Arbitration In IndiaConstruction Arbitration – Part II

November 11, 20210

ESSENTIAL DOCUMENTS IN CONSTRUCTION CONTRACTS

Documents relating to Construction Contracts may vary depending on the nature of the Construction Project/Activity as well as the chosen form of contract. Such contracts are illustrative, have multitude of documents specific to the immovable property and no two Construction Contracts can be similar beyond a certain point. However, the standardized documents would be:

  1. Drawings: Drawings are the detailed structures with the complete description of the immovable property the construction of which is being undertaken.  
  2. Specifications: These range from description of the property to specifications of drawings and also include the scope and quality of work/products being used. 
  3. Bills of Quantities: Several quantities of items are required in order to complete construction work, thereby bills of quantities is a representative of list of items needed for construction which enables pricing of contract between two or more parties. 
  4. Conditions of Contract: The conditions of contracts is an essential part of the document. It comprises of substantive provisions with respect to the relationship between parties. It also includes conditions on performance of work. It can further entail risk allocation and responsibility of parties in unforeseen circumstances. 
  5. Employer’s Requirements: The employer lists out the scope of work and the standard of work expected from the contractor. The document embodies the expectation and requirements of the employer. The document entails all requirements ranging from material to be used to the drawings and final construction of the immovable property. 
  6. Performance Requirements: This document is the embodiment of the output of the construction or the performance desired from the final product. Thus, an employer can state the performance requirements expected from the final product which is to be achieved by the contractor. For example, in a power plant construction project, the final generation capacity of the power plant would be mentioned here. 
  7. Responsibility for Information and key data: Herein, both parties are required to disclose or specify key data or any information that is in relation to the construction. It is the responsibility of both parties to disclose any such pertinent information that may be required by the other party. For example, in a construction contract for an oil refinery, soil testing information may have to be provided by the employer, based on which the contractor begins construction activities. 
  8. Dispute Resolution Agreement: It sets out the method of dispute resolution under the contract. 

PRICING STRUCTURE

Apart from the form of contract, the choice of contract is intrinsically linked to the overall payment and pricing mechanism of the transaction. Following are various mechanisms encountered in construction:

1. Fixed-price or lump sum: The amount to be paid is pre-determined and specified in the contract based on the anticipation of cost to be incurred. The scope of price escalation is narrow and restricted only to pre-negotiated exhaustive list of conditions. 

The peculiar point herein is that the contractor commits to complete the its entire scope of work for a specific sum, which in turn requires that the contractor fully understands all of his future obligations and is able to price them during the tender phase. Thus, the contractor assumes the risk for both performance and price

2. Cost- Plus: It guarantees payment of costs of the contractor including overheads and profit whereas the owner retains the cost risk. It is best suitable for complex projects where the cost cannot be ascertained, scope of the work is not well defined at tender stage, or where the kinds of labour, material and equipment needed to meet the owners requirements are uncertain

This also leads to high administration costs in order to maintain and verify complete records of the materials used. 

It is more flexible but only at an immense cost and uncertainty of the owner. 

  1. Target Cost: It is a variant of cost plus pricing. Owner and contractor agree on the specific target cost and incase of overspending, the excess will be distributed between them as per agreement. 
  2. Measured Cost: Contractor attaches a fix price to each item of work as per the owner’s estimation of quantities and the amount to be paid is calculated during the execution phase. The calculation is done based on the measured quantities and the contractor’s price for each item

The risk pertaining to the quantity is with the whereas the risk pertaining to price is with the contractor. Thus, it is considered to be hybrid mechanism of fixed price / lump sum and cost- plus pricing

CONSTRUCTION DISPUTES 

Disputes that may arise out of construction contracts are dissimilar to any other type of dispute. Construction disputes are highly technical and complex in nature and almost always call for urgent resolution, and involve various parties. Contracts with respect to constructions involve several risks, and resultantly witness a greater need for effective allocation of risk amongst various parties. There is a need for quick resolution, it is thus, quintessential to deploy an effective case management techniques in construction dispute resolution.

Further, factors that may lead to construction dispute include failure to administer the contract due to ambiguous terms of the contract or technical issues, force majeure; failure on the part of the employer/contractor/subcontractor to understand their obligation under the law or incomplete design; organizational behaviour and culture issues; or poorly drafted contract, errors in contract document or incomplete claims.

As mentioned above, disputes could arise from the stage of formation of contracts on existence of a valid contract and extend to pricing, delays etc. Contractual interpretation of key provisions, and inconsistent provisions in the documents forming the entire contract could lead to another set of disputes. Any construction contract comprises of a number of parties to the contract, be it a contractor or employer or supplier or sub-contractors among others. In general, it is the employer being principal or owner, who engages the contractor for the purpose of construction and subsequently engages a sub-contractor. 

Any such party entering into the detailed construction contract, has often paved the way through a number of offers, tenders, negotiations, bank guarantees and other concerned documents. Disputes relating with bank guarantees, conditional and unconditional nature of these guarantees constitute a set of disputes seeking reliefs against wrongful invocation. Fraud in tenders could attract a set of penal laws.

Construction disputes not only arise out of static conditions but are also due to delays variations in prices, designs, weather conditions, labour conditions etc. Time is the essence in every construction, yet the most frequent disputes arise out of delays in completion as in discussed in detail below. 

Breach of contract, wrongful termination, wrongful invocation of bank guarantees, wrongful withholding of retention amount, non-rectification of defects during defects liability period are other types of disputes.

CLAIMS FROM CONSTRUCTION DISPUTES

Throughout the construction process, both employers and contractors have to man- age the interface between all of these participants, as well as government authorities and stakeholders. They have to plan their works in a logical manner to ensure that the different resources and expertise needed for construction are coordinated and provided on time and within budget.

With so many moving parts, there are nearly always deviations from the original construction plan. Therefore, construction contracts and parties, aggrieved from the deviations occurred, make claims for the losses suffered. 

Following are the most likely scenarios in which contractors or employers may make claims:

  • Late access or possession of site;
  • Adverse unforeseeable physical conditions; 
  • Extensions of time for completion;
  • Rejection and retesting of works;
  • A contractor’s failure to remedy work within a reasonable additional time;
  • Variations to the contractor’s scope of work; or
  • The contractor’s entitlement to suspend work.

 

Once a dispute arises, the issue is identified and risk is allocated, the next step is to determine the reliefs that can be claimed under the law.

As a result, considering the complexities and technicalities of these disputes, there is an increasing need for speedy resolution in order to have an effective and efficient resolution method in construction disputes without any additional delay already cause or additional costs already born by the parties. Henceforth, the parties usually switch to arbitration for easier flow of justice.  

AMLEGALS REMARKS

Construction Contracts must clearly and unambiguously detail the work to be carried out with proper documentation, including the drawings for the project at hand, performance conditions that need to be met, timelines that must be followed. However, most importantly, the Construction Contract must provide for a systematic dispute resolution mechanism that is structured keeping in mind the concerned parties and their needs and expectations, while also ensuring that such dispute resolution must not hamper or hinder the project timelines in any way. 

Another major factor that is likely to impact the performance of the Contract as well as the resolution of any dispute arising therefrom is the the pricing structure chosen by the parties at the time of the commencement of the transaction. The proper selection of such pricing structure, thus, goes a long way in ensuring that the parties’ interests are safeguarded, especially since the highly technical nature of work involved directly leads to a myriad of complex disputes arising from such Contracts. 

Once such a dispute arises, it is essential that the response to the resultant claim be quick, efficient and cost effective. Our upcoming blog shall deal with the necessity and importance of Arbitration as the go-to dispute resolution mechanism for such disputes, and the crucial role played by the Dispute Board in this regard. 


For any query or feedback, please feel free to get in touch with rohit.lalwani@amlegals.com or vineeta.tekwani@amlegals.com.

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