Construction Arbitration - Marriage of Law & Science

- Er. Alpesh Yadav[1]*

Introduction

Construction industry has seen some of the largest and complicated arbitrations often involving rigorously interplay of technical and legal interpretations. Construction arbitration does not merely revolve around contracts but also demands technical aptitudes and practical understanding of the industry.

Construction businesses embroiled in disputes prefer using arbitration mechanics rather than going for litigation to resolve their disputes. This article seeks to identify how arbitration is so uniquely suited for the resolution of engineering disputes and what are the role of Engineers and Lawyers in construction arbitration.

Anatomy of Construction Dispute

The Construction Sector is classified mainly into three important segments a) Infrastructure, b) Commercials and c) Residentials. Each sector has its own issues only slightly overlapping. Construction disputes are primarily technical in nature and can potentially have far reaching impact on the projects but to understand the same let us first briefly understand the types of disputes involved in construction. Disputes in the construction industry continue to be proliferate mainly due to:[2]

(a) Difference in opinion over designs & drawings, compliance with specifications & standards, ambiguous terms, guillotine provisions, fit for purpose, etc.

(b) Differing site conditions, force majeure, etc.

(c) Constriction disagreements over owners directed changes and change of scope.

(d) Change in legislation / law.

(e) Unrealistic contract duration or completion date and consequent differences of opinion on extensions of time and compensation.

(f) Errors and / or omissions to understand and comply with contractual obligation.

(g) Poorly drafted or incomplete and unsubstantiated claims.

As it may be clear from the above list, technical aspect is inextricable from construction disputes.

How construction arbitrations are different from generic arbitrations

Construction disputes are unique due to the nature of science and arithmetic involved in its adjudication. The other important aspects which differentiate them from others is discussed in the following paragraphs.

Quantum of losses

For most sectors other than construction, cause of differences are certain and their contracts provide mechanism for computing damages or may have amounts predetermined for defaults. The same is not the case with construction contracts. Construction claims are largely technical in nature such as disagreements over rates, quantities, scope, durations, and may also have consequential losses such as loss of profit, loss of opportunity and overheads. The nature of dispute and computation of damages depends on the facts and circumstances of each case. It becomes difficult to establish the quantum of such claims only based on documentary evidence and reliance is placed on established engineering concepts and formulae. The adjudicators often exercise caution when dealing with quantum of claims and use their own expertise or engage experts / specialist to decide the quantum of damages or compensation.

High Stakes and Volatility

The monetary stake involved in construction business can be very high. The infrastructure and commercial contracts have longer gestation period and therefore investment remains blocked for longer period, whereas residential projects are confronted with highly volatile market. Further construction industry is the one, which is most effected by economic crisis as it directly impacts the demand. Under such circumstances, any discrepancies, ambiguities, differences, delays can turn the project financially unviable. Construction projects are more susceptible to financial challenges and are prone to disputes.

Multiple Stakeholders

Multiple parties are involved in each construction project, such as the owners, architect, designers, contractors, vendors, suppliers, etc. Most are directly involved in the project and local authorities, public utilities, technical institutions, labour unions, personal interest groups are indirect stakeholders. Each party may have unique role and contractual arrangements with one or several others involved in the project. Any delays, inefficiencies, defects by any of these stakeholders is detrimental to the project and consequently on interest of other parties involved. Understanding the role of stakeholders in disputes in construction arbitration could be challenging. Interestingly when other aggrieved parties join the interested parties in a single arbitration proceeding, apportioning of liability and award thus becomes a task for the arbitrators and the parties.

Complex point of law and procedure

Construction disputes are often connected with delay in acquisition of land, environmental concerns, increase in the cost of labour and materials, shortage of labour, issues related to migrant labours, finance, disinvestment, etc. and their resolution often requires compliance to their related statutes such as contract law, land acquisition law, labour law, environmental law, income tax law, company law and such others. These disputes often involve exceedingly complex technologies, intellectual property rights issues, regulatory schemes, ownership rights, which cut across many domestic and international jurisdictions.

Further the arbitration law in India allows the parties to choose their own law, Indian or foreign, based on which arbitration will be conducted, place and forum of arbitration, within or outside India, adopt their own procedures or the procedure of any internationally recognized arbitral forums. Arbitration award may further require compliance to several law requirements, some unstated, for its enforcement.

Construction arbitration therefore encompassing multiple parties in multiple jurisdictions, with complex interrelated statutes, could involve painstaking arguments on complex legal positions.

Voluminous Documents

Construction contracts are highly illustrative and consist of several documents with distinct purposes but interlinked with each other. Documents differs based on the nature of construction activities such as public private partnership, turnkey, EPC, item rate, etc and form of contract chosen such as FIDIC, NEC, JCT, ACE, Government Contracts[3], etc. Complexity of documents, inconsistencies coupled with long lifecycle of construction projects can be breeding ground for disputes.

Construction arbitration involves deciphering of these complex contracts and contemporaneous records. Documents filed by parties could be in the form of multiple agreements, designs & drawings, charts, schedules, cost accounts, communications, emails, minutes of meetings, etc., which may require time consuming and cumbersome analysis to recreate the timeline of events and ascertain the facts.

Experts

Given the technical nature of disputes, the role of experts in construction arbitration sometimes become inevitable. The expert, either party appointed, or tribunal appointed, can be renowned independent professional such as quantity surveyors, geologists, chartered engineers, chartered accountant, etc., called upon to decipher and analyse the technical documents, to overcome evidentiary hurdle and give its opinion. The parties may also have expert witness having adequate experience and knowledge to lend credence to their case. Thorough and convincing expert testimony can help a party prevail on any of the hosts of issues that typically arise in construction disputes.

Arbitrators

The inherent techno-legal complexity involved in construction disputes necessitate the adjudicating body be well versed with the construction industry and have adequate technical and legal knowledge. The arbitration law regime in India gives the parties the liberty to appoint arbitrators of their choice which they feel could be adequate to adjudicate their disputes. If a balance of technical and legal expertise is maintained while appointing the arbitrators, the tribunal could be better equipped to handle expert evidence and submissions on technical and legal aspects.

How arbitration is uniquely suited for the resolution of construction disputes

Amongst the two primary mode of adjudication for resolving disputes (a) litigation in the courts and (b) arbitration, the most preferred mode in the construction industry is arbitration for three fundamental reasons (i) efficiency of time; (ii) confidentiality; and (iii) control over the process of dispute resolution.

Construction industry is ideally placed to reap the benefits of arbitration to resolve its disputes. This is true for several reasons and some of them are enumerated below.

a) Peculiar nature of constructions disputes is such that if not resolved quickly can have cascading effect causing time and cost overrun. Such disputes cannot be allowed to linger and languish in usual channel of litigative process of the country.

b) Parties in arbitration have the liberty to choose their arbitrators who may understand the engineering and underlying scientific principles, thereby limiting the amount of time counsel needs to spend on educating the tribunal.

c) Engineering disputes are distinct as they revolve around analysis of complex technical documents and science involved. With engineering savvy arbitrator on the panel, viable conclusion can be drawn from data subjected to assessment and testament.

d) Arbitration encourages creative ways of receiving expert testimony that are not available in a court trial.

e) The arbitration regime in India has been revamped by several amendments in recent years to make arbitration proceedings in India more effective, especially for the construction sector.

f) The changes have far reaching impact for the construction industry as it balances the control that one party (generally the owner) used to exercise previously. The regime now gives more power to the arbitral tribunal for award of interim measures and provide for cost effective and timely redressal of disputes.

Role of Engineers and Lawyers

We discussed above, construction disputes are distinctive, often involving mixed issues of facts and law. The identification of the intricacies of cross obligations and assessing their impact on project for apportionment of liability is highly technical in nature and has evolved into a specialised jurisprudence in itself. Knowledge of the technical details involved in the contract and grounding in law are both essential to effectively resolve construction disputes.

Construction arbitrations therefore necessitates the arbitrators and advocates to have certain knowledge of engineering principles and some comfort with related mathematics apart from applying the law for deciding the disputes. A techno-legal counsel or team of Lawyers and Engineers can proficiently present contentious technical case and render scientific principles involved in an understandable manner before the arbitrators.

Often to conclude the matter the arguing counsels and / or arbitrators may have to understand the Engineers approach towards the issues and its practical resolution.

Concluding Thoughts

Construction industry is one of the most dynamic sectors not only on a global scale, but also in India and is expected to grow approximately 85% worldwide by 2030 with India, China, and United State accounting for 57% of the total growth[4]. It is one of the major contributors to India's economic development but is also regarded as one of the most conflict and dispute ridden industries.

In a sector which is subjected to such extreme technicalities and complexities, it is imperative to resolve issues efficiently and economically and it is therefore important to have distinct expertise and in depth understanding of subject. With the added stress of the COVID-19 emergency on the markets, there is a potential for an influx of disputes which if not resolved effectively could cause immense and long term damage to the industry.

As could be perceivable from the above discussions, rational approach for success in construction arbitration could be concrete collaboration of technical and legal profession for effective resolution of disputes rather than playful game of grammar by the parties.

To conclude


“Talent wins games, but teamwork and intelligence win championships.”

- Michael Jordan

[1] Alpesh holds Engineers Degree from Mumbai University and PGs in Construction Management from NICMAR and Institute of Engineers. He is pursuing Master of Business Law and PGD in Environmental Law from NLSIU. He has more than 16 years of experience in contracts management and arbitration. He can be contacted at alpesh.yadav@hotmail.com.

*This article is an opinion piece by the Author on the current arbitration and technolegal regime. The views are personal to him and does not necessarily reflect the views of the blog.

[2] Global Construction Disputes Report 2020, Published by Arcadis Construction Claims Consulting. [3]Government utilities such as Neeti Ayog, Railways, NHAI, NHPC, etc. have devised their own standard contract formats for infrastructure projects. [4] Forecasted by PriceWaterCoopers in Global Construction 2030 Report.

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