kalam14. Arbitration under the auspices of the CIAC will have the following features:
Speed; The CIAC Arbitration Rules provides for tight timelines for appointment of arbitrators and for rendering of the award. Under the CIAC Arbitration Rules, the arbitrator will have to make a reasoned award within 45 days from close of hearing.
Trained Arbitrators: The panel of arbitrators of CIAC consists of professionals from the construction industry as well as the legal fraternity. They have gone through formal training before being admitted to the panel. As on today, approx 140 arbitrators have been trained and certified in arbitration workshops conducted in India and Singapore and have been admitted to the panel.
Strict Code of Ethics for Arbitrators: An arbitrator is appointed to a particular case only after availability and conflict of interest checks are made. Arbitrators appointed are reminded in each assignment, of the strict Code of Ethics under which they are to conduct the arbitration.
Transparent management of arbitrator’s fees: To assist parties know their financial exposure to the costs of arbitration, CIAC will charge parties based on a published Scale of Fees.
Monitor the progress of the case: The Secretariat of CIAC will monitor the progress of the case throughout the arbitration.
Arranging facilities and services for hearing: The Secretariat would be able to arrange
Rooms for arbitration hearings. The Secretariat would also be able to arrange
transcription, translation and interpretation services. Audio and video recording facilities can also be arranged.15
The CIAA Model Arbitration Clause states that “”All and any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in New Delhi or any other place in India* in accordance with the Arbitration Rules of the Construction Industry Arbitration Association (;CIAA Arbitration Rules;) for the time being in force at the commencement of the arbitration, which rules are deemed to be incorporated by reference in this clause.” 16 If the matter is domestic (between Indian parties) then New Delhi or any other place in India can be chosen. If the matter is international (between an Indian party and foreign party or between two foreign parties) then Singapore is to be chosen.17 In India there is an all inclusive legal scheme to conduct arbitrations i.e. Arbitration and Conciliation Act, 1956 to conduct arbitrations irrespective whoever the party maybe a domestic or a foreign element. Before the 2016 amendment to the Arbitration Act earlier this year, in construction contracts for large projects particularly with public sector undertakings (PSUs), the owner tended to control the arbitration proceedings entirely. The PSUs generally exercised this control through one-sided arbitration clauses in the contracts. Under the Arbitration Act, the parties are free to agree on the procedure for the appointment of the arbitral tribunal.18 In the case of ACE Pipeline Contracts (P) Ltd v. Bharat Petroleum Corporation Ltd19, the arbitration agreement read: “Any dispute or difference of any nature whatsoever or any claim, cross-claim, counterclaim or set-off of the Corporation against the vendor or regarding any right, liability, act, omission or account of any of the parties hereto arising out of or in relation to this agreement shall be referred to the sole arbitration of the Director (Marketing) of the Corporation or of some officer of the Corporation who may be nominated by the Director (Marketing).20 4 Based on this, the arbitration agreements with PSUs would provide that the managing director or employee of one of the parties to the dispute would be the arbitrator.
The courts of India prior to this amendment had time to time upheld the validity of such clauses. In the case of Indian Oil Corporation Ltd. ;Ors.Vs.Raja Transport Pvt. Ltd21.
Section 11(2) of the Arbitration and the Conciliation Act,1956.
Bharat Petroleum Corporation Ltd and Ace Pipeline Contracts Private Ltd (2007) 5 SCC 304.
(2009) 8 SCC 520 Indian Oil Corporation Ltd.;Ors.Vs.Raja Transport Pvt. Ltd
Which was reaffirmed in the case of Denel (Proprietary Limited) v Bharat Electronics Ltd. ; Anr 22, it was held that the fact that the named arbitrator is an employee of one of the parties is not ipso facto a ground to raise a presumption of bias or partiality or lack of independence on his part. There can however be a justifiable apprehension about the independence or impartiality of an employee arbitrator, if such person was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other Department) to the officer whose decision is the subject-matter of the dispute. Thus, heads of departments and directors, not associated with a contract could have been appointed as arbitrators. This has been held in a number of decisions of the Court; inter alia, Ladli Construction Co. (P) Ltd v. Punjab Police Housing Corporation Ltd23, Secy. to Govt., Transport Deptt v. Munuswamy Mudaliar24, S. Rajan v. State of Kerala.25
However this position has undergone a significant change with the 2016 amendment to the Arbitration Act (amended Arbitration Act) which, inter alia, provides that notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule (of the amended Arbitration Act) shall be ineligible to be appointed as an arbitrator.26 Thus, by virtue of the Seventh Schedule, employees, consultants, advisor, managers, directors or other persons who are part of the management of a party to the dispute are disqualified to be appointed as an arbitrator irrespective of what the arbitration agreement may provide.27 The Delhi High Court in a recent landmark judgement has confirmed this position.
Though this position has undergone a drastic change with the introduction of the 2016 amendment which provides that notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule (of the amended Arbitration Act) shall be ineligible to be appointed as an arbitrator.28
Arbitration is perhaps the most commonly used mechanism for settlement of technical disputes in a construction project. It is a quasi-judicial process to the extent that legal protocol
Arbitration Petition No. 16 OF 2009, Supreme Court of India.
Ladli Construction Co. (P) Ltd v. Punjab Police Housing Corporation Ltd (2012) 4 SCC 609,
Secy. to Govt., Transport Deptt v. Munuswamy Mudaliar 1988 Supp SCC 651
S. Rajan v. State of Kerala (1992) 3 SCC 608.
Section 12(5) of the amended Arbitration Act
Rule 1 ; 12 of the Seventh Schedule of the amended Arbitration Act.
Section 12(5), THE ARBITRATION AND CONCILIATION (AMENDMENT) ACT, 2015
is largely observed, and it is important that the arbitrator, who basically acts as a judge, understands legal procedures. In India, the Arbitration and Conciliation Act, 1996, provides the legal framework for the arbitration process. In principle, collection and interpretation of evidence, examination and cross-examination of witnesses, etc., are some examples of essentially legal matters, which an arbitrator needs to have a sound understanding of. However, a basic belief in principles of natural justice and a practical approach are a hallmark of a successful arbitrator. He should be able to guide and provide a direction to the proceedings, which could be quite tough, especially when the parties to the dispute are represented by professional lawyers. In fact, the law has now added a new dimension to the arbitration process by empowering the arbitrators to conciliate and help the parties in arriving at a fair compromise or an equitable settlement of the case before him. As far as the number of arbitrators is concerned, much like the judicial system, technical disputes can also be resolved by single arbitrators, or a panel of several arbitrators, and though the parties are free to determine the number of arbitrators, it should be ensured that the number is odd, so that a situation of a tie? in an award is preempted. Often, one arbitrator each is nominated by the contractor and the owner, and these individuals together choose a third colleague arbitrator, to complete the constitution of a bench of arbitrators.29 The most careful planning cannot always prevent disputes and this step is the last chance to resolve a dispute before resorting to a binding settlement.30 The disputes in the construction projects in India are of utmost concern since they are directly related to the development of the country. An effective claim management process is essential to ensure that any contractual claims arising are dealt with in a way that is fair to each involved party.
A recent development was the approval of series of initiatives by the Cabinet Committee on economic affairs chaired by the Prime Minister Shri Narendra Modi on 31st August, 2016 with an intention of reviving the construction sector in India. The proposal was put forward by the NITI Aayog and was approved by the Cabinet Committee on Economic Affairs It was the payment of 75% of the arbitral award to an escrow account against margin free bank guarantee by the government agencies in cases where the arbitral award is pending. This account may be used for the repayment of bank loans and to meet the requirements of an ongoing construction project. This measure would certainly stimulate the development process in the construction industry. Government Departments and PSUs have also been
Management of Claims and Disputes in Construction Industry, International Journal of Science and Research ISSN (Online): 2319-7064
instructed to transfer cases under arbitration to the amended Arbitration Act which has an expedited procedure, with the consent of the contractors. In the long run, other measures are also under consideration, including changes to bid documents and model contracts, and increased use of conciliation. NITI will also examine the idea of creating ;claim take out funds; financed by private sector investors, while the Department of Financial Services will examine a suitable scheme for addressing stressed bank loans in the construction sector. 31
The move comes in the backdrop of the need to have a slew of short-term and long-term initiatives to address the issues ailing the construction sector. The construction sector is a major contributor to economic activity accounting for about 8% of GDP. In recent years, the construction sector has been affected by the large number of projects which got stalled during the period of stagnation between 2011 and 2014. The banking sector also has a large exposure, studies have shown that a key factor behind the difficulties facing the construction sector is the pendency of claims from Government bodies. An estimated Rs. 70,000 crores is tied up in arbitration. Over 85% of the claims raised against Government bodies are still pending of which 11% is pending with the Government agencies, 64% with arbitrators and 8.5% with courts. The average settlement time for claims is estimated at more than seven years.32 The construction sector has been facing several challenges leading to decline in overall development and growth.
Dispute Review Boards (DRB) provide the construction industry with a mechanism to help construction projects to predict and handle potential construction problems before they occur, to provide advisory opinions on questionable or disputed matters, and to provide an alternate dispute resolution process to settle any disputes that cannot be settled between the parties to the construction contract. DRBs are currently used all around the world in the construction of roads, railroads, tunnels, dams, bridges and other major construction projects. It is only in recent years that the DRB has been used in the construction of large commercial buildings such as manufacturing facilities, shopping centres, hotels, etc. Because the construction industry has seen the many benefits, DRBs are now being used for the construction of small commercial projects and large residential houses. If the DRB is empowered with the ability to render final and binding decisions upon the parties to the construction project, the project is virtually guaranteed to continue with a minimum amount of lost time and money that would normally be encountered when arbitration or litigation is required to settle disputes.
Press Information Bureau, Government of India. Cabinet Committee on Economic Affairs (CCEA), 31-August-2016
CDRS recommends the DRB having the authority to make final and binding decisions, which is reflected in the following information.33
UNITED KINGDOM: Hamish Lal, construction partner at Akin Gump Strauss Hauer ; Feld, suggests that while statutory adjudication and the existence of the Technology and Construction Court (TCC) has made arbitration less common on UK projects, the use of arbitration on international projects has increased significantly.34 The ADR banner has been increasingly adapted and may be used to describe three distinct movements. First, the development of a new professional group seeking to institutionalise party supported negotiations. These new professional groups are essentially non-lawyers who advocate the use of mediation or conciliation in dispute resolution. The second distinct movement could be described as the lawyer’s counter attack or the remodelling of litigation practise. This movement may include such things as the “mini-trial” which seeks to ensure that lawyers are included as part of the mediation process. Finally, the courts have entered the ADR arena by attempting to regulate the pathway to trial and also by offering court annexed ADR.35
Respondents perceive negotiation as the most effective dispute resolution technique in terms of time, costs, satisfaction, minimisation of further disputes, etc. Second, respondents considered that they were most able to answer the questions relating to negotiation, slightly less confident in the areas of arbitration and litigation, and particularly unsure about mediation processes, expert determination and adjudication.36 This clearly indicated the growing scope of arbitration and other ADR methods in UK for the adjudication of industry related disputes.
UNITED STATES: There are two basic methods to resolve disputes in the United States legal system i.e. a) litigation in the court system, b) arbitration before a neutral person or panel, chosen by the parties to hear and determine the dispute. Recently, more and more construction disputes are being submitted to arbitration, where the arbitrators are often more familiar with the construction process and construction related issues, than judges. In United
Alternative Dispute Resoultion in the UK Industry, 14th Annual ARCOM Conference, 9-11 September 1998, University of Reading. Association of Researchers in Construction Management, Vol. 2, 428-37
States, the public policy has developed very strongly which is favouring arbitration.37 Florida courts have ruled that arbitration is the favoured means of dispute resolution as an alternative to litigation.38 Any controversy or claim arising out of or relating to the contract or breach thereof, shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any Court having jurisdiction.39
Lapidus v. Arlen Beach Condominium Association, 394 So.2d 1102 (Fla. 3rd DCA 1981).
Roe v. Amica Mutual Insurance Company, 533 So.2d 279 (Fla. 1988)
Arbitration in the Construction Industry, Stuart H. Sobel (March 1996)
The construction industry not only in India but all around the globe is the major contributor towards the overall development of the nation since it involves and employs workers pertaining to various knowledge and skills. It marginally contributes towards the growth of GDP of a country. Since construction being a very vital industry and involves a huge investment of money in it, a country cannot afford much delay in the adjudication of cases related to construction disputes. In the 21st century, the construction related disputes are needed to be resolved at the earliest otherwise it may lead to stagnant construction projects along with the declining economy of the country and the bank flooded with the recovering of loan amount. The slow and cumbersome process of litigation in the courts imposes a big threat to the speedy disposal of the cases in the construction industry due to which the countries are resorting to alternative methods of resolving the disputes. A detailed analysis of the Indian scenario along with the comparative study of United Kingdom and United States even shows us the shifting of the culture of resolving the disputes towards arbitration and mediation and other ADR methods. This is majorly happening because of the speedy, efficient, cost and time effective and less formal process of the ADR methods. A very effective feature of the Arbitration Act is that the arbitrator can encourage settlement of the dispute between the parties during any stage of the arbitration.40 If the parties reach a settlement and so desire, the terms of such settlement can be recorded in an award of the tribunal.41 This technique has become popular the world over and is utilised as a helpful tool for dispute resolution.
Thus, Arbitration is very helpful in resolving complex construction disputes and it is a vital decision which can reduce the time and cost of such long prevailing disputes and can determine a dispute in a much better way.
Section 30(1) of the amended Arbitration Act.
Section 30(2) of the amended Arbitration Act