Dispute Resolution - Critical Role of Solution - Oriented Approach

By Krrishan Singhania & Niti Jain | February 23, 2021

Published in Construction Times

Dispute Resolution – Critical Role of Solution – Oriented Approach

The construction industry is the second largest industry of the country after agriculture. It makes a significant contribution to the national economy and provides employment to large number of people. In its path of advancement, the industry has to overcome a number of challenges. The conflicts and disputes are mainly due to uncertain environment and the complex nature of projects in the Industry. Such disputes result in delays in project implementation, increase in cost, loss of revenue due investments getting stuck in dispute resolution process. There has been an influx of disputes and challenges in the aftermath of pandemic. In this article, we attempt to not only highlight the challenges but also the solution ahead to overcome the aftermath of the pandemic. The Solution oriented approach is qui essential for the development of the Industry.

Legal Hurdles

The Aftermath of pandemic has not only decreased the liquidity and viability of the businesses but also has created various stumbling blocks for the Industry. An attempt is made to high such roadblocks which might come in the way of development for the construction industry:-

Delay in adjudication of the pending cases
Increase in the number of Labour disputes due to revenue loss because of pandemic;
Force Majeure clause an escape route for delay in payments of contractors;
Non- recovery of dues from the vendors/ operational creditors due to suspension of insolvency proceedings;
Non- payment of statutory dues;
Lack of effective trials in pending arbitrations due to video conferencing, as a result of the pandemic;

Steps taken by Government to deal with the aftermath

In order to deal with the aftermath, the Government has also taken various steps to bring stability and liquidity in the Industry. Some of these steps are mentioned herein below:-

National highway projects were unimpeded by the outbreak of Covid-19. Various new road contracts were awarded through the course of the pandemic, to ease the financial difficulties of developers and contractors by ensuring that work continued smoothly.
National Highway Authority of India (NHAI) in a positive decision decided to descope pending right of way without reducing construction period for highway developers working on BOT-HAM projects so as to make the process smoother. NHAI issued a standard operating procedure (SOP) pertaining to approach towards de-scoping the pending right of way (ROW) for BOT (build, operate, transfer) HAM projects.
The National Highways Authority of India (NHAI) awarded the highest length of projects during the months of April to August of financial year 2020-21, as compared to the projects awarded during the same period in the last three years.
Despite lockdown and the prevailing situation, NHAI took various initiatives to instill confidence in the bidders of the sector. To ease the liquidity crunch and ensure cash flow to the contractors, NHAI ensured that no payments are delayed due to closure of office and disbursed Rs 10,000 Crore during lockdown in March 2020 using digital platforms.
In another tryst with technology to cut lengthy administrative processes while bringing better transparency, the National Highways Authority of India (NHAI) is set to become the country’s first government backed construction sector organisation to go ‘fully digital’ with cloud-based Data Lake Software. The road construction company plans to deploy software that will not just track files but will also pin-point officials behind delays in disposing of matters. The move is also likely to enhance efficiency and transparency at NHAI.
The Highways Ministry extended the duration of a liquidity-related relaxation provided to road project contractors in response to Covid-19 that enabled monthly payments for work done till 30^th June 2020.
A relief package for road contractors and concessionaires was also announced to help them overcome the impact of Covid-19 outbreak. The measures included extension of project timelines between three to six month and payments to subcontractors via an escrow account.

In another welcome step, Hon’ble Delhi High Court recently in case titled “Skylark Infra Engineering Pvt Ltd v National Highways Authority of India & Anr” ordered the status quo in respect of the bank guarantees and other securities in a dispute during the pandemic. Therefore, these decisions taken by Judiciary and Legislature, are definitely, boon for the Industry. However, what more practically steps that can be taken to smoothen the dispute resolution process for the Industry is discussed hereinafter.

Solution Oriented approach

During these testing times for the industry, it is critical to focus more on a solution oriented approach that can ease out the process of dispute resolution. Arbitration as a dispute resolution mechanism has always been a favoured resolution method to solve the complexities in this sector. Such complexities emerge due to the involvement of multiple parties, high stakes in the projects, calculation and determination of amount of compensation, analysis, assess and review of huge amount of data and the requirement of involvement of technical experts for the resolution of disputes. It is paramount to identify the challenges derived from the ‘new normality’ derived from social distancing and its impact on court, arbitration, mediation and dispute board proceedings. This will minimize the number of disputes in this sector for speedy development of infrastructure. Few takeaways are mentioned below:-

The first, immediately apparent impact of COVID-19 on construction projects is the delay and disruption of project activities, which will inevitably lead to contractors’ claims for additional time and costs. To ensure their entitlement to an extension of time and/or losses suffered, contractors should make sure they timely submit their requests for an extension of time, respecting the procedural requirements as listed in their respective contracts.
Transparent and detailed documentation is the backbone of resolving disputes. To deal with the influx of disputes, it is necessary to ensure that the contractors
A distinction must be made between the claims which are completely document based and those which requires oral evidences. In Arbitrations which are completely based on documents, parties must resort to trial by documentary evidences. This will not only fasten the adjudication of the claims but would also enable the parties to get their arbitrations awards enforced.
Another, perhaps even more significant, consequence of the global pandemic caused by COVID-19 is that certain contractors are or will be forced to suspend the works entirely or, in the worst-case scenario, to terminate their contracts. Typically, force majeure events relate to events which are outside of parties’ reasonable control, preventing a party from performing its contractual obligations. The primary consequence of invoking force majeureis that the contractor is entitled to suspend performance of its contractual obligations for the time period of the force majeure It is important, however, that the contractor provides timely notice of the force majeure event to the Employer, at the moment when it became aware, or should have become aware, of the relevant event constituting force majeure, as this is typically one of the requirements under most construction contracts.
Also, it is important that the new commercial contracts are drafted carefully particularly the clause of force majeure. The clause of force majeure should be exhaustive enough to cover any pandemic like that of Covid-19.

Force-Majeure Clause in Pre-covid Contracts: Its Impact

Another issue of consideration for the Industry is the effect of Force-Majeure Clause on the existing contracts entered prior to the pandemic. Whether the outbreak of Covid-19 and the ensuing lockdowns ordered by the Central and State Government would be sufficient to invoke the force majeure clause in the contract would depend on the following factors:

Establishing the causal connection between the force majeure event and hindrance to the performance of the contract;
Harmonious construction with all the provisions; and
Compliance with the condition precedents contained in the force majeure clause.

Govt. of India vide its Memo No. F. 18/4/2020 PPD dated 19-02-2020 issued by the Deputy Secretary of Govt. of India, Ministry of Finance stated as follows:

“A doubt has arisen if the disruption of the supply chains due to spread of corona virus in China or any other country will be covered in force majeure clause. In this regard it is clarified that it should be considered as a case of natural calamity and force majeure clause may be invoked whenever considered appropriate, following due procedure.”

The pertinent point is that this memo gives rise to force majeure in respect of contracts dependent on supply chains, however the courts may not apply the same principles in all commercial contracts. Therefore, the questions which shall be considered by judiciary:

Whether there lies a force majeure clause in the contract in question or not; and
Whether this pandemic has affected the fundamental basis of the contract.

The courts will have to ascertain whether the contract has become impossible to perform and whether the doctrine of frustration of contract could be made applicable to such a contract. Of course, in such events, the courts and arbitrators will have to evaluate and decide each dispute on individual merits, which would be based on the terms of the contract, the intent of the parties, steps taken to mitigate.

Conclusion:

The concerns and practical difficulties arisen with times requires taking of positive steps to deal with the aftermath. The various roadblocks that still persist in the way of resolution should be tackled with a more crystallized procedure, be it time- consuming litigations or threat of coercive action post the resolution process.

Published in Construction Times