No construction method is perfect. Thus, parties entering into any construction contract may find it very beneficial to devote attention, early in the contracting process, to the express provision of some mechanism for resolving disputes.
The advent and increasing acceptance of new approaches to construction – fast tracking, design-building and construction management – bring more uncertainty to the construction process since many specifics are not determined at the time of signing the contracts. These uncertainties inevitably lead to more disagreements which, in turn, increase the need for some satisfactory means of resolution.
There are three basic methods of dispute resolution in the construction industry: Arbitration , Negotiation and Litigation. Negotiation is the most common; Litigation is the most publicized and Arbitration is the least understood. This does not mean that Arbitration is new, little used or only applicable to small disputes.
For many years, Arbitration has played an important role in the resolution of disputes that arise in the course of Construction Contracts. Construction industry, a growing number of builders, contractors, subcontractors, architects, engineers and owners have utilised arbitration to resolve a variety of common Construction Contract disputes.
Construction Arbitration refers to an institutional mechanism for the resolution of disputes pertaining to construction and infrastructure.
The increasing use of this private means of disputes resolution reflects an appreciation by the construction industry of the need to resolve disputes promptly, with finality, at reasonable cost and through expert decision-makers who understand the technical questions and industry practices that are most often at the heart of construction disputes.
Resolving construction disputes through means other than litigation is now recognised throughout the construction industry as a more expeditious, less costly and time consuming means of settlement. In such disputes, Arbitrators are professionals who are knowledgeable about construction practices, are trained and are neutral. Parties to the dispute can, thus, safely assume that Arbitrators understand the complexities of construction disagreements and resolve the issues equitably.
Thus, Arbitration is an effective mode of Alternative Dispute Resolution (ADR) and it promotes effective case management techniques to bring about efficient and timely resolution of construction disputes.
Several factors make Construction Arbitration more demanding; For instance, while handling disputes relating to construction activity, one has to closely look at each and every technical aspect such as analysing large volume of data, involvement of multitude of parties, quantum of damages which further requires technical experts, etc. Thus, it is needless to say that high stakes are involved in such disputes.
The traditional Court system primarily aims at ensuring just results. Further, it cannot be denied that the Indian Courts are over-burdened and rigid which leads to inefficiencies in the overall functioning of the judicial machinery.
Arbitration proceedings, on the other hand, are more flexible and an Arbitral Award is obtained fairly quickly as compared to a favourable judgement through litigation. Moreover, Arbitration proceedings are premised on the principle of party autonomy. Thus, parties can choose and appoint an Arbitrator based on their preference considering the range of complexities involved in their Construction Contract.
The term ‘Construction’ can be defined as any practice of building or assembling or carrying out any form of work involving construction of an immovable property which can further include engineering work.
Unique characteristics of Construction Projects are:
- That they are often carried out on-site in remote locations, while being exposed to environmental hazards;
- That from conception to implementation, a Construction Project involves a myriad of organisations and individual specialisations; and
- That they have a long development and execution life cycle that is generally measured in years.
These characteristics result in Construction Projects being specifically prone to an exceptionally huge scale and variety of risks. Hence, for successful implementation of such projects, this risk must be managed and mitigated and, thus, parties settle the issues associated with such projects’ risks through express contractual provisions.
A Construction Contract is formed when two or more consenting parties enter into a detailed contract for building a specific immovable property covering all the rules or principles with respect to such construction.
The Accounting Standard (AS) 7 defines a Construction Contract as “a contract entered specifically for construction of an asset or a combination of assets that are closely inter-linked or inter-dependent in terms of design, technology and function or ultimate purpose or use.”
FORMATION OF A VALID CONTRACT
The law governing Construction Contracts are the general principles of law of contract, encapsulated in particular under the Indian Contract Act, 1872 (the Contract Act). It is, thus, crucial to understand the context and interpretation of the provisions of a contract. For a contract to be binding upon the parties, it is essential to first identify whether it is, in fact, a valid contract.
Construction Contracts are challenging to form as they are preceded by a range of negotiations, offers, counter-offers, tenders, advance bank guarantees, and related documents. Thus, majority of the disputes arise in relation to the very formation of contracts.
Construction Contracts are highly illustrative and comprise of multiple sets of documents having distinct purposes. Disputes related to construction vary from the formation of a contract between parties to the validity of the contract. Furthermore, the complexity of documents involved in Construction Contracts, along with the long duration of a Construction Project, calls for disputes.
For example, there might be situations where parties might anticipate execution of a contract, and commence work in anticipation. In the event a party does not recognise work carried out by the other in anticipation, the performing party is compelled to suffer expense and loss of value for work carried out. On the other hand, a party might expect work to commence in anticipation, while the performing party may not consider that a valid contract is in existence.
In such an event, the employer may expect completion of some work and have a claim for delays, or non-completion of work while the performing party may not even recognise existence of a valid binding contract.
Hence, it is important for all provisions of the contract to be clear and unambiguous. Moreover, all provisions in the Construction Contract should provide for clarity in a way which is understood and interpreted in the same manner as the other party. In a Construction Contract, there should be no room for any lacunae as it may lead to unnecessary and avoidable disputes between parties to the contract.
In order to determine whether a contract is valid or not, it is vital to look at the main essentials of a contract i.e. offer and acceptance. These are the principles that ensure that the contract is binding and enforceable in nature. Reliance on vague provisions in the Tender documents or in the understanding of a party without sufficient evidential support would not suffice to establish the formation of a valid contract.
STANDARD FORM CONTRACT
In order to avoid the risk pertaining to formation of a valid contract, parties can opt for a Standard Form Contract instead. Standard Forms Contracts aid in reducing costs, both by reducing costs that would result from the development of a contract and the cost of uncertainty as to what the bargain contains. They provide for lower transaction costs, and clarity and consistency of terms. They are aimed at supporting faster negotiation and adoption of terms between contracting parties while providing jurisdiction as well as industry specific flexibility.
Domestically and internationally, there are a wide range of Standard Form Contracts provided by various professional associations such as International Federation of Consulting Engineers (“FIDIC”); the Institution of Civil Engineers; the Institute of Chemical Engineers; the Joint Contracts Tribunal; the Engineering Advancement Association of Japan; the Civil Engineering Contractors Association; and the Design Build Institute of America (“DBIA”).
The increasing usage of tailor-made Construction Contracts has given rise to a never-ending list of disputes as well, all peculiar to the unique set of circumstances and issues pertaining to the field of construction. Dispute resolution mechanisms have, in turn, had to evolve to provide solutions that are not only time-sensitive but also backed by sector-specific knowledge.
While Arbitration has always played a pivotal role when it comes to disputes arising out of Construction Contracts, it has assumed an even more significant role in recent times, with increased acceptance of Arbitration as a dispute resolution mechanism overall, as well as the level of flexibility and party autonomy that it offers. For this very purpose, it has become more necessary than ever before that Construction Contracts are worded clearly and unambiguously, since it no longer governs just the transaction at hand, but also the eventual dispute resolution mechanism that parties might have to resort to.
In our upcoming blog, we shall delve further into the necessary documentation involved in drawing up such Construction Contracts as well as the role played by them in effectively preventing as well as resolving disputes arising therefrom.
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