An ounce of mediation is worth a pound of arbitration and a ton of litigation.

- Joseph Grynbain

In 2014, Professor Sai Om Cheng of the Construction Dispute Research and Resolution Unit (CDRRU), Hong Kong City University published a research paper that, using the Fuzzy Fault Tree (FFT) model, showed that the probability of having a dispute in any construction project ranged from 0.99-1.0. Essentially, disputes are inevitable in a construction project.

As George Herbert once said, “Litigation consumes time, money, rest and friends.” Indeed, countries across the world have realised that litigation is not the most appropriate solution to resolving construction and real-estate disputes owing to the time and expense involved. Hence, a range of alternate dispute resolution (ADR) mechanisms has evolved to resolve disputes in a faster, cheaper and more amicable fashion. RICS, the world’s oldest and largest provider of ADR-based dispute resolution services in the land, property and construction industries, which is now starting its services in India, resolves $ 2 billion worth of disputes every year.

ADR mechanisms

The range of ADR mechanisms comprises:

Negotiation: A non-binding process where two or more participants attempt to reach a decision on matters of common concern when they are in disagreement, without any third-party interference.

Mediation/conciliation: Also called ‘facilitated negotiation’, it is a non-binding process where the parties attempt a consensual resolution with a neutral third party’s help.

Dispute resolution board (DRB)/dispute avoidance and adjudication board (DAAB): DRBs are non-binding standing boards comprising neutral experts constituted throughout the execution of the project or as required, to amicably resolve day-to-day disputes that occur normally during the course of a project. These have not been very successful in India. These are now being replaced by DAABs whose decisions are time-bound and have the status of ‘temporary finality’, which means the decision of the DAAB has to be implemented before resorting to arbitration or litigation.

Statutory adjudication: This has been incorporated in the UK, Ireland, Canada, Australia, New Zealand, Singapore and Malaysia as part of the Construction Law/Construction Contract Act/Security of Payment Act. It is basically a fast (28-45 days), interim dispute-resolution mechanism specifically for payment-related disputes in construction contracts and has ‘interim binding’ status, which means the decision has to be implemented before resorting to arbitration or litigation. The success of statutory adjudication can be gauged from the fact that in the UK (the first country to have statutory adjudication), out of 15,000 cases referred to adjudication in the past 10 years, less than 300 have gone for arbitration or litigation.

Arbitration: Arbitration is a binding adjudication of the parties’ claims and defences by a neutral arbitral/panel of arbitrators (usually three). The arbitration ruling is binding on parties as a court decree and can be challenged only under very limited grounds. In MCD vs. Jagan Nath Ashok Kumar and ANR (1987), the Supreme Court ruled, “It is possible that with the same evidence the Court might have arrived at a different conclusion than the Arbitrator, but that by itself cannot be a ground for setting aside the award of Arbitrator as long as the Arbitrator had given logical reasoning for the award and unless there was violation of principles of Natural Justice.” India enacted the Arbitration and Conciliation Act in 1996, which laid down rules and regulations for the conduct of domestic and international arbitration and grounds for challenge. The amendment passed in 2015 was focused on time-bound arbitration and ensuring the neutrality of the arbitrator. And the amendment legislated in 2019 aims to ensure better quality of arbitration by legislating minimum criteria for eligibility of arbitrators and having institutionalised arbitration. The amendments passed in 2019 are yet to be implemented.

The range of ADR mechanisms is illustrated below:

Real-estate disputes

As opposed to construction contracts, disputes under the Real Estate Regulatory Authority (RERA) are between developers and homebuyers. RERA has a mechanism to resolve disputes through appointed adjudicators with appeals being heard by an appellate tribunal. Though RERA has provided a reasonably effective forum for real-estate disputes, it is getting bogged down with a plethora of disputes, thereby delaying the process. UP RERA has the maximum number of complaints, 28,843, with about 18,000 disposed of to date. Maharashtra RERA, which has the maximum number of projects, has received about 12,000 complaints to date. In fact, Maharashtra RERA was the first RERA to start and promote ADR in the form of conciliation services, with the active support of builder’s associations such as CREDAI. However, despite a success rate of 80 per cent, only 5-6 per cent of cases have gone to the conciliation forum to date.

The pendency of cases in Indian courts is well known—75 lakh cases in lower courts, according to the Economic Survey of India. As against the average global value of construction disputes of $ 30.7 million, NHAI alone faces disputes in the range of $ 9 billion. In most cases, about 25-30 per cent of the award value is the interest component. This results in a lose-lose situation for both the developer/employer and the contractor, with the employer having to pay huge interest owing to the delays in the litigation process and the contractor facing a major cash flow crunch because of delayed payments, often leading to bankruptcy. Only effective and willing implementation of ADR by all stakeholders can reduce these costs, thereby resulting a win-win situation.

About the author: Brigadier Amit Kathpalia (Retd) MRICS is a Civil Engineer with 36 years of experience in construction works pan India and has been with the Indian Army, Military Engineering Services and Public Works Dept. He is a construction contract specialist and a FIDIC trainer. He is currently Head of Training and Product Development at RICS South Asia.