Alternative Dispute Resolution and Arbitration Some Personal Experiences S.A.Reddi Dy.

Managing Director (retd), Gammon India Ltd Introduction Indian construction contracts have traditionally been based on the Indian Contracts Act 1872. Though in force for more than a century, there has been hardly any worthwhile amendment to reflect the societal changes that have taken place particularly after independence. The concept of master servant relationship is still reflected while interpreting many provisions of the Contract Agreement. Same is the case in respect of General Conditions of Contract. Every State P.W.D., every Department of Central Government, every Public Section Undertaking, whether State or Central and every Consulting Engineers / Architects have their own Standard Conditions of Contract. There are more than 100 such documents in operation in India. Each of developed countries operates not more than five different sets of General Conditions of Contract. FIDIC General Conditions of Contract closed the gap further, bringing it to a single set of General Conditions of Contract. Majority of the International Contracts and domestic contracts in many countries are based on FIDIC; not so in India. Even International financial institutions such as the World Bank, Asian Development Bank, etc. have standardized their General Conditions, broadly based on FIDIC FIDIC Conditions of Contract FIDIC conditions hold a reasonable balance between the requirements & interests of the parties concerned. FIDIC allocates fairly the risk & responsibilities between the contracting parties. The contracting parties will react favorably to clearly stated obligations. Avoids unsatisfactory performance, increased costs & disputes FIDIC conditions address generic issues concerning in project implementation: o Working relationship between different parties, protocol for communication

o o o o o

Rights & obligations of employers, contractors Insurance risk mitigation & risk sharing Quality Control, Engineering & structural failure Delays, damages, Claims, Disputes Safety, security of plant, machinery & personnel

Uniqueness of Construction Activity Every construction project is unique; no two sites / designs are alike. The quality of the Employers, Consultants, Contractors vary widely. The construction period is decided on adhoc basis and not based on any scientific system. There are uncertainties in land

acquisition, Right of way, Law and order, conflicts between state and central Government, vagaries of weather and a host of other issues. Every construction contract is uniquely related to a particular site & ground conditions which may not be fully defined when the work is designed. Despite modern methods of site investigation, uncertainties exist throughout the operation of contract. Construction work is exposed to weather and subject to its constraints. Claims arise out of above uncertainties, among others. Claims in Civil Engineering Contracts Claims appear to be inescapable components of almost all construction contracts. A successful claim may turn the fortunes of the contract; or indifferent processing may be sufficient to turn profit into loss. Claims may be negotiated, amicably settled or may lead to arbitration or litigation. A claim is a request, within an existing contract, for additional payment, or additional time, for a task which is additional to agreed work & for which the existing contract does not make provision- or does not appear to do so. Claims may be o For additional payment or for additional time to complete the contract (Time, Money, or for both time & money) o Due to design changes, changes in working circumstances, changes to contract conditions. o For events that do not affect the current work, but which can bring all work to a standstill in future Claims may arise out of Contractual Right, Breach of Contract - The Reasonable Expectation, Oversights and Omissions in the contract agreement etc. Disputes A dispute is a disagreement that arises out of an agreement. In construction industry, disputes are unavoidable despite best of intentions, due to large number of uncertainties. Provisions for settlement of disputes are laid down in the contract agreement. Mere silence may amount to repudiation in many cases. Disputes which are capable of reference to arbitration must necessarily arise between the parties in respect of a defined legal relationship, whether contractual or not The Arbitration and Conciliation Act, 1996 The Arbitration Act of 1940 was being adopted in contracts until the Act was revised in 1996. There have been numerous complaints about the unsatisfactory nature of the earlier Act. There were many untenable provisions concerning challenging the award. Neither party was satisfied. In almost all cases, the award used to be challenged.

The 1996 Act is based on UNCITRAL (United Nations Commission on International Trade Law) covers International / Domestic Arbitration and Conciliation and provides for reasoned award, minimizes the supervisory role of Courts, permits mediation, conciliation etc during arbitral proceedings to encourage settlement of disputes Award is enforceable as if it were a decree of the court. Grounds for Challenge Award is in conflict with the Public Policy of India A party is under some incapacity The arbitration agreement is not valid The party is unable to present his case The dispute does not arise out of contract The subject matter of the dispute is not capable of settlement by arbitration under the law An interim award is permitted but reasons for the award shall be stated. The award may include, in the sum for which award is made, interest at such rates as it deems reasonable, on the whole or part of the money, for the whole or part of the period. The sum shall, unless the award otherwise directs, carry interest @ 18% p.a. from the date of the award to the date of payment Enforcement of the Award Award shall be final and binding on the parties. Award shall be enforced under the Code of Civil Procedure, 1908 as if it were a decree of the court; in case award is neither challenged nor payment made, execution petition can be filed in court. Unfortunately, the reality is not that simple. Almost all the arbitration award relating to construction is challenged and the dispute takes a long time to get resolved. Despite the well intended provisions of the 1996 Act, habits die hard; there are numerous cases of the Awards being challenged, mostly on grounds that the Award is in conflict with the Public Policy of India. Alternatives are being considered, including Dispute Resolution Board, Mediation etc. Dispute Resolution Board (DRB) DRB is formed at the very beginning of the Contract operation, before disputes arise. DRB Members have strong construction & technical background, have no interest in taking sides and can come up with more equitable findings than the arbitrators without such background. Disputes are settled during construction, relieving owners, contractors from entering into litigation. Parties are expected to get quick, early read on what to expect if dispute moves to arbitration or litigation. Parties can resort to arbitration if not satisfied. Expenses are very low as compared to those of arbitration, results in lower bid prices and reduction in number of claims. In case of failure to agree upon appointment of DRB, the appointing entity or official named in the Contract Agreement shall, upon request of either or both parties and after

due consultation with both parties, appoint this member of the DRB. This appointment shall be final and conclusive. Some selected Case Histories: Some of the case histories have been selected, reflecting various aspects of arbitration, conciliation, alternate dispute resolution, etc. The description is based on the authors involvement in many of the cases cited Case 1: Bassien Creek Bridge, Mumbai

Contract awarded based on tenders without PQ. The Contractor was financially sound but new to bridge construction in marine environment. He employed a British consultant for designs. There was a vacuum regarding construction. Two caissons collapsed during sinking; could not be corrected. Contract terminated at the contractors risk and cost Fresh tenders invited. Alternative layout was adopted to avoid two failed foundations. Bridge completed by the second contractor in three years, at more than double the original cost. The first contractor raised a dispute. Arbitration award was in his favour, despite the PWDs intention to recover the cost. The Contractor kept contemporary records and appointed a senior legal counsel to fight the arbitration case. Case 2: NHAI contracts - Ambiguity in price variation clauses There were more than 100 contracts spread over the country, but no uniformity in drafting price variation clauses. In consequence, some contractors were paid for price variation while others were denied. This resulted in stalemate & retarded progress; some contractors suspended work pending settlement of dispute. The matter is under arbitration. There was abnormal price rise in steel and the price variation clauses were based on indices which did not reflect a ground reality. Many Contractors typically lost several crores of rupees. Matter referred to arbitration. Results are uncertain; even if the arbitrator awards, the same will be challenged by the aggrieved party. Case 3: Pamban Bridge, Tamilnadu

History of Tendering, Construction, Revised Tendering, Arbitration The first Contract was awarded in 1974 to a local Contractor, competent but with no experience in bridges in marine environment. Contract terminated mid-way due to nonperformance. The Contractor contented that delay was due to cyclones and referred the dispute to Arbitration. Almost the full value of contract was awarded in favour of the contractor. Award contested by the Department. After attempting departmental work unsuccessfully, the job was re-tendered and awarded to the Second Contractor. Contract was not awarded within validity period; repeated extensions sought from lowest bidder who was reluctant as in the mean while he had better opportunities elsewhere. He offered a conditional extension; if the job is not awarded within the extended period, the contract price will be increased by 10% for each month of delay in award of work .the contract price was increased on account of delayed acceptance of the tender. The second contract (1984-88) involved few months time overruns; extension granted with proviso of no payment for escalation. Dispute referred to sole arbitrator in 1992 settled in 1995. The employer challenged the award. The court ruled in favour of the contractor. The employer appealed; pending decision, court directed payment of Rs 25 lacs + other Rs 25 lacs against BGB. Final decision is pending (2008) Case 4: Mandovi Bridge, Goa

The old bridge, completed in 1970 collapsed in 1986 due to corrosion of reinforcement. Government decided to re-commission the bridge by dismantling the deck and piers and constructing new piers and decks on existing foundations which were assumed to be safe. Tenders were invited in 1986 for based on FIDIC Conditions; unconditional offer requested which was complied with. LOA contained additional stipulations, despite the bidder offering unconditional quote. The Employer wanted stacking & disposal of debris at locations decided by the Engineer Bidder treated LOA as counter offer and declined. After protracted discussions; the conditional LOA was withdrawn and a new unconditional LOA was issued

Case 5: Trombay Power Plant Civil Works Dispute Resolution by Amicable Settlement Issue No.1: short weight of cement As per tender documents, cement bags as received from the manufacturers will be issued to the Contractor; no claims will be entertained regarding any shortage in weight Actually, cement (packed in jute bags) issued to the Contractor had a shortfall of 5 10%. Due to weigh batching, contractor had to make good the shortfall by using more bags of cement. The Employer recovered cost of cement from contractors bills without considering the shortfall in weight. Contractor claimed for the excess number of bags actually used. Owner rejected claim, citing the Special Conditions of Contract. Contractor rebutted by citing Technical Specifications of the Contract IS 456 and IS 8112 Issue 2: Dispute regarding reinforcement wastage : Reinforcement steel was supplied by Owner. Wastage % specified in contract with penal recovery for unaccounted wastage. Large wastage was experienced during execution, due to varying column heights, beam spans, etc. Contractor protests penal recovery; since no detailed drawings were issued during tender, no allowance made in tender for increased wastage After completion the disputes were resolved by amicable settlement. Owner appointed a committee of two General Managers not connected with the project, said the claim will be accepted if Contractor was able to convince the committee, else Contractor would have to give up his case. A Gentleman's agreement!. Contractor accepted the conditions Cement is an essential commodity, falls under Essential Commodities Act. Contractor cited the provisions of the Act and possibility of criminal prosecution. Owner retaliated that cement was not supplied by him but by the cement manufacturer. Contractor argued: since Owner recovered cost of cement from contractor, he was the supplier Construction drawings for various structures were prepared and issued by the consultant after the award of the work. Variety of column heights, beam spans etc resulted in substantial cut pieces of the reinforcement and consequent increase in wastages not contemplated at tender stage. Contractor submitted such increased wastages should be to the Owners account.

The issues were amicably settled after only three sittings of the committee within one month. After careful consideration, Owner accepted contractors contentions on both the issues. The cost of additional bags of cement used due to short weight of cement bags was reimbursed. Owner waived the penal recovery for excess wastage of reinforcement steel beyond the percentage stipulated in the contract. Case 6: Dam Project in Meghalaya Contract for construction of two dams, 15 km away from each other, awarded in 1977 and completed in 1982. Three separate disputes were referred to arbitration in 1984: Compensation for Suspension / Stoppage of work Basis of Payment for extra work due raising of height of dam Claim for extra payment for aggregates Dispute 1: There were intermittent suspensions of work due to delay in power supply, explosives, cement & steel by owner. The following issues were referred to arbitration: - Whether compensation is payable for suspension in either of the two Dams individually or together -.Basis of compensation for suspension beyond 12 hrs: simultaneous application of hourly rate & flat rate in a day or only on daily basis - Payment of escalation on compensation amount Contractor argues: Dams on separate rivers, 15 km apart, different site conditions. Suspension at one site would affect performance of contract Owner: As it is one composite contract, compensation clause would be effective only if work simultaneously stopped at both dam sites Award upheld contractors compensation claim for suspension of work at either dam; simultaneous suspension at both dams not relevant Contract provided for two rates of compensation - an hourly rate for suspension up to 12 hrs and per diem rate for suspension beyond 12 hrs For suspension beyond 12 hrs, Contractor claimed hourly rate for 12 hrs + per diem rate Award: Compensation for suspension / stoppage of work beyond 12 hrs in a day payable on per diem rate only Escalation on Compensation Contractors argument: Claim raised for labor wage escalation which was not covered in compensation Clause Arbitrators decision: Not entitled. - Contract clause silent on escalation - Compensation for suspension is a matter different from contractors right to be reimbursed on account of increased labor cost during suspension period

Dispute 2: Raising the dam level Employer decides to raise height of dam by 8 m. Contractor asks for revised rate The Employer makes provisional payment at revised rate subject to arbitration on following issues: - Whether work involved in raising the dam is within scope of contract. - If outside the scope, the rate payable Contractors argument: Tender rates worked out as per drawings issued by the Owners which clearly showed the height of dam, 704.26 m Award was given in favor of Contractor in 1990. These works to be paid at rates, terms and conditions already agreed to earlier with interest at 12 % p.a.. Award made Rule of Shillong Court. The Owners refuse to pay interest due. The issue is pending with District Court, Shillong for 13 years after the original award, several years after the concerned work was executed & for 28 years after commencement of the work!!! Dispute 3: Extra lead for aggregates Contract envisaged collection of sand from 3 km upstream. Due to raising the dam height, the sand quarry submerged. Further sand was collected from lead of 55 km. Contractor claimed for increased cost (96 lacs). Owner refused to pay the amount Contractor completed the work and the dispute is under arbitration since 1991 Establishment of stone quarry: The project was located in Meghalaya (Assam-Meghalaya Border).Contract specified stone quarry in Meghalaya. Mid way through the project, the State Government closed the quarry and subsequent procurement was done from quarry in Assam. Increased lead paid for by the Owner; relocation cost (Rs.27 lacs) denied. Matter referred to Committee set up by Owner. Committee recommends Rs. 20.5 lacs; rejected by Owner. Matter referred to arbitration in 1991 Employer brought stay-order in 1996 against arbitration proceedings citing misconduct by contractor. Stay-order not vacated till 2005. Contractor appealed to Court to vacate stay order. Subject pending for 14 years after commencement of arbitration!!! Case 7: Ganga Bridge Patna 5575m, 4 Lanes

Claim due to Introduction of PF settled by Conciliation PF rules applicable to construction labor were brought into force after award of the contract & during construction. Contractor claimed for additional expenses involved in

enforcing PF rules including the Employers Contribution. The contract conditions included reimbursement of extra expenditure due to legislative changes. The Employer was unwilling to accept despite prolonged correspondence and justification. One option was to refer to arbitration, along with other outstanding issues; project completed in 1992, the arbitration process is still on in 2008! Instead the issue was taken up directly with the Provident Fund Commissioner. Using the Commissioners goodwill it was possible to settle the claim (Rs.3 crores) mutually Changes in Labour Laws Dispute referred to arbitration The contract provided for compensation due to variation in prices of labour, materials, and POL. Any changes in labour laws and regulation attracted price variation. During operation, the number of working hours for labour was reduced from 9 to 8 by Legislation. Disputes arose concerning compensation. Matter is under arbitration (as on 2008), even though the event occurred 30 years ago. Cess on Construction Power generated by the Contractor: negotiations with the State Government Dispute settled by

The Contractor obtained the power connection from SEB for operating construction equipment. The State Electricity Board supply was erratic, with frequent variations in voltage. These necessitated installation and operation of diesel generators by the Contractor exclusively for fulfilling the bridge construction contract. However, the State Electricity Board demanded payment of electricity duty for the power generated by the contractor plus penalty. Though specifically exempted in the contract, SEB brought legal action, attaching all construction equipments. All works came to a stop and there was a furor in the local press. The Chief Minister intervened, conducted negotiations with all concerned and got an Ordinance issued, specifically exempting Ganga Bridge at Patna construction from the purview of the concerned provisions of the Electricity Act Applicability of Factories Act to construction: The definition of Factories Act is all pervasive. Any establishment employing 20 / 10 persons with power is deemed to be a factory. Bridge construction involves labor & power. The Inspector of Factories defined the bridge construction as a factory! A notice was served on the Managing Director and all other Directors for non compliance of provisions of the Factories Act. . Mines Act applied to bridge construction: The foundation construction involved dredging of soil from inside the well foundations. Mines department demanded royalty for mining soil (a state property) from below ground. The dredged soil was mostly refilled inside the dredge hole after sinking the well foundation. Mines department demanded royalty once again for using state property for bridge construction

The disputes were settled after prolonged litigation Case 8: A Bridge in UP - Constructed in 1960 The project was completed with 8 months time overrun; full extension granted by the CE. However the SE is the Engineer as per contract. Due to personality conflicts, the SE granted extension of time for 7.5 months and imposed penalty for balance 15 days; matter referred to arbitration. The arbitrator upheld the SEs decision Case 9: Irrigation Project in Orissa - Completed in the Early Sixties Daily labour working hours reduced from 9 to 8 after the award of contract; the Employer refused to compensate. Claims referred to arbitration. After more than 10 years of litigation at various courts including the Supreme Court of India, the award went in favor of the contractor. The State government still refused to honor the award. The Contractor resorted to extreme measure of threatening to attach the government treasury to get paid Case 10: New Pattao Bridge at Goa Arbitration case The Contract was awarded in 1983. Due to collapse of Old Mandovi Bridge, Goa in 1986, the authorities decided to revised the design criteria for the New Patto Bridge halfway through the contract. The revisions resulted in time and cost overruns; Contractor submitted claims in 1989 Rs.120 lacs. The negotiations were started and a compensation of Rs.90 lacs was almost agreed upon but not implemented due to procedural wrangles. The dispute was referred to arbitration in Aug 94. The Contractor claimed escalation for the time overrun of more than 100% due to exceptional changes in design. This resulted in prolonged arbitration proceedings, challenge of the award, court cases etc during the next 10 yrs. The contractor ultimately received payment of Rs.1.91 crores; including interest of more than Rs.1 crore. Case 11: Dam Project in Bihar The contract was awarded in the Nineties. The Employer paid mobilization advance and the contractor mobilized equipment, staff etc and actually commenced the work. In the meanwhile, the Employer ran out of funds. Further works suspended by the contractor indefinitely. The Contractor tries to remove his idle equipment but the Employer objected and filed criminal case against the contractor, terminated the contract and declined to release the contractors equipment from site, blacklists the contractor. The disputes were referred to Court, arbitration in 2002, dormant in 2008! Issues referred to Arbitration by the contractor included: Refund of mobilization advance Reimbursement due to breach of contract on account of abandonment of work Compensation on idle time, post-termination Reimbursement of the overhead charges

Reimbursement of unrealized profit Loss and humiliation due to criminal case Interest by way of damages

Case 12: Narmada Bridge at Kasrawad, MP - Narmada Bachao Andolan One km long bridge contract was awarded in the Seventies. After the site was established, there were obstructions to work by the Andolan, colony and offices were burnt down. The work was suspended for several years. When peace returned to site, the originally quoted rates were found not workable; however; the Employer insisted on completion at old rates, resulting in suspension of work for several years The work was resumed after several years. After protracted negotiations for revision of rates spanning over a decade; the rates were increased by 83% and the bridge completed. Epilogue The experience of settlement of disputes through arbitration in India has been most disappointing Most of the arbitration awards are challenged, citing Public Policy of India, despite the 1996 Arbitration Act. Mediation, conciliation appears to be better. Dispute Resolution Board concept needs encouragement; both parties should honour the DRB decisions