NATIONAL SEMINAR ON CONSTRUCTION CHALLENGES LEGAL SUBTLETIES

Transcription

1 Seminar on Construction Contracts :Legal Subtleties NATIONAL SEMINAR ON CONSTRUCTION CHALLENGES LEGAL SUBTLETIES 16 November 2012, Bangalore Poornima Hatti Neela Badami

2 OVERVIEW Introduction: Forms of Dispute Resolution Arbitration Structural Framework in India Why Arbitration? Construction Contracts Meaning Parties Involved Interpretation Standard Form Contracts Problems in the Construction Industry that could lead to disputes Specific heads brought under arbitration Determination of the agreement Payment and time Execution of work and delay Neutralization of risks: Proactive approach Arbitration in construction contracts Concept of Damages in Construction Contracts

3 CHOICE OF DISPUTE RESOLUTION MECHANISM Arbitration: Intl or domestic Mediation Domestic litigation Expert determination Conciliation 3

4 MEDIATION KEY FEATURES Voluntary Confidential Non-binding the mediator s mandate is only to facilitate discourse between the parties, not to make judgment Informal Quick and cheap Room for creativity Preservation of business relationship between the parties High success rate 4

5 MEDIATION STEP BY STEP Agreement to mediate Selection of mediator Pre-mediation contact Preparation Initial joint meeting Private meetings Settlement/concluding phase Costs of the mediation 5

6 MEDIATION - MYTHS A sign of weakness Unnecessary Negotiation has failed why should mediation succeed? Thee mediator adds no value Full disclosure is necessary before mediation can be entertained Mediation wastes time and money if no settlement is achieved Mediation only delays progress of court or arbitral proceedings 6

7 Arbitration A method of private, binding and enforceable dispute resolution Part of a growing group of alternative dispute resolution procedures, along with conciliation, mediation and expert determination. By written agreement Parties can select arbitrators, based on expertise and background Parties can select choice of law and forum.

8 WHY ARBITRATION? Speedier resolution of disputes Less costly as compared to litigation Confidentiality: The parties can subject the whole dispute to confidentiality through agreement. Ability to choose an arbitrator who is an expert on the subject matter, as compared to inability to choose a judge in litigation. More informal process. Higher likelihood of parties remaining on good terms even after settlement of disputes, as compared to litigation. Party autonomy

9 STRUCTURAL FRAMEWORK OF ARBITRATION IN INDIA India enacted its Arbitration and Conciliation Act in 1996, based on the UNCITRAL Model Law. The Act provides for domestic arbitration international commercial arbitration, enforcement of foreign award and conciliation

10 KEY ISSUES THAT MAY ARISE IN ANY ARBITRATION Competence Competence Section 9 remedy Section 11 role Limited scope of appeal- unless there is a serious concern. Appreciation of evidence is at the best in the trial. Different choices of law. Institutional v. ad hoc arbitration

11 INCREASING POPULARITY OF ARBITRATION Increasing use of arbitration to settle international disputes Increasing number of international commercial transactions and disputes. International contracts parties increasingly reluctant to rely on jurisdiction of home courts of other side. International arbitration gained wide acceptance in international business and legal communities. One study: 90% international contracts contain arbitration clause. Increasing use of arbitration in Asia Number of cases involving Asian parties on the rise: 1983: 3% of ICC arbitrations involved one or more Asian parties. 2006: 17% of ICC arbitrations involved one or more Asian parties. Investor-state arbitration has also begun to grow in Asia. Cases have included: Bangladesh, Indonesia, Malaysia, Mongolia, Pakistan and the Philippines. Increasing number of Asian states have entered into BITs. 11

12 PROBLEMS PECULIAR TO THE CONSTRUCTION INDUSTRY WHICH COULD POTENTIALLY LEAD TO DISPUTES Inherent nature of the industry. Building construction is not like the manufacture of goods in a factory. The size of the project, site conditions, the use of many materials and the employment of various kinds of operatives make it virtually impossible to achieve the same degree of perfection that a manufacturer can. It must be a rare new building in which every screw and every brush of paint is absolutely correct. - Emson Eastern v. EME Developments (1991) 55 BLR 114 Multiplicity of parties (general contractor, sub-contractor, supplier, engineer, architect, owner, etc.) When there are so many parties involved, it is difficult to point out default. Finger pointing becomes a problem, when each party blames the other. Weather conditions, site specifications.

13 CONTD.. Tendency of faults to show up late: A construction project is a continuous one, usually spread over a number of years. A fault may turn up at any time. If it happens in the beginning, again, it can upset the whole time schedule of the construction unless the dispute is resolved quickly. Neighbouring constructions: Since the project cannot exist in isolation, owners of neighbouring sites can present difficulties. Laws relating to nuisance, planning, environmental impact and neighbourhood proprietor interests will come into play. Delivery procedure is unique to construction industry.

14 CONTD.. Changing nature of the work and unforeseen circumstances: Manpower shortage: The work may not go as planned, and may require, for example, more manpower. In one case, for example, the drawings and designs were changed in the course of construction of the works. This resulted in an abnormal increase in the quantum of work and, consequently, the contractor claimed a higher amount. These types of problems are common. Shortage of material Accidents, through fire, flood etc. Design that proves to be impossible to construct.

15 SPECIFIC HEADS OF DISPUTES BROUGHT UNDER ARBITRATION Determination of the agreement The failure of the contractor or sub-contractor to proceed in a competent, diligent and satisfactory rate The contractor or sub-contractor ceasing work on site The employer repudiating the contract by denying contractor access to site, not making progress payment, being insolvent or claiming to determine the contract. Payment and Time Non-payment of progress claims by contractor or sub-contractor Non-payment of amount certified in final account Extension of time costs claims by contractor or sub-contractor Liquidated and ascertained damages charged against the contractor or sub-contractor Contractor claim sums for fluctuation of prices.

16 CONTD.. Execution of work and delay Changes in sub-structure design and lack of temporary support during excavations Defective materials and claims of negligent manufacture and supply Poor quality of workmanship including defects in brickworks, tiling, footing and wall construction Delays and extension of time due to local authorities requirements Negligence and nuisance.

17 NEUTRALIZATION OF RISKS: PROACTIVE APPROACH Example: In the Parbati Stage III project there arose a situation where there was water inflow of more than 100 litres/second, and silt and debris flow, which needed ground treatment. But there was no provision in the contract providing for ground treatment, which resulted in the project being stuck at this stage for several months. The same problem, when it arose in the Niagara Tunnel Project, Canada and the Karahnjukar Hydroelectric Project in Iceland, was averted because bad ground situations was already anticipated and provided for in the contract. As we have discussed, construction contracts are prone to varying conditions, including increase in rate of taxes and duties, promulgation of new taxes, increase in price of raw materials, not to mention weather and site-specific risks. These risks should be offset by a suitable provision in the contract.

18 NEUTRALIZATION OF RISKS: PROACTIVE APPROACH If during the course of execution there are extra items of work required to be executed, a schedule of the following items should be appended to the contract, to enable both parties to arrive at the figure payable, and to avoid claims at a later date. Overheads to include all indirect cost at site including interest on borrowings, bank guarantees etc. to be spelt out as a percentage of cost Supervision Profit Day rates for workmen of all categories Day work for all supervisory staff Day work/ hourly rates for all equipment Hard costs will be worked out on actual.

19 ARBITRATION IN CONSTRUCTION CONTRACTS Advantages in arbitrating construction contracts: In the construction industry, insofar as international disputes are concerned, arbitration is fast becoming the preferred method of dealing with disputes. This is basically due to: Neutrality: If a risk analysis is undertaken, most contractors, due to a natural fear of litigating in foreign ground, would prefer not to choose a situation where a foreign court will have the final say. They would much prefer a neutral arbitrator. Enforcement: The judgments or orders of foreign courts would be extremely difficult to enforce in other jurisdictions. However this problem can be resolved through arbitration, especially after the New York Convention. With over a hundred countries signatories, the New York Convention ensures that any award given in any of these states is enforceable in the other. Expert: The construction industry is extremely complex and a technical area, and a choice of arbitrators can ensure that an expert considers the questions.

20 PROBLEMS WITH ARBITRATION IN THE CONSTRUCTION INDUSTRY Difficulty in Joinder: Since there are multiple parties, joinder will be a problem. For example, the CIAC Rules regarding joinder say: If the parties so agree, the Tribunal shall also have the power to add other parties (with their consent) to be joined in the arbitration and make a single Final Award determining all disputes between them. (Rule 33.2) Thus clearly, only if the parties so wish, joinder can be effected. Invariably, in an industry with differing interests and conflicts, and several parties, it is unlikely that all parties will agree to a joinder. Difficulty in consolidation: For the same reason, consolidation into one hearing or under one arbitrator will be problematic. This might lead to separate proceedings having to be commenced, different arbitrators likely to be appointed, and separate findings of fact or law as a result.

21 CONSTRUCTION INDUSTRY ARBITRATION COUNCIL (CIAC) CIAC is a body that works under the aegis of the Construction Industry Development Council (CIDC), an apex body for the Construction Industry established by the Planning Commission and construction industry. It provides an institutional mechanism for the resolution of construction and infrastructure related disputes. The CIAC was set up by the CIDC in cooperation with the Singapore International Arbitration Centre (SIAC). The arbitration centre in India provides facilities for alternative dispute resolution, both international and domestic arbitration.

22 FIDIC A 100 year old industry body International Federation of Consulting Engineers. Widespread knowledge about consulting engineering which have been crystalized into various standard forms of contracts. Specific Dispute Adjudication Boards with stringent tests for adjudicators. Appeal to ICC arbitration usually. Other recognised and well established arbitrations include ICC, LCIA, SIAC, Nani Palkhivala Centre.

23 DAMAGES IN CONSTRUCTION CONTRACTS Some basics of contract law What are contracts? agreements enforceable by law, must be performed at the time fixed for performance, consideration not void or voidable Breaches Kinds of breaches, with examples: Failure to perform Refusal to perform Disability to perform Consequences of breach of contract, with examples: Specific performance Injunction Damages Damages Liquidated Damages

24 SOME FEATURES OF CONSTRUCTION CONTRACTS RELEVANT TO A DISCUSSION ON DAMAGES Time is of the essence i.e, if contract not performed within specified time, other party can treat contract as repudiated (broken) Obligations imposed on employer and principal what must he / it be doing to enable you (engineer / contractor) to perform your role? Environmental factors how provided for? Force majeure clauses what are covered? How can you (engineer / contractor) make use of the above to your advantage?

25 DAMAGES Basic principle of damages under contract is to give a person the gains that were expected from the performance of the contract. Section 73 and Section 74 of the Indian Contract Act, 1872 codify the principles for the grant of damages under Indian law. Section 73 (general damages) provides that when a contract is breached, the person suffering is entitled to compensation from the breaching party. However, remote or indirect losses are not covered. Section 74 (liquidated damages) provides that if the contract specifies a sum payable on breach, or, any other penalty stipulation, the suffering party is entitled to reasonable compensation not exceeding the amount stipulated.

26 LIQUIDATED DAMAGES Employer / principal s objective is to get the project or construction completed on time Hence, LDs act as the stick in the carrot / stick approach in the contract (with the carrot being consideration or milestone payments) Typically provided for in the event construction is not completed on time (time being of the essence in construction contracts). Genuine pre-estimate of damages

27 SAMPLE LIQUIDATED DAMAGES CLAUSES IN CONSTRUCTION CONTRACTS The tentative schedule for completing the construction of super-structure shall be months from the construction oil the entire super-structure under the present agreement. If the construction is not completed within this specified time, then the developer shall pay to the owner, damages at the rate of Rs. per month. Any willful delay on the part of the second party in completing the construction within the stipulated period will render him liable to pay liquidated Rs. * per day which will be deducted from payments due to him. The first party may cancel the contract and take recourse to such other action as deemed appropriate once the total amount of liquidated damages exceeds 2 % of the contract amount. (Note : The amount of liquidated damages per day should be determined at 0.05 % of the contract value of the works and indicated here)

28 WHEN IS THE CONTRACTOR NOT LIABLE TO PAY LIQUIDATED DAMAGES? When the employer has waived the right to insist upon them, such as when the employer has failed to deduct or retain them in cases where it is imperative on his part under the contract to do so. Where the liquidated damages are stipulated for at a certain amount per day or per week, there must be a definite date from which they are to run. If no such date is fixed by the contract, the liquidated damages clause shall not be effective. When the delay is caused by the employer.

29 CONCLUSION Points to ponder

30 Thank you! CHENNAI Suite# 672, CitiCentre, Level 6, 10/11 Dr. Radhakrishnan Salai (formerly Cathedral Road) Chennai BANGALORE 62/1, Palace Road, Vasanthnagar, Bangalore NEW DELHI No. 62, First Floor, Sahyog Apartments, Mayur Vihar Phase I, New Delhi