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DISPUTE RESOLUTION IN EPC CONTRACTS

Abhishek Singh PXV Law Partners E- mail: abhis hek . s ingh@ pxvlaw. c om
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OUTLINE
ADR Mechanisms Conciliation Arbitration Expert Determination

Multi-Tiered Dispute Resolution


Dispute Resolution Boards Best Practices
STRICTLY PRIVATE NOT FOR CIRCULATION

Writ Remedies in EPC Contracts

ADR MECHANISMS CONCILIATION

CONCILIATION
The Part III of the Arbitration and Conciliation Act, 1996 ("Act") provides for recognition of conciliation in commercial disputes. [Section 61]

Unless the parties have specifically excluded conciliation procedure, they are free to take recourse to conciliation prior to arbitration.
Confidential process. Proceedings cannot be relied on in a subsequent arbitration / litigation. Conciliator cannot be presented as a witness. Restriction on initiating arbitral or judicial proceedings during conciliation proceedings except for preserving rights. [Section 77] Settlement arrived before the conciliator has the same status as an arbitral award.

ARBITRATION KEY ASPECTS

ARBITRATION-KEY ASPECTS
Section 5 of the Act a deliberate departure from UNICTRAL Model law. Section 5 starts with non-obstante clause and limits the scope of judicial intervention. Section 8 limits discretion of courts and mandates the court to refer the parties to arbitration when there is an arbitration agreement. Arbitral tribunal is competent to rule on its own jurisdiction including the validity of the arbitration agreement. [Section 16]

An appeal lies against an order if the arbitrator decides that he does not have jurisdiction or if the arbitrator decides that he has exceeded the scope of his authority.

JUDICIAL INTERVENTION IN ARBITRATION


Making reference in a pending suit [Section 8]. Passing interim orders [Section 9].

Appointment of arbitrators [Section 11].


Court assistance in taking evidence [Section 27]. Setting aside an award [Section 34]. Enforcement of an award by way of decree [Section 36].

Entertaining appeals against certain orders [Section 37].


Directing delivery of an award [Section 39(2)]. Reference of a dispute to arbitration in insolvency proceedings [Section 41].

INTERIM PROTECTION
Both the court and the arbitral tribunal have the power to grant interim protection.

Under section 9, court can allow interim protection before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36.

Generally, pre-arbitration notice invoking arbitration is required or the court must be satisfied that effective steps to commence arbitration would be taken. [Sundaram Finance Ltd. vs. NEPC India Ltd., AIR 1999 SC 565] .
Under section 17, the arbitral tribunal can also order interim measures of protection. Problem of enforceability. The arbitral tribunal can draw negative inference in case of non-compliance.

Section 17 would operate only during the existence of the arbitral tribunal not pre or post arbitration.

SECTION 34 SETTING ASIDE AN ARBITRAL AWARD


Power to set aside an arbitral award under section 34 is very limited Incapacity Arbitration agreement invalid No proper notice of appointment of arbitrator or arbitral proceedings Arbitral award outside the scope of the agreement Composition of arbitral tribunal or procedure not in accordance with agreement of the parties Court finds that subject matter of dispute is not capable of settlement by arbitration under the law or arbitral award is in conflict with public policy of India Against the Act or substantive law Against the Act example: unreasoned award, unless agreed otherwise [Section 31]; against the terms of the contract [Section 28]; right to a hearing unless agreed otherwise [Section 24]. The award is in conflict with the public policy of India, if the award was induced by fraud, misrepresentation or corruption. Patently Illegal [ONGC v. Saw Pipes, (2003) 5 SCC 705] In ONGC, the Supreme Court of India set aside an award, which held that liquidated damages had to be proven. Under section 74 of the Indian Contract Act, 1872 the actual loss or damages need not be proven. The Supreme Court found the award to be against the public policy of India, since the award was against the substantive law of India.

SETTING ASIDE AN ARBITRAL AWARD UNDER SECTION 34 IS NOT AN APPEAL


Under section 34, a court cannot re-appreciate the evidence. [M/s. Arosan Enterprises Ltd. vs. Union of India & Anr., (1999) 9 SCC 449] If a possible view has been taken in relation to the obligations of the parties based on construction of the terms of the agreement, then interference by the court is not justified. [Hind Builders vs. Union of India, (1990) 3 SCC 338]

EMPLOYEE ARBITRATORS
Government, statutory body or PSU contracts, where a government employee is named as an arbitrator.

Senior officer of the government body who was not involved with the execution of the contract and was independent and impartial - not barred from functioning as arbitrator merely because their employer is a party to the contract. [Indian Oil Corporation Ltd. and Ors. vs. Raja Transport, (2009) 8 SCC 520]
However, there is an obligation independence and impartiality.

GOVERNING LAW OF ARBITRATION


Dispute referred to international commercial arbitration can be subject to three different laws.

1. Proper law Law governing the substantive contract.


2. Law governing the construction and validity of the arbitration agreement Law governing the agreement to arbitrate and the performance of that agreement. 3. Procedural law of arbitration Law governing the conduct of the arbitration. (1) can be different , but (2) and (3) are usually the same. Where parties fail to choose the law governing the arbitration proceedings, it would be the country where the arbitration is held (seat). Seat NOT to be confused with venue of arbitration.

FOREIGN ARBITRAL AWARDS Part I applies to domestic arbitrations, while Part II applies to international commercial arbitrations. International commercial arbitration is defined under section 2 (f) of the Act, For the Act to apply, the arbitration must be commercial as defined under the Indian law. And at least one party is Foreign national or habitually resides in a foreign country. A corporation, which is incorporated in a country other than India. Government of a foreign country. Body of Individuals, association or a company whose central management or control is exercised in a foreign country. Bharat Aluminium Co. vs. Kaiser Aluminium Technical Service Inc. [2012 (8) SCALE 333] overruled Bhatia International [(2002) 4 SCC 105] and Venture Global [(2008) 4 SCC 190]. The most important impact is that in international commercial arbitration held abroad Part I of the Act will not apply. Hence, section 34 setting aside the award or Section 9 interim measures cannot be resorted to.

FOREIGN ARBITRAL AWARDS


Other critical implications of Bharat Aluminium Co. vs. Kaiser Aluminium Technical Service Inc. The seat of arbitration will decide the applicable law of arbitration. The venue of arbitration may change, but it will have no effect on the seat of arbitration. The seat of arbitration remains the place initially agreed by or on behalf of the parties.

Bharat Aluminum to apply only post 06.09.2012. Therefore, any application for relief under section 9 or 34 in respect of foreign seated arbitration will continue to be governed by the Bhatia principle. If existing international arbitration agreements are pre 06.09.2012, advisable to have them amended.

DISPUTE RESOLUTION BOARD

DISPUTE RESOLUTION BOARD


In large projects, quasi legal body commonly known as Disputes Resolution Board (DRB) can be formed. DRB is intended to provide a site based, less formal and optionally binding solution to disputes prior to the process of arbitration. Generally, DRB is constituted at the time of commencement of contract. Three stages of DRB: Onset level: During the working of the project, period status meetings, discussions, etc. Dispute arose level: If conflicts arises during the execution of the project, DRB could provide informal opinion on potential areas of disagreement so that they are solved before it eventually escalates to dispute. Hearing level: The hearing procedures allow both parties to explain their position as well as to respond on the issues involved in the dispute. The DRB will conduct the hearing and attend every issue in relation to the dispute.

Upon reaching a solution, DRB members make a recommendation in writing to both parties.

DRB PROBLEMS
Ministry of Road Transport & Highways new EPC model places great emphasis on DRBs. Done away with mediation process. A World Bank study (2007) on the operation of dispute resolution mechanisms for civil works in India concluded that the operation of DRBs had been ineffective. The DRBs took far longer than contractually mandated to make their recommendations and faced high rejection rate.

It was noted that the success of DRBs depended on the intent of the contract personnel to manage the contract professionally and efficiently. Where the DRBs had been established on time, site visits conducted regularly, and disputes referred by parties promptly, the results were positive.

EXPERT DETERMINATION

EXPERT DETERMINATION
Expert determination is an important method of dispute resolution preceding arbitration / litigation. Resolving disputes by experts can be very effective where technical issues are involved. However, an expert determination is not a binding arbitration award. [Joint Investments Pvt. Ltd. v.

Escorts, (2010) 170 DLT 487]

MULTI-TIERED DISPUTE RESOLUTION

MULTI-TIERED DISPUTE RESOLUTION


The process essentially involves resolving disputes through a multi-tiered dispute resolution clause which provides for separate dispute resolution processes at distinct and escalating stages. ADR mechanism commonly incorporated into multi-tiered dispute resolution clauses include: negotiation, conciliation, expert determination, dispute resolution board and finally, arbitration. Key benefits: filtering system- only the complex disputes result in arbitration; can effectively deal with a range of conflicts with a minimum of disruption to the project.

The Courts in India have shown an inclination to enforce multi-tiered dispute resolution clauses. However, there is a conflict of view. Stages preceding to arbitration / litigation can be waived by the parties.

MULTI-TIERED DISPUTE RESOLUTION


The steps preceding the coming into operation of the arbitration clause though essential are capable of being waived. [M.K. Shah Engineers & Contractors vs. State of Madhya Pradesh, (1999) 2 SCC 594 ] When the parties agree for a specific procedure and mode for settlement of their dispute by way of arbitration and also prescribes certain pre-condition to be complied with for referring the matter to arbitration, the parties are required to comply with those pre-conditions and only then refer the matter to the arbitration. [Tulip Hotels Pvt. Ltd. vs. Trade Wings Ltd, MANU/MH/1748/2008] Validity of two tier arbitration clauses which envisages an initial domestic arbitration, and challenge to the domestic arbitration award before another arbitral tribunal pending consideration before a larger bench of Supreme Court in Centrotrade Minerals vs. Hindustan Copper Limited , (2006) 11 SCC 245.

DRAFTING ARBITRATION CLAUSES

DRAFTING DISPUTE RESOLUTION CLAUSES BEST PRACTICES, IBA GUIDELINES

The parties should decide between institutional and ad-hoc arbitration. Benefits? The parties should select a set of arbitration rules and use the model clause recommended for these arbitration rules as a starting point. The scope of dispute subject to arbitration should not be limited. The parties should select the seat of arbitration practical and juridical factors. Despite Bharat Aluminum, its better to expressly exclude Part I of the Act. The parties should specify the number of arbitrators impact on overall cost, duration and the quality of the arbitral proceedings. The parties should specify the method of selection and replacement of arbitrators and, when ad-hoc arbitration is chosen, should select an appointing authority.

DRAFTING ARBITRATION CLAUSES BEST PRACTICES


Where applicable, time limits for each event for e.g. nominating arbitrator, should be specified.

The parties should specify the language of arbitration. Language of documentation, effect of choice on arbitrators / counsels must be considered.
The parties should indicate the rules of law governing the contract, venue, seat of arbitration, etc.

Alternative dispute resolution mechanisms such as conciliation, DRBs, expert determination, etc. should be clearly specified.
Parties may consider specifying the powers of the arbitral tribunal to grant interim relief.

WRIT REMEDY

WRIT REMEDY IN PROJECTS


Writ remedy is not a routine jurisdiction but an extraordinary jurisdiction meant for an extraordinary purpose. In contractual matters, the courts are reluctant to exercise their writ jurisdiction. However, even in contractual matters the State and its instrumentalities are duty bound to act fairly and reasonably. If the impugned act of the State is arbitrary or unfair or unreasonable, a writ is maintainable. [Kumari Shrilekha Vidyarthi vs. State of U.P. and Ors., (1991) 1 SCC 212] Writ petition may not be an appropriate remedy when disputed questions of facts are involved and the parties are required to lead evidence. [Mrs. Sanjana M. Wig vs. Hindustan Petro Corporation Ltd, (2005) 8 SCC 242] Existence of arbitration clause in an agreement is normally a bar to the exercise of writ jurisdiction, however, not an absolute bar. There are certain exceptions where the writ jurisdiction can be invoked even in the presence of arbitration clause. Facts and circumstances test. Examples of effective use of writ remedy in projects.

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