Brigadier Amit Kathpalia, Chief Engineer, Andaman Public Works Department
Construction projects across the world are riddled with disputes. These disputes occur due to a variety of reasons such as long gestation periods, changes in the political, economic and regulatory environment, organisational culture, personality issues, opportunistic behaviour, contract management and technical issues. The causes of disputes in construction projects fall under five main categories – technical, contractual, regulatory, economic and behavioural issues. Professor Sai On Cheung, Head, Construction Dispute Research Unit, City University of Hong Kong, in a study on the occurrence likelihood of construction disputes using the FFT (Fuzzy Fault Tree) model, has concluded that the probability of a construction dispute in any project ranges from 0.99 to 1.0, that is, disputes are inevitable in any construction project.
Need for a construction law?
Most countries following the common law system (the UK, the US, China) have enacted a construction law providing guidelines on various aspects of construction projects, certain mandatory provisions to be included in construction contracts and methodologies to deal with infirmities in bidding, contract evaluation and payments. Countries following the civil law system such as Kuwait and the UAE have specific codified provisions dealing with construction contracts – for example, a mandatory provision for “price balancing” in Kuwait.
The UK passed the Housing Grants, Construction and Regeneration Act, 1996 (commonly called the Construction Act, 1996), which was subsequently amended to the Local Democracy, Economic Development and Construction Act, 2009. The Construction Act, 1996, laid down the definition of construction projects and construction operations (drilling for oil gas, extraction of minerals, delivery of components to site are not included as part of construction operations), modalities of agreements, entitlements to stage payments, referring disputes to adjudication, notice to withhold payments, right to suspend performance for non-payment and prohibition of conditional payments. Some notable provisions of the 2009 amended act are:
- Contracts need not be in writing (adjudication provisions must be in writing).
- Slip rule: Provision to allow an adjudicator to correct typos or clerical errors in his decision arising due to accident or omission.
- “Pay when certified” clauses banned except under certain specific conditions.
- Payment notice to be given by payer not later than five days after the payment due date. Notice must be issued even if the amount due is nil. Person issuing the notice must state the sum due and the basis of calculation. If the payer fails to serve a timely valid payment notice and the payee has submitted an application for payment, the amount in the application becomes due.
- If the payer fails to issue a valid payment notice, the payee may serve a “payment default notice”. The final date of payment will be postponed by the number of days it took the payee to issue the payment default notice.
- Timely “pay less notice” must be given by the payer giving reasons after serving the payment notice or receiving a payment default notice, if the payer intends to pay less than the notified sum.
- The contractor/payee has the right to suspend his obligations in whole or in part if timely payment is not made.
Most of these clauses are meant to provide a level playing field to contractors/payees vis-à-vis the employer/payer and improve their cash flow for the betterment of the project.
China enacted its construction law on October 1, 1997, which was subsequently amended on April 22, 2011. The law states its purpose as “tightening supervision over and administration of construction activities, maintaining order of the construction market, ensuring construction quality and safety and promoting sound development of the construction industry”. The law deals with construction permits, business qualifications for undertaking construction projects, letting and undertaking construction contracts, supervision over a construction project, safety controls, quality control and legal liabilities.
Some interesting and unique provisions of China’s construction law, which was revised in 2011, are:
- Project management, advisory services and consultancy services have been included in the definition of construction works.
- All publicly funded projects must use standard forms of contracts (FIDIC [International Federation of Consulting Engineers] for contracts with international firms).
- Late interim payments will attract interest penalty, which will be twice the late payment at prevailing bank lending rates.
- Prohibition on subcontracting whole work.
Main contractor and subcontractor are jointly liable to the owner for the subcontracted work. This represents a fundamental difference from the common law rule of privity of contract. (The common law doctrine of privity of contract means that a contract cannot [as a general rule], confer rights or impose obligations arising under it on any person except the parties to it.)
The US has state-wise construction laws. Most provisions are similar/common among states. In addition, there are associated laws, the most notable being the False Claims Act, the Forfeiture of Fraudulent Claims Act and anti-fraud provisions of the Contract Disputes Act. The False Claims Act severely penalises overinvoicing, front-end loading of bids and hidden materials substitution, with the whistle blower being entitled to up to 25 per cent of the claim amount.
The Indian scenario
India is one of the few common law countries which has neither a construction law nor a standardised form of contract for government agencies. While certain provisions of a construction law are dealt with by other laws such as the Indian Contract Act, labour laws, etc., many issues such as front-end loading of tenders, quoting high/low rates, penalties for delays in payments, right to suspension, etc. are not specifically dealt with by any associated law. This lack of standardisation leads government agencies to formulate their own “General Conditions of Contract” which are generally “distorted” versions of FIDIC. Variations in contract conditions among different government agencies, uncertainty in interpretation and imbalanced risk allocation leads to adversarial relationships and further to disputes. There are no standard guidelines to deal with infirmities in contracts before acceptance and during execution. Ideally, such infirmities/ambiguities should be minimised before the acceptance of a contract. Some specific examples are:
- Quoting high/low rates: Quoting unreasonably high/ow rates for certain items/schedules is a common feature in construction tenders. Such contracts are accepted if found to be reasonable overall. However, accepting such tenders can lead to disputes in case of variations in rates of such items. Under the Kuwait Civil Law, the employer has the right to carry out “price balancing” with the L1 tenderer without changing the agreed tender amount.
- Front-end loading: Front-end loading is a common feature in construction contracts and a major cause of failure. This problem is more acute in the Indian scenario where funds generated due to front-end loading are often used by contractors for other purposes. The price balancing provision in countries in the Middle East mitigates this problem to some extent. The False Claims Act of the US penalises contractors very heavily for front-end loading leading to rejection of the tender and blacklisting of the firm.
- Errors in quoting: In 2014, Hyderabad-based KMC Constructions Limited, while bidding for the Angul-Sambalpur highway project, entered an amount of Rs 1,500 instead of Rs 1,500 crore due to a computer error. The bid was rejected and the security amount of Rs 10 crore had to be forfeited by the firm. To allow for such situations, US laws have a “mistake in bid” provision wherein the withdrawal of a bid is permitted where the price is substantially lower than other bids and is submitted in good faith and is the result of a clerical error.
- General conditions of contracts (GCC) of government agencies: Due to the lack of a construction law and standard forms of contract, major government agencies have variations in the GCC provisions.
- Risk and cost: The Military Engineer Services (MES) follows the methodology of risk and cost in case of termination of the whole contract or a part thereof, while the Delhi Metro Rail Corporation, Central Public Works Department (CPWD) and Indian Railways (IR) mostly follow forfeiture of performance guarantee/security deposit.
- Incentive for early completion: Exists only in the CPWD and the National Highways Authority of India.
- Right to suspend whole or part works due to late payment: Not included in contract conditions of any agency (important provision of the UK Construction Law, 2009).
- Claim by contractor due to delay in interim payment: Different provisions in GCCs of government agencies.
- Advance payment by employer: Different provisions in GCCs of government agencies.
- Appointment of arbitrators:
- CPWD: Sole arbitrator who is a serving or retired officer of CPWD.
- IR: Panel of three arbitrators who are serving/retired officers of the railways.
- MES: Sole arbitrator who is a serving officer under the engineer-in-chief.
The best way to minimise disputes (which are inevitable) in construction projects is through prevention. One of the major causes of disputes in the Indian context is imbalanced contract
formulation and management due to lack of standardised guidelines. Will the enactment of a construction law lead to a more balanced
contract formulation and management and perhaps a change in stakeholder behaviour? Or do we need only better implementation of existing laws with a few amendments and standardised contract agreements? These are aspects which need further deliberation.