Arbitration In IndiaConstruction Arbitration – Part IV

CONSTRUCTION ARBITRATION VS GENERIC ARBITRATION

Arbitration is perhaps the most widely accepted and relied upon Alternative Dispute Resolution (ADR) Mechanism which is opted for by parties in a dispute arising out of Construction Disputes in order to make it beneficial for all stakeholders involved therein.

There are various factors like the unique nature of industry, involvement of technical experts, engagement of multiple parties etc which make Arbitrations in the Construction Industry a little extra demanding and different from general Arbitration in other sectors and industries.

Construction Arbitration has a unique nature due to large number of parties involved, longer life span of project of construction in the dispute, huge amount of data to be reviewed and analysed related to construction which may not be the case in general Arbitration.

In general Arbitration, usually parties provide with how damages are to be premeditated but in Construction Arbitration, the calculation of damages varies with technical and expert opinion, delays in project, defects etc, so to decide damages or compensation, the Arbitrator must take help of expert surveyors and specialist.

Moreover, multiple stakeholders are involved in any Construction Arbitration as compared to a general Arbitration. Experts in Construction Arbitration help in deciphering the defects and delays subject to loss of revenue. Further, parties may want to join all the interested parties into a single proceeding to achieve a universal resolution of the entire dispute.

Construction Arbitration, thus, stands on a different level as compared to the generic one in terms of its unique features and complexities involved.

ARBITRATION AGREEMENT

In Construction Contracts, certain questions are often reserved for the engineer and it is only after his decision, that the decision is either declared to be final or may be reviewable by the Arbitral Tribunal.

Where such questions are reviewable by the Arbitral Tribunal, it is generally accepted that the Arbitral Tribunal is empowered to review both the findings of fact and law made by the engineer.

However, where the Contract states that the decision of the Engineer is final, two questions arise:

1. Whether the engineer functioned as an Arbitrator or as an expert; and
2. Assuming that the engineer functioned as an expert, whether the engineer’s decision is reviewable by Courts and if so, what is the scope of such review.

The issue of whether the engineer functioned as an Arbitrator or as an expert will depend upon the language of the clause that requires him to decide the questions. If the language is susceptible to the interpretation that reference to the engineer is in the nature of Arbitration Agreement, then his decision would be an Arbitral Award; otherwise it would be an Expert Decision.

Thus, what constitutes an Arbitration Agreement is of particular significance in Construction and Infrastructure Contracts.

As per the Indian Contract Act, 1872, an Agreement can be oral or written, although according to the governing Arbitration and Conciliation Act, 1996 (“the Act”), in order to initiate Arbitration proceedings under the purview of the Act, it is essential to have a written Arbitration Agreement. The said Agreement does not have to be a separate or distinct from the Contract, but can be part of a Contract in the form of a clause, which is the standard form of an Arbitration Agreement.

An Arbitration Agreement can also be binding if such Agreement is made through exchange of letters, telegram or any other form of telecommunication. The primary purpose is to have on record that both parties consented to Arbitration and no party can deny the existence of an Arbitration Agreement.

In a Construction Contract, an Arbitration Clause can be in any form. It can be a simple statement binding the two parties to refer the dispute to Arbitration or a detailed document not only binding the parties to Arbitration but also establishing the rules and regulations that are to be followed when Arbitration proceedings are initiated this including the number of Arbitrators, procedure to appoint an Arbitrator, etc.

However, since Construction Contracts are highly complex and involve several minute details it is advised to parties that while including a Dispute Resolution Clauses, a more detailed Arbitration Clause should be included envisaging the process of selection of Arbitrator, procedure and timeline for the Arbitration process, etc.

Unfortunately, the judgments of Indian Courts are not always consistent as to whether such a term would be an Arbitration Agreement or not.

It is crucial to note that the Court, in the case of ACE Pipeline Contracts (P) Ltd v. Bharat Petroleum Corporation Ltd [(2007) 5 SCC 304], interpreted the decision of the engineer acting pursuant to the Arbitration Agreement and Dispute Resolution Clause that provided –

“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).”

Allowing Department Heads and Directors who are not associated with the Contract to be appointed as Arbitrators the Court had upheld the clause. It was believed that the Arbitrator named in the Arbitration Agreement cannot be presumed to be bias or raises a presumption of bias for the sole reason that he is an employee of either one of the parties.

In Bihar State v. Encon [(2003) 7 SCC 418], the relevant clause was:

“60. In case of any dispute arising out of the agreement, the matter shall be referred to the Managing Director, Bihar State Mineral Development Corporation Limited, Ranchi, whose decision shall be final and binding.”

The Court formulated the following test:

“The essential elements of an Arbitration Agreement are as follows:

1. There must be a present or a future difference in connection with some contemplated affair;
2. There must be the intention of the parties to settle such difference by a private Tribunal;
3. The parties must agree in writing to be bound by the decision of such Tribunal;
4. The parties must be ad idem”.

Having laid down a principle in the most general terms, the Court then went on to say that it, having regard to the facts and circumstances, would “proceed on the basis that the clause constituted an Arbitration Agreement”. In effect, thus, the Court laid down no clear principle and went on to say that the clause constituted an Arbitration Agreement.

However with 2016 Amendment to the Act, this position underwent subsequent changes. Section 12 (5) of the amended Arbitration Act provides:

“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.”

Along with this, categories mentioned in the Seventh Schedule of the Act specifies that any person falling under the requisite categories would be ineligible to be appointed as an Arbitrator.  Such person include any person having a significant interest in one of the parties or has any affiliation with parties or a person who is a lawyer and representing any of the parties to dispute. The provision explicitly states that –

“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.”

Focusing on accountability and impartiality of the Arbitrator, Fifth Schedule of the Act specifies certain grounds which would determine whether situations that may arise are substantial enough to raise reasonable suspicions over the independence or impartiality of the appointed Arbitrator.

The Delhi High Court in the case of Orissa Concrete and Allied Industries Ltd v. Union of India & Anr [(2016) SCC OnLine Del 3463] stated that,

 “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).”

The Arbitration Agreement in a Construction Contact is essential for Arbitration proceedings to begin when disputes between parties arise. It also allows parties to set the terms and conditions i.e. procedure and guidelines to be followed by both parties whilst initiating dispute resolution proceedings.

A dispute often arises between the parties over the meaning as well as effect of terms in Construction Arbitration Contracts like Venue, Seat and Governing Law.

Venue is usually termed to be the geographically convenient place where parties have decided to conduct their Arbitration. Whereas, Seat is the juridical place that decides as to which specific Court will supervise the Arbitration, the scope and enforcement of Arbitral Award passed.

Parties are at a liberty to choose their Governing Law, Rules, Seat of Arbitration, etc. Usually there are no such limitations when it comes down to choice of contract. However, except as set out specifically in Fifth and Seventh Schedule of the Arbitration and Conciliation Act 1996.

But, as per TDM Infrastructure Private Ltd v UE Development India Pvt Ltd [2008 (14) SCC 271], the parties can choose a foreign Seat of Arbitration but cannot choose to contract out of Indian law and choose a foreign Governing Law as it would be against the ‘public policy’ of India. No such restrictions are however applicable if any one of the party is a foreign entity as per Arbitration and Conciliation Act 1996.

AMLEGALS REMARKS

Construction disputes are typically more complex and involve several complexities. Likewise, Construction Arbitration involves disputes pertaining to non-compliance of specifications, breach of terms of the Agreement, delays, maintenance, damages, and defects, etc.

On the contrary, in Generic Arbitration, the parties usually pre-estimates the loss, and the clauses in the Agreement provide measures to calculate the damages, lay down a specific procedure for the dispute resolution, and also provides a timeline for the same.

It is pertinent to note the underlying differences between Construction Arbitration and Generic Arbitration. Practices and mechanisms such as fast track Arbitration, interim relief measures, etc. should be implemented in order to specifically address the several issues arising out of Construction Disputes and Construction Arbitration. In this regard, our upcoming blog in this series shall discuss the unique challenges posed by Multi-Party Arbitration as well as the importance of Emergency Arbitration when it comes to Construction Disputes.

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