ARBITRATION IN CONSTRUCTION CONTRACTS (WITH ANALYSIS OF DISPUTES & DISPUTE RESOLUTION SYSTEMS) By G.S. TAWARMALANI (Former Director General, CPWD) This book and the effort made in its compilation is dedicated to the Central Public Works Department and the CPWD brotherhood which nurtured my knowledge and gave me an opportunity to gain a rich experience in civil engineering profession and in contract management techniques. Almost four decades of active service spread over all the echelons of hierarchy in this department made me a professional that I am today. G.S. Tawarmalani Preface It was way back in August 1958, that after my graduation, I joined the Central Public Works Department, the premier construction agency of Government of India. It was then that I took a plunge in the practical arena of planning and construction of civil projects. For the next over forty years, I have had the privilege of a very intimate association with the construction management and contract management. Working in the Central Public Works Department as well as in the other allied organisations like National Buildings Construction Corporation and the Indian Council of Agricultural Research, on deputation from CPWD, I had the opportunity to deal with various facets of construction projects and contractual disputes arising on them. The four decades of intimate association with the infrastructure projects, and construction contracts, gave me an insight into the problems and the difficulties that the contractors as well as the supervisors face in converting the planned concepts into physical tangible assets on ground. Umpteen number of construction projects suffer from severe setbacks on account of disputes between the owners and the constructors, and between the supervisors and contractors. Non resolution or delayed resolution of such disputes is one major malady that results in time overruns and cost overruns in construction projects. During these four decades of association with constructions and with construction contracts, I handled the construction projects in all echelons of the construction organisation from a junior engineer to the head of the organisation. I thus had the opportunity to gain experience at the level where the disputes get created to the level of appointing the mediators and/or arbitrators, and then to the level of accepting and/or contesting the awards given by such arbitrators. Having handling disputes and awards in construction contracts all through my service career, I am unable to discard an impression that a lot of subjectivity inevitably enters into the awards that are handed out by mediators and/or arbitrators in construction contract disputes. Irrespective of whether the subjectivity is by design or by accident it leaves a bad taste in the relations between the parties to the dispute and consequently affects the future course of the project implementation. There is no argument against the dictum that the contractors ought to get what is due to them without any undue delay. On the other hand the contractors should not get something that is not due to them. If the system can achieve this goal of fair-play, the result will be a healthy interaction between the two disputing parties which in turn will go a long way in bringing about an overall improvement in project implementation. It is my belief that a contractor will stand to gain a lot if in formulating his strategies, he has an access to the knowledge of what sort of claims are generally found to be just and what claims are generally considered to be frivolous. Similarly it should help the departmental officers a lot if they knew what the chances of success are, on their decisions if they are contested in arbitration like fora. Even the arbitrators themselves can gain from knowledge of the trend of decisions given on common type of disputes in the past. Knowledge of this kind should, in my perception, make the dispute resolution system itself healthy. I endeavoured to make this compilation, which in my view, should work as a ready reckoner on what the claimants have been claiming in the past and what the respondents’ stand was on those issues; and more important, what the different arbitrators said on those issues in the past. The compilation would have served its purpose if it can provide food for thought to the parties at dispute, and to the arbiters adjudicating on the disputes, by elucidating the type of claims and adjudication thereon in the past. The aim is to encourage the claimants and the respondents to formulate a well considered and reasonable approach in their contentions and the arbiters to take decisions with an awareness of what the earlier peers in the field said about those issues. To make the compilation more meaningful, I have included a brief write up on the common dispute resolution mechanisms in construction contracts and an overview on arbitration laws as seen by the construction managers of both categories, namely the supervisory managers and the contracting managers. CPWD contract forms and the Standard Bidding Documents represent two diverse kinds of contract forms in vogue. While the former makes a large number of decisions taken by the departmental officers final and binding, the latter does not contemplate any finality in any decision of a departmental officer. But then, even in disputes arising from such final decision under the CPWD contract forms, instances are not wanting wherein the arbitrators have chosen to adjudicate on issues sought to be kept out of their purview. This compilation is based on the disputes raised in implementation of the CPWD contract form, which went through the process of arbitration and culminated into awards. I have tried to faithfully analyse the awards taken up by me in the sample for study. I have also included in the compilation, the data to show a comparison between the claim amounts, the award amounts and the amounts accepted by the opposing parties as genuinely payable, even without or before adjudication on the issues by the arbitrators. This is done to show the extent up to which the disputes could have been sorted out even without reference to arbitration. At least to that extent there need not have been any fight and/or litigation between the parties. I have also tried to briefly summarise the stand taken by the claimants and the respondents on various issues and the reasoning of the arbitrators, as evidenced from the awards. The task of this compilation was, as can be expected, stupendous. My effort has been to faithfully summarise the import of the language used in the awards and/or to reproduce figures therefrom. If any sporadic and inadvertent inaccuracies are found to have entered the compilation, I humbly ask to be excused. But I am confident that the compilation as a whole is accurate enough to convey the overall sense and the overall pattern of claims, contentions and judgements, which was my main purpose of conducting this exercise. I hope the readers will find the information contained in the compilation useful. A compilation of this kind will be more useful if the salient features of the governing laws for the dispute resolution mechanism and the general overview of the systems and procedures are also included. The development of law is a continuous process. We become wiser on certain ticklish issues when the judgements are delivered to settle the interpretation matters. The basic acts also get amended from time to time. We earlier had Arbitration Act of 1940. Now we have the Arbitration Act of 1996. The applicability of previous judicial decisions in the new scenario when a new law is enacted needs to be analysed on the basis of the similarity or the dissimilarity with the earlier provisions. I have accordingly incorporated a write up before the compilation to cover these aspects and to give the broad comparison of provisions of the new Act vis-à-vis the old Act. For full import of the changes one naturally has to refer to the two bare acts themselves. The compilation is made with reference to the nearest clause that could have a relevance to the issue. Such a compilation is more meaningful if it brings out the trend of the decisions on particular issues. Accordingly, the analytical data indicating the percentage success is given against claims categorised under several of the clauses. I have also given an analysis in totality towards the end. Further, I have also given the judicial decisions often quoted in dealing with the matters of acceptability or otherwise of awards in construction contracts and on issues emanating from such awards in Appendix 2. I hope that the construction managers, the contractors and the arbitrators will find this compilation useful and that this will prove to be a step forward in bringing reasonableness and uniformity in decision making process in dispute resolution exercises in construction jobs. G.S. Tawarmalani October 30, 2001 Table of Contents Serial Topic Reference to Clause No. in CPWD Page No. Forms Old Forms 1995 Form 1. Salient features of Construction Contracts - - 1 2. Types of clauses generally incorporated in - - 1 Construction Contracts 3. Decisions which are stipulated to be final & - - 3 conclusive in CPWD Contract Form 4. Disputes in Construction Contracts - - 6 5. Dispute Resolution in Construction Contracts - - 7 6. Conciliatory systems in Construction - - 8 Contracts 7. Arbitration - - 11 8. An overview of the statute governing - - 12 arbitration proceedings 9. Summary of provisions in Arbitration Act of - - 14 1996 & comparison with 1940 Act 10. Levy of compensation 2 2 24 11. Claims relating to refund of forfeited security 3 3 36 deposit and Risk & Cost cases 12. Claims relating to completion certificate, site 6 8, 8A & 8B 47 clearance etc. 13. Claims regarding payment of Running 7 7 48 Account bills and final bill 14. Claims pertaining to supply of stipulated 10 10 66 materials and recovery therefor 15. Escalation claims 10C & 10CC 10C & 10CC 72 16. Claims pertaining to materials obtained in 10D 10D 80 excavation, and during dismantling work 17. Claims relating to Extra and Substituted 12 12 81 Items and rates therefor 18. Deviation Limit and claims consequent to 12A 12.2 104 deviation in quantities i Table of Contents Serial Topic Reference to Clause No. in CPWD Page No. Forms Old Forms 1995 Form 19. Claims arising out of reduction in the scope 13 13 & 14 106 of work 20. Claims arising out of deductions and 14 16 107 recoveries for bad work 21. Claims relating to the liabilities in 17 17 117 maintenance & Guarantee periods and claims for refund of amounts withheld on that account 22. Claims relating to labour welfare and labour 19 19 120 returns etc. 23. Claims relating to adjustment of dues 29A 29A 123 pertaining to other contracts 24. Claims relating to charges for water for used 31 31 & 31A 123 in construction 25. Claims relating to supply of departmental 34 34 124 machinery and recovery therefor 26. Claims relating to employment of technical 36 36 125 staff by the contractor 27. Claims relating to Sales Tax and other 38 38 127 statutory taxes 28. Claims relating to recovery at higher rates for 42 42 128 excess and/or less consumption of materials supplied by Department 29. Claims pertaining to payment for abnormally Nil Nil 137 high & low rated items - AHR & ALR 30. General claims such as loss of profit, idle Nil Nil 139 labour, machinery & establishment charges etc. due to prolongation of contract period, and other general type of claims 31. Claims not identified against any particular - - 164 clause as arbitrator clubbed several claims and gave a combined decision 32. Claims relating to recovery of conditional Conditional Conditional 164 rebates rebates given in rebates given in the offer the offer i i Table of Contents Serial Topic Reference to Clause No. in CPWD Page No. Forms Old Forms 1995 Form 33. Claims for payment of interest on amounts Nil Nil 168 due or considered to be due 34. Claim relating to limitation 25 25 180 35. Claims for Cost of arbitration Nil Nil 180 36. A few claims which were withdrawn without - - 191 contest and which, further, can also not be categorised for want of details 37. Analysis - - 194 38. Appendix 1 - - 195 List of awards and the names of works taken in the analysis. 39. Appendix 2 - - 199 Some often quoted court decisions, citation and a gist of decisions relevant to arbitration work. Notes: 1. All amounts in this compilation are in rupees. 2. In column titled `Extent of claim accepted by Respondent’ the word Respondent refers to the party opposing the particular claim. This word is not to be taken to refer to the Respondent in the case as such. ii i Arbitration in Construction Contracts by G.S. Tawarmalani An overview of the genesis & the governing laws Salient features of Construction Contracts Several types of contract forms are in vogue in the construction industry in the Country. Many organisations have evolved their own standard forms on which the construction agreements are drawn. These forms give the general terms and conditions between the parties to the contract. In addition most of the projects usually have some special conditions or additional conditions which spell out the conditions drafted to suite the special requirements of specific projects. Amongst the various government construction agencies, Central Public Works Department is the premier construction agency of Government of India for execution of that government’s Public Works program. This department has laid down the procedures and practices for execution of government construction jobs entrusted to it. These procedures are widely followed by several other government and public sector construction organisations also. CPWD has evolved some standard construction contract forms designed to suit the different situations. Prominent amongst the forms used on works are the Item Rate Tender form and the Percentage Rate Tender form which were revised and combined into a single compilation entitled “GENERAL CONDITIONS OF CONTRACT FOR CENTRAL P.W.D. WORKS” in 1995. Clause 25 of these forms (old forms PWD 7 & PWD 8 as well as the new combined form of 1995) gives the mechanism for resolving disputes that may arise in implementation of the contract. The other type of construction contract form that needs a mention here is the Standard Bidding Documents (SBDs) that are used in constructions executed with World Bank/IBRD assistance. This form is also widely adopted in construction projects in the Country. Clause 67 of these documents gives the procedure to be followed for dispute resolution in implementing the contracts drawn on the basis of that form. Types of clauses generally incorporated in Construction Contracts Terms and conditions governing the relationship between the parties involved in execution of the construction projects may differ from one contract to the other, particularly in respect of the special and/or additional conditions drafted specifically for specific projects. But the fundamental provisions are usually contained in the standard contract forms, which determine the main characteristics of the agreement drawn for execution of the construction project. Irrespective of whether CPWD contract form is used, or Standard Bidding Documents are used, or even in other form used, the basic clauses can be classified into well identified categories. By and large, the clauses specifying the general terms and conditions in a construction contract may be of the following broad categories. • Clauses explaining the meaning of the terms used in the contract - Definition clauses. • Clauses laying emphasis on the parties to stick to the agreed terms. • Clauses stipulating the nature of guarantees to be given for performance of the contract. • Clauses specifying the method and the mode for making payments for the work done. • Clauses specifying time schedule and the penalties, damages etc., payable in the event of failure to give satisfactory performance in quantitative terms. • Clauses emphasising on the qualitative aspect of performance and action to be taken in the event of failure in this regard. • Clauses relating to remedies available to a party, for defaults in performance of, and for breaches by, the other party. • Clauses specifying the obligations for making arrangement for materials and plant & machinery. • Clauses pertaining to labour welfare measures for the construction labour. • Clauses relating to establishment to be employed - or not to be employed - on the work. Depending on the specific conditions of contract and the degree of clarity in the provisions made, a wide variety of disputes arise in implementation of construction contracts. 1 Arbitration in Construction Contracts by G.S. Tawarmalani An overview of the genesis & the governing laws Notable amongst the contract Forms in vogue in the Country, as already mentioned, are the CPWD Contract Forms and the Standard Bidding Documents. The CPWD forms are used in domestic contracts by several government departments. The Standard Bidding Documents (SBDs) were evolved for IBRD/IDA financed schemes and the conditions included therein derive inspiration from FIDIC documents. Dramatise personae and their interaction in CPWD contract forms (CPWD Contract Forms) Supervisory agency through its Contracting agency and/or nominated personnel comprising contractors, and their authorised of its site engineers and other technical and non-technical nominated staff/officers personnel PROJECT EXECUTION Dramatise personae and their interaction in the IBRDA/IDA financed contracts (Standard Bidding Documents) ENGINEER EMPLOYER/OWNER CONTRACTOR Interaction PROJECT EXECUTION Barring cases of contractors themselves working as Estate Developers and barring a few construction projects, where the owner himself purchases construction materials and employs labour directly under his control on daily wages, almost all construction projects are executed through construction contracts. There is an owner and there is a builder or a contractor. In most of the construction projects therefore, there is involvement of at least two parties, if not more, working for a common goal of developing infrastructure. The owner specifies the requirements and controls the finances. The contractor constructs. The owner, also termed as an employer sometimes, as in SBDs, may supervise the work through in-house resources or the supervision of the work may be through a separate technical organisation and/or personnel. More often than not, the owner is represented by construction supervisor or a supervisory agency, as in government works where organisations like CPWD/PWDs look after the interests of the owner ministry. In a government or a Public Sector project, we thus have a department supervising the work and a Contractor doing the construction work. In such situations, the role of the owner gets subsumed in the role of the supervisory department, as that organisation works for and on behalf of owner. These two, namely the construction department and the contractor, in such a case, constitute the two parties in the construction contract. At times there may also be a consultant with whom either of the parties may have a separate agreement for performance of their respective obligations. 2 Arbitration in Construction Contracts by G.S. Tawarmalani An overview of the genesis & the governing laws In the contracts based on SBDs, there is a third party between the owner and the contractor, the Engineer who acts as a go between the two main parties, namely the owner and the contractor. The Engineer, even in this arrangement is, to an extent, a representative of the owner. No doubt the Engineer is also covertly empowered to act as a mediator in some cases, but by and large all such decisions are to be taken by the Engineer after consultation with the owner and the contractor. His decisions do not necessarily have a finality and the decisions can be questioned and/or challenged in an appropriate forum like arbitration etc. While none of the Engineer’s decisions in the contracts drawn on SBDs are final and conclusive, as many as 32 issues in CPWD Contract form 1995 are termed as final, conclusive and binding on the parties to the contract. These decisions are to be taken by the engineers of the supervising agencies in a quasi-judicial capacity and are sought to be kept outside the ambit of the arbitration agreement in clause 25 of the contract form. Decisions which are stipulated to be final & conclusive in CPWD Contract Form Decisions taken on some of the issues arising from the provisions of clause 2, 3, 4, 10, 10 B, 15, 16, 19 D, 19 G, 19 J, 25, 27, 30, 32, 33, 34, 36, 38, 42, 43, Safety Code Item 8(p), CPWD contractors labour regulations item 18, are stipulates to be final, conclusive and binding on the parties to the contract. These are sometimes referred to as `Excepted Clauses’. There are two schools of thought on whether the disputes arising on the decisions taken under such excepted clauses do really fall outside the purview of arbitration clause or not. As per one school of thought, such decisions having been taken in the course of project execution by the officers dealing with the project execution as one of the interested party in the contract can not be final and conclusive. The decision must come from a separate impartial party. It is therefore, argued that whether the issue is referable to the arbitrator or not should be decided by the arbitrator(s). On the other hand as per the other school of thought, such decisions having been stipulated to be final and conclusive do not fall under the ambit of the arbitration agreement and that such issues fall under the exceptions contemplated under clause 25 of the CPWD contract form which is the arbitration agreement. There is a lot of force in this argument as clause 25 specifically states that the provisions of that clause apply only to those disputes, which arise from matters other than those wherein, specific provisions exist in the contract. But still, taking a practical view, the departmental officers would be well within their jurisdiction to take a view that since the contract specifically stipulates that the decisions of the departmental officers are final and conclusive on such issues, such disputes which question the decision on issues, agreed to be final and binding, are not to be referred to arbitration. Particularly so, when the arbitration clause itself recognises the exceptions in the opening para itself. And then, the resolution on the question as to whether the dispute is to be referred or not in any individual case, can only come through litigation in a court of law. Serial Clause Authority whose Topic No. decision is said to be final 1. Clause 2 Superintending Decision on the compensation to be levied for failure Engineer to maintain the agreed rate of progress, or for delay in completion. 2. Clause 3 Engineer-in-charge Opinion of the Engineer-in-charge, regarding whether the contractor shall not be able to complete the work by the specified date of completion, for the purposes of taking further action under clause 3 to determine the contract. 3