The construction industry worldwide is expected to grow approximately 85% by 2030 to 15.5 trillion with India, China and US accounting for 57% of the total growth. It is one of the major contributors to India’s GDP and is expected to be the engine for overall development. However, the industry in India is plagued with delays and cost-overruns. As reported by the Ministry of Statistics, more than 295 infrastructure projects worth INR 150 crore have been delayed with overrun of more than INR 1 lakh crore. It can be reasonably presumed that time overrun would lead to cost overrun which in turn would lead to disputes. Thus, it is imperative to demystify the conundrum that is construction disputes to resolve issues efficiently and economically.
There are two primary means of resolving disputes through adjudication – litigation in the courts or arbitration. The preferred mode of dispute resolution in the construction industry is arbitration for three fundamental reasons: (a) efficiency of time; (b) confidentiality; and (c) control over the process of dispute resolution.
In India, there is a comprehensive legal regime in place – the Arbitration and Conciliation Act 1996 (Arbitration Act) to conduct arbitrations irrespective of who the party to the arbitration may be – a domestic entity or a foreign entity. Before the amendment to the Arbitration Act earlier this year, in construction contracts for large projects particularly with public sector undertakings (PSUs), the owner tended to control the arbitration proceedings entirely. The PSUs generally exercised this control through one-sided arbitration clauses in the contracts.
For example, under the Arbitration Act, the parties are free to agree on the procedure for the appointment of the arbitral tribunal. Based on this, the arbitration agreements with PSUs would provide that the managing director or employee of one of the parties to the dispute would be the arbitrator. For example, in an agreement between Bharat Petroleum Corporation Ltd and Ace Pipeline Contracts Private Ltd dated 10 June 2002 pertaining to the Mumbai-Manmad Pipeline Extension Project, the arbitration agreement read: “Any dispute or difference of any nature whatsoever [or] any claim, cross-claim, counterclaim or set-off of the Corporation against the vendor or regarding any right, liability, act, omission or account of any of the parties hereto arising out of or in relation to this agreement shall be referred to the sole arbitration of the Director (Marketing) of the Corporation or of some officer of the Corporation who may be nominated by the Director (Marketing).”
Prior to the amendment, the Courts had time and again upheld the validity of such clauses. The mere fact that the arbitrator named in the arbitration agreement is an employee of one of the parties does not, ipso facto, raise a presumption of bias on the part of the arbitrator or disqualify the arbitrator under the Arbitration Act. Thus, heads of departments and directors, not associated with a contract could have been appointed as arbitrators.
However this position has undergone a significant change with the 2016 amendment to the Arbitration Act (amended Arbitration Act) which, inter alia, provides that notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule (of the amended Arbitration Act) shall be ineligible to be appointed as an arbitrator. Thus, by virtue of the Seventh Schedule, employees, consultants, advisor, managers, directors or other persons who are part of the management of a party to the dispute are disqualified to be appointed as an arbitrator irrespective of what the arbitration agreement may provide. The Delhi High Court in a recent landmark judgement has confirmed this position. If an arbitration agreement provides for the appointment of a person who is ineligible for appointment by virtue of this provision, then the arbitration agreement will still remain valid and enforceable and the parties may mutually choose another arbitrator for the dispute (or the Court if the parties fail to reach an agreement).
While this amendment in the law goes a step further to ensure that there is no bias or partiality in an arbitration, the law recognises that party autonomy is the most sacrosanct rule of arbitration. For example, let us assume that the parties wish to appoint a person as an arbitrator who is ineligible for appointment under the Seventh Schedule. In such a case, the parties are free to choose such person as the arbitrator if they so agree in writing after the dispute arises.
This change has a far reaching impact for the construction industry as it balances the control that one party (generally the owner) used to exercise previously. In addition to this clause, the amended Arbitration Act has also re-vamped the arbitration procedure with respect to domestic and international arbitrations seated in India. For example, the principal changes which will impact the construction industry are: (a) fixed time-lines for completion of the arbitration proceedings and challenge of arbitral awards which should ensure that construction projects are not left in limbo for indefinite periods of time; (b) an increase in the powers of the arbitral tribunal for award of interim measure; (c) an exhaustive regime for costs based on the general rule that the unsuccessful party will be ordered to pay the costs of the successful party, thereby thwarting delaying tactic; and (d) the Court in relation to international arbitrations seated in India shall be the relevant High Court exercising jurisdiction over the dispute. It is pertinent to mention herein that the amended Arbitration Act shall only apply to Arbitration proceedings commenced after 23 October 2015 which means essentially that request for arbitration should be received by the Respondent after 23 October 2015.
Thus, given the nature and inherent complexity of construction disputes, the construction industry is ideally placed to reap the benefits of arbitration as a mode of dispute resolution. For example, the parties are at liberty to appoint a technically qualified arbitrator specialising in delay claims on the arbitral tribunal, which simplifies the procedural aspects of dispute resolution because the tribunal is better equipped to handle expert evidence and submissions on complicated and technical delay analysis claims. Another very effective feature of the Arbitration Act is that the arbitrator can encourage settlement of the dispute between the parties during any stage of the arbitration. If the parties reach a settlement and so desire, the terms of such settlement can be recorded in an award of the tribunal. This technique has become popular the world over and is utilised as a helpful tool for dispute resolution.
Thus, arbitration of complex construction disputes is a pivotal strategic decision which can minimise the cost and time impact of prolonged disputes in a project and provide a definitive and binding determination of the dispute.