Diverse Facets Of Construction Arbitration And Best Practices

Bindita Chaturvedi

28 Feb 2022 7:57 AM GMT

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  • Diverse Facets Of Construction Arbitration And Best Practices

    CONSPECTUS:-The Construction Industry in India is increasing with each passing day because of the increased developmental and other infrastructure activities which is carried out by the Government and the private sector in India. Therefore, it is believed that the Construction industry is one industry which cannot be squeezed into water tight compartment or which can be compressed...


    The Construction Industry in India is increasing with each passing day because of the increased developmental and other infrastructure activities which is carried out by the Government and the private sector in India. Therefore, it is believed that the Construction industry is one industry which cannot be squeezed into water tight compartment or which can be compressed into one domain. This is an industry which is associated, linked and connected with other industries and thus, the disputes that arise from it are also complex and composite. The Indian Construction industry is a major sector but vast, complex and consist both i.e. the real estate sector and the urban development sector. Construction business in India received the 2nd highest foreign direct investment for the period of 2000-2020. It is believed and expected that by 2025, the construction business market in India will emerge as the third largest industry, globally.


    Accounting Standard (AS) 7, applicable for accounting period on or after 01.04.2021, defines a construction contract as a contract, specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.


    The uncertainties that greatly influence the progress of the construction projects vary due to different reasons such as adverse weather condition, fluctuation in the market, lack of raw materials, human resources etc., which on the other hand, adversely impact the budgeted costs and completion date.

    In the case of construction projects with respect to dams, bridges, power stations, metros, speed rails etc, the certitude of disputes are potentially higher because these projects are highly complex and technical in nature and involve multiple parties. The parties or major players who are directly involved in these disputes are:-

    1. Employers
    2. Contractors
    3. Designers
    4. Contract Administration

    There are other parties whose involvement is not direct in the construction disputes but these parties also have a significant influence on the construction projects. These parties include the following:-

    1. Lenders
    2. Insurance companies,
    3. suppliers and consultants,

    There are various government authorities/public bodies that are involved in the construction projects, whose permits and sanctions play an important part in the construction and Infrastructure development projects in India such as the Department of Mining and Geology for quarrying permits, or the Ministry of Environment, Forest and Climate Change for environmental clearances etc.

    Therefore, a complex web of contractual rights and liabilities are created due to the involvement of multi parties and from which one may sensibly expect a potential outburst of disputes. Thus, due to the involvement of different parties/multi parties, there arises a trammel that augments the intensity of the disputes in the construction industry. Therefore, it is the need of the hour for the lawyers in India to be well informed about construction-related contractual and legal issues, including the alternate dispute resolution process i.e. the construction arbitration.


    "All war are follies, very expensive and very mischievous ones. In my opinion there never was a good war or a bad peace. When will mankind be convinced and agree to settle their differences by arbitration?"- Benjamin Franklin

    In the case of Empire Jute Co. Ltd. and others vs. The Jute corporation of India 2007, SC, the Hon'ble Apex Court recognized the importance of the ADR system. The Hon'ble Apex Court reiterated the principle that courts would not exercise their writ jurisdiction under Article 226 or 32 or discretionary power under Article 142 of the Constitution of India to grant relief to the parties, when there was an alternate forum i.e. the arbitration available to resolve the dispute between the parties. The Apex Court further held that though the power of judicial review vested with the superior court had wide amplitude but the same should not be exercised to decide a dispute arising out of a contract when there is an arbitration clause available in the contract and that such disputes should always be settled by Arbitration.

    The Apex Court in the case of Food Corporation of India vs. Indian Corporation of Arbitration AIR 2003, SC pointed out that the legislative intent of the Arbitration Act of 1996 is to minimize the supervisory role of the court in arbitral process and expeditious appointment of arbitrator so that all contentions may be decided by the process of arbitration without recourse to litigation.

    There are four basic forms of ADR (Alternate dispute resolution) process/ techniques/mechanism which are considered by the parties for settlement of disputes and the same are also applicable and available for resolution in any construction disputes. The four forms of ADR mechanisms are:-

    1. Negotiation

    2. Mediation

    3. Conciliation

    4. Arbitration


    The idea behind the preference of arbitration over litigation has various advantages attached to it. One such advantage is that the autonomy of the parties in arbitration is supreme. The Parties are free to decide the procedure of arbitration and also the arbitrator /arbitral tribunal. As per the section 16 of the Arbitration and Conciliation Act, 1996, the Arbitrator or the Arbitral Tribunal have the competence to rule on their own jurisdiction.

    Not only this, section 17 of the Arbitration and Conciliation Act, 1996 authorises the Arbitrators to order interim measures which on the other hand minimises the intervening role of the courts, however, there are few exceptions to this as it evident from section 9, 34 and 37 of the act. There are certain schedules in the act such as Schedule V to VII which has specified certain criteria and the same mandates that the arbitrator has to be independent, impartial and have no relationship with the disputants.

    The Act also has also dealt with the criteria for the experience which is required for the arbitrator and further has dealt with their availability of time for devoting sufficient time to the arbitral proceedings.

    Therefore, it is expected from the Arbitrator and even the mandate of the Arbitration and Conciliation Act, 1996, requires that the award which is passed by the Arbitrator will be based on merit, technically sound and which will not give rise to any other and further perplexity during its enforcement.


    That Section 26 of the Arbitration and Conciliation Act, 1996, provides for the appointment by the arbitration tribunal of experts with domain knowledge. The said provision is beneficial but it must be kept in mind that the opinions given by the experts cannot be considered as exhaustive, comprehensive, all-inclusive and sufficient for resolution of disputes which are related to a particular field/domain such as construction projects, IP, banking, engineering, finance etc.

    Technical issues are the focal point for the entire process of the settlement of dispute resolution in these kinds of arbitrations matters, which ultimately takes the shape of commercial and financial issues in the form of claims for damages, payments etc. Therefore, it can be said that where an arbitration tribunal lacks domain knowledge then it will not be in a position to do justice while passing an award because an arbitration award will become/treated as a decree, which will be enforced like a court order. Therefore, it is imperative to understand the idea and concept behind choosing an arbitration tribunal. To make the awards enforceable it must be kept in mind that it should be based on domain knowledge and covers the relevant legal provisions so that it is just and can withstand scrutiny if any by the courts if such awards are ever challenged under section 34 of the Arbitration and Conciliation Act, 1996.


    There are certain types of claims in construction projects such as time Claims Costs Claims. The following can cost claims i.e. loss/expenses (damages) additional payment under specific provisions of the contract of the project, additional payment under specific provisions of the contract act, variations, disruptions, prolongations.

    Objectives of time claims

    1. To extend the contract completion time

    2. To waive the LD liable to be paid to the employer

    3. To prepare the claim record document for the cost claims

    Objectives of time claims

    1. To reimburse the loss and expenses incurred in the project

    2. To compensate the extra preliminaries due to delay in the project by the faults of employer and consultants.

    Construction claim process generally consists of the following main four steps:-

    1. To identify the problem/reason for the claim and then raise the claim accordingly

    2. Registering that claim and then reaching for a settlement or disagreement between the contractor and employer

    3. In case there is a disagreement then a dispute is created between the contractor and employer

    4. Disputes are then referred for resolution through ADR/Litigation


    The COVID-19 pandemic qualifies as a "force majeure" event under the 2017 FIDIC Red Book 

    [3]. Disputes[4] are now arising because of COVID-19. But one should not have the general assertion that it will and can qualify as an Exceptional Event and therefore, it should not be seriously contested as disputes can still arise due to the project centric issues. FIDIC provides for 2 tiers of dispute resolution in case the disputes arise. The two types of resolution are stated herein below:-

    1. A Dispute Adjudication/Avoidance Board (DAAB)
    2. ICC arbitration (upon failure of DAAB)

    The above mentioned has become a topic of discussion and deliberations and at present one can say that the industry can be brought into the ambit of "techno commercial legal issues", as it involves the fusion of highly complicated technical issues which on a later stage gets converted into extensive commercial and financial disputes and the same calls for a well adept and effective resolution issues and disputes that sprout out from the Infrastructure and Construction projects In India.

    Author: Bindita Chaturvedi, Senior Associate. Views are personal.

    [1] www.investmentindia.gov.in, Sector expert Sanchi Padia.

    [2] https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/accounting-standards.html#Accounting Standard (AS) 7, applicable for accounting period on or after 01.04.2021

    [3] Clause 18 of the FIDIC Red Book

    [4] Clause 20 of FIDIC Contract deals with Dispute Resolution

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