Dispute Resolution: Weighing the need for a construction law in India

Weighing the need for a construction law in India

Construction projects across the globe are faced with disputes. These disputes may arise due to a number of factors such as delays in project implementation and the failure to comply with preset project standards. The Global Construction Disputes Report 2018 has recognised contract management and imbalanced contracts as the major causes of construction disputes in the past five years.

In order to resolve construction disputes, four best practices have been adopted worldwide. Several countries have put in place balanced contract conditions. For example, under the New Engineering Contract–3 in the UK, a contractor has the right to suspend work either partially or fully in case of a delayed payment or handover of the site. However, in India, not a single contract model gives this right to the contractor. Enactment of a construction law providing guidelines on various aspects of construction projects, certain mandatory provisions to be included in the construction contracts and methodologies to deal with infirmities in bidding, contract evaluation and payments is another crucial step which a few countries have taken. A construction law came into effect in China in 1991 and in the UK in 1996. Other countries such as Australia, New Zealand and Canada have followed suit. Another initiative involved the adoption of a interim dispute resolution mechanism. In the US, dispute review boards have worked quite well which was not the case with Canada and New Zealand. Therefore, these countries have a statutory adjudication process in place. Countries that do not have a construction law in place have introduced certain other associated laws which ensure timely payments and remove infirmities in contracts before their acceptance. For example, countries following the civil law system have specific codified provisions in place for dealing with construction contracts, such as a mandatory provision for price balancing in Kuwait.

The Indian construction industry has been suffering on account of failures on the part of the parties involved to resolve disputes expeditiously and effectively. India is one of the few countries to have adopted neither a construction law nor a standardised form of contract for government agencies. To deliberate upon the need for a construction law in the country, a panel discussion was held at the India Infrastructure Forum 2019.

Divergent views

Takers for a new law

In the Indian context, while some provisions of a construction law are dealt with by other laws such as the Indian Contract Act, 1872, labour laws, etc., many issues such as front-end loading of tenders, quoting of 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 (International Federation of Consulting Engineers) contracts. These variations in contract conditions among different government agencies, uncertainty in interpretation and imbalanced risk allocation result in disputes.

The Indian Contract Act, which came into effect in 1872, has failed in ensuring that contracts are balanced. The Central Public Works Department and the National Highways Authority of India (NHAI) are the only two agencies which give incentives to contractors for early completion of projects. The defence sector has conveniently removed interest on late payments to the contractor in its contracts, leaving the contractor with no option but to go for arbitration.

In order to make sure that the government puts in place a balanced contract for the contractor and that the contractor, in turn, does the same for the subcontractor, a construction law is definitely needed. A construction law is not supposed to be a comprehensive law. It must focus only on three aspects – having a balanced contract condition, ensuring timely payment and cash flow both to the contractor and the subcontractor and implementing a speedy interim, statutory dispute resolution mechanism which can be challenged later in arbitration. The law will thus help in removing all the anomalies in a contract, and ensure better contract management and formulation.

Exploring alternatives: Case against the need for a new law

Contributing to around 70 per cent of the investment across infrastructure sectors, construction forms the backbone of the economy. However, cost and time overruns of 20-25 per cent are becoming the norm, rather than an exception, in the construction industry. Therefore, there is a need to identify the reasons for such overruns, and bring in a mechanism for plugging the gaps in the beginning or during process implementation. While the traditional methods adopted for contract procurement, monitoring and dispute resolution might not have given the desired results, government authorities are of the opinion that it does not call for the enactment of an altogether new law.

A major issue faced by the construction industry is that the risk is not placed on the parties that are best suited to manage them. Moreover, not all stakeholders are involved in the decision-making process for project implementation. While a good substantive law already exists, there are bits and pieces which can be put into place such as an amendment to Section 28 of the Indian Contract Act, 1872, and the introduction of an adjudication process.

With a specialised construction law, issues will arise with regard to which parts/sectors should be covered. The problem being faced today is that an ad hoc, piecemeal approach is adopted. For example, the amendment to the Specific Relief Act has special provisions for contracts relating to infrastructure projects specified under the Amendment Act of 2018. The amendment prohibits a civil court from granting an injunction for such infrastructure projects where the injunction would cause an impediment or result in delays in the progress or completion of the projects. However, the need of the hour is not to have a substantive law, but rather to formulate a code which relates to taxes, labour, compliances, standards and specifications depending on the nature of the industry.

It is impractical to ask for a new law for construction. Changing a few aspects without taking up parliamentary time will make the existing law easier and better for the industry. The first thing to be worked upon is the allocation of risk because if the risk is placed upon the party which is best placed to manage it, then companies will not take risks which they are incapable of handling and the issue of claims will not arise. The solution is to establish a dispute resolution board or a statutory adjudication mechanism, that helps maintain cash flow during the construction period of a project by providing a cost-effective and speedy means of resolving disputes on a binding, but not final, basis.

In order to address the issue of balanced contracts, a standardised form of contracts can be adopted. The entire industry is based on the model concession agreement. The way forward is to change the document, share the risk and give it to the party best suited to handle it. The ideal way to deal with the existing issues is to have a standard government mandate in place.

Next steps

Most of the experts are of the opinion that the Indian contract law is well placed and is capable of resolving all issues in its current form. There is thus no need for a new law. Rather, the need of the hour is to ensure better implementation of the existing laws with a few amendments and the introduction of standardised contract agreements. These changes will require strong will on part of the government authorities. Better implementation of the current laws with the requisite amendments will help in alleviating most of the problems of the construction industry.