This article is written by Pratibha Chauhan, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).
Table of Contents
Instead of getting trapped in the complex procedure of the courts of law for the resolution of disputes, the alternative dispute resolution mechanism is being preferred by businesses and companies with commercial interests to seek resolution to the said disputes in a quick and effective manner. Arbitration is considered to be the most effective and preferred amongst all the alternative dispute resolution mechanisms because of the advantages it offers to the parties such as confidentiality, flexibility, autonomy, time and cost efficiency and enforceability. Therefore, the inculcation of arbitration clauses in contracts and agreements has now become not just a trending phenomenon but also a necessity for effective dispute resolution.
However, adding an arbitration clause as a boilerplate clause without any scope for modification and resorting to it as required by the parties to make it enforceable can be responsible for rendering its purpose futile and might lead to litigation as a last resort to reach a conclusion. So, the process of tailoring an effective arbitration clause requires detailed and proper analysis, careful approach, and diligence in all forms of contracts in general and in Engineering, Procurement and Construction (EPC) contracts in particular as the disputes in the execution of construction contracts have the potential to cause huge losses if not resolved quickly and effectively. The reason for this is that EPC contracts are by nature highly technical and complex as they involve a multitude of parties (sometimes national and often international), which can drive complex questions related to the matters such as seat, governing laws, jurisdiction, consolidation, and expertise. Through this article, the author tries to explore the role of arbitration in solving disputes arising in EPC contracts.
ADR in the infrastructure sector
The infrastructure and construction sector is characterized by nexus-like contracts and construction agreements. Doesn’t matter if the contract is merely an engineering, procurement and construction contract or a concession agreement that holds validity for an extended period, the contractors have to deal with endless logistical issues which include but are not limited to questions related to design, finance, raw materials, defect liability, construction, etc. With the increasing complexity of the infrastructure contracts, a manifold increase has been observed in the complications of the disputes also. The courts of law might not, therefore, turn out to be the most effective platform providing for the resolution of such complex disputes. There has been an increase in Alternative Dispute Resolution, taking over to become the way to resolve disagreements and disputes in cases of complex contracts in general and in the case of infrastructure contracts in particular.
ADR, as suggested by the name itself, offers alternative instruments to resolve the disputes between parties without accommodating legal proceedings as a resort. The methods provided by the Alternative Dispute Resolution mechanism are much faster and effective. The underlying principle of the mechanism is the doctrine of party autonomy which is closely related to the principle of minimal judicial interference. As these doctrines drive the Alternative Dispute Resolution mechanism being the core principles of it, ADR works outside the rigid and strict confines of the Courts of law. The principles of party autonomy and minimal judicial intervention make the process of resolving disputes more flexible and effective. These principles not only bring in flexibility but also ensure efficiency and cost-effectiveness in the process and leverage the benefit of preventing pressure from the already overworked judiciary.
All these benefits make Alternative Disputes Resolution an extremely popular and widely adopted mechanism for resolving conflicts between the parties in the infrastructure and construction industry. The most prevalent mechanism or tools used are Mediation, Conciliation and Arbitration. Not only this, but hybrid ADR is also equally important and popular that offers a blend of the above mentioned three. In India, the arbitration process is governed by the Arbitration and Conciliation Act, 1996 that is based on the UNCITRAL Model Law on International Commercial Arbitration. The most crucial mandates of this Model are flexibility and Party Autonomy. Accordingly, under a valid arbitration agreement only, an arbitration process can be referred to the parties.
Further, the aspect of party autonomy is especially helpful in infrastructure arbitration as the parties are allowed to choose arbitrators, decide their qualifications. Therefore, it is not uncommon to frequently have Engineers as members of the Arbitral Tribunal and this gives a better understanding of the disputes as Infrastructure Arbitrations often involve disputes complicated and technical questions related to facts and financial claims.
What are EPC contracts?
An Engineering Procurement and Construction (EPC) contract is a comprehensive contract framework including all related aspects, which is prominently used in the construction industry, and involves detailed engineering designs to procuring equipment and materials to deliver a duly constructed unit within an agreed date of completion, in consideration for a lump-sum price decided in the contract.
An EPC contract usually has a larger scope as it carries out detailed performance obligations of a comparatively larger number of parties than other usual commercial contracts like that of employer-employee, project management and consultant, supplier, contractor and subcontractor, and that makes EPC contracts more complex. All these characteristics enhance the scope of disputes limited to not only the design, quality and timeline of the EPC contract but also, involving the rights and obligations of the parties and allocating risks; offering arbitration as the timely and effective mechanism for the resolution of disputes. Thus, an EPC contract, drafted well, must adhere to minimizing the contractual obligations of the parties involved with the main contractor and further limit cross-claims of other contractors.
Significance of arbitration in EPC contracts
Arbitration, on both domestic and international levels, is considered as the most preferred instrument of resolution of the dispute in EPC contracts, because of a huge number of disputes involved and the complexities underlying, which are distinct from other varieties of commercial disputes as EPC contracts are wide in scale, often involve too many parties with separate contractual arrangements and the disputes covering a huge amount of money, usually in millions or billions.
Moving further, construction projects usually operate for a long span of time, usually for years, and there exists the need of producing and generating crucial documents on a daily basis, involving original planning to engineering, fabrication and commissioning related issues. As a consequence of this, there arises a need for the investigation and assessment of complex conflicts along with expert testimony; and a huge amount of data is required to be tested and analyzed regularly. Arbitration is thus the best possible way of negotiations in construction disputes as it provides increased flexibility and autonomy to the parties to prepare and present their cases more effectively.
When drafting an arbitration clause, choosing the arbitration venue that will settle a dispute between the parties is of critical importance. International arbitration is designed in a way to create a neutral forum so that neither party has to litigate in the courts of the other party’s home country or expose itself to an unfamiliar legal system and face adverse consequences as a part of it. The applicable procedural law, sometimes referred to as lex arbitri, will depend on the seat of arbitration. The place of arbitration has far-reaching implications at every stage of the process and therefore in cases when arbitration is the preferred method of dispute resolution, the arbitration clause must stipulate a well-considered arbitration-friendly venue.
Significance of choosing arbitration to resolve disputes in EPC contracts
Choosing arbitration is of great significance when it comes to dispute resolution and the significance can be:
- The whole process of arbitration is to be completed within a fixed timeline.
- Construction projects involve a huge amount of data and a large degree of privacy is required by the parties, which is ensured in cases referred to arbitration.
- In arbitration, parties are allowed to select seasoned arbitrators or judges with significant experience in disputes related to construction projects.
- Arbitration permits settlement of disputes at any stage of arbitration and the judgment can be passed in the form of a tribunal award and enforced like a court decree.
- Myriad forms of appeal exist in litigation, which prolongs adjudication and increases the time taken to conclusively resolve disputes. In contradiction to that, arbitration offers definitive awards and arbitration awards are enforceable as civil court decrees.
- As transnational parties may be involved in EPC contracts or there might be cases in which the seat of arbitration may be international, it would be beneficial to select arbitration as the preferred mode of dispute resolution for the sheer reason that arbitral awards passed in arbitration are considered to be enforceable on a near-worldwide basis, as contrary to the limited recognition of in-court judgments.
- The entire process of arbitration involves the minimal scope of judicial intervention, including non-interference with the execution of merit-based arbitral awards.
For the success of any mechanism of Alternative Dispute Resolution, minimalized intervention by the courts is to be ensured. Accordingly, in India, the arbitration jurisprudence ingrains the principle of minimal judicial interference. This has been recognized and recommended by the Courts in several recent judgments, in some instances, the Court has refused to interfere when there was no ground for the same. This approach has not only made the dispute resolution process faster and effective but has also benefited the infrastructure and construction industry in several other ways.
- https://blog.ipleaders.in/how-to-draft-an-effective-arbitration-clause-in-epc-contracts/#:~:text=Arbitration%2C%20whether%20domestic%20and%20international,often%20 include%20 several%20 parties%20with
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