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February 21, 2019

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Real Estate Construction Claims & Speedy Resolutions: Making the Right Choices & Road Ahead


- Shweta Bharti, Senior Partner [ Hammurabi & Solomon ]

Shweta-Bharti

The article discusses the kinds of disputes arising in the construction sector, options for resolution of disputes and hurdles therein and the road ahead in resolving them expeditiously...

Construction claims have their own uniqueness since it often requires parties to continue performing their respective obligations creating myriad challenges which make construction disputes uniquely different from other disputes since the repercussion of the disputes may often result in enhancement of the cost of the project as well as delays in project completion.

This article seeks to discuss the kinds of disputes arising in the construction sector, the options for resolution of disputes,and the hurdles therein, and the road ahead resolving such disputes in an expeditious manner.

Kinds of construction disputes


The key construction disputes are –

i) failure of parties in interpretation of contracts and understanding the terms and conditions thereof,

(ii) breaches arising out of the contract by either party,

(iii) delays in payments or insufficient payments commensurate to the performance,

(iv) drawing and design-related concerns or inadequate/insufficient design,

(v) Project Engineer favoring either party, leading to allegations of bias against him.

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Even though the contracts are extensively negotiated prior to execution thereof, the issues relating to the interpretation of such negotiated terms and conditions have been seen to be one of the major point of discord between the parties. The reliance is thereafter placed on the discussions prior to the execution of the contract and arrive at an essence/understanding of such terms and conditions. Similarly, the breaches of contracts result in damages being claimed by the aggrieved party, including the same leading to demand for specific performance of the contract or in certain extreme cases also result in termination of the contract. Though, for most companies, termination is not viewed as the most viable option for the very fact that the entire project after having progressed to a certain stage would have to be reunderstood by a new contractor, which shall not only delay the project but also cause additional cost burden on the owner companies.

Options of dispute resolution & challenges

There are various mechanisms for resolution of the above stated disputes, viz., hardship-negotiation, mediation, conciliation, arbitration and litigation. There are certain contracts where hybrid mechanism has also been chosen as a way for resolution of disputes wherein a combination of a few mechanisms is adopted in order to arrive at an early and amicable resolution. We have most often witnessed hardship-negotiation (without the assistance of any third-party intervenor) preceding the arbitration clause and have also been successfully in various cases and the parties have been able to negotiate and arrive at a settlement. The other hybrid mechanism successfully implemented is arbitrators donning the role of informal mediators/conciliators prior to initiation of arbitration and making attempts at ensuring successful resolution of disputes.

While the above mechanisms have often paved the way to successfully resolve disputes, it has been noticed that there is no substitute for arbitration and it still remains the preferred form of dispute resolution in the real estate sector. Thus far, preference in arbitrations has been given to ad-hoc arbitrations as compared to institutional arbitrations, there being very few construction-related arbitration institutions besides the Construction Industry Arbitration Council (CIAC), which is working under the aegis of the Construction Industry Development Council (CIDIC). Besides the CIAC, there are few institutions viz. ICA, SIAC etc. as well, providing for institutional arbitration services. In such circumstances, there arises a need for world-class arbitral institutions with techno-legal professionals empaneled as arbitrators in order to bring about a swifter resolution to construction disputes which have various technicalities involved which may not be understood in the right perspective by practicing lawyers and retired judges. We have also noticed in our past experience that emergency reliefs that have been sought by the parties in construction disputes have largely come through in institutional arbitrations, where the institutions provide for such emergency reliefs while in ad-hoc arbitrations, the prevalent practices and procedures have been given more weightage, thereby delaying the reliefs to a certain extent. With amendments in the Arbitration & Conciliation Act, 1996 (Act), in 2015, followed by another amendment in 2018, there has been a sea change in the manner in which arbitrations have been conducted in the past in India. The timelines provided to conclude the arbitration proceedings have been tightened, followed by the limited scope for challenge left under Section 34 of the Act, and limited interference made in proceedings under Section 37 of the Act as well as by Supreme Court, the same has made arbitrations the most preferred method of dispute resolution for the construction industry. The other aspect of costs of arbitration has also now been considered in the amendment made to the Act and the arbitrators’ fees have been curtailed basis the schedule provided in the Act, making the costs involved in an arbitration more predictable and certain.

The other traditional mode followed by the industry in the olden times was to take their disputes to courts with parties filing for damages and specific performance against the other party. However, with the cases taking years before the courts and forums, the construction industry swiftly changed their strategy to adopt arbitration more than litigation. It was in this light that the commercial courts were established in all major high courts for disputes above a certain threshold (`1 Crore and above) in order to ensure expeditious hearing of the cases before courts. Various amendments were carried out in the Code of Civil Procedure 1908 to include the provisions of the Commercial Courts Act, including fixing the timelines for various procedures as prescribed. Newer mechanisms of convening case management hearings for framing of issues were introduced which was thus far an alien concept in the Indian judicial dispensation system. These changes that have been brought about in the courts have facilitated expeditious hearings and the parties are now finding cost-effective recourse in litigation as compared to arbitration, which becomes an expensive affair with arbitrator’s fees, institutional expenses, matters subsequently ending up in courts with challenges made to the awards under Section 34 of the Act followed by an appeal under Section 37 of the Act and the matter ultimately being decided by the Supreme Court. The commercial courts are less expensive with the court fees being much lesser in comparison to the arbitrator’s fees. While the decree passed by the single Judge is still subjected to the regular first appeals and thereafter followed up to Supreme Court in SLPs, the cost involved most times in pursuing a matter before the court is less expensive than pursuing the same in arbitration. However with all the virtues being discussed about resorting to the commercial courts, the fact of the matter remains that arbitration has taken a clear lead in the run to the best option for resolution of disputes in the construction industry. Almost all construction agreements consist of a dispute resolution clause wherein arbitration is preceded either by a negotiation by the parties themselves within a particular timeframe or mediation/conciliation through their respective mechanisms.

In construction contracts, the Dispute Resolution/Review Board also plays a pivotal role since it precedes the traditional dispute resolution mechanisms. The Board keeps a vigil on the site and the progress made in constructions and thus in case of disputes, it takes efforts for amicable settlement of such disputes. The Board consists of 3 members, one member each appointed by the respective parties and the Chairman is selected by the 2 Party appointed Members. Since the members are neutral, independent, usually from the construction industry and thus have the requisite experience and familiarity in interpreting the contracts, it enables amicable resolution of disputes expeditiously. Upon the failure in arriving at settlement, the Board Member recommends resorting to Litigation or Alternate Dispute Mechanism provided for under the Contract.

The Road Ahead

The future of the construction industry lies in making contracts more enforceable and the resolution of their dispute clauses more effective. Considering that most construction-related disputes arise in relation to public contracts between the government and private parties, the government has emerged as the prime litigator in most cases with little leeway to resolve their disputes amicably. The Union Budget 2015-2016 had proposed to introduce the Public-Contracts (Resolution of Disputes) Bill, 2015 to streamline the institutional arrangements for resolution of such disputes. The Bill suggested setting up of a tribunal for public contracts to: adjudicate upon disputes and differences, refer the disputes and differences to arbitration, and adjudicate upon awards arising from such proceedings, adjudicate upon disputes involving a public authority, service provider or contractor and exercise supervisory control over the arbitral proceedings. The jurisdiction of the tribunal was proposed to include disputes arising from a public contract that has been executed or entered by any Centre, state or local authority or any entity society or trust owned or controlled by the government. Such a law is still awaited, but will still need to overcome the challenge of excessive tribunalization of dispute resolutions. Though specialized expertise and sectorial understanding of issues and complexities peculiar to the real estate sector is key to expeditious resolution of construction disputes, numerous other tribunals set up to reduce the burden of the courts have been of little help.

In order to make the construction industry more robust, the focus ought to be to make the resolution and enforcement of construction disputes expeditious and cost effective and steps in this direction are required to be taken on an urgent basis, including setting up of more cost effective institutional arbitration centre’s on the lines of CIAC to provide specialized dispute resolution mechanisms with a tiered approach for resolution of disputes be provided under one umbrella and facilitation of negotiation, mediation, conciliation and arbitration be made available for the parties.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.

 

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