Tuesday, 31 May 2022

Arbitration in construction industry

 Arbitration in the construction industry

The construction business is one of the most important contributors to global economic growth. This is especially true in India, where this business accounts for a significant portion of the country's GDP. This business encompasses a wide range of activities, including development and infrastructure projects, engineering work, and commercial and residential building, to name a few.

The construction sector is riddled with intricacies and technicalities; as a result, any conflicts emerging from such operations would necessitate employees who have specific experience in such areas and are excellent at comprehending the complexity of such situations.

Contracts for Construction

A construction contract, according to Accounting Standard (AS) 7, is a contract specially negotiated for the building of an asset or a group of assets that are closely connected or interdependent in terms of design, technology, function, or final purpose or use.

A construction contract often comprises several parties. The employer, the contractor, the supplier, and the project management consultant, among others, all sign it.


Construction Contracts-Related Conflicts

Construction contracts, as previously said, include several parties and deal with complicated challenges and complexities. Contracts of this sort always result in conflicts of different kinds. Disputes over building contracts can develop from the very beginning of the contract formation process.

Furthermore, disagreements may emerge when essential contract clauses or some conflicting provisions in contract contracts are interpreted. Disputes over bank guarantees and their conditional/unconditional character may develop as a result of fraud in tenders that are subject to criminal penalties, or the contract may give rise to disputes over bank guarantees and their conditional/unconditional nature.

However, the most common disagreements are of a substantive character. A construction contract's time clause, for example, is critical; nonetheless, changes owing to delays in completion are common. Breach of contract, modifications and extensions of time, wrongful termination, and non-rectification of faults are some of the other substantive arguments.

Mechanisms for Resolving Disputes

Construction contract parties typically choose a dispute resolution process that is precisely suited to maximise time and cost savings and efficiency, as well as being the most effective based on the nature of the construction project. Multi-tier dispute resolution clauses (MTDRC) to a dispute adjudication board are examples of these procedures (DAB). In this note, I will go through these two techniques briefly.

MTDRC

A construction contract's parties can choose the dispute resolution system they want to use based on their own needs. If people are working on a long-term project, they may desire to keep their connections intact. To this end, parties may agree to engage in non-binding dispute resolution processes such as negotiation, conciliation, or mediation before proceeding to the binding and ultimate procedure of arbitration (if a settlement cannot be reached through the non-binding process).

Escalation Agreements refer to clauses that include a multi-tiered conflict settlement mechanism.

For instance, a Nego-Med-Arb provision that requires the parties to:

  1. a round of discussions to settle a disagreement, followed by

  2. formal mediation, then follow-up

  3. Arbitration that is legally binding.

Similarly, parties participating in smaller or simpler construction projects might choose to go straight to arbitration to get quick and binding results.

 Is it possible to implement MTDRCs or Escalation Clauses in India?

Conditions prior to arbitration (pre-arbitral steps) stipulated in MTDRCs have been interpreted and implemented by Indian courts on several occasions, subject to specific stipulations. The requirements are not exhaustive and were created by court precedent.


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