Change in Arbitration Norms for Construction Companies – Sudip Mullick, Partner and Niharika Dhall, Associate, Khaitan & Co.

New Delhi, February 15, 2017: The year 2016 has brought about a large number of positive changes to revive and revitalize the construction industry since the relative difficulty of doing business in India and the slow process of dispute resolution was becoming a huge discouragement for foreign investors. To put things in context, as per the World Bank’s Ease of doing business index (2016), India ranks 172 out of a total number of 190 countries worldwide when it comes to enforcing contracts. It takes on average about 1420 days and costs 39.6% of the claim value for resolution of contractual disputes. As regards the construction industry, more than 295 infrastructure projects worth Rs. 150 crore have been delayed with an overrun of more than Rs. 1 lakh crore and the total amount of investment that is currently tied up in arbitration is approximately INR 70,000 crores.

In light of this,the year that has gone by saw the legislature and the executive take aggressive measures to improve dispute resolution in India. The Cabinet Committee on Economic Affairs recently approved certain reformative measures to aid the arbitral process, for example, advising government departments and public sector undertakings (PSUs) to transfer pending arbitration matters to the amended arbitration procedure with the consent of the other party and increasing the use of conciliation in dispute resolution. Moreover, in cases where the government departments and PSUs have challenged arbitral awards rendered against them, 75% of the amount of the award shall first be deposited by the government departments / PSUs into an escrow account against a margin-free bank guarantee from the contractor which will ensure that liquidity is available and no financial burden is unnecessarily imposed on the contractor.

Furthermore, speaking at the valedictory event of the Global Conference on National Initiative towards Strengthening Arbitration and Enforcement in India, the Hon’ble Prime Minister noted that businesses seek assurance of the prevalence of rule of law in the Indian market and they need to be assured that the rules of the game will not change overnight in an arbitrary fashion and that commercial disputes will be resolved efficiently. Thus, a robust legal framework backed by a vibrant arbitration culture is essential to the growth and development of the country.

The key tool to realise this objective is the amendment of the arbitration law through the enactment of the Arbitration and Conciliation (Amendment) Act, 2015 (Amendment Act). The Amendment Act has brought in much needed changes and seeks to overhaul the system of alternate dispute resolution in India. For instance, jurisdiction of courts in international commercial arbitration taking place in India is now vested with the High Court exercising territorial jurisdiction in the matter. Furthermore, the powers of the arbitral tribunal have been increased especially with respect to grant of interim relief and the orders of the tribunal have been brought on par with orders of the Court for all purposes.Thus, if a contractor wants to either prevent the owner from unlawfully encashing the bank guarantees or compel the owner to make interim payments (which are approved and undisputed), notwithstanding the existence of a dispute, such request for interim measure can be made to the arbitral tribunal once the arbitration has commenced. However, enforcement of such interim orders of arbitral tribunals may still be a challenge. Most importantly, a strict time period has been imposed for the completion of arbitration proceedings to ensure that the dispute is not prolonged and can resolved economically.] The construction sector should benefit from this provision because projects in dispute will not remain suspended/halted for very long. The amendment to the arbitration law has also introduced a comprehensive regime for costs based on the general principle that the unsuccessful party will pay the costs of the successful party.

The amendments shall apply in relation to arbitral proceedings commenced on or after the date of commencement of Amendment Act (that is, 23 October 2015) and nothing contained in the Amendment Act shall apply to the arbitral proceedings commenced before the commencement of the Amendment Act, unless the parties otherwise agree.

Undoubtedly, the amendments shall fully apply to arbitrations where the request for commencement of arbitration has been sent after 23 October 2015. However, there has been a large amount of confusion regarding the applicability of these amendments to proceedings which may be pending before court or are in the process of being instituted in court with respect to arbitrations commenced (and/or completed) prior to the amendments. This issue has led to an increase in litigation and become even more complicated in light of conflicting judgement of the Hon’ble High Courts.

However, the Hon’ble High Court of Delhi has recently considered this issue and attempted to clarify the confusion with a very well-reasoned opinion wherein they have held that irrespective of whether a narrow or wide interpretation is given to Section 26 of the Amendment Act, the result would be that the amendments would be prospectively applicable and all arbitral proceedings (including the court proceedings in relation to proceedings before the arbitral tribunal), which commenced in accordance with the provisions of Section 21 prior to 23 October 2015, would be governed, subject to an agreement between the parties to the contrary, by the un-amended Arbitration and Conciliation Act 1996.

Thus, the year 2016 saw the introduction of various changes to boost the construction industry and the hope is that the coming year will witness their effective and timely implementation.

Corporate Comm India(CCI Newswire)