Construction Arbitration Case Study in India - LexResolv

Construction Arbitration Case Study in India

What is construction arbitration?

Construction arbitration simply refers to the method of resolving disputes in the construction sector.  Moreover, the dispute in this sector generally arises in these 3 segments:

  • Residential
  • Infrastructure
  • Commercial Construction
construction arbitration
The construction team working on site. Builders, engineers, architects in helmets and overalls holding blueprints, toolkits, measuring tools. Vector illustration for building, engineering, labor

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Construction Arbitration: Agreements

An arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes that have arisen or may arise between them in respect of a defined legal relationship, whether contractual or not.[1]   

Construction Arbitration agreements,  like most agreements,  can be either oral or written. However, if ADR is under the purview of the 1996 Act, the arbitration agreement must be in written form.

A normally written Arbitration agreement consists of

(a) A document signed by the parties;

(b) An exchange of letters, telex, telegrams, or other means of telecommunication [including communication through electronic means] which provide a record of the agreement; or

(c) Additionally, an exchange of statements of claim and defense in which the agreement’s existence is alleged by one party and not denied by the other[2].

Read Also – Validity of the Arbitration Agreement

Arbitration construction: Features

Arbitration in the construction industry has a unique feature, which is quite distinct from the general arbitration practice[3], which continues in various other industries. However, tThe arbitration clause for construction purposes is made keeping in mind the standards that the government provides. Examples are The Central Public Works Department (CPWD), the Military Engineer Services (MES), public enterprises, railway, etc.

In general, arbitration agreements include all the possible disputes relating to the business; there are certain exemption or exclusion clauses in contractual arbitration agreements. Their decision of authority in the agreement is final and binding on the parties.

Another feature of arbitration agreements is that the parties are free to agree on the procedure for the appointment of the arbitral tribunal[4]. The same is for construction arbitration. The parties have full freedom to choose their own procedures and arbitrators for reloving disputes.

Casestudy: 

Hindustan Construction Company Limited & Anr. v. Union of India & Ors[5]

In this case, the escape of the liability of the award debtor under sec 34 was struck down by the Supreme Court.  i.e., the application for setting aside the arbitral award.

Brief Facts

In this case, the petitioners are the construction companies undertaking large-scale building projects such as roads, bridges, tunnels, rail facilities, etc., for the government bodies. They were under disturbance because whenever there is a cost overrun, it caused a dispute between the government bodies. This causes a delay in the recovery of their legitimate dues, which can only be recovered through civil proceedings or arbitration.

Moreover, if the decision were in the petitioner’s favor, the government bodies would challenge it u/s 34 and 37. Thus, leading to an automatic stay of the decision.

 Also, the bodies, being statutory bodies, are out of the scope of the Insolvency & Bankruptcy Code, 2016. But this does not apply to the petitioners. Thus, due to this injustice, the petitioners challenged the validity of sec 34.

Issues of the case

  1. Whether sec. 87 is constitutionally valid or not?
  2. Whether the 2019 amendment to the Arbitration and Conciliation Act, 1996 is infringing the judgement of BCCI v. Kochi Cricket Pvt. Ltd.[6]

Arguments raised by the petitioners

  1. Sec. 36 of this act and sec. 36 of Model UNCITRAL Law are contradictory to each other. So, the decision should be taken by a larger bench
  2. The arbitrariness which was removed by the 2015 amendment is being infringed by this section.
  3. Additionally, the insertion of sec 87 by the govt. is contrary to the 2015 amendment
  4. The sec. 87 is violating articles 14, 19(1) (g), 21, and 300-A of the Indian Constitution.
  5.  Due to sec. 87, the award holders claim back the awards.
  6. Also, this section is in direct violation of the judgment of BCCI v. Kochi Cricket Pvt. Ltd.[7] 
  7. The dispute, due to sec. 87, is not solvable through civil appeal which causes the respondents to stop the arbitration.
  8. The petitioners also challenge sec 3 (7) of the IBC as it does not include govt. bodies as a corporate person.
  9. The contention also includes about the absurdity of sec 87 read with different sections of IBC.

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Arguments raised by the respondents

  1. The respondents defended the insertion of sec 87 and the revocation of sec 26.
  2. The parliament has a clear intention regarding the 2019 amendment
  3. The sec 26 is not an attack on the BCCI judgement
  4. There is no evidence to challenge the prospective effect of the 2015 amendment
  5. The respondents defend the challenge against the IBC by stating that a writ petition u/a 32 cannot be converted to recovery proceeding.

Judgement by the court

The Apex court gave the decision:

  1. The Srikrishna Committee Report introduced the Sec 87 to remove the ambiguity. But this was actually removed by the BCCI case.
  2. The 2015 amendment is not of a clear nature. Also, no automatic stop in the arbitration decisions was originally there in the act
  3. Sec 87 is in violation of IBC
  4. Also, the section is violative of A. 14 of the constitution

Thus, the court concluded that introducing sec 87 is a lacuna on the part of the govt.

Construction/infrastructure is one of the fastest-growing sectors of our economy. And, the companies spend in construction disputes as Arbitration saves time and money for both parties. Moreover, many companies are introducing an arbitration clause in their contracts and agreements.  

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[1] The Arbitration and Conciliation Act, 1996, §7

[2] The Arbitration and Conciliation Act, 1996, §7(4)

[3] Alfred Arthur Hudson and Ian Norman Duncan Wallace, Hudson’s Building and Engineering Contracts, 11th Edition, Sweet and Maxwell, U.K., 2003

[4] The Arbitration and Conciliation Act, 1996, §11(2)

[5] 2019 SCC OnLine SC 1520

[6] CIVIL APPEAL NOs. 2885-2886 OF 2018

[7] CIVIL APPEAL NOs. 2885-2886 OF 2018

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