This article is written by Arpit Kumar Mallick, pursuing Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

Introduction

Complex construction projects commonly give rise to disputes which are often referred to as arbitration. But what makes construction arbitration different from any other type of commercial arbitration? In India, the Arbitration and Conciliation Act, 1996 gives the term “commercial” a wide interpretation so as to cover arbitrations relating to disputes arising from all relationships of a commercial nature, whether contractual or not.

Construction disputes are large, technically complex, and of high value. They lend themselves to arbitration. In 2019, 24% of new cases filed at ICC were construction and engineering cases, more than the energy sector which represented 16%. Expert evidence plays a central role in construction disputes, not only in the presentation of opinion evidence but in the factual investigation as well.

Especially for large scale projects, it is vitally important to select the right tribunal, who are going to need the experience of the construction industry and of managing construction disputes. Careful case management is crucial in order to manage the arbitration cost-effectively, particularly given that construction disputes tend to be document-heavy.

This article will start by considering some key features of construction projects before turning to common claims in the construction context. Also, it will look at why construction practitioners typically choose arbitration as their method of dispute resolution and the specific features of construction arbitration. It will end by considering the disadvantages of resolving construction disputes through arbitration, and some methods by which one can try to avoid arbitration altogether.

Key features of construction and engineering projects

The construction industry covers a wide range of technically complex projects, not just the construction of buildings, but also major infrastructure projects such as bridges, tunnels, hi-speed rail, metros and power stations. Large infrastructure projects usually involve multiple parties. At a minimum, there will be an owner of the project, a contractor and normally a number of sub-contractors. On many projects, there will also be lenders, consultants, suppliers and insurers. These relationships can form a complex contractual web of obligations from which numerous types of disputes can arise. The high value, international nature and longevity of projects can give rise to even more risk including change in the political and legal regimes, inflation, force majeure events and resource constraints. There will also be a large volume of documentation generated on a daily basis during the project, which can make managing the project more challenging and costly.

Common construction and engineering claims

The most common contractor claims relate to changes or variations in the contractors’ scope of work, specifically where the contractor claims it is entitled to additional payment, and additional time to complete the project as a consequence of changes in scope. Dispute over changes often comprises disagreements over whether the original scope of work has in fact been varied. This can involve a detailed examination of the scope of work documents incorporated into the construction contract, such as technical specifications, drawings and bills of quantities. It can also involve disagreements over whether the employer or owner has actually instructed such a change as opposed to the contractor simply developing the design as part of the normal design process.

Claims for additional time to complete are frequently referred to as ‘Extension of Time’ claims. Construction contracts typically include a mechanism for the contractual completion date to be extended where the contract has been delayed for particular reasons. Those reasons include changes in the scope of work, but often include matters such as force majeure, extreme weather, or unpermitted acts or omissions of the employer which delay the work. These mechanisms extend the contractual completion date and are intended to relieve the contractor from liability for liquidated damages due to delay. Assessing who is responsible for the delays is often a complex question. Determining the true cause of delay and in turn, the contractual entitlement to an extension of time involves a detailed factual investigation of the history of the part of the project. The views of delay experts are often sought by the parties in support of their case. In most cases, the contractor will need to demonstrate that the delayed activities were on the critical path in order to establish an entitlement to an extension of time. The critical path is the sequence of key activities which if delayed would delay the overall completion of the project, the point being that not every activity which is delayed will actually delay the completion of the project. Only those delays that impact activities that sit on the critical path will normally give rise to an entitlement to an extension of time.

Key reasons why construction disputes are arbitrated

The international nature of the projects means the parties will usually wish to avoid local unfamiliar court systems. Instead, they prefer a system that is perceived as neutral, and where enforcement is more certain. Multi-party and multi-contract disputes are very common in the construction industry where large projects involve a complex framework of inter-related contracts. For example, a dispute between an owner and a contractor may raise similar issues as a dispute between a contractor and a subcontractor. Arbitration rules increasingly cater for multi-party and multi-contract disputes. However, the parties may have different approaches and objectives. Whereas a contractor may wish to include both the owner and its sub-contractor in a dispute, for example, to recover liquidated damages levied by an employer against the sub-contractor who the contractor believes was the ultimate cause of the delay, the owner may not wish to spend more time and money involving a third party for whom the contractor has already assumed the responsibility and will not wish to have to defend claims from many parties. This is a scenario which the parties should, therefore, consider very carefully at the contract drafting stage. If consolidation and joinder are preferred, the parties should ensure that each of the contracts contains compatible arbitration clauses that the parties have consented to in advance.

Another key point is that arbitration is private and often confidential. Parties may not wish to air their dirty laundry in public.

It is also appealing to have the opportunity to ensure construction experience on the tribunal because parties can so act with arbitrators having extensive experience in the construction industry. Local courts may often lack special expertise in construction with perhaps the notable exception of the Technology and Construction Court in England and Wales. In fact, the ICC Report on Construction Arbitration in 2019 specifically recommends that the tribunal should be made of people with experience of seeing how an international arbitration of a construction dispute is carried through from start to finish.

Specific characteristics of construction arbitration

• Choice of experienced arbitrator 

As mentioned in the above paragraph. In India, generally, there are no limitations on the choice of arbitrator except factors set out in the Fifth and Seventh Schedule of the Arbitration and Conciliation Act 1996, that affect the independence and impartiality of an arbitrator.

• Interim relief

This is also an important factor. For example, an injunction may be sought by the contractor wishing to block a draw on a performance bond. Or the contractor may seek an injunction to prevent an owner from terminating the contract. The availability of an emergency arbitrator can assist with this. In fact, in 2019 half of the emergency arbitration applications to the ICC related to the construction, engineering and energy sector. In India, the Arbitration & Conciliation Act 1996 has vested powers with both the courts and the tribunals to grant interim relief. However, there is no specific provision for emergency arbitration in India as the Act does not specifically include an emergency arbitrator under the definition of ‘arbitral tribunal’. Nevertheless, recent rulings have indicated that emergency awards are valid and enforceable in India. Another significant development in relation to construction disputes is the Specific Relief (Amendment) Act 2018 of India, which bars courts from granting injunctions in relation to any contract involving an infrastructure project when granting such an injunction would significantly delay or cause any impediment to the progress of such a project.

• Dispute Adjudication Board (DAB)

Also unique to the construction industry is the availability of the DAB. These usually rule on temporary issues, for example, interim payments. They provide decisions that are binding but not final. They can be overturned by the arbitral tribunal once constituted. DABs can be useful on ongoing projects, particularly if there is standing as opposed to an ad-hoc DAB, which is already familiar with the background and progress of the project. DABs can help maintain contractual cash flow by resolving issues quickly and they can also help to protect relationships as the parties are encouraged to work together to keep the project moving forward. However, they are less suitable for more complex or high value, one-off disputes due to their interim nature as well as relatively short procedural timeframe. In India, the DAB system has not been as effective as envisaged. The Specific Relief (Amendment) Act 2018 of India establishes specialised courts in respect of contracts relating to infrastructure projects to dispose of matters within a fixed timeline of 12 months.

• Preliminary issues and bifurcation

Given the complexity of construction arbitration and the number of issues typically in scope, the parties may wish that the tribunal consider certain preliminary issues first in order to streamline the procedure. Common examples would include dealing with issues concerning the liability of variations and breaches of a contract before turning to extensions of time or prolongation costs claims. The ICC Report recommends that the claimant’s case on liability should be known before the decision is made as to time and money. A decision on liability and causation will often lead to an agreement on the remaining issues in dispute and that can have positive consequences in terms of the cost.

• Document production

This is of particular importance in construction arbitration. It is often a challenging and time-consuming aspect of any arbitration. However, a potential benefit of arbitration is it permits the parties some flexibility to agree to narrow the scope of the disclosure in various cases. Given the large universe of documents that are typically in issue, the parties might wish to consider how to manage the documentation both during the life of the arbitration and at the final merits, for example, by using software that each party and the tribunal can access and having that set up early.

• Record-keeping

In construction disputes, good record-keeping is often decisive as contemporaneous documents are usually considered to be the key evidence of what happened and in what sequence on the project. A good record-keeping process provides a paper trail to support the positions taken by the parties at each stage of the construction.

• Claims presentation

The parties often use Scott Schedules. These are tables that summarise the position of the parties or the experts on different heads of claims and leave space for the tribunal to record its decision on each issue. If the parties wish to use these, they should be discussed at the first procedural hearing. The ICC report also recommends that the claimants and respondents submit a chronology of events where there are claims for delay or disruption. After each party has submitted its chronology, it recommends that the tribunal should compile a composite chronology and send that to the parties asking them to clarify any discrepancies. This composite chronology can then be updated as the case develops, and it should serve as a useful reference point during the claim. In India, the Arbitration and Conciliation Act 1996 provides the essentials for pleadings of both the claimant and the Respondent including the right to submit a counterclaim or plead a set-off.

• Expert evidence

This is central to any construction case, especially for issues of delay and quantum. Other fields of expertise include forensic accounting, engineering standards, and the root cause of defects. An expert is likely to be heavily involved from the beginning of the case, or before the case has formally commenced. The process of adducing expert evidence is arguably becoming more and more efficient with increased use of joint expert reports, hot-tubbing and tribunal appointed experts. The ICC Report says that independent experts should ideally discuss their views with each other before preparing their reports. Shadow experts are also often appointed and are experts who work behind the scenes to assist in the preparation of the case. They are not considered independent and therefore thought should be given as to whether it is prudent to put them forward as independent experts later in the proceeding. It is also important to bear in mind that depending upon the agreed scope of the disclosure, any advice given by shadow experts may be potentially disclosable. The Indian Arbitration Act empowers the tribunal to appoint experts or apply to the Court for assistance in taking evidence. Recently, the Specific Relief (Amendment) Act 2018 of India provides the court with powers to engage technical experts to assist on specific issues, which would expedite the resolution of complex construction disputes.

Disadvantages of resolving construction disputes through arbitration

Construction arbitration sometimes tends to defeat its purpose of the swift, inexpensive, efficient, private and informal mode of dispute resolution. It has come to resemble the litigation process with greater expense, more procedures and longer duration. The legal fees, administrative costs, and arbitrators’ fees can be considerable.

Scheduling and rescheduling conflicts between the parties, witnesses, lawyers and arbitrators can cause delays in the arbitration process, with hearings held in a disjoint manner resulting in large complex arbitration proceedings running over several years.

Since construction disputes are almost always multi-party, different arbitrators hearing a dispute involving multiple parties can reach different and inconsistent conclusions if the arbitration is not consolidated.

Legal manoeuvring can also inevitably delay the arbitration by forcing a party to refer a court to compel arbitration or seek enforcement of the arbitral award. The damages and costs awarded in such an award can be exemplary as the tribunal has no statutory limits on the amount or type of damages awarded unless explicitly mentioned in the contract document.

Preventative steps to avoid arbitration in construction disputes

While it is not always possible to avoid arbitration, there are some important things that can be done by the parties to try and avoid a construction arbitration. Careful and accurate contractual drafting is key, and schedules and boilerplate provisions should not be neglected. The contractual terms also need to be made consistent with the technical documents forming part of the contract. It is also important to ensure that there are no requirements that cut across each other. For example, consideration needs to be made as to the standard of performance required of the contractor. Providing for only a reasonable skill and care obligation in the general terms and conditions may not prevent the application of a more onerous obligation fit for the purpose of the application, if such an application is embedded in the technical documents, for example, in the form of 20-year design life.

Once the contract has been entered into, it is important that the project team fully understands the key requirements of the contract and complies with them from the start, including the project timetable and particularly payment and notes provisions. Variations and extensions of time procedures should always be complied with. Delay or potential delay should be identified as early as possible and the contractually required notice must be given. Those on the receiving end of such notices also need to address them as soon as possible and certainly within any contractually required timeframe.

Throughout the project, it is important to try to formalise agreements and contractual amendments before proceeding with any work performing any obligations that are inconsistent with the original terms of the contract. Even if this does seem difficult in practice, this is especially important if the contract requires any amendments to be in writing and executed by the parties.

The standard of record-keeping is going to be the key because keeping clear and detailed contemporary records is vital. Excellent record-keeping strengthens your negotiation position and makes it less likely that the disputes will escalate to arbitration. It is important to ensure key documentation is always sent to the other parties at the time the documents recording agreement and the house procedures are expressly agreed, and that any errors or false assertions in the documentation produced by the other parties are corrected at the time. Schedules must be updated in light of the events, and it is important to ensure it is a live tool and not a historical snapshot. 

One needs to be alive to signed and unsigned documents, especially variation requests and orders. Construction contracts sometimes expressly provide that a variation order must be signed for the variation to be valid. An unsigned variation order can sometimes be used by employers to challenge the contractors’ entitlement to additional time and the money arising from the variation on the basis of a variation order which was not formally agreed upon.

It is important for the project team to understand that where an on-site representative is present on the site and is maintaining oversight of the project, this does not mean that the contractor is absolved of responsibility or liability just because the site representative takes a hands-on approach to review designs or other documents. Overall claims should be addressed early and fully before they develop into serious disputes. In this regard, implementing a robust claim recording and management system is important.

Views on the future

Given the profound impact of the COVID-19 pandemic, hybrid hearings and virtual hearings, in addition to physical hearings, are here to stay. Closer attention is being paid to alternative means of dispute resolution given the costs associated with the arbitration. Interestingly, the Belt & Road Project has provided a stimulus for addressing the role of mediation as an alternative to arbitration in a combination of the Med-Arb-Med or Arb-Med-Arb approach that we see in China and Singapore.

The ICC has a task force looking at how ADR can work in parallel with the arbitration, an area of recent considerable interest. It might initially seem like a very odd concept to think that an arbitrator wearing the hard hat of an arbitrator will switch the hat with the softer hat of a mediator, conduct mediation, and if that fails, put the hard hat of an arbitrator on again. It will be quite challenging for the arbitrator in his or her mind to somehow limit his or her awareness of what has been shared in the mediation. The Singaporean law shows us one way of dealing with that. This is definitely going to be a very dynamic and interesting area for consideration in the near future.

References

1. World Bank, Standard Operating Procedures for Dispute Boards in India, Improving the Functioning of Dispute Review Boards (DRB) in India, Indian Council of Arbitration, New Delhi, April 2016.
2. The Honourable Neil Wittmann, Q.C., Using a “Scott Schedule” in Arbitration, ADR Perspectives, ADR Institute of Canada, https://adric.ca/adr-perspectives/using-a-scott-schedule-in-arbitration/
3. Expert Evidence in construction disputes, International Arbitration Report, Issue 12, May 2019, Norton Rose Fulbright.
4. Gransberg, D. D., and Joplin, C. A., Developing construction claims for arbitration: Two arbitrators’ viewpoints, Cost Engineering, 2000, 42(7), 29-31.
5. National Academy of Sciences, Better contracting for underground construction, 1974, Standing Subcommittee No. 4, Contracting Practices of the U.S. National Committee on Tunneling Technology and National Research Council, National Academy of Engineering, Washington, D.C.
6. Rubin, R. A., Fairweather, V., Guy, S. D., and Maevis, A. C., Construction claims: Prevention and resolution, 1992, 2nd Ed., Van Nostrand Reinhold, New York.
7. Trantina, T. L., An attorney’s guide to alternative dispute resolution (ADR): ‘ADR 1.01., 2001, Presented at the New Jersey Bar Association, Justice Marie L. Garibaldi America Inn of Court for Alternative Dispute Resolution, October 11, Bedminster, N.J.
8. SIAC-SIMC ARB-MED-ARB Protocol, http://simc.com.sg/v2/wp-content/uploads/2019/03/SIAC-SIMC-AMA-Protocol.pdf

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