The construction industry in India is ailing because of, inter alia, the failure of the parties to resolve disputes expeditiously and effectively. The total amount of investment that is currently tied up in arbitration is approximately INR 70,000 crores. With respect to pendency of disputes, 64% of the total claims raised against government entities and public sector units (PSUs) are still pending in arbitration and 11% are still pending with the government entities themselves. The average duration for settlement of disputes is more than 7 (seven) years in India. These statistics reveal that urgent and efficacious reforms are needed, especially since the construction industry is the backbone of this country. It accounts for 8% of India’s GDP and is the largest direct and indirect creator of employment, employing nearly 40 million people and creating 2.7 new jobs for every lakh invested. Thus, the recovery of the construction industry is critical for stimulating and maintaining the current rate of growth and economic activity.
The first slew of changes were implemented by the Arbitration and Conciliation (Amendment) Act 2015 (2015 Amendment) which has brought in stricter timelines and reformed the arbitral procedure to a large extent. The 2015 Amendment is applicable prospectively to arbitration proceedings and it may also apply to Court proceedings commenced after the amendment or pending in courts, even where such court proceedings pertain to arbitrations under the previous Arbitration and Conciliation Act 1996, prior to the amendment (previous Arbitration Act). Furthermore, the Hon’ble High Court of Calcutta has recently opined on the limited the scope of enquiry in arbitral awards and has held that the ground of public policy under Section 48(2)(b) and 34(2)(b)(ii) is of very limited scope and the award must be crying out as being patently unfair for it to be regarded as contrary to the public policy of India. Thus, there is a positive move to streamline dispute resolution processes in India.
In light of the same, the Cabinet Committee on Economic Affairs has approved certain reformative measures to aid the arbitral process, which have been discussed below:
- Arbitration proceedings involving government departments and PSUs that commenced under the previous Arbitration Act should be transferred to the amended Arbitration Act with the consent of the other party. This is possible by virtue of an enabling provision in Section 26 of the 2015 Amendment which states that the Parties by mutual consent can apply the amended arbitration act to the arbitral proceedings commenced under the previous Arbitration Act. This will ensure stricter timelines for completion of the arbitration and prevent inordinate delays which have become associated with arbitrations involving government departments and PSUs.
- In cases where the government departments and PSUs have challenged arbitral awards rendered against them, 75% of the amount of the award shall be first deposited by the government departments and PSUs into an escrow account against a margin-free bank guarantee from the contractor which ensures that liquidity is available and no financial burden is unnecessarily imposed on the contractor. The money in the escrow account can be used for: (i) first, the payment of dues of lenders; (ii) second, the completion of the project; and (iii) third, the completion of other projects by the said government departments and PSUs as may be mutually agreed. We are still to evaluate the actual implementation of these reforms, however, this one measure alone can singlehandedly address many of the problems that plague the construction industry. For example, the National Highways Authority of India won only 38 arbitrations out of a total of 347 arbitrations. This illustrates that the grievances of the contractors are real concerns and a lot of progress can be made if the government departments and PSUs deposit 75% of the arbitral award against them in escrow and make the liquidity available to contractors.
In addition to this, there are certain changes advised with respect to the text and format of the agreements that are to be concluded in the future by government departments and PSUs for construction work. All the concerned ministries and government departments have been asked to conclude EPC (turnkey) contracts based on the FIDIC model in place of unit-rate contracts, wherever appropriate and with suitable modifications and revisions. Furthermore, increased use of conciliation as a mode of dispute resolution is encouraged and it is advised that a clause to this effect be incorporated in the agreements. Conciliation is a confidential process of non-adjudicatory third party intervention in which the third party plays an evaluative role to the extent that the conciliator makes recommendations and actively advises the parties in the negotiations.
The Conciliator should ideally be an industry expert and should assist the parties in an independent and impartial manner in their attempt to reach an amicable settlement of their dispute. If the conciliation proceedings result in a settlement agreement, such settlement agreement concluded by the Parties shall be deemed to be an arbitral award.
Thus, the mood in the country to facilitate quick and effective resolution of construction disputes is evident from the recent judgements of the Judiciary and the reforms passed by the Government and we are positive that arbitration in the construction sector will become more efficient and streamlined.
This article was first published in Financial Chronical Online - October 2016.