This article is written by Nancy Patel, pursuing Certificate Course in Arbitration: Strategy, Procedure and Drafting from Lawsikho.com. Here she discusses “Construction Arbitration: How is it Different from Generic Arbitration”.
Arbitration is a method of dispute resolution is favoured by the disputant parties to resolve various commercial and civil disputes, the construction sector is one such sector, where arbitration can prove to be beneficial to all stakeholders taking into account the complexity involved in such matters. The Construction Sector is mainly divided into three segments a) Infrastructure, b) Residential and c) Commercial construction.
Anatomy of Construction Dispute
Construction disputes are more complex (technically as well as factually). Typically construction disputes occur between the owner and the main contractor, subcontractors, sub-subcontractors, architects, end purchasers and design professionals.
The factors that contribute to the construction dispute are as follows:
- Failure to administer the contract due to ambiguous terms of the contract or technical issues, force majeure;
- Employer/contractor/subcontractor failing to understand their obligation under the law or incomplete design ;
- Organizational behaviour and culture;
- Poorly drafted contract, errors in contract document or incomplete claims.
Construction Arbitration vis a vis Generic Arbitration
Unique Nature of Dispute
Construction disputes are unique due to the involvement of multiple parties. Some of these parties may not be directly connected with the dispute but are nonetheless affected parties. The life of a construction project may be spread over a few years. During a project cycle, a large volume of data will be generated which will need to review and analyzed at the time of the dispute, this may not be the case in generic arbitration.
Construction arbitration involves dispute(s) arising from violations of specifications for materials and workmanship; Violations of terms of the agreement; Interpretation and/or application of contractual provisions; Commencement time and delays; Maintenance and defects; Payment defaults of employer or contractor; and Changes in contract costs.
Calculating the quantum of Damages
In generic arbitration, the parties generally pre-estimate the loss and contract clauses provide how damages are to be calculated or there is pre-estimate amount decided by the parties, however in construction arbitration the issues range overtime schedule, cost, reasons of delay, technical and expert opinion, laboratory experiments of faulty equipment, defects in designs, etc, so to decide damages or compensation, Arbitrator must take help of expert surveyors and specialist.
Multiple Stakeholder in Construction Disputes
There is a multitude of parties involved in the construction project, therefore, delays, inefficiencies; defects can be a result of several participants such as owners, architect, designer contractors, sub-contractors, etc., along with their separate contractual agreement, each having its dispute resolution provisions. To achieve a universal resolution of the entire dispute, parties may want to join all the interested parties into a single proceeding, so an award can be apportioned appropriately and inconsistent decisions avoided.
Very High Stakes are involved in the Construction Business
The high stakes involved in most of the government contracts and other private infrastructure projects the importance of arbitration for dispute resolution is very apparent. It is estimated that a roughly 70000 crore is stuck in Arbitration and the NHAI itself 22,000 crores is held up in arbitration.
A template clause will not aid in the effective resolution of construction Arbitration, therefore as compared to generic arbitration, however in case of Construction Arbitration all the aspect of the construction disputes that may arise in the lifecycle of a project, differing in size, nature, and complexity. The clause could waive off certain rights like oral examination, or restriction on several witnesses to avoid delay the whole process, as compared to generic arbitration, in construction and infrastructure arbitration the use of oral witness is very low. Therefore arbitration clause should be drafted to suit the needs of the specific situation encountered by the parties. Construction Arbitration involves deciphering of complex contracts and documentation. A lot of data in the form of multiple agreements, cost accounts, emails, schedules, design, statutory permissions, court matters, minutes, etc., are required to recreate the timeline of events, the analysis of which is time-consuming and cumbersome.
It involves a complex point of law and procedure
Decisions in disputes are governed by substantive law and terms of the contract; fairness and natural justice which are for rules of conduct of the arbitration. Law should permit arbitration to be inquisitorial rather than adversarial to be more fair and quick. In the Middle East, for example, there are several national law requirements, some unstated, with which compliance is mandatory if an award is to be enforceable.
In generic Arbitration, a retired judge or senior lawyer may be adequate as an Arbitrator, but not in case of Construction Arbitration. Given the complexity of the dispute, an Arbitrator must be well versed with the industry, construction contract, cultural and local environment, knowledge of relevant laws and legal precedents, legal systems, strong leadership quality in the management of the case, tech-savvy, weekday availability. Tribunal should be balanced as we have seen that there are many stakeholders involved in the matter.
Experts requirement will be inevitable
Thorough and convincing expert testimony can help a party prevail on any of the hosts of issues that typically arise in construction disputes. Experts in construction matters are often used to decipher engineering standards, analyze schedule delays, perform forensic accounting and find the root causes of defects, market conditions for loss of revenue claims to weather patterns for claims of force majeure.
Institutional Arbitration vis-a-vis Ad Hoc Arbitration
A lack of framework to conduct ad hoc arbitration in an impartial and time-bound manner makes the process no better than litigation. In a generic arbitration, parties may be able to resolve their dispute smoothly but looking into the complexity of construction arbitration an institutional arbitration is favoured as there is a cap on cost, the surety that arbitrator is neutral and all the information is kept confidential a promise and finally minimum 12 to 24 months. It gives guaranteed resolution; all that is required is that a clause is added in the contract that all disputes will be settled through a particular arbitration centre. E.g. Construction Industry Arbitration Council, Nani Palkhiwala Arbitration Centre, and London Court of International Arbitration India, Singapore International Arbitration Centre.
Parties to Arbitration cannot wait for a long period for eventual remedy as there will be a number of factor including financial burden. There are times when parties to construction cases will need such interim measures to maintain the status quo until the tribunal provides the award based on the full hearing on the merits. In Generic arbitration, the parties may not insist on interim measures, however, due to high stake matters, it becomes essential to give interim reliefs. The Bombay High Court has recently granted ad-interim relief to a Chinese heavy industry giant. He has claimed Rs. 100 Crores as unpaid dues against the purchasers to whom it sold the machinery.
Global practices need to be developed and institutional mechanism needs to be in place to adequately address the multitudes of issues arising out of Construction Arbitration such fast track arbitration, interim relief, procedural formalities, the applicability of inquisitorial law and support of legislature and judiciary as the problems of Construction Arbitration is very different from Generic Arbitration.
- Construction Industry Arbitrations: Recommended Tools and Techniques. (2019). [online] Paris, France: International Chamber of Commerce (ICC). Available at: http://www.iccwbo.org [Accessed 25 Jul. 2019].
- Strengthening Arbitration and its Enforcement in India – Resolve in India (online), New Delhi: Niti Ayog
- Arbitration Act: Bombay HC relief to Chinese Manufacture under Part I : Bar & Bench. [Accessed 24 Jul.2019]
- Benefits of Institutional Arbitration and their role in Construction Industry: CA Rajkumar Adukia
- Effective Handling of Construction & Infrastructure Arbitration in India (2015) (online), New Delhi: Law Senate. Available at: http://www.lawsenate.org [Accessed 25 Jul. 2019].
- Shaikh, S., Magar, D. and Parkar, F. (2019). Claims and Disputes in Construction Projects. International Journal for Research in Applied Science & Engineering, [online] 4(XI), pp.252-257. Available at: http://www.ijrset.com [Accessed 25 Jul. 2019].
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