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Special report
The Art of Arbitration
Professor Madhav Deobhakta, Partner, Sane & Paymaster,
gives JANAKI KRISHNAMOORTHI an insight into the intricacies
of arbitration and its practice in the construction industry.
Professor Madhav Deobhakta, Partner, Sane & Paymaster,
Mumbai, assumed the mantle of arbitrator two decades ago,
after practicing as an architect for 30 years.
He has since adjudicated nearly 60 cases. A member of several
professional organisations and committees, including
the Indian Council of Arbitration and Mumbai Heritage Conservation
Committee, he was also President of the Indian Institute of
Architects (1988-1992) and Chairman, Education Committee,
Commonwealth Association of Architects (1995-1997).
Professor Deobhakta, who has been on the faculty of Rachna
Sansad Academy of Architecture, Prabhadevi, since 1957, was
also its principal in 1991-92. And he has authored the book
Architectural Practice in India, the second updated edition
of which will be published this year by the Council of Architecture.
Here’s what he tells us about the intricacies of arbitration
and its practice in the construction industry….
The Arbitration Act
The Arbitration Act, enacted in 1940 based on the British
model, had several shortcomings. Hence, it was replaced by
The Arbitration and Conciliation Act 1996. This Act is more
balanced and on par with international practice. But it does
require some amendments which are already being discussed
in various forums.
Some of the positive highlights of this Act are:
l It has limited the intervention of courts.
l Arbitrators have been given wider powers.
l It stipulates that reasons for arriving at an award should
be enumerated.
l Conciliation, which was earlier an
informal arrangement, has been given a legal status.
l The terms of conciliation when transferred on to a stamp
paper become a formal agreement between the two parties in
dispute. But we have not taken to conciliation like other
countries and still largely prefer arbitration.
l A conciliator or mediator need not be professionally qualified
whereas an arbi-trator has to be a qualified professional.
Qualifications and qualities
of arbitrators
An arbitrator is generally a professional of repute with considerable
experience and knowledge. He or she must have some knowledge
of laws involved but they need not be lawyers. Apart from
professional qualifications, an arbitrator must have clear
thinking and analytical abilities and an open and unbiased
mind. Being a member of the Indian Council of Arbitration
or any such organisation is not mandatory.
In the construction industry, arbitrators are generally either
architects or civil engineers. Sometimes, retired judges are
also appointed, parti-cularly when the case goes to court.
But there are reservations in some quarters about appoint-ing
retired judges as arbitrators as they may not be well versed
with the technical aspects of cons-truction. Moreover, courts
have set aside some of the awards given by retired judges.
In fact, a well-known senior counsel at a national conference
on arbitration stated that retired judges should not adjudicate
on disputes of tech-nical nature (such as in the con-struction
industry) as they do not understand the technical aspects.
Appointment of
arbitrators
Arbitrators can be appointed directly by parties to a dispute.
They can also
be appointed by institutions like the
Indian Council of Architecture, Council of Architecture, Indian
Institute of Architecture (IIA) or Indian Council of Arbitration,
if parties approach them or if it is so stipulated in the
agreement between the parties seeking arbitration. If the
agreement specifies the qualification of an arbitrator, it
must be followed. For instance, the agreement format of the
Indian Institute of Architecture says that an arbitrator must
be a fellow of the IIA. A fellow is elected after he has been
in the field for seven to 10 years.
Generally, if a sole arbitrator is appointed, disputes can
be resolved quickly. A panel of three arbitrators is appointed
when parties cannot agree on a nominated sole arbitrator.
In that case, each party nominates its own arbitrator and
these two arbitrators then jointly appoint the third arbitrator,
who becomes the presiding arbitrator. The decisions are taken
either unanimously or
by majority.
If party A appoints an arbitrator, party B cannot object to
A’s nominee unless the latter can prove the existence
of a nexus between party A and his nominee. If the appointed
arbitrator has worked for party A on the same case that is
under dispute, he or she should not adjudicate that case.
But he can if he has worked on some other project for party
A. In any case, the Arbitral Tribunal is empowered to listen
to the objections raised in respect of jurisdiction or scope
of authority of the arbitrators and settle the issue. When
the joint arbitrators are in disagreement over the appointment
of the presiding arbitrator, the chief justice appoints the
arbitrator.
Nature of disputes
Disputes between owners and contractors arise mainly because
many architects do not perform their role as project architect
and quasi-arbitrator (first arbitrator). Disputes can also
occur between the architect and owner of the project who could
be a developer, corporate house, government agency or even
an individual.
Disputes are generally about quality of service, delays in
completion of projects, non-payment of dues and non-payment
for extra work carried out. Sometimes, the contractor claims
more money when there is a delay. But the owner may place
the blame on the contractor for the delay and even apply liquidated
damages owing to losses suffered by him. On the other hand,
the contractor may contend that the work slowed down owing
to the owner’s instructions to keep the work on hold
or the drawings not being issued on time.
The contractor can certainly be penalised if he is responsible
for the delay. But if either the architect or owner had kept
the project on hold or had not provided drawings or clarifications
on time, he cannot be blamed. In all such cases, the contractor
must be given reasonable time extension. In one such case,
there was a specific clause in the contract that the contractor
would apply in writing for extension of time but he did not
do so. Yet the Arbitral Forum ruled that the architect was
duty bound to grant time extension as the contractor was not
at fault.
Duration of arbitration
If parties cooperate and the matter is not too complicated,
the dispute generally gets resolved in three to six months.
But if counsels produce witnesses, or go to court to set aside
an order, it can go on for years!
Arbitrators’ fees
Fees vary depending on the complexity of the case and the
nature of claims. The Council of Architecture has specified
the amount that can be charged, which architects must adhere
to. By and large, technical arbitrators (like architects,
civil engineers) charge much lower fees compared to others.
Modus operandi
Once the parties involved agree to resolve their dispute through
arbitration, they appoint their nominees and inform each other.
The two arbitrators then jointly appoint the presiding arbitrator
and the Arbitral Forum is constituted. The forum then calls
the parties for a preliminary meeting, which is held at a
mutually con-venient place and time.
At the preliminary meeting, after getting a brief idea, the
parties
are given directions. The claimant submits his
case first with all the necessary documentation and supporting
evidence like letters and drawings. Then, the respondent files
his reply to which the claimant files a re-joinder. Thereafter,
both parties commence their submissions. Parties can produce
witnesses at this stage if they so desire. Arbitrators usually
do not insist on oral evidence. If one party wants to produce
oral evidence and the other does not, the party that chooses
to lead evidence cannot compel the other party to do likewise.
Minutes of site meetings is important evidence as every change,
decision, delay and instruction given is recorded. Normally,
arbitrators do not make site visits, but do so to verify quality
of work or if parties wish to show something.
Parties themselves can present their case or appoint techno-legal
consultants (architects or engineers with a legal background)
to argue the case. Sometimes even advocates and senior counsels
are appointed by parties. All proceedings are recorded and
minutes distributed to all concerned at the earliest. Both
parties should be given sufficient time to put forward their
case as otherwise they can set aside the award on the ground
of not being properly heard. At the last meeting, parties
confirm that they have completed their say and arbitrators
can proceed with the writing of the award.
Arbitrators peruse voluminous documen-tation, consider the
arguments presented, look into the merits of the case and
then write the award. The award contains a brief history of
the case, the submissions of the claimant and respondent,
and reasons for arriving at the award. In certain cases where
construction work comes to a standstill owing to the dispute,
an interim award is given to enable the work to proceed.
The award
According to the prevailing Arbitration Act, the award passed
by an arbitral tribunal has the force of a decree and can
be executed in the same manner as a court order. After an
award is declared, if errors or omissions are pointed out
by parties, the award should be rectified within three months
from the date of the award. If the award is not accepted by
one of the parties, they must take the matter to court within
three months from the date of award. On receiving intimation,
arbitrators submit all the documents to the court.
An award can be challenged in a court only on the following
grounds:
l It is against public policy.
l The arbitrator has not applied his mind.
l The parties have not been given enough opportunity to present
their case.
Quick Bytes
• Arbitrators in the construction industry are generally
either architects or civil engineers.
• Disputes are generally about quality of service, delays,
non-payment of dues and
non-payment for extra work carried out.
• Both parties should be given sufficient time to put
forward their case.
• Minutes of site meetings is important evidence.
Dispute Resolution
Here are some of the landmark cases where Professor Madhav
Deobhakta was involved as an arbitrator:
CASE 1
Parties in dispute: Civil contractor vs public-sector undertaking
(PSU)
Type of project: Housing
Location: Mumbai
Details: The contract sum was Rs 5 crore and the project was
to be completed in two years. However, the project got delayed
for various reasons. The contractor was paid Rs 4.70 crore
and the dispute was over Rs 30 lakh. Even after the architect
issued the final certificate of payment, the PSU’s project
manager made further deductions in the amount. The company
finally paid only Rs 3 lakh; that too after the contractor
signed a blank ‘full and final’ receipt. The amount
and date were filled in by a PSU executive.
But as soon as the Rs 3 lakh cheque was encashed, the contractor
went to the High Court claiming he had signed the receipt
‘under duress’. The HC ruled against him as he
had signed the final settlement receipt. He appealed to the
Supreme Court, which sent the matter to the arbitral tribunal.
The company’s counsel objected saying that the tribunal
did not have jurisdiction as the contract was fully and finally
concluded. The apex court asked the tribunal comprising three
arbitrators to adjudicate whether the contract was executed
fully and satisfactorily, whether the receipt was given under
duress, and even decide on the issue of jurisdiction. After
hearing both sides, the tribunal decided it had the jurisdiction
to go into the dispute.
The award: The tribunal arrived at the conclusion that the
contractor had signed the receipt under duress and he was
entitled to his claim and interest at 18 per cent on the amount.
The tribunal reasoned that the PSU’s project manager
did not have the authority to make changes in the final certificate
of payment issued by the architect.
CASE 2
Parties in dispute: Civil contractor vs private limited company
Type of project: Factory building
Location: Karjat
Details: The private limited company, which had entered into
a collaboration with a German firm, wanted to build a factory
at Karjat for export-oriented products. Owing to numerous
changes made by the Vastu consultant on various occasions,
parts of the building had to be changed or demolished and
rebuilt according to his whims. As a result, the project was
delayed and the machinery supplied by the German collaborator
lay in the godown for two years. Ultimately, the collaborator
cancelled the agreement. Despite not being responsible for
the delay, the contractor was not paid his dues even after
the architect had certified his bills. Hence, he initiated
arbitration proceedings. During the hearings, the respondent’s
counsel produced the company’s managing director as
a witness. However, during cross examination he was unable
to answer the questions satisfactorily because he was not
involved in the decision-making process during construction
and five years had elapsed since the dispute arose.
The award: As the contractor had maintained proper records
to show how he was asked to build something and then change
or demolish various parts of the building, the arbitral tribunal
awarded a substantial amount to him.
CASE 3
Parties in dispute: Architect vs cooperative housing society
Type of project: Residential building
Location: Mumbai
Details: The architect demanded fees at a higher percentage
than the Rs 90,000 originally agreed upon as there was delay
in completing the project. He even refused to apply for the
occupation certificate till his claim was settled.
The society terminated his services and sent him a cheque
according to the agreed rate. However, the architect refused
to accept the cheque and went to the High Court. The court
appointed a tribunal. In the meantime, the society had
to appoint another architect and pay him Rs 20,000 to get
the occupancy certificate from the Brihanmumbai
Municipal Corporation.
The award: As the project was delayed owing to reasons beyond
control, the tribunal held that the architect was only entitled
to the sum originally agreed to. In fact, the tribunal awarded
him only Rs 70,000 after deducting the fee the society had
to pay the second architect to get the occupancy certificate.
The tribunal also didn’t accept the architect’s
claim for interest as the society had sent the cheque on time,
which the architect had declined to accept.
Tips to Architects
Play it safe and pre-empt disputes with the following guidelines:
• Freeze all production drawings, including large scale
details, before tenders are invited. Otherwise estimates can
go wrong and tender offers can become unrealistic.
• Avoid issuing drawings on a piecemeal basis during
construction. If changes must be done for any reason, give
a reasonable time extension to contractors for completing
work even if they do not ask for it.
• Issue final certificate of payment to the contractor
within the time stipulated in contract.
• Maintain meticulous minutes of all site meetings with
decisions taken, revised deadlines agreed, and promises made
by different stakeholders.
• Involve all consultants at the preliminary design
stage itself to avoid compromises and cost and time overruns
as subsequent changes amount to compromises.
• Always obtain a letter of appointment according to
the format of the Council of Architecture because it is in
the interest of both the owner and the architect.
• Clause 15 of the Conditions of Engagement is a ‘safety
valve’ for architects. In the absence of
this arbitration agreement clause, the owner can take the
architect to a consumer forum for deficient service.
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