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  • Subhrotosh Banerjee

Arbitration in Construction Disputes

With the increasing use of arbitration as the preferred mode of dispute resolution and with a booming real estate sector in India, the intersection of the two is inevitable. Given the complexity of construction disputes, it has become widely known that arbitration is a far more efficacious method of resolving disputes as opposed to the traditional adversarial systems, such as courts. Before we can analyse watershed case laws on the topic, it is important to understand why arbitration is in fact a suitable means of resolving disputes in the construction sector.

Applicability of Arbitration: Construction disputes can be attributed to certain reasons as to why they occur, firstly, due to the ambiguous terms of the contract or technical hindrances or force majeure events; secondly, employer or contractor failing to understand their obligations under the contract, thirdly, organisation behaviour within the project. Unique nature of construction in so far as they involve technical specifications of construction, employee or labour codes or monetary considerations such as overtime issuances and delay costs make a specialised tribunal for the dispute necessary. Joinder of proper parties to the dispute is another consideration that must be taken into consideration as there are often multiple stakeholders in a project, necessitating joining of concurrent claims by such multiple parties or for purposes of evidentiary relation to the subject matter of the dispute. Specific institutions are also in place in order to administer arbitrations in construction disputes specifically, such as the Construction Industry Arbitration Council in New Delhi. Therefore, given the factors of fast-track process, interim relief and procedural formalities it is important to embrace arbitration in the construction sector and widen its applicability in cases.

Landmark Judgements in the field: In this part of the article, we will assess the impact of several watershed cases that have been set the law in various aspects of construction arbitration. The Apex Court in the case of National Highways Authority of India v. Sayedabad Tea Estate [1]held that an application for appointing an arbitrator under the statutory authority of Section 11 of the Arbitration Conciliation Act, 1996 (“ACA”) was not maintainable in light of Section 3G (5) of the National Highways Act, 1956 (“NHA”) which itself provided for the appointment of arbitrator by the Central Government. The NHA provides under Section 3G (5) that the competent arbitrator appointed by the CG will have the authority to acquire and determine the compensations to be granted. The question, therefore, before the Apex Court, arose as to which of the appointments was valid, whether it was the one done by the parties under Section 11 of ACA or the one by the CG under Section 3G (5) of the NHA. The court held that since the NHA under the section used the expression ‘subject to’, it indicated that it would have an overriding effect over other provisions such as that of the ACA. Therefore, the appointment under the ACA was deemed invalid.

Furthermore, the Supreme Court in the case of Government of Haryana PWD (B and R) Branch v. M/s G.F. Toll Road Pvt. Ltd. and Ors.[2] laid down that a former employee couldn’t be disqualified from acting as the arbitrator in a given case. In this particular case, a concession agreement was entered into by the parties for certain construction works, which contained an arbitration clause. The arbitrator appointed by the parties, after a dispute arose, was a retired engineer-in-chief. An objection was raised regarding this appointment as questions of impartiality were brought up regarding the arbitrator nominee, as he was a former employee by the respondents. Appellant sought a substitute arbitrator in this case from the Indian Council of Arbitration, however, the ICA had already made appointments on behalf of the appellants and for the role of presiding arbitrator. The Court took cognizance of the provision of Section 15(2) of the ACA which provided for the appointment of a substitute arbitrator according to the rules applicable for the appointment of the arbitrator who is sought to be replaced. However, the court noted that the case was governed by the pre-amendment ACA which did not provide such disqualifications. Moreover, on merits the court held that the ex-employee had retired nearly 10 year prior, so the claims of bias were not justified in this case.

Another notable case of an arbitration dispute in a construction case was in the case of Union of India v. Parmar Construction Co.[3]In this case, the respondent company contracted with railways to undertake various construction projects. The respondent company claimed costs for escalation of prices beyond initial estimates because of price hikes for raw materials and delays in undertaking the project. The appellant refused to pay said costs, leading to the respondent company invoking arbitration. The Rajasthan HC had, in contravention of the agreement, appointed an independent arbitrator. This was later rejected by the Apex Court wherein it held the 2015 amendments as inapplicable to the present dispute and passed directions to appoint the arbitrator under Clause 64(3) of the arbitration agreement between the parties. This judgement reinforced the principles of party autonomy and minimising judicial intervention.

Certain notable recent case laws have to be noted on the topic as well. For instance, in the case of Delhi Metro Rail Corporation Ltd. v. N.S. Publicity Ltd.[4] the respondents appealed the award which had denied the claim for overheads and stated that the loss on account of said overheads was absorbed in the claims of loss of profits. To this end, the Delhi HC opined that the respondent’s claim of overheads was over and above the claim for loss of profits and the decision of the Arbitral Tribunal that such overheads had been absorbed in profits is patently erroneous”. The question of overheads is uniquely common in construction arbitrations which necessitates arbitrators to closely examine the nature of the claims and their characterisation and only then determine the question of overlap between the two.

Other construction arbitrations have settled the law regarding several procedural aspects of arbitration. One such notable case is Mumbai International Airport Ltd. v. Airport Authority of India[5]wherein the court had held that under Section 9 of ACA, court is also concerned with the necessity to preserve the status quo and facilitate the arbitral process to be initiated by the parties. In furtherance of the same, it had opined that it was “open to Section 9 court to, while passing pre-arbitral interim measures of protection under Section 9, condition such grant by requiring the parties benefiting therefrom, to institute arbitral proceedings within a specified timeframe”. This can be inferred from the scheme of the 2015 Amendments to the ACA, wherein it had been held that if the arbitration had not been commenced within 90 days of interim relief granted, the same will stand null and vacated. Therefore, this laid the law in striving to strike a balance between maintaining the day-to-day business in an unaffected manner while also preserving the claims and subject-matter of the dispute in question.

Conclusion: Given the propensity of the multitude of disputes and immense complexity in construction cases, there has to be better mechanisms and institutional support in facilitating construction arbitration. Construction Arbitration is a growing trend in the legal system and is a welcome one in so far as it clarifies and settles the dispute efficiently and clarifies several procedural aspects of arbitration. While quite distinct from “usual” cases of arbitration, construction arbitration has several unique benefits and therefore, has the potential for becoming the mainstay in resolving real estate disputes in India.

[1] 2019 (11) SCALE 520.

[2] 2019 3 SCC 505.

[3] 2019 (2) ARBLR 328 (SC).

[4] 2021 SCC Online Del 2639.

[5] (2021) 278 DLT 75.

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