alternative dispute resolution and arbitration

7/29/2019 Alternative Dispute Resolution and Arbitration

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Alternative Dispute Resolution and Arbitration

Some Personal Experiences

S.A.ReddiDy.Managing Director (retd), Gammon India Ltd

Introduction

Indian construction contracts have traditionally been based on the Indian Contracts Act

1872. Though in force for more than a century, there has been hardly any worthwhileamendment to reflect the societal changes that have taken place particularly after

independence. The concept of master servant relationship is still reflected while

interpreting many provisions of the Contract Agreement. Same is the case in respect of

General Conditions of Contract. Every State P.W.D., every Department of CentralGovernment, every Public Section Undertaking, whether State or Central and every

Consulting Engineers / Architects have their own Standard Conditions of Contract.

There are more than 100 such documents in operation in India.

Each of developed countries operates not more than five different sets of General

Conditions of Contract. FIDIC General Conditions of Contract closed the gap further,bringing it to a single set of General Conditions of Contract. Majority of the International

Contracts and domestic contracts in many countries are based on FIDIC; not so in India.

Even International financial institutions such as the World Bank, Asian DevelopmentBank, etc. have standardized their General Conditions, broadly based on FIDIC

FIDIC Conditions of Contract

FIDIC conditions hold a reasonable balance between the requirements & interests of the

parties concerned. FIDIC allocates fairly the risk & responsibilities between thecontracting parties. The contracting parties will react favorably to clearly statedobligations. Avoids unsatisfactory performance, increased costs & disputes

FIDIC conditions address generic issues concerning in project implementation:

o Working relationship between different parties, protocol for communication

o Rights & obligations of employers, contractors

o Insurance risk mitigation & risk sharing

o Quality Control, Engineering & structural failure

o Delays, damages, Claims, Disputes

o Safety, security of plant, machinery & personnel

Uniqueness of Construction Activity

Every construction project is unique; no two sites / designs are alike. The quality of the

Employers, Consultants, Contractors vary widely. The construction period is decided

on adhoc basis and not based on any scientific system. There are uncertainties in land


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acquisition, Right of way, Law and order, conflicts between state and central

Government, vagaries of weather and a host of other issues. Every construction

contract is uniquely related to a particular site & ground conditions which may notbe fully defined when the work is designed. Despite modern methods of site

investigation, uncertainties exist throughout the operation of contract. Construction

work is exposed to weather and subject to its constraints. Claims arise out of aboveuncertainties, among others.

Claims in Civil Engineering Contracts

Claims appear to be inescapable components of almost all construction contracts. A

successful claim may turn the fortunes of the contract; or indifferent processing may be

sufficient to turn profit into loss. Claims may be negotiated, amicably settled or may leadto arbitration or litigation.

A claim is a request, within an existing contract, for additional payment, or additional

time, for a task which is additional to agreed work & for which the existing contract doesnot make provision- or does not appear to do so. Claims may be

o For additional payment or for additional time to complete the contract (Time,

Money, or for both time & money)

o Due to design changes, changes in working circumstances, changes to contract

conditions.

oFor events that do not affect the current work, but which can bring all work to a

standstill in future

Claims may arise out of Contractual Right, Breach of Contract - The Reasonable

Expectation, Oversights and Omissions in the contract agreement etc.

Disputes

A dispute is a disagreement that arises out of an agreement. In construction industry,

disputes are unavoidable despite best of intentions, due to large number of uncertainties.Provisions for settlement of disputes are laid down in the contract agreement. Mere

silence may amount to repudiation in many cases. Disputes which are capable of

reference to arbitration must necessarily arise between the parties in respect of a definedlegal relationship, whether contractual or not

The Arbitration and Conciliation Act, 1996

The Arbitration Act of 1940 was being adopted in contracts until the Act was revised in

1996. There have been numerous complaints about the unsatisfactory nature of the

earlier Act. There were many untenable provisions concerning challenging the award.Neither party was satisfied. In almost all cases, the award used to be challenged.


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The 1996 Act is based on UNCITRAL (United Nations Commission on International

Trade Law) covers International / Domestic Arbitration and Conciliation and provides for

reasoned award, minimizes the supervisory role of Courts, permits mediation,conciliation etc during arbitral proceedings to encourage settlement of disputes

Award is enforceable as if it were a decree of the court.

Grounds for Challenge

Award is in conflict with the Public Policy of IndiaA party is under some incapacity

The arbitration agreement is not valid

The party is unable to present his case

The dispute does not arise out of contractThe subject matter of the dispute is not capable of settlement by arbitration under the law

An interim award is permitted but reasons for the award shall be stated. The award may

include, in the sum for which award is made, interest at such rates as it deems reasonable,on the whole or part of the money, for the whole or part of the period. The sum shall,

unless the award otherwise directs, carry interest @ 18% p.a. from the date of the awardto the date of payment

Enforcement of the Award

Award shall be final and binding on the parties. Award shall be enforced under the Code

of Civil Procedure, 1908 as if it were a decree of the court; in case award is neither

challenged nor payment made, execution petition can be filed in court. Unfortunately,the reality is not that simple. Almost all the arbitration award relating to construction is

challenged and the dispute takes a long time to get resolved. Despite the well intended

provisions of the 1996 Act, habits die hard; there are numerous cases of the Awardsbeing challenged, mostly on grounds that the Award is in conflict with the Public Policy

of India. Alternatives are being considered, including Dispute Resolution Board,

Mediation etc.

Dispute Resolution Board (DRB)

DRB is formed at the very beginning of the Contract operation, before disputes arise.DRB Members have strong construction & technical background, have no interest in

taking sides and can come up with more equitable findings than the arbitrators without

such background. Disputes are settled during construction, relieving owners, contractorsfrom entering into litigation. Parties are expected to get quick, early read on what to

expect if dispute moves to arbitration or litigation. Parties can resort to arbitration if not

satisfied. Expenses are very low as compared to those of arbitration, results in lower bidprices and reduction in number of claims.

In case of failure to agree upon appointment of DRB, the appointing entity or official

named in the Contract Agreement shall, upon request of either or both parties and after


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due consultation with both parties, appoint this member of the DRB. This appointment

shall be final and conclusive.

Some selected Case Histories:

Some of the case histories have been selected, reflecting various aspects of arbitration,

conciliation, alternate dispute resolution, etc. The description is based on theauthors involvement in many of the cases cited

Case 1: Bassien Creek Bridge, Mumbai

Contract awarded based on tenders without PQ. The Contractor was financially sound but

new to bridge construction in marine environment. He employed a British consultant for

designs. There was a vacuum regarding construction. Two caissons collapsed duringsinking; could not be corrected. Contract terminated at the contractors risk and cost

Fresh tenders invited. Alternative layout was adopted to avoid two failed foundations.

Bridge completed by the second contractor in three years, at more than double the

original cost. The first contractor raised a dispute. Arbitration award was in his favour,despite the PWDs intention to recover the cost. The Contractor kept contemporary

records and appointed a senior legal counsel to fight the arbitration case.

Case 2: NHAI contracts - Ambiguity in price variation clauses

There were more than 100 contracts spread over the country, but no uniformity in

drafting price variation clauses. In consequence, some contractors were paid for pricevariation while others were denied. This resulted in stalemate & retarded progress; some

contractors suspended work pending settlement of dispute. The matter is under

arbitration.

There was abnormal price rise in steel and the price variation clauses were based on

indices which did not reflect a ground reality. Many Contractors typically lost several

crores of rupees. Matter referred to arbitration. Results are uncertain; even if thearbitrator awards, the same will be challenged by the aggrieved party.

Case 3: Pamban Bridge, Tamilnadu


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History of Tendering, Construction, Revised Tendering, Arbitration

The first Contract was awarded in 1974 to a local Contractor, competent but with noexperience in bridges in marine environment. Contract terminated mid-way due to non-

performance. The Contractor contented that delay was due to cyclones and referred the

dispute to Arbitration. Almost the full value of contract was awarded in favour of thecontractor. Award contested by the Department. After attempting departmental work

unsuccessfully, the job was re-tendered and awarded to the Second Contractor.

Contract was not awarded within validity period; repeated extensions sought from lowest

bidder who was reluctant as in the mean while he had better opportunities elsewhere. He

offered a conditional extension; if the job is not awarded within the extended period, the

contract price will be increased by 10% for each month of delay in award of work .thecontract price was increased on account of delayed acceptance of the tender.

The second contract (1984-88) involved few months time overruns; extension granted

with proviso of no payment for escalation. Dispute referred to sole arbitrator in 1992settled in 1995. The employer challenged the award. The court ruled in favour of the

contractor. The employer appealed; pending decision, court directed payment of Rs 25lacs + other Rs 25 lacs against BGB. Final decision is pending (2008)

Case 4: Mandovi Bridge, Goa

The old bridge, completed in 1970 collapsed in 1986 due to corrosion of reinforcement.

Government decided to re-commission the bridge by dismantling the deck and piers andconstructing new piers and decks on existing foundations which were assumed to be safe.

Tenders were invited in 1986 for based on FIDIC Conditions; unconditional offer

requested which was complied with.

LOA contained additional stipulations, despite the bidder offering unconditional quote.The Employer wanted stacking & disposal of debris at locations decided by the

Engineer Bidder treated LOA as counter offer and declined. After protracted discussions;the conditional LOA was withdrawn and a new unconditional LOA was issued


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Case 5: Trombay Power Plant Civil Works

Dispute Resolution by Amicable Settlement

Issue No.1: short weight of cement

As per tender documents, cement bags as

received from the manufacturers will be

issued to the Contractor; no claims will beentertained regarding any shortage in weight

Actually, cement (packed in jute bags) issued to

the Contractor had a shortfall of 5 10%. Dueto weigh batching, contractor had to make good

the shortfall by using more bags of cement.

The Employer recovered cost of cement from contractors bills without considering theshortfall in weight. Contractor claimed for the excess number of bags actually used.

Owner rejected claim, citing the Special Conditions of Contract. Contractor rebutted byciting Technical Specifications of the Contract IS 456 and IS 8112

Issue 2: Dispute regarding reinforcement wastage :

Reinforcement steel was supplied by Owner. Wastage % specified in contract with penal

recovery for unaccounted wastage. Large wastage was experienced during execution,

due to varying column heights, beam spans, etc. Contractor protests penal recovery;since no detailed drawings were issued during tender, no allowance made in tender

for increased wastage

After completion the disputes were resolved by amicable settlement. Owner appointed a

committee of two General Managers not connected with the project, said the claim will

be accepted if Contractor was able to convince the committee, else Contractor wouldhave to give up his case. A Gentleman's agreement!. Contractor accepted the conditions

Cement is an essential commodity, falls under Essential Commodities Act. Contractor

cited the provisions of the Act and possibility of criminal prosecution. Owner retaliatedthat cement was not supplied by him but by the cement manufacturer. Contractor argued:

since Owner recovered cost of cement from contractor, he was the supplier

Construction drawings for various structures were prepared and issued by the

consultant after the award of the work. Variety of column heights, beam spans etc

resulted in substantial cut pieces of the reinforcement and consequent increase inwastages not contemplated at tender stage. Contractor submitted such increased

wastages should be to the Owners account.


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The issues were amicably settled after only three sittings of the committee within one

month. After careful consideration, Owner accepted contractors contentions on both the

issues. The cost of additional bags of cement used due to short weight of cement bagswas reimbursed. Owner waived the penal recovery for excess wastage of reinforcement

steel beyond the percentage stipulated in the contract.

Case 6: Dam Project in Meghalaya

Contract for construction of two dams, 15 km away from each other, awarded in 1977and completed in 1982. Three separate disputes were referred to arbitration in 1984:

Compensation for Suspension / Stoppage of work

Basis of Payment for extra work due raising of height of dam

Claim for extra payment for aggregates

Dispute 1: There were intermittent suspensions of work due to delay in power supply,

explosives, cement & steel by owner. The following issues were referred to arbitration:

- Whether compensation is payable for suspension in either of the two Damsindividually or together

-.Basis of compensation for suspension beyond 12 hrs: simultaneous application ofhourly rate & flat rate in a day or only on daily basis

- Payment of escalation on compensation amount

Contractor argues: Dams on separate rivers, 15 km apart, different site conditions.

Suspension at one site would affect performance of contract

Owner: As it is one composite contract, compensation clause would be effective only if

work simultaneously stopped at both dam sitesAward upheld contractors compensation claim for suspension of work at either dam;

simultaneous suspension at both dams not relevant

Contract provided for two rates of compensation - an hourly rate for suspension up to 12

hrs and per diem rate for suspension beyond 12 hrs

For suspension beyond 12 hrs, Contractor claimed hourly rate for 12 hrs + per diem rateAward: Compensation for suspension / stoppage of work beyond 12 hrs in a day payable

on per diem rate only

Escalation on Compensation

Contractors argument: Claim raised for labor wage escalation which was not covered in

compensation ClauseArbitrators decision: Not entitled.

- Contract clause silent on escalation

- Compensation for suspension is a matter different from contractors right to bereimbursed on account of increased labor cost during suspension period


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Dispute 2: Raising the dam level

Employer decides to raise height of dam by 8 m. Contractor asks for revised rateThe Employer makes provisional payment at revised rate subject to arbitration on

following issues:

- Whether work involved in raising the dam is within scope of contract.- If outside the scope, the rate payable

Contractors argument: Tender rates worked out as per drawings issued by the Owners

which clearly showed the height of dam, 704.26 mAward was given in favor of Contractor in 1990. These works to be paid at rates, terms

and conditions already agreed to earlier with interest at 12 % p.a.. Award made Rule of

Shillong Court. The Owners refuse to pay interest due. The issue is pending with District

Court, Shillong for 13 years after the original award, several years after the concernedwork was executed & for 28 years after commencement of the work!!!

Dispute 3: Extra lead for aggregates

Contract envisaged collection of sand from 3 km upstream. Due to raising the damheight, the sand quarry submerged. Further sand was collected from lead of 55 km.

Contractor claimed for increased cost (96 lacs). Owner refused to pay the amountContractor completed the work and the dispute is under arbitration since 1991

Establishment of stone quarry: The project was located in Meghalaya (Assam-MeghalayaBorder).Contract specified stone quarry in Meghalaya. Mid way through the project,

the State Government closed the quarry and subsequent procurement was done from

quarry in Assam. Increased lead paid for by the Owner; relocation cost (Rs.27 lacs)

denied. Matter referred to Committee set up by Owner. Committee recommends Rs.20.5 lacs; rejected by Owner. Matter referred to arbitration in 1991

Employer brought stay-order in 1996 against arbitration proceedings citing misconductby contractor. Stay-order not vacated till 2005. Contractor appealed to Court to vacate

stay order. Subject pending for 14 years after commencement of arbitration!!!

Case 7: Ganga Bridge Patna 5575m, 4 Lanes

Claim due to Introduction of PF settled by Conciliation

PF rules applicable to construction labor were brought into force after award of the

contract & during construction. Contractor claimed for additional expenses involved in


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enforcing PF rules including the Employers Contribution. The contract conditions

included reimbursement of extra expenditure due to legislative changes. The Employer

was unwilling to accept despite prolonged correspondence and justification. One optionwas to refer to arbitration, along with other outstanding issues; project completed in

1992, the arbitration process is still on in 2008! Instead the issue was taken up directly

with the Provident Fund Commissioner. Using the Commissioners goodwill it waspossible to settle the claim (Rs.3 crores) mutually

Changes in Labour Laws Dispute referred to arbitration

The contract provided for compensation due to variation in prices of labour, materials,

and POL. Any changes in labour laws and regulation attracted price variation. During

operation, the number of working hours for labour was reduced from 9 to 8 byLegislation. Disputes arose concerning compensation. Matter is under arbitration (as on

2008), even though the event occurred 30 years ago.

Cess on Construction Power generated by the Contractor: Dispute settled bynegotiations with the State Government

The Contractor obtained the power connection from SEB for operating construction

equipment. The State Electricity Board supply was erratic, with frequent variations in

voltage. These necessitated installation and operation of diesel generators by theContractor exclusively for fulfilling the bridge construction contract. However, the State

Electricity Board demanded payment of electricity duty for the power generated by the

contractor plus penalty. Though specifically exempted in the contract, SEB brought legal

action, attaching all construction equipments. All works came to a stop and there was afuror in the local press. The Chief Minister intervened, conducted negotiations with all

concerned and got an Ordinance issued, specifically exempting Ganga Bridge at Patna

construction from the purview of the concerned provisions of the Electricity Act

Applicability of Factories Act to construction:

The definition of Factories Act is all pervasive. Any establishment employing 20 / 10

persons with power is deemed to be a factory. Bridge construction involves labor &

power. The Inspector of Factories defined the bridge construction as a factory! A notice

was served on the Managing Director and all other Directors for non compliance ofprovisions of the Factories Act. .

Mines Act applied to bridge construction:

The foundation construction involved dredging of soil from inside the well foundations.

Mines department demanded royalty for mining soil (a state property) from belowground. The dredged soil was mostly refilled inside the dredge hole after sinking the well

foundation. Mines department demanded royalty once again for using state property for

bridge construction


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The disputes were settled after prolonged litigation

Case 8: A Bridge in UP - Constructed in 1960

The project was completed with 8 months time overrun; full extension granted by the CE.

However the SE is the Engineer as per contract. Due to personality conflicts, the SEgranted extension of time for 7.5 months and imposed penalty for balance 15 days; matter

referred to arbitration. The arbitrator upheld the SEs decision

Case 9: Irrigation Project in Orissa - Completed in the Early Sixties

Daily labour working hours reduced from 9 to 8 after the award of contract; the Employer

refused to compensate. Claims referred to arbitration. After more than 10 years oflitigation at various courts including the Supreme Court of India, the award went in favor

of the contractor. The State government still refused to honor the award. The Contractor

resorted to extreme measure of threatening to attach the government treasury to get paid

Case 10: New Pattao Bridge at Goa Arbitration case

The Contract was awarded in 1983. Due to collapse of Old Mandovi Bridge, Goa in

1986, the authorities decided to revised the design criteria for the New Patto Bridge

halfway through the contract. The revisions resulted in time and cost overruns;Contractor submitted claims in 1989 Rs.120 lacs. The negotiations were started and a

compensation of Rs.90 lacs was almost agreed upon but not implemented due to

procedural wrangles. The dispute was referred to arbitration in Aug 94. The Contractor

claimed escalation for the time overrun of more than 100% due to exceptional changes indesign. This resulted in prolonged arbitration proceedings, challenge of the award, court

cases etc during the next 10 yrs. The contractor ultimately received payment of Rs.1.91

crores; including interest of more than Rs.1 crore.

Case 11: Dam Project in Bihar

The contract was awarded in the Nineties. The Employer paid mobilization advance and

the contractor mobilized equipment, staff etc and actually commenced the work. In the

meanwhile, the Employer ran out of funds. Further works suspended by the contractor

indefinitely. The Contractor tries to remove his idle equipment but the Employer objectedand filed criminal case against the contractor, terminated the contract and declined to

release the contractors equipment from site, blacklists the contractor. The disputes were

referred to Court, arbitration in 2002, dormant in 2008!

Issues referred to Arbitration by the contractor included:

- Refund of mobilization advance

- Reimbursement due to breach of contract on account of abandonment of work

- Compensation on idle time, post-termination

- Reimbursement of the overhead charges


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- Reimbursement of unrealized profit

- Loss and humiliation due to criminal case

- Interest by way of damages

Case 12: Narmada Bridge at Kasrawad, MP - Narmada Bachao Andolan

One km long bridge contract was awarded in the Seventies. After the site was established,

there were obstructions to work by the Andolan, colony and offices were burnt down.

The work was suspended for several years. When peace returned to site, the originallyquoted rates were found not workable; however; the Employer insisted on completion at

old rates, resulting in suspension of work for several years The work was resumed after

several years. After protracted negotiations for revision of rates spanning over a decade;

the rates were increased by 83% and the bridge completed.

Epilogue

The experience of settlement of disputes through arbitration in India has been mostdisappointing Most of the arbitration awards are challenged, citing Public Policy of

India, despite the 1996 Arbitration Act. Mediation, conciliation appears to be better.Dispute Resolution Board concept needs encouragement; both parties should honour the

DRB decisions

alternative dispute resolution and arbitration

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