Arbitration In IndiaConstruction Arbitration – III

DISPUTE BOARD

Dispute Boards are a common feature of Construction and Infrastructure Contracts. They are one of the most availed Alternative Dispute Resolution options within Construction Contracts and are intended to provide a concurrent resolution or recommendations for disputes. The decisions of such Dispute Boards are binding unless revised by the ultimate dispute resolution forum, namely, Arbitration or Litigation.

The practice is that the parties comply now and argue later, thereby allowing the contract to proceed without undue interruption while also preserving the parties’ right to seek an ultimate determination of the dispute through the usual channels of Courts or Arbitration.

The rationale is to adjudicate disputes on an interim basis without stopping work or unnecessarily hindering progress since halting work due to disputes can have serious consequences on the viability of the project overall on account of cost overruns, deferred timelines, etc.

Further, the aim is to avoid, as far as possible, the time and expense of Arbitration as well. Most contracts with Dispute Board provisions require a Board decision or recommendation as a necessary precondition to Arbitration.

There is no place for implied powers as the process is not underpinned by legislation or conventions, unlike arbitration or statutory adjudication. The contractual provisions will be contained within the Clause/Provision of the underlying contract that deals with Dispute Resolution.

However, the dispute resolution mechanism through Dispute Board is not as effective as was envisaged, mainly because of the following reasons:

1. Delay in constitution of Dispute Boards and loss of considerable time before the Dispute Board mechanism is put in place;
2. Lack of requisite qualifications, expertise and awareness about the spirit and procedures of Dispute Board in the members of the Dispute Board;
3. Long-time taken in resolving disputes referred to the Dispute Board, much beyond the period stipulated in the contract;
4. Tendency of parties to challenge the decisions of Dispute Board in Arbitration or Litigation, as such decisions are not statutorily final and binding;
5. Mindset of non-acceptance of the system and lack of honouring of the decisions given by Dispute Board.

WHY ARBITRATE CONSTRUCTION DISPUTES?

Construction plays such a significant role not only in the development of the economies of nations but also in the growth of international business transactions. Further, decision-makers, both public and private, have to deliberate on the problem of whether to litigate or arbitrate in cases of disputes arising from, or connected with, Construction Contracts.

In making comparisons between the two methods for the settlement of disputes, certain advantages of arbitration over Court litigation may be considered.

1. Technical Expertise: Since disputes in the Construction Industry invariably involve technical matters, an Arbitrator with the requisite qualifications may be chosen on account of his expert knowledge. A judge, with only legal training to rely on, seldom possesses practical experience in commerce or finance, let alone the technicalities of the Construction Industry.

Very often, disputes arise on account of the failure to specify in the contract the obligations of the parties. Arbitration in such and similar cases may be conducted in a manner indicative of the high level of technical knowledge of the participants so that further education need not be given. Being knowledgeable in the field, the Arbitrator can receive evidence, hear arguments, and make the Award as efficiently and equitably as possible.

2. Expeditious: Resort to Arbitration frequently results in the termination of the dispute between the parties much faster than it would take for them to go to Court. Court proceedings are lengthy and prolonged over a period of time.

Arbitrators and Arbitral Tribunals, on the other hand, can set their hearings and other proceedings at the convenience of the parties concerned without having to take into consideration other cases and incidents that may delay the solution of the disputes.

3. Final Determination: Since Arbitration is contractual in nature, a party that participates in a proceeding is considered to have vested the Arbitrator or Arbitral Tribunal with authority or jurisdiction to make a final determination of all issues of facts and of law related to the dispute.

4. Eases the burden on Judicial System: To the extent that the facilities of Arbitration are employed for the settlement of disputes, the workload of the Courts correspondingly decreases. As a result, the public budget for the maintenance of the Judicial System becomes less heavy to sustain.

5. Elements of judicial process: Because Arbitration is generally conducted in accordance with Conventions adopted and agreed upon by the nations, Arbitral proceedings have acquired elements akin to judicial processes. Adherence to procedural requirements similar to those followed in national Courts has become more compelling due to the participation of lawyers in such Arbitral proceedings.

6. Simplicity: Litigation before national Courts involves the application of substantive and procedural rules that may not easily be comprehensible to the parties. Arbitration, on the other hand, is characterized by simplicity of proceedings. No special form is required for presenting a demand for Arbitration or of responding thereto. Pre-hearing and other kinds of conferences between the parties or other counsel may be held to arrive at some legal or equitable solution to the dispute.

7. Single Forum for all parties: One feature of Arbitration that makes it attractive as a means of settling disputes is the possibility of bringing together in one proceeding all the parties that may be involved. In order to do so, it is essential, however, that the contract should clearly specify so.

The importance of consolidation of causes of action is heightened in disputes arising out of Construction Contracts because of the close inter-relationship of many of the parties. The owner hires the architect independently of the general contractor. In turn, the general contractor hires the various subcontractors and suppliers. The architect generally hires the structural and mechanical engineers. A construction dispute frequently involves many of these parties, but privity of contract flows only between the party hiring and the party being hired.

8. Efficient method: The efficiency of any method for the settlement of disputes depends on the qualifications of the decision-makers.

Since the parties are given the opportunity to choose the Arbitrators in both Ad Hoc as well as Institutional Arbitration, they can designate those whom they deem to be qualified enough to conduct the proceedings. More often than not, Arbitration proves to be a more efficient means of resolving disputes than litigation for the very reason that the Arbitrators appointed by the parties are qualified and/or experienced to deal with matters pertaining to Construction Contracts.

9. Convenience: Arbitration being contractual in character, the parties can specify the time and place for the conduct of the proceedings. Naturally, their choices will be such as will be convenient to them, their witnesses and their counsel.

The conduct of litigation, on the other hand, is designed to suit the convenience primarily of the Court, and then of counsel; the interests of litigants and witnesses are the last to be considered. Moreover, even in terms of logistics, hearings held in Courts are not at all favourable to saving time and resources for the parties involved.

10. Confidentiality: Litigation is conducted in open Court with the public and the press being permitted to observe the proceedings. Adverse publicity could result to either or both of the parties which inadvertently damages the interests of the parties involved.

In contrast, Arbitration is conducted in private, between the parties themselves, and not in the form of a public hearing. As a result, neither the pleadings and witness testimonies nor the final Award are not made public, thereby preserving the confidentiality of the parties.

11. Suitable for questions of facts: Where the issues between the parties are primarily factual in nature, arbitration can be the suitable method for settlement. This is particularly true if the dispute involves quality of materials or degree of performance.

In large construction projects, the parties may stipulate in the contract that claims and counterclaims for arbitration may be filed only with a detailed presentation of the facts. This procedure may not be permissible in a regular Court of justice.

12. Flexibility: One advantage of Arbitration is that the parties to the contract may specify the scope or nature of the dispute that may be referred to Arbitration. The parties can, in the Construction Contract itself, stipulate for Arbitration, either broad or limited in scope, and the terms under which the proceedings shall be conducted. It is, thus, evident that flexibility is one of the inherent features of Arbitration.

13. Continuance of work: In view of the size of some construction projects involving the expenditure of huge sums of money and the employment of thousands of people, it is often necessary to insert, in the Construction Contract, a provision that work shall continue while Arbitration goes on. Such stipulation may not effectively be enforced where resort to Courts is made by either of the parties.

14. Defense not absolute: As a matter of strategy, where the defense of a party to a claim of the other is not absolute, Arbitration may be a better remedy. The reason is that they may be able to obtain a compromise, or other form of resolution favourable to them.

AMLEGALS REMARKS

In continuation of our previous blogs in this series on Construction Arbitration, this article begins by discussing the concept and utility of Dispute Boards, with reference to disputes arising out of Construction and/or Infrastructure Contracts.

Dispute Boards actually have a lot of potential when it comes to such Construction Disputes since this form of dispute resolution not only offers final and binding solutions to the dispute(s) at hand but also permits a time-sensitive interim adjudication thereof.

Moreover, since the process of dispute resolution through Dispute Boards is not governed or underpinned by any legislation, treaty, convention, etc., it also permits a lot of flexibility as per the parties’ will and understanding.

However, dispute resolution through Dispute Boards has its own peculiar set of disadvantages, owing to which this mechanism of dispute resolution has not proved to be as useful as anticipated/expected.

This is where the pivotal role and relevance of Arbitration as an Alternative Dispute Redressal (ADR) Mechanism shines through. It allows parties to draw up their own terms and conditions when it comes to resolving disputes, appoint subject-matter experts as Arbitrators, preserve their confidentiality, etc.

One of the most crucial benefits of Arbitration, in terms of resolving disputes arising from Construction and/or Infrastructure Contracts, is that it allows parties to stipulate, in the Contract itself), that the construction work shall continue even during the pendency of adjudication of the dispute(s). This saves a lot of time and resources of all the parties since, in Construction Contracts, time is evidently of the essence.

Our upcoming blog in this series will seek to differentiate between Generic Arbitration, on the one hand, and Construction Arbitration, on the other. Further, it shall also cover the details of factors and considerations that need to be kept in mind while drafting an Arbitration Clause or an Arbitration Agreement under the bigger umbrella of the actual Construction Contract.