Litigation Versus Arbitration
litigation versus arbitration
Arbitration in Construction Contracts in India
Construction contracts are unique in nature as the construction industry embraces a very wide variety of types of construction ranging from pure building work to pure engineering with combinations of building and engineering to varying degrees. A construction projects is continuous in nature usually spread over number of years. The problems that arise in the working of the projects are sometimes not foreseeable or even if they are foreseeable, their magnitude may not be foreseeable before or during the execution of the contract. Since the numbers of the parties involve in the construction contract it is oblivious that the disputes will arise between them if one party failed to perform their obligation in terms of the contract. Disputes can be resolved either through litigation or through Alternative disputes resolution mechanism, which includes Mediation, Conciliation and Arbitration. In India where the courts are already heavy burdened with the backlog of cases, the dispute hangs over for years. Litigation is expensive as well as time consuming. If litigation is resorted for every problem, then, such problems will likely to increase rather than to resolve the tension generated by the emergence of such problems.
In the Construction contract, where the huge money involves, an early and inexpensive dispute resolution is required otherwise the project will run in time overrun resulting into the huge losses of money, idling of manpower and machineries.
Though Mediation and Conciliation is very inexpensive mode of dispute resolution mechanism but the decision of the Mediator and Conciliator are not enforceable. Due to this reason the Mediation and conciliation fails in most of the cases. Arbitration is also one of the Alternative Dispute Resolution modes, which is more successful than mediation and conciliation because the Award passed by the Arbitrator is as good as the decree passed by the Civil Court.
Before 1996, statutory provisions of Arbitration were covered by three different enactments namely, the Arbitration Act, 1940, The Arbitration , (Protocol and Convention) Act, 1937 and The Foreign Awards (Recognition and Enforcement) Act, 1960. The Arbitration Act, 1940 laid down the framework within which the domestic arbitration was conducted in India while the other two enactments dealt with the foreign awards. In 1996, Arbitration and Conciliation Act, 1996 was come into force. This Act repealed all the three previous enactments. Arbitration Act, 1996 is based on UNCITRAL model law.
Part I of the Arbitration Act,1996 deals with domestic arbitration, part II deals with enforcement of foreign wards, part III deals with conciliation and part IV deals with the supplementary provisions. Moreover Arbitration and Conciliation Act, 1996 is applicable only to disputes, which are civil in nature.
A valid Arbitration Agreement is must for invoking the Arbitration and set into motion the Arbitration mechanism. Section 7 of the Arbitration Act, 1996 defines the Arbitration Agreement. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. An arbitration agreement shall be in writing.
An arbitration agreement is in writing if it is contained in-
(a) A document signed by the parties;
(b) An exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
(c) An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other..
Section 8 of the Arbitration Act, 1996 bar the filing of civil suit in relation to any dispute if arises between the parties where a valid Arbitration Agreement between the parties exist.
Section 9 of Arbitration Act, 1996, gives power to Civil Court to grant interim injunction for preservation, interim custody or sale of any goods, which are the subject matter of the arbitration agreement or securing the amount in dispute in the arbitration or Such other interim measure of protection as may appear to the court to be just and convenient, before, during or after the Arbitral proceedings.
Section 10 of the Act, provides for the number of arbitrators. The parties are free to determine the number of arbitrators provided that such number is not an even number. If the parties have failed to provide for the number of arbitrators, in that case, it is provided that an arbitral tribunal shall consist of a sole arbitrator.
Section 11 prescribes procedures for appointment of Arbitrator under which a person of any nationality may be an arbitrator unless other wise agreed to by the parties. The parties are free to agree on a procedure for appointment of an arbitrator(s).
Under Section 11(3) and (4), if the parties fails to arrive at an agreement, as mentioned above in an arbitration with three arbitrator, each party shall be entitled to appoint one arbitrator and the two appointed arbitrators shall appoint a third arbitrator who shall act as the presiding arbitrator. If a party fails to appoint an arbitrator within 30 days from the receipt of a request to do so from the other party or if the two appointed arbitrators fail to agree on the third arbitrator within 30 days from the date of their appointment, the appointment shall be made upon request of a party by the Chief Justice or any person or institution designation by him.
However, in Datar Switchgear vs Tata Finance Ltd. (2000)8 SCC 151: 2000(3) Arb LR 447, it had been held that if one party demanded appointment of an arbitrator and the other party did not make the appointment, the right to appoint was not automatically forfeited on the expiry of 30 days, however, the right would be forfeited if the opposite party fails to make the appointment and the claimant approaches the Chief Justice or his designate for the needful.
Until, the recent judgment pronounced by the apex court in M/s. S.B.P. & Co. Versus M/s. Patel Engineering Ltd. and another 2008) 4 SCC 190, the appointment of arbitrator by the court was an administrative order, however, The constitutional benches verdict in M/s. S.B.P. & Co. Versus M/s. Patel Engineering Ltd. overruling the judgment in Konkan Railway Corpn. Ltd. & anr. Vs. Rani Construction Pvt. Ltd. [(2000) 8 SCC 159] held that the order passed by the Chief Justice or his delegate of the High Court, appointing the arbitrator is now appealable, thus enunciating that the order passed under section 11 is not an administrative order but a judicial order.
Under Section 16 of Arbitration and Conciliation Act 1996, a party may take a plea of lack of jurisdiction on many grounds including the following:
i) Arbitration Agreement does not exist
ii) Contract containing it is invalid
iii) There has been full & final settlement and contract is discharged
iv) Disputes do not arise out of contract
v) Reference is beyond the scope of Arbitration Agreement.
The arbitrators are free to choose procedure and subject to parties agreement, may conduct the proceedings “in the manner they consider appropriate. Neither the Code of Civil Procedure nor the Indian Evidence Act applies to arbitrations. In an international commercial arbitration, parties are free to designate the governing law for the substance of the dispute.
An award can be challenged before Court under section 34 of the Arbitration Act, 1996 on the following grounds.
- a party was under some incapacity; or
- the arbitration agreement was not valid under the governing law; or
- a party was not given proper notice of the appointment of the arbitrator or on the arbitral proceedings; or
- the award deals with a dispute not contemplated by or not falling within the terms of submissions to arbitration or it contains decisions beyond the scope of the submissions; or
- the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties; or
- the subject matter of the dispute is not capable of settlement by arbitration; or The arbitral award is in conflict with the public policy of India.
A challenge to an award is to be made within three months from the date of receipt of the same. The courts may, however, condone a delay of maximum 30 days on evidence of sufficient cause. Subject to any challenge to an award, the same is final and binding on the parties and enforceable as a decree of the Court.
Supreme Court of India decision in Oil and Natural Gas Corporation vs. Saw Pipe (2003) 5 SCC 705 the Court added an additional ground of “patent illegality”, thereby considerably widening the scope of judicial review on the merits of the decision.
In another Judgment Supreme Court in the recent case of Venture Global Engineering v. Satyam Computer Services Ltd (Venture Global) (2008) 4 SCC 190 held that a challenge to a foreign award in India would have to meet the expanded scope of public policy as laid down in Saw Pipes. The Venture Global case creates a new procedure and a new ground for challenge to a foreign award.
Under Section 37 of the Arbitration Act, 1996, an appeal shall lie from the following orders (and from no others) to the court authorised by law to hear appeals from original decrees of the court passing the order, namely: -
(a) Granting or refusing to grant any measure under section 9;
(b) Setting aside or refusing to set aside an arbitral award under section 34.
(2) An appeal shall also lie to a court from an order of the arbitral tribunal–
(a) Accepting the plea referred to in sub-section (2) or sub-section (3) of section 16; or
(b) Granting or refusing to grant an interim measure under section 17.
The award passed by the Arbitral Tribunal can be executed in the same manner as the decree of the Civil Court is executed.
Azeez Nazar Sabri
