Janaki Krishnamoorthi presents the concluding case study in a 20-part series, and a summary on the effectiveness of arbitration
The owners of a plot in a Mumbai suburb entered into an agreement in July 1994 with a developer to build a residential building in the plot. After deducting the area of reservations like roads, recreation ground, maternity home, etc, the developable area worked out to about 36,420 sq ft. The developer obtained approval for the building plan in his name in November 1996 but assigned the actual work of development to a contractor at Rs 800 per sq ft plus balcony area to be constructed thereafter.
However, neither the developer nor the contractor had the required financial resources to undertake the project. So they approached another contractor to develop the plot and an agreement was signed by the developer, principal contractor and new contractor in November 1999. The major terms were as follows:
● The new contractor would bear the initial expenses for obtaining the Commencement Certificate (CC) from the municipal Corporation up to the amount of Rs 15 lakh, which would be refunded with interest at 24 per cent per annum to him. This amount was increased to Rs 25 lakh by a supplementary agreement between the parties in December 1999 with other terms remaining the same.● The new contractor would be entitled to interest at 24 per cent per annum on amounts certified for payment by the architect against bills raised by him for construction costs from the date of each such certificate to the date of receipt of payment. In addition the developers and/or principal contractor will pay the new contractor an amount at Rs 100 per sq ft of saleable built-up area in the building.● The developer would pay the principal contractor a sum calculated at Rs 800 per sq ft of the floor area including balcony of the building to be constructed. This rate was increased to Rs 900 per sq ft of super built-up area vide the building contract entered between them in May 2001.● The new contractor would carry out the work as per sanctioned plans and complete it by June 2001 or within any extended period. In case the work was delayed beyond June 2001 or any extended period approved by the architect, the new contractor would be entitled to any escalation in prices of material and labour for works executed after June 2001 as certified by the architect.
The project execution period was extended to March 2002 but it could actually be completed only in October 2003. After completion of about 40 per cent of the work in March 2002, the new contractor expressed his inability to finance and execute the project any further. This led to the respondent raising Rs 50 lakh and getting the project completed by appointing other agencies.
Disputes arose on several issues including responsibility for delay, payments against cost of construction and interest thereof, profit margin to claimant on work executed by other agencies, payments against flats sold, costs for excess steel consumption, payment against price escalation and financial liabilities of each party. The new contractor invoked arbitration and Dr Roshan Namavati was appointed sole arbitrator in July 2004 to adjudicate the disputes that arose between the new contractor (claimant), developer (respondent 1) and principal contractor (respondent 2) who were represented by advocates. Both the claimant and respondents filed their claims and counterclaims respectively.
The claimant’s contention
The claimant filed claims for payment against construction costs, profit share, interest against payments made to subcontractors for plumbing, electrical work, drainage, etc, and payment against sale of flats. The claimant sought relief under Section 17 of the Arbitration & Conciliation Act 1996 and asked the arbitrator to secure the constructed property or disputed amount as interim relief.
The arbitrator, however, ruled that securing the building was beyond the scope of Section 17 as the original owner had already sold the flats in the building and it would not be fair for the arbitrator to take away the proprietary rights of the flat owners. As the claims were of a monetary nature and as it was not shown that the respondent was incapable of paying the balance amount to the claimant, the application for securing the disputed amount was also rejected. The arbitrator then dealt with each claim independently. Two major claims and the arbitrator’s rulings are briefly enumerated below.
Claimant’s share of profit on work executed by other agencies
Some part of the project work was sublet to other contractors and a dispute arose on whether the profit percentage for the claimant should be calculated only on the amount paid by the claimant to those contractors or on full payment made to them. There was also a difference of opinion over whether the profit percentage should be 5 per cent or 15 per cent. The respondent referred to the architect’s letter that stated that as the work was sublet to other agencies, the responsibility of the claimant was reduced to that extent and hence he would be entitled to only 6 per cent profit on such billings. The claimant on the other hand relied on another letter from the architect that stated that it would be the owner’s prerogative to decide on the profit percentage to be granted to the claimant, which could be between 5 and 15 per cent.
The arbitrator pointed out that the architect’s act was contradictory and ‘respondent-oriented’ as he allowed 5 per cent on full agency payments previously and then calculated the profit percentage only on payments made by the claimant in the final bill. Hence, he ruled that the claimant was entitled to percentage profit on the total cost of agency works irrespective of who paid the agencies. The arbitrator also maintained that the arbitration did not deal with owners’ prerogatives but was circumscribed by the contract terms. Hence, referring to a contract clause where the parties had mutually agreed that the profit component would be 10 per cent, the arbitrator ruled that the claimant was entitled to 10 per cent and accordingly worked out the award.
Claimant’s entitlement to Rs 100 per sq ft of saleable area
The respondents contended that the claimant was not entitled to the payment of Rs 100 per sq ft of saleable area as he had committed breach of contract by not financing the project and not completing the work as per contract terms. In addition they alleged that the work done was also defective. The respondents further stated that they raised Rs 50 lakh on security of six flats in the building and appointed other agencies to complete the work and no work was done by the claimant after March 2002. The respondents also submitted that they had suffered loss owing to delay in completion and flats were sold at a distress price while work was in progress.
The arbitrator opined that this was a case of part performance of the contract by the claimant as 40 per cent of the work was executed by him. When the claimant expressed his inability to finance the project further, the respondent raised Rs 50 lakh on security of flats in the building. Though the claimant repaid Rs 50 lakh with interest, it did not absolve him of breach of contract. The arbitrator also held that the respondents and claimant were jointly responsible for the delay as the work of some agencies were controlled by the respondents. The arbitrator observed that even the respondents were liable for breach as they made payment to other agencies appointed by the claimant without the claimant’s consent and this was not tenable as the agencies were creditors of the claimant. Further, the arbitrator pointed out that respondent 2 accepted breach in selling flats prior to discharge of liability and said it was done with the claimant’s consent but had no proof of the said consent. And though the contract provides that the respondents should intimate claimant prior to the sale of any flat, this too was not done. Hence, the arbitrator held that this was a case of contributory breach by all parties and ruled that the claimant was entitled to a sum at Rs 40 per sq ft of saleable area for part performance.
Janaki Krishnamoorthi on problems and prescriptions….
Ever since the outdated Arbitration Act of 1940 was replaced with the Arbitration & Conciliation Act 1996, everyone anticipated that arbitration would become a powerful and effective mode of resolving disputes in commercial sectors, including construction. A decade and a half later, however, there is disappointment all around as arbitration has failed to live up to the expectations of industry professionals, experts, arbitrators and litigants. Indeed, the case studies presented by CW along with the experiences and views of the arbitrators have reiterated that arbitration has not been as effective as it should have been. However, it has not been a total failure either.
“Arbitration has been partly successful as judgements are still pronounced faster than in courts,” avers SR Tambe, an arbitrator and former secretary in the Public Works Department, Government of Maharashtra. “In fact, some court cases are being transferred to arbitration. I am aware of two cases filed in 1994-95 that were moved to arbitration in 2007 as there was no progress.” Justice SM Jhunjhunwala, a retired High Court judge who handles construction-related cases as an arbitrator, concurs, saying, “Arbitration has been effective to some extent as several cases are being disposed of faster.” But he is quick to add, “Many are also getting prolonged mainly because judges acting as arbitrators often adhere to the same procedure followed in courts. As a result, cases get drawn out at exorbitant costs to the parties. No doubt principles of natural justice have to be followed but not in the stringent manner as done in courts. Arbitration has to be on a different footing.”
What is ailing arbitration?
Many arbitration proceedings have become alter egos of court proceedings with pleadings, applications and adjournments; right from questioning the jurisdiction of the arbitrators and presenting witnesses to bringing in the Code of Civil Procedure and Evidence Act that is not applicable to arbitration. According to industry sources, while several lawyers not trained in the practice of arbitration tend to follow court proceedings, many arbitrators unfamiliar with the practice of arbitration are unable to manage the arbitral process effectively. Claimants and respondents, too, try and stall proceedings if it works in their favour by delaying submissions of claims, documents and seeking frequent adjournments. In several cases, arbitrators handling too many cases have difficulty sparing the time and advocates have to sandwich arbitrations between their regular court cases. Unfortunately, the new Act does not stipulate any time limit for completing arbitration cases though the earlier Act had specified four months, which could be extended with consent of concerned parties or the court.
In 2003, the Law Commission submitted a report suggesting changes in the Arbitration Act 1996, including a one-year limit for declaring awards, empowering the tribunal to fix time limits for filing claims and introducing fast-track arbitration. In 2005, the Justice Saraf Committee appointed by the government studied the implications of the Law Commission’s recommendations and submitted its report. Unfortunately, both reports appear to be gathering dust. There is even a Parliamentary Standing Committee Report highlighting the various drawbacks in arbitration like huge pendency of cases, absence of accountability among arbitrators, lack of specific directives on who can be appointed as an arbitrator and their fees, and time limit for granting an award. The committee had recommended setting up an Indian Arbitration Commission with powers to grant accreditation to the professional institutions coming forward to render their services in institutional arbitration.
Is institutional arbitration the solution?
Many believe that institutional arbitration, widely prevalent abroad, could be a solution to the ills plaguing the present ad-hoc arbitration being practiced in India. In institutional arbitration, a specialised reputed institution assumes the functions of aiding and administering the arbitral process. Apart from having a list of qualified and trained arbitrators who would adjudge the cases, the institution would have set rules fair to both parties, including conduct of arbitrators, their fees and duration of proceedings. “Institutional arbitration is definitely a better option as everything is controlled by the institution,” opines Justice Jhunjhunwala. “There are several advantages like availability of qualified arbitrators, established rules and procedures, and administrative and support services.”
But the culture of institutional arbitration is yet to take off in India, especially in the construction industry. “Institutional arbitration is ideal as it would have fair rules, a monitoring process and less room for manipulation,” says Dr Kirty Dave, an arbitrator and techno-legal consultant. “It could also weed out arbitrators who are not good. However, we have to cultivate the culture of institutional arbitration in India. In addition, we should also have institutions of calibre to handle it. At the moment we have no such institutions. The government can foster the development of institutional arbitration by making it mandatory in its contracts.”
Should the intervention of the courts be curbed?
Yet another major obstacle in the success of arbitration is the rampant practice of challenging arbitration awards in courts, particularly by the government and its agencies. Section 34 of the 1996 Act makes provision for the review of the arbitral award by courts only if there has been fraud, bias or violation of natural justice. Yet there is considerable interference by courts, aver arbitrators, resulting in several petitions challenging the awards.
“There are certain grounds on which the challenge is allowed and courts should act within the purview of the grounds mentioned in the Act,” concedes Justice Jhunjhunwala. “Unfortunately, this is not being done in many cases for one reason or another.” As a result, several such appeals lie pending for years in courts. In fact, recently, the chief justice of Bombay High Court announced his plans to speed up the process of arbitration in the region by creating a dedicated court to hear arbitration-related applications.
All the aforementioned factors are evidently defeating the very purpose for which arbitration was introduced: cost-effective and speedy justice. At the same time, there is little doubt that arbitration is an important alternative tool to the expensive and long drawn out formal judicial system. “We should definitely not give up because arbitration as such is not defective,” declares Dr Dave. “All of us, right from the government, arbitrators and advocates to litigants, institutions and courts, have to work towards making it successful.”
Dr Roshan H Namavati
The details of this case have been provided by Dr Roshan H Namavati, a civil engineer and architect with a doctorate in Philosophy of Law (property) from Mumbai University. Dr Namavati has been practicing as a valuer, surveyor, architect and techno-legal consultant in Mumbai for over five decades. He has been an arbitrator on several construction-related cases and in several disputed valuation of properties referred by the tribunals of the Income Tax Department. Twice elected president of the Institution of Valuers, Dr Namavati is a fellow of the Indian Institute of Architects, The Institution of Engineers (India) and The Institution of Surveyors; an associated member of the Institution of Arbitrators (India); and member of the Indian Council of Arbitration. He was a member of the ad-hoc committee appointed by the Government of India for suggesting norms of valuation for taxation and has also authored several books on valuation. Dr Namavati can be contacted at email@example.com