This article is written by Mohammad Khurshid Anwar, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.

Drafting a Dispute Resolution Clause in Construction Contract

Introduction 

Dispute is a part of human life, it has been happening since the beginning of humanity. Probability of happening a dispute is more when two or more parties are bound by a commercial relation through an agreement. Therefore, all the agreements have dispute resolution clauses. These dispute resolution clauses can be a simple clause referring any dispute to court in accordance with prevalent law; or it can be a complex clause where stages of dispute resolution can be incorporated in an agreement in compliance with related national or international Act and regulation. 

Construction contracts where lots of activities happen under a single contract is more prone to disputes and requires careful drafting of dispute resolution clauses. It is in favor of parties to the contract that a smooth dispute resolution mechanism is in place, in order to save time, cost and effort required behind dispute resolution. Sometimes the cost of disputes can become greater than the dispute itself. 

Construction contracts are being entered into for centuries and so is the improvement of the dispute resolution mechanism. Almost till the first quarter of 20th century any construction dispute was settled through court. These disputes used to consume significant time. With passage of time a more fast and innovative way of dispute resolution started coming into existence first it was arbitration which also used to take significant time, then came another process of mediation and adjudication which started serving dispute resolution in lesser time. 

Drafting of any dispute resolution clause requires consideration of penitential dispute which can erupt according to the nature of contract/agreement in hand, prevailing acts for dispute resolution which differ from country to country or international acts which are accepted by parties.

This article will concentrate on the mechanism of dispute resolution and factor to be considered while drafting dispute resolution clauses in construction contracts.

Processes of dispute resolution

• Amicable Settlement: it is the most common form of dispute resolution, if it happens initially during the start of dispute, dispute can be resolved without any additional cost. However, this option is applicable at any stage of dispute resolution.
  1. Representative: Generally senior management of parties are involved.
  2. Duration: not fixed, depending upon both the parties.
  3. Basis of dispute resolution : mutual understanding, it can be within the periphery of agreement outline or any other agreement between parties.
  4. Act/Regulation/ Agencies: applicable law.
• Mediation: it is a non-adversarial process or say a collaborative process which invites both the parties for a dispute resolution. A mediator is chosen by the parties who is generally a domain expert, sometimes if the parties are not satisfied with one mediator then they can go for two mediators or more. It is non-binding, without prejudice and is just an attempt to obtain expert opinion in the field, if expert opinion is acceptable to parties then the issue can be resolved, else parties can go for Arbitration/Adjudication or Court in accordance with the agreement in hand.

Indian Chambers of Commerce provide rules for Mediation for international cases. For adopting mediation as a procedure parties shall agree for the procedure, there should be well written procedure on selection of Mediator, timeline to be followed by each party. What should be done in case of success and what should be done in case parties fail to achieve dispute resolution. 

• Adjudication: Adjudication is a binding dispute resolution procedure if not challenged in time. It is generally used for expedited dispute resolution processes. It is most common in England and it is compulsory in England for a construction dispute to go through the Adjudication process, since it is enforceable by Law of England. It is another fact that a contract can have supply items in addition to construction activities. The adjudication will not apply for supply item dispute and is valid for construction disputes only. 

For accepting adjudication as a dispute resolution process, the process is similar to any other dispute resolution process. The contract shall specify the mechanism of appointing an Adjudicator; the boundary of operation in which Adjudicator will act for resolving any dispute; timeline for dispute resolution by adjudication; mechanism of implementation of accepted resolution given by Adjudicator and in case of non-acceptance of dispute resolution option available to each party to go for higher dispute resolution method like Arbitration or Court.

• Conciliation: Similar to Mediation or Adjudication Indian law permits Conciliation under THE ARBITRATION AND CONCILIATION ACT, 1996. The settlement through Conciliation is not binding if not accepted by parties. 
• Arbitration: this is the most common way of dispute resolution and is internationally accepted through 1927 Geneva Convention and later 1958 New York convention when United Nation. THE ARBITRATION AND CONCILIATION ACT, 1996, is based on United Nation recommendation to adopt UNCITRAL Model Law on International Commercial Arbitration. Here an Arbitral tribunal is formed consisting of one Arbitrator or 3 Arbitrator. Since arbitration is a well regulated process both at nation and international level most countries have their own Arbitration process. 

In this process the court act as administrator and the arbitral award is binding on both the parties subject to conditions :

• Appointment of Arbitrator has been followed in accordance with the act.
• Arbitration procedure has taken place in accordance with contractual provision in hand.
• Arbitration award granted by Arbitrator is within the jurisdiction of Arbitration procedure.

For a good drafting of dispute resolution clause one should be aware of above procedure and the procedure the parties wants to follow. The next section will concentrate on drafting of dispute resolution clauses.

Drafting of Dispute Resolution Clauses 

Dispute resolution clauses in any contract should be comprehensive and shall be in line with applicable Act or Rule being followed by the parties. All the portions where there are chances of dispute shall be linked to dispute resolution clause. All the entities involved in dispute resolution shall be defined like Dispute, Dispute Resolution, Dispute Resolution Board, Arbitration Tribunal and other relevant terms as required. Example: FIDIC (Red Book) Condition for Contract for Construction proposes following definition for DAAB and DAAB agreement:

“DAAB” or “Dispute Avoidance/Adjudication Board” means the sole member or three members (as the case may be) so named in the Contract, or appointed under Sub-Clause 21.1 [Constitution of the DAAB] or Sub-Clause 21.2 [Failure to Appoint DAAB Member(s)].

“DAAB Agreement” means the agreement signed or deemed to have been signed by both Parties and the sole member or each of the three members (as the case may be) of the DAAB in accordance with Sub-Clause 21.1 [Constitution of the DAAB] or Sub-Clause 21.2 [Failure to Appoint DAAB Member(s)], incorporating by reference the General Conditions of Dispute Avoidance/Adjudication Agreement contained in the Appendix to these General Conditions with such amendments as are agreed. 

However, dispute resolution clauses should make specifically clear the mechanism which parties can follow. Most of the countries have their dispute resolution acts in place. In India it is THE ARBITRATION AND CONCILIATION ACT, 1996, at international level International Chambers of Commerce (ICC), and UNCITRAL. Parties can also choose which country law should be followed depending upon the location of the project. A typical dispute resolution clause should have the following: 

• A clause giving way for amicable settlement like the one below:

 “Any dispute in connection with or arising out of Contract, including any question of its existence, validity or termination (a “Dispute”), shall to the extent possible be settled amicably by Parties. The parties will negotiate in good faith to settle any Dispute. In the event the Parties are not able to resolve the dispute either party may give written notice of the Dispute to another party (“Dispute Notice”). Upon receipt of Dispute Notice Senior Representative from each Party shall meet within 10 days, at a mutually agreed time and place. The Senior Representatives will be given 15 days to resolve the issue unless agreed otherwise by both the Parties.

• If Mediation/ Adjudication/ Conciliation is applicable then sub-clauses should contain:
  1. Introductory provisions mentioning the applicable rule for Adjudication or Mediation or Conciliation, in international contracts it is generally ICC rule of Mediation or English Law for Adjudication or THE ARBITRATION AND CONCILIATION ACT, 1996 for conciliation in India.
  2. The case when Mediation/Adjudication/ Conciliation proceeding can be initiated.
  3. Procedure for appointment of Mediator/ Adjudicator/ Conciliator.
  4. Place and language of Mediation/Adjudication/ Conciliation.
  5. Process of Mediation/Adjudication (written/meeting) along with timelines 28 days/42 days.
• Arbitration : the clause should expressly mention when a party can approach for Arbitration, along with: 
  1. Rule governing Arbitration proceeding.
  2. Procedure for selection of Arbitrator, (parties can select Arbitrators from the list of Arbitrators maintained by different agencies).
  3. Place and Language of arbitration.
  4. Arbitration Award is binding unless procedure mentioned in the contract is not followed by Arbitrator/Parties, if the procedure for Arbitration is not followed.

In addition, the above dispute resolution clause should also link the payment of settlement to either parties through payment terms. 

Conclusion 

Dispute resolution clause provides a mechanism to relate contractual disputes with applicable rules/act or regulations. Party initiating the contract generally keeps applicable acts or regulations applicable for the land or follow international agency dispute resolution rules. 

While drafting a dispute resolution clause preference and mechanism of dispute resolution should be made clear. Often it is of two stage at first stage starts when option of amicable settlement fails parties go for Mediation/ Adjudication/ Conciliation based if through Mediation/Adjudication/conciliation settlement is not reached then dispute resolution goes for 2nd stage i.e. Arbitration or court. 

References

• https://uncitral.un.org/en/texts/arbitration/contractualtexts/arbitration#:~:text=The%20UNCITRAL%20Arbitration%20Rules%20provide%20a%20comprehensive%20set,ad%20hoc%20arbitrations%20as%20well%20as%20administered%20arbitrations.
• https://iccwbo.org/dispute-resolution-services/mediation/mediation-rules/
• https://iccwbo.org/more-icc-websites/
• https://iccwbo.org/dispute-resolution-services/
• FIDIC (Red Book) Condition for Contract for Construction 2017
•  http://legislative.gov.in/sites/default/files/A1996-26.pdf
• The Arbitration and Conciliation act 1996
• Series of construction law seminars, University of Westminster
• https://www.youtube.com/watch?v=tVIbAy55UMs&t=1080s

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.