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Arbitration
Debate Over Delay
JANAKI KRISHNAMOORTHI presents the ninth in a series of case
studies referred for arbitration
In December 2001, the owner and developer of a plot in a
Mumbai suburb entered into an agreement with a civil contractor
to construct an office building in Mumbai with an approximate
built-up area of 125,000 sq ft. The project was to be completed
in November 2002.
According to the stipulation of Brihanmumbai Municipal Corporation
(BMC), the contractor was to be paid construction cost at
Rs 771 per sq ft of built-up area with the area defined in
the contract as sanctioned FSI, air-handling units (AHU),
staircase, lift area, lift machine room and basement. Elevation
features, duct voids, underground/ overhead water tanks, pavement,
security cabin, electric substation, meter room and common
toilets were to be provided by the contractor without charging
anything extra. The owner appointed two architects and an
RCC consultant for planning, preparing drawings, complying
with formalities and supervising the project.
Contract terms
The following were the other major terms of the contract:
• The contractor had to submit monthly bills through
architects who would certify them within a week and the owner
was to make payments within a week of such certification.
• While making payments, the owner had to deduct retention
money (RM) of 5 per cent, pay 50 per cent of billed amount
by cheque and in lieu of the balance 50 per cent allot galas
along with one open car parking space per gala to the contractor,
calculating the value at Rs 3,821 per sq ft of saleable area.
• After obtaining the occupancy certificate (OC), the
contractor could retain, transfer or sell the premises. If
the market price of the saleable area exceeded Rs 3,821 per
sq ft, the contractor could retain the profit. But in the
event of market price decreasing, the owner would reimburse
the loss without interest.
• If payments were delayed beyond two weeks of certification,
the contractor would be entitled to 18 per cent per annum
interest on the unpaid amount till it is paid.
• The project had to be completed within 11 months from
the date of the agreement, failing which the contractor would
be liable to pay compensation to the owner at 1 per cent of
the contract value per month, limited to 5 per cent of the
contract value to be worked out as agreed.
• If the contractor failed to adhere to the agreed work
schedule, the owner could terminate the agreement if the breach
was not remedied within two weeks of notice.
Points of dissent
Differences and disputes surfaced between the owner and the
contractor over delay in executing the project, changes made
in design and consequent deferred issue of drawings, project
period extension, certification and payment of bills, and
allotment of premises as agreed to the contractor. Both parties
nominated their own architect to jointly settle the quantum
of work completed and payment issue. Based on drawings, the
architects calculated the completed work area and the payment
due to the contractor. The owner, however, did not agree with
the decision and asked them to reduce the area. The architects
declined to comply but soon after the architect nominated
by the owner unilaterally estimated the dues to the contractor.
But the owner did not pay even this amount and the contractor
also declined to accept this. In January 2003, the contractor
invoked arbitration.
Arbitration
The arbitral tribunal comprised two co-arbitrators with Dr
Kirty Dave representing the contractor (claimant) and a retired
high court judge representing the owner (respondent). Yet
another retired high court judge was appointed as the presiding
arbitrator. Both parties were represented by an advocate
and a techno-legal consultant. The preliminary meeting of
the tribunal was held on
April 23, 2003.
The respondent raised preliminary objections over the claimant’s
right to invoke arbitration as it alleged that the latter’s
partnership firm was not properly registered under The Indian
Partnership Act of 1932. It also questioned the validity of
claims put up under the signature of one Vipul Shah who it
claimed was not the legally constituted representative of
the claimant. After examining the documents produced
by the claimant, the tribunal overruled the objections.
The claimant’s
contention
While the work was in progress, the respondent made a change
in the construction design, from the originally agreed ‘beam
slab’ to a ‘flat slab’. The claimant alleged
that this change in design and deferred issue of drawings
caused the delay in executing the project. And the respondent’s
refusal to grant more time amounted to a cardinal breach of
contract and there was no provision in the agreement by which
the respondent could close the agreement before the project’s
completion. The claimant also maintained that the respondent
defaulted in making the payment as per the agreement.
The claimant submitted eight claims, including those for non-payment
of bills, work completed, loss owing to sudden closure of
contract, loss of profit on work unexecuted owing to sudden
stoppage, loss owing to non-allotment of galas, delay damages,
interest on award amount, and cost of arbitration. The claimant
also argued that as the respondent was responsible for the
delay, refused to grant justified time extension and defaulted
in making the payment, it could not demand any compensation.
The respondent’s representation
The respondent, however, held the claimant responsible for
the delay, alleging that despite handing over the site early
and issuing all plans and drawings on time, the claimant failed
to mobilise resources on time and complete the work according
to schedule. It declared that payments were generally made
in advance to the contractor and even prior to the architect’s
certification, and argued that only some of the bills, which
were incorrect and uncertified, had not been paid.
In turn, the respondents submitted six counter claims, including
those for compensation owing to delay in completion of work,
loss owing to delay in construction and enhanced cost of construction
and loss owing to marketing and publi-
city expenses.
Interim award
The claimant submitted an application in August 2004 requesting
for an injunction restraining the respondent from transferring,
letting out or in any other way creating third party rights
with respect to the 24,165.29 sq ft of the property that was
to be allotted to it in lieu of payment as per the contract.
The respondent’s advocate, however, agreed not to sell
or dispose of only 14,000 sq ft of the property and the tribunal
accordingly passed an interim order.
Finally, the respondent and claimant reached a settlement
on the issue in April 2006 whereby the respondent agreed
to execute an agreement for sale of
1,660 sq ft of the property in favour of the claimant. Both
parties also reached a consent agreement on the quantity of
work done and on two claims regarding payments against pending
bills.
The final decision
After examining the documents and listening to oral evidence
and the legal representatives of both parties, the tribunal
arrived at the following key conclusions:
• The respondent failed to provide reasonable facilities
for completing the project on time.
• Changes effected in design (from beam slab to flat
slab) and the time of issue of drawings necessitated the need
for more time to execute the project.
• Not extending the time for completing the project
was unfair on the part of the respondent.
• The claimant was deprived of the contractual right
to complete the work and gain business profit and hence it
was entitled to payment for work done and had to be compensated
for loss owing to unexecuted balance work.
The ruling
The tribunal accepted the following claims of the claimant:
• Loss of profit on the work it was prevented from executing
owing to sudden stoppage of work by the respondent: The tribunal
ruled that as a settlement had been reached for work done
and on bills raised, the only element of loss of profit could
be considered on balance cost of work and awarded an estimated
sum along with loss of profit at
10 per cent owing to termination of contract.
• Interest on award amount: The tribunal ruled that
no interest was payable against two claims settled by mutual
consent and awarded 10 per cent interest on only one claim
for loss owing to stoppage of work from the date of the preliminary
meeting of the arbitral tribunal (23.4.2003) till payment.
All other claims were rejected by the tribunal because they
were based on assumed figures, not backed by concrete details
and analysis, or overlapping with other claims.
The tribunal rejected all the counter claims of the respondent
as all of them were based on project delay attributable to
the respondent. The tribunal ruled that the respondent also
committed breach of contract by not extending the time to
complete the project.
The tribunal ruled that arbitration cost should be borne by
both parties but the respondent should also bear the claimant’s
share of the arbitrators’ fee.
In a Nutshell
Type of project: Office complex
Location: Mumbai
Agreement executed:
December 2001
Arbitration invoked: January 2003
Parties in dispute: Plot owner/developer and civil contractor
Arbitral tribunal: Dr Kirty Dave
co-arbitrator, nominated by claimant, and two retired high
court judges; one representing the respondent
and the other nominated as
presiding arbitrator
Parties represented by: Advocates and techno-legal consultants
Preliminary meeting of tribunal: April 2003
Duration: Four years
Award declared: June 2007
Arbitrary Laughs
(Conceived by Dr Kirty Dave)
Q : What is the difference between litigation and arbitration?
A : A five-star hotel bill.
Q : Why do we need joint arbitrators?
A : So they can sleep by turn.
Respondent : Sir, shall we go in for extension of time?
Arbitrator : I don’t mind as long as the escalation
formula of contract is applicable to my fees.
Respondent : We had to reduce the rate as the contractor
did not cure the concrete and we had to do it.
Arbitrator : But why did you allow him to lay concrete that
required to be cured later on?
Claimant : For brickwork, they changed bonds, leading to
lot of breakages.
Arbitrator : I know when bonds are broken; they create rights
and liabilities.
Arbitrator : Tell me in brief what created the dispute.
Claimant : Only ‘piles’ [meaning pile foundation],
sir.
Arbitrator : You should have gone to a surgeon in time.
Arbitrator : Did you suffer such huge losses in this contract?
Claimant : Not exactly, but my techno-legal advisor convinced
me I had.
Dr Kirty Dave
The details of this case have been provided by Dr Kirty Dave,
co-arbitrator in the case, who has handled several arbitration
cases as an arbitrator and a techno-legal consultant. An arbitrator
on the panel of the American Arbitration Association, he is
also Chairman, Law and Arbitration Committee of Builders’
Association of India; National Vice-President of the Indian
Institution of Technical Arbitrators; Vice-President, Indian
Council of Arbitrators; and elected representative of the
council’s governing body. A graduate in engineering
and law, Dr Dave acquired his doctorate in engineering law
from the US. He served as a Class I officer in the Government
of India and has been an engineering consultant to Iran and
Oman, and a techno-legal consultant to the US Government,
Brihanmumbai Municipal Corporation, and many leading national
and international firms. The first Indian engineer to be invited
by the US as a ‘Citizen Ambassador for Construction
Management’, he teaches construction law at the postgraduate
level, besides being an adjunct professor to the Indian Institute
of Technology - Mumbai.
You can contact Dr Dave on Tel: 022-26609991 or
E-mail pspe@technolegal.org
Dr Kirty Dave’s views on…
Appointment of arbitrators
As our Arbitration Act does not specify who can be an arbitrator,
you can name your Chinese wife or even your business partner
as an arbitrator in your own case. If someone questions an
arbitrator’s neutrality in a case, the decision would
be taken by the same arbitrator himself and cannot be challenged
in court. You can only challenge the award but by then many
years would have gone by. Further, several government and
public-sector organisations do not allow the claimant to select
his own arbitrator. The co-arbitrator and the presiding arbitrator
have to be chosen from the list sent by them.
Arbitral proceedings
These have become an alter ego of the courts with the entire
court culture being imported into the process. The Code of
Civil Procedure and the Evidence Act, which are not applicable,
have made their entry through the back door and the latter
is being used recklessly to delay proceedings. The construction
business is hugely documented and all arbitrators have to
do is to study and understand the documents, apply the standard
questions and law, and arrive at a decision. Oral evidence
is hardly necessary and yet many arbitrators encourage it.
Thus, cases get prolonged with each sitting costing nothing
less than Rs 3 lakh to Rs 4 lakh. Can we afford this? We are
also losing out on our international reputation as many people
shy away from initiating arbitration proceedings in India.
False claims
In the construction industry, false claims are aplenty and
those who file them get away without being penalised. For
instance, an American design company that raised a claim for
its unpaid fee against a municipal corporation ended up defending
a false counter claim of Rs 1,800 crore! Ultimately, the shocked
American firm gave up its claims and agreed to a settlement.
In the US, the corporation would have been sued for false
claims and been made to pay a heavy penalty under the False
Claim Act (FCA). It is time we also introduced a mechanism
like FCA. Apart from saving time and money consumed on such
false claims, we would also prevent the greater risk of such
claims being awarded.
Unfair contract terms
Many contracts in India, particularly those drafted by the
government and public-sector units, have clauses that are
internationally considered unconscionable (unfair or violating
the fundamental law of the society) or illusory (not binding
yourself but binding the other side). Clauses like ‘no
compensation for delay whatsoever’ and ‘this work
in part or as a whole can be withdrawn without assigning any
reason’ fall under these categories. A contractor who
prepares to execute a project reaches the site only to be
driven out soon after by the employer without any compensation
because the project was shelved. And the contractor faces
the situation because he signed a contract with clauses over
which he had no say. Unfortunately, our law does not recognise
the existence of unconscionable or illusory clauses. In India,
courts believe that once you sign a contract, executing it
is your responsibility irrespective of whether the document
you signed is executable or not.
Encashment of bank guarantee
Contractors generally assure performance through a bank guarantee
that can be encashed by the employer even upon his assuming
that the contractor has failed to perform. The employer need
not prove breach of contract. How can the employer be the
judge in his cause? Many companies have been completely paralysed
owing to such encashment. This is yet another area that needs
to be looked into. I believe that if the three situations
enumerated above – conflict of interest, bank guarantee
and unconscionable process – are taken care of in drafting,
sanctioning or endorsing a contract, the construction industry
will benefit immensely.
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