Nowadays, companies with commercial interests instead of getting stuck in the court of law for resolving a dispute prefer to choose an alternative dispute resolution mechanism to quickly and effectively resolve a dispute. Out of the alternative dispute resolution mechanisms, arbitration is considered the most effective and preferred one because of the advantages that it provides to the parties, namely; confidentiality, flexibility, parties’ autonomy, time and cost efficiency and enforceability. Thus, the insertion of arbitration clauses in contracts is now both a trend and a necessity.
However, merely inserting an arbitration clause as a boilerplate clause without modifying and resorting to it as per the needs of parties to make it enforceable renders its purpose futile and shall open the doors of litigation. This process of tailoring an effective arbitration clause has also to be done with much analysis, care, and diligence in EPC (Engineering, Procurement and Construction) contracts as the disputes arising out of construction contracts may be different.
EPC contracts are highly technical and complex in nature, involving a multitude of parties (often international), which may raise issues such as seat, governing law, jurisdiction, joinder, consolidation, experts among others. Thus, although the arbitration clause may vary according to the nature of EPC contracts, certain fundamentals for drafting an effective arbitration clause in an EPC contract have to be duly noted.
What are EPC contracts?
An EPC (Engineering, Procurement and Construction) contract is an all-inclusive contract framework, which is prominently used in construction industry, involving detailed engineering designs to procuring equipments and materials to finally delivering a properly constructed entity within an agreed completion date, in consideration for a lump-sum contract price. Since a contractor is needed to deliver a complete facility, the other party only has to turn a key to begin working or running the facility, it is also known as a turnkey construction contract.
An EPC contract is large in scope carrying out detailed performance obligations of a greater number of parties than usual commercial contracts such as that of employer, contractor, sub-contractor, project management consultant, designer, supplier among others, with their independent commercial relationships, making it quite complex. This also increases the scope of disputes to not only the design, quality and timelines of an EPC contract but also includes the obligations and rights of participants and allocating risks; providing arbitration as the timely and effective dispute resolution mechanism.
Thus, a well drafted EPC contract must adhere to limiting the contractual obligations of the different parties with the main contractor and further minimise cross claims of other contractors.
Significance of arbitration in EPC contracts
Arbitration, whether domestic and international, is considered as the preferred mode of dispute resolution in EPC contracts, due to the vast number of disputes involved and its underlying complexities, which differs from other commercial disputes as EPC contracts are broad in scale, often include several parties with separate contractual arrangements and disputes which may cover millions or billions amount of money.
Further, the construction projects’ timelines span years, with crucial documents generated every day by thousands of witnesses, from original planning to engineering, fabrication, and commissioning. As a result, complex conflicts are to be investigated and assessed along with expert testimony; and a massive amount of data is required to be analysed and tested. Arbitration is thus favourable in construction disputes as it provides the parties the flexibility and autonomy to prepare and present their cases effectively.
Other significance of choosing arbitration as the preferred mode of dispute resolution are:
- A fixed timeline is provided for completion of the arbitration.
- As a lot of data is involved and for arbitral proceedings, a large degree of privacy is indeed needed by the parties which is provided in arbitration.
- Selection of seasoned arbitrators (judges) who have significant experience in construction-related disputes is allowed to the parties.
- As a lot of parties may be involved, complex disputes may arise, arbitration allows settlement of disputes between parties at any stage of the arbitration, which can be passed as a tribunal award and enforced as a court decree.
- In contrast to the myriad forms of appeal available in litigation, which merely prolong adjudication, the arbitration award is definitive and enforceable as a civil court decree.
- As international parties may be involved or where the seat of arbitration may be international, award passed in arbitration is enforceable on a near-worldwide basis, as opposed to the limited recognition of in-court judgments.
- International parties favour arbitration since it avoids having to litigate in the other party’s home country’s courts or exposing themselves to an unknown legal system.
- In the entire arbitration process, judicial intervention is and can be made minimal, including non-interference with the execution of arbitral awards on merits.
Things to note for an effective arbitration clause
Usually, parties and their counsel haphazardly copy and paste a conventional arbitration agreement without thoroughly examining the terms of their contracts, which later wastes time and money when the disputes arise and thus cause the case to be disrupted. Depending on the essence and form of the EPC contract, the parties should use creative and versatile mechanisms to draft an arbitration clause as many variables are to be considered while drafting.
An arbitration agreement/clause must be in writing, signed by all parties, and registered, according to Section 7 of the Act. Further, it should also be remembered that arbitration is a contract-based mechanism that allows the parties to adapt the process to their own requirements, as opposed to litigation, which has set legal requirements. As a result, the parties may draft the specifics of the procedures taking into account criteria such as interrelations between the parties, the time period for passing an award, discovery limits, arbitrator competence and selection, the laws adopted to govern the dispute, the seat, cost and others that are appropriate for any likely conflicts.
The content of an arbitration agreement/clause differs depending on the essence of the main contract and other aspects, but there are certain basic aspects that apply to all contracts and circumstances. Disputes may be resolved in a reasonable manner if consideration is taken to include these elements that shall make the arbitration clause effective, which are:
Multi-tier Dispute Resolution Clause (MTDRC)
Parties today do not tend to go straight to arbitration to resolve a dispute, and in a long-term project like an EPC contract, where parties must maintain a long-term relationship while considering potential business prospects; parties often choose mediation, conciliation, or negotiation as the first tier of resolution. Parties to smaller and simpler projects can choose to go straight to arbitration to ensure a faster resolution.
This multi-tiered strategy can also save the parties’ money by avoiding arbitration if the whole dispute is resolved by discussions or mediation; or it may minimise the amount of disputes that must be resolved by arbitration through resolving frivolous or irrelevant claims at the outset. However, these tiers of resolution must prescribe a time limit, process, expense, and termination, because in time-sensitive and urgent matters, the ability to seek interim measures can be lost, increasing the likelihood of an arbitration clause being deemed pathological.
The pre-arbitral steps are only enforced if the provision meets certain non-exhaustive criteria, which have been developed by courts in cases such as Ravindra Kumar Verma v. M/s BPTP Limited and Tulip Hotels Pvt. Ltd. v. Trade Wings Ltd.. These non-exhaustive criteria to be included in MTDRC are: ‘shall’ should be used in instead of ‘may’ to indicate that pre-arbitral steps are mandatory; language should be unambiguous; MTDR should be time bound; balance to rights of both parties should be provided; and parties should not waive or deem the enforcement impossible through their conduct. But these criteria too don’t guarantee enforcement as it depends upon case to case basis.
Incorporation by reference
While the arbitration agreement in the form of a clause in the substantive contract is considered to be ideal, there are often instances in the construction industry where an arbitration clause is incorporated by reference either from a parent agreement or by reference to a standard form contract, which is allowed. Thus, when two parties contract on the basis of general standard terms including an arbitration clause; or when two other parties in the same group of corporations, or by organisations up and down the chain deal on the basis of terms previously agreed upon by two parties, incorporation complications arise.
The current state of Indian law regarding the incorporation of an arbitration clause by referring to a document, as per the case of Giriraj Garg v. Coal India Limited and Others, can be summarised as follows:
The cases of incorporation by references are divided into two groups, namely, ‘single contract’ and ‘two contract’, based on the document being referred to, rather than the parties’ intent in using the terminology to refer to the document.
In the case of a ‘single contract,’ the reference is to a ‘standard form contract’ that the parties to the current contract are familiar with from a recognised trade organisation or regulatory institution. In this case, a general reference, with no clear mention of the arbitration clause, is adequate to have the effect of incorporating the arbitration clause in the principal contract.
However, in the case of the ‘two contracts’, the reference is made to an agreement that is not a standard type contract, but rather some other contract between the contracting parties or among third parties, or any other document containing an arbitration clause. In this case, a general reference to the terms of a contract would not be considered to have incorporated the arbitration clause, and an express reference, i.e., precise mention of the arbitration clause, would be required. It simply means that even though it is determined that the reference is so broad that the parties agreed to include all of the contract’s terms, the arbitration clause is excluded.
Scope of Disputes: Range of disputes, Consolidation and Joinder of parties.
Only those disputes that are specified in the arbitration clause can be referred to arbitration; hence, the range of the disputes must be examined, widened or ‘excepted’, and unambiguously written to avoid litigation.
Parties often use the language that “Any dispute arising under this agreement shall be referred to arbitration..”, which limits the range of disputes being referred to arbitration to the contract in which the arbitration clause is incorporated. In an EPC contract, a lot of independent agreements other that the main agreement may be entered into between the same parties and/or non-parties (non-signatories, who are not parties to the primary contract containing the arbitration clause but are parties to an ancillary contract that is essential to the transaction), which include owners, contractors, subcontractors and equipment suppliers. Therefore, the correct language would be that “Any dispute arising in relation to or in connection to or under this agreement shall be referred to arbitration..”, so that all disputes concerning the same project undertaken have one adjudication stop and no different arbitration runs for the same parties and inconsistent decisions are avoided.
However, such consolidation would only be appropriate when before the dispute arises, the arbitration clauses in every agreement, i.e., main contract and subcontracts is made compatible so that arbitration is before the same arbitral body; or when the disputes arise from the same legal relationship, consolidation would only be appropriate with the consent of the parties to negotiate and agree to form a separate dispute resolution agreement that provides for arbitration before the same body.
In the case of Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & Ors., the Supreme Court of India endorsed the ‘group of companies’ doctrine, and explained that non-signatory sister companies of a larger group of companies will be bound by an arbitration arrangement entered into by the larger group of companies if the parties clearly intended to bind all signatories and non-signatory affiliates. Thus, mere corporate relations within a party are insufficient; mutuality of purpose, the manner in which the contract in question is performed, and the involvement of the non-signatory in that performance will also form the backbone of such a joinder of parties.
Further in Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr., the Supreme Court of India held that where different agreements were entered upon by several parties for a single commercial project, these different agreements were integrally inter-connected and thus all the parties can be referred to a composite arbitration.
The International Chamber of Commerce (ICC) and the International Centre for Dispute Resolution (ICDR) also allow claims resulting from various contracts to be brought forward and settled in a single arbitration, as well as the consolidation of multiple arbitrations into one.
Although consolidation provides significant efficiencies, it should not jeopardise a party’s ability to present its case effectively. Employers also usually oppose any contractor’s plan to include subcontractors in the main contract’s arbitration due to increased expense and delay.
Number, Qualifications and Appointment of the Arbitrators:
Parties must take advantage of the fact that, in arbitration, they have the right to choose the arbitrators and the number of arbitrators to settle their disputes according to their preferences. The number of arbitrators has a direct impact on the expense of arbitration proceedings for the parties, since more than one arbitrator costs more, thus sole arbitrator is most preferred. The total number of arbitrators must always be odd, so that in the event of a disagreement among the arbitrators, the majority or presiding arbitrator will make the final judgement.
The next element of the arbitrator(s) qualification is that they must be experienced, qualified, have expertise in the area of dispute, have earned positive feedback for previous decisions, are trained, and are impartial. While, in most cases, parties do not specify the requirement of a specific qualification of arbitrator who has specific technical knowledge or a specific status, parties do specify the qualifications of an arbitrator in cases such as a large infrastructure/construction project because a good and efficient arbitration depends on a good arbitrator who has the authority to decide and interpret timely the claims, costs, and pass awards.
The required qualifications of an arbitrator in an EPC contract with mutual consent of the parties may be one of an engineering qualification, such as a senior/retired civil engineer or structural engineer, or one who has exposure to implementing or overseeing major infrastructure projects, in order to understand the complex details of the project execution than a Judge or any general arbitrator. This type of specification is also enforceable in a court of law, and a party may petition the court for the appointment of an arbitrator with the requisite qualifications as stated in the arbitration agreement/clause.
The arbitration clause must also specify the process to be used in selecting and appointing arbitrator(s) which may also be referred from S. 11 of the Arbitration and Conciliation Act, 1996. If the parties fail to appoint an arbitrator or the other arbitrators fail to appoint a presiding arbitrator, the parties may file an application for appointment with the court or a designated institution under S.11 of the Arbitration and Conciliation Act, 1996. However, this will trigger a delay in the commencement of the Arbitration proceedings. To avoid this, parties can also choose an institutional arbitration for arbitration which may have its own procedure to appoint an arbitrator which can be followed.
Details of Institutional Arbitration Centre, if chosen
Parties must not have an arbitration clause in their contract without clearly stating the particulars of the arbitration centre (if one is chosen), such as its name and address; otherwise, the arbitration clause would be nullified.
Parties are advised to choose institutional arbitration over ad hoc arbitration because under ad hoc arbitration for every small procedural dispute such as appointment of arbitrators, termination of arbitrators, challenge to arbitration, etc. the parties have to move to the court. This shall not only increase the burden of the courts but also the time spent in resolving the dispute will be increased. But choosing an institutional arbitration helps in taking all these decisions itself in case of procedural disputes as it has its own set rules, conducting the arbitral proceedings smooth. Further, the institutional arbitrations have their own model arbitration clauses which can be chosen if the institutional arbitration is selected such as see that of SIAC.
The only implication of choosing an institutional arbitration is that the parties shall be bound by the rules of that institution. So the parties must go through the rules of the said institution before choosing it.
It must be noted that the place of Institutional arbitration has nothing to do with the seat of arbitration. So in international arbitration, where the chosen institution is SIAC, the courts of Singapore shall not necessarily have the jurisdiction if the parties have chosen the seat as India, the courts of India will only have the jurisdiction. Thus, the chosen place of Institutional arbitration can be SIAC but the seat will be India which has to be expressly mentioned.
Seat of Arbitration
The seat of arbitration does not have to be the place of the hearings; rather, it usually specifies the degree of involvement or interference by the local courts in the arbitration process, such as for appointment, appeal, enforceability, and so on, as well as the level of involvement or intervention by the courts in exercising jurisdiction over the seat. This is important where the parties belong to two different states in domestic arbitration or two different countries in international arbitration, and the parties thus should choose a convenient place for arbitration and put it in the Arbitration clause.
However, under Section 20 of the Arbitration and Conciliation Act, 1996, if the parties fail to specify a place of arbitration in domestic arbitration in India, the arbitrator has the authority to do so, taking into account the parties’ preferences. However, it is critical to expressly mention the seat of arbitration in matters of international arbitration for a myriad of purposes, including the scope of the dispute, conduct, enforceability of the arbitral award, judicial intervention, visas, right to use overseas counsel, expenses of arbitration, and arbitrator choice, among others.
The Supreme Court of India has recently in the case of BGS SGS Soma JV v. NHPC Ltd., held that “wherever there is an express designation of a ‘venue’ and no designation of any alternative place as the ‘seat’, combines with a supranational body of Rules governing the arbitration, and no other significant contrary indicia, the inexorable conclusion is that the stated venue is actually the juridical seat of the arbitral proceeding.”
Since EPC contracts often include international parties, parties should not, unless there are compelling and inevitable reasons, choose a seat of arbitration in a country that is not a signatory to the New York Convention or the Geneva Convention on the Execution of Foreign Arbitral Awards, or of which both the parties and the chosen seat are members. Only awards made in Nations party to the convention are eligible for the New York Convention’s pre-enforcement regime. Furthermore, also within the New York Convention signatories, the courts apply various criteria to the grounds for appealing and setting aside arbitral awards.
The governing law, which must be explicitly defined, is the substantive law that will be used to resolve the conflict. Unlike agreements between parties from the same legal system, agreements between parties from different legal systems may raise a variety of issues, such as the relevant statute, competent forum, and so on. As a result, concerns about the option of applicable legislation and the jurisdiction of the courts arise in international arbitration.
When evaluating EPC contracts involving foreign parties, special attention should be paid to the issue of the governing law of the arbitration agreement, as the substantive agreements governing law is not always the same as the arbitration agreement governing law. In the case of Reliance Industries v. Union of India, the Supreme Court of India recognised that three set of laws may apply to any given arbitration, which is the proper law of the contract; the proper law of the arbitration agreement; and the proper law of the conduct of the arbitration.
In most jurisdictions, the parties to a contract are free to choose the law that will govern their relationship. The parties’ right to specify the guiding law in an arbitration agreement or clause is enshrined in various international treaties and institutional rules. The governing law of an agreement specifies and governs the parties’ rights, obligations, and powers, as well as how the agreement’s dispositions will be interpreted.
Language of the arbitration proceedings
One of the most important aspects of the arbitration process is the use of language. In the absence of a specific clause, disagreements about the language in which the arbitration proceedings will be conducted can occur.
Since India is a country with multiple dialects, parties may communicate their business transactions in languages other than English and Hindi, and further the languages may vary if the parties are from different countries. Conducting Arbitration when holding the related documents in various languages and determining the issue is extremely difficult in such a case. Furthermore, the witnesses would be unable to comprehend the relevant papers. The parties would have to pay higher translation costs for each document in order for the other party and/or witnesses to understand it. As a result, it is best to determine the arbitration language in the arbitration agreement itself.
Arbitration has long been the preferred method of settling EPC contract disputes, and with good reason: it gives parties and tribunals the flexibility they need to accommodate the unique nature of these disputes while also achieving the overall objective of economy and performance. Furthermore, an arbitration clause/agreement can be added to or substituted for the arbitration tribunal rules or the UNCITRAL model to represent the needs of a specific dispute or the jurisdiction in which it is seated.
In short, arbitration benefits the construction industry when the arbitration clause/agreement is meticulously written while anticipating multiple transactional factors. A poorly written clause, on the other hand, could be contested in a court of law and if found to be unenforceable, would open the floodgates to the courts of law and render the entire point of arbitration pointless.
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