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Construction Litigation

CONSTRUCTION LITIGATION

            Disputes may arise between the contractor and the owner due to the following reasons.

  1. Supply of materials from the owner to the contractor.
  2. Handling all the site to the contractor.
  3. Extra works carried out without contract agreement.
  4. Delay in the completion of the work.
  5. Substandard work or defective work.
  6. Payment to the contractor through running bills.
  7. Supply of stores, machineries and the rent for the machineries.
  8. Recovery.
  9. Availability of drawing and other specifications.
  10. Measurements of the works.

The Contractor has the following responsibilities:

  1. He must ensure safety of materials, men and machinery on the site and should guard against accidents either to the workers or to the local people.
  2. He must ensure quality of the work as required by the owner.
  3. He must complete the work within the agreed time.
  4. He must ensure the quality of materials which he is receiving from the owner.
  5. The contractor should make proper entry of the instructions regarding change of specification or deviation from the sanctioned estimate or drawings.
  6. He must make proper entry of the materials received from the owner.

When there is a failure in the responsibilities of the contractor as well as in the responsibilities of the owner, dispute arises and this may in turn lead to litigations.

Jurisdiction of Courts

         
          The courts of the place from where the tender acceptance letter has been issued shall have the jurisdiction to decide any dispute arising out of or in respect of the contract.

INDIAN ARBITRATION ACT 1940

            Disputes may arise between the contractor and the owner because of several factors such as recovery on account of alleged delays, defective work or excess consumption of materials etc.  The disputes can be settled through litigation in a court of law or, where the contract permits, through arbitration.  Arbitration is the process of hearing and determination of a dispute by an impartial referee selected or agreed upon by the parties concerned.
          The Indian Arbitration Act was enacted in 1940 and provides for arbitration in the following three cases:

  1. Arbitration without intervention of a court:  The owner and the contractor enter into an arbitration agreement in advance or after the dispute has arisen.  The dispute is settled through arbitration according to the Act.
  2. Arbitration with Intervention: When the owner and the contractor having entered into an arbitration agreement are unable to proceed further in terms of the agreement, the court’s intervention is sought for settlement of the dispute.
  3. Arbitration in Lawsuits:  When a dispute is the subject matter of a lawsuit pending in a court, both parties may agree to settlement of the dispute through arbitration in terms of the Act.

The Indian Arbitration Act 1940 does not control the conduct of the owner and the contractor in deciding the form of the arbitration agreement.  The Act does not prescribe the procedure to be adopted by the arbitrator for conducting the proceedings.  The arbitrator thus enjoys flexibility in the procedure leading to expeditious settlement of disputes.  The Act does not provide for interference with the award given by the arbitrator.  The arbitrator is also not bound under the Act to state reasons in support of the award given by him.  The award is, therefore, final and can only be challenged in a court of law on questions of law and / or misconduct of the arbitrator.

ADVANTAGES OF ARBITRATION

         
          The advantages of settling disputes through arbitration instead of litigation in the courts are as under:
          Cost: arbitration is less expensive than litigation.
Speed: disputes are settled much faster (usually within 4  months) through arbitration as compared to lawsuit in the courts.
Convenience:  arbitration hearings are fixed considering the convenience of the concerned parties.
Technical Knowledge: both parties have the distinct advantage of appointing arbitrator(s) having technical knowledge and expertise in construction.
Informality:  arbitration proceedings are conducted in a relatively informal atmosphere observing certain minimum prescribed legal formalities.
Proceedings in Private Premises:  Unlike proceedings in courts which are exposed to the general public, arbitration proceedings are held in private premises, Business interest and reputation of the parties will, therefore, not suffer.
Finality of Award: the award given by the arbitrator is final.  It can only be challenged on questions of law and / or misconduct or arbitrator(s).

ARBITRATION CLAUSE

         In view of the advantages of arbitration, most of the construction contracts incorporate a suitable arbitration clause in the agreement.  Following are the main provisions of the arbitration clause.

  1. All disputes or claims arising out of or relating to the contract, or the breach thereof, will be settled through arbitration in accordance with the Indian Arbitration Act, 1940.
  2. The parties may agree to the appointment of a single arbitrator or each party may nominate an arbitrator and the two nominated arbitrators may mutually select an umpire.
  3. The parties will mutually agree regarding the sharing of arbitration fees and expenses.
  4. The arbitration proceedings will be conducted by the arbitrator(s) in accordance with laid down procedures at mutually convenient dates and places.
  5. In the event of a difference of opinion between the two arbitrators concerning the award, matter will be referred to the umpire and his decision will be final.
  6. The arbitration award will be final and binding upon both parties.

CONTENTS IN NUTSHELL

                Construction contracts are formalized in the form of a written document which defines clearly the rights and obligations of each party.  In engineering contracts, the contractor offers to execute the work for a monetary consideration on certain terms and conditions.  A contract is reached when the offer or proposal made by the contractor is accepted by the owner.  The elements of a contract consist of offer, consideration and acceptance.
          The main types of contracts for execution of civil engineering works include lump sum contract, item rate contract, lump sum and schedule contract, cost plus fixed fee contract, cost plus percentage of cost contract and special contracts.  In a lump sum contract, the contractor offers to do the whole work for a total stipulated sum of money and individual rates are not quoted for the various items of work.
          Such contracts are more suitable for works for which contractors have prior construction experience and details of the work involved are clearly known.  Such contracts are not suitable for difficult foundations and works susceptible to unpredictable hazards and variations.  Item rate contracts are also known as schedule contracts.  In these contracts, the contractor undertakes to carry out the work on an item rate basis.  Payment is made on the basis of measurements of items of work actually executed.  Such contracts are commonly used for all types of civil engineering works financed by government / public bodies.  Turn key contracts are special contracts in which all works pertaining to various disciplines such as civil, electrical, mechanical engineering etc. are in the hands of a single contractor called the main contractor.
          The contract document consists of the contract agreement (on non-judicial stamp paper of prescribed value) and cover or title page, content page, NIT, tender form, schedule of issue of materials, drawings, specifications (general and detailed) and conditions of contract.
          Specifications are statements which describe the nature and class of work, materials to be used, labour to be deployed methods of work, quality of workmanship etc. Specifications directly affect the cost of the work.
          Important conditions of contract include time of completion, delay and extension of time, penalty, compensation for delay in completion of work, liquidated damages, debitable agency, valuation of variation, settlement of disputes, force measure, price escalation and termination of contract.  During execution of work, price escalation may occur due to increase in labour wages, material prices etc. as a result of inflation.  An appropriate clause is, therefore, generally included in the contract agreement.  The payment for escalation on labour, materials and POL is usually determined by standard formulae.
          Disputes may arise between the contractor and owner during the execution of work because of several factors. These disputes can be settled either through litigation in a court of law or where the contract permits, through arbitration.  Arbitration is the process of hearing and settlement of a dispute by an impartial referee selected and agreed upon by the parties concerned.  Settlement of disputes through arbitration has many advantages such as less cost, speedy settlement, convenience and informality of proceedings etc.  The award given by the arbitrator is final and binding on both parties.  It can only be challenged in a court of law on questions of law and / or misconduct of the arbitrator.