ARBITRATION AND CONCILIATION ACT,1996,W.R.

T CONSTRUCTION CONTRACTS

ASSIGNMENT – 1 (WEEK-1)

In India, in ancient times, people often voluntarily submitted their disputes to a group of wise
men called the Panchayat for a dispute resolution. This soon germinated into a whole system of
arbitration. The Arbitration Act of 1940 was based largely on multiple opportunities being
awarded to litigants to approach the court for intervention. As the judicial system in the country
was extremely sluggish, it was found that such a provision only led to further delays in the
judicial process. The Arbitration and Conciliation Act of 1996 was introduced after many
discrepancies were observed in the Act of 1940. The main aim of the 1996 act was to bring about
a legal framework for fair and just settlement of disputes arising in International Commercial
Arbitration. In order to streamline the process of Arbitration further, a proposal was submitted to
an expert committee to review and make suggestions. The study deals with is arbitration in the
construction contract.

"The construction industry is almost unique among commercial endeavours, indeed it can almost
be said that each individual contract in the construction industry contains a degree of  uniqueness
even though the contracts may be based upon standardised forms. First of all the construction
industry embraces a very wide variety of types of construction ranging from pure building work
to pure engineering with combinations of building and engineering to varying degrees.
Engineering work in itself covers many totally dissimilar activities such as structural
engineering, i.e., steel and reinforced concrete frames for buildings; soil engineering including
the design of foundations; services engineering including complicated water and electrical
supplies to a building, sewage disposal and heating engineering, all in connection with pure
building operations through to the pure engineering of the design and construction of roads,
bridges, tunnelling, construction of dams, to name but a few of the engineering specilisations.
Irrespective of this wide ranging nature of the work involved, construction contracts generally
have certain factors in common in that the contracts run for long periods and the contractor's
work embraces many different trades each with their own, often conflicting, problems.  

The majority of the work is executed on an open site subject to the vagaries of weather with the
materials being obtained from a variety of specialist suppliers and with substantial sections of the
work being sublet to specialist contractors who may be either nominated by the consultant in
charge of the contract or directly employed by the contractor itself. The contractors involved
vary from very large organisations, often of almost international standing, to relatively small
concerns. The other contracting party, generally described as the employer or building owner
covers a similarly wide range from the private individual arranging for a house to be built for his
own occupation to a public or government body or large commercial company undertaking
multi-million pounds, worth of work. from the smallest to the largest contract, however, there is
one thing in common; to the employer the project is a matter of great importance and any failure
by the contractor to execute the work timeously or properly can have serious consequences."
A contractual term may be express or implied. It would depend upon construction/interpretation
of the contract, the nature of the transaction, the surrounding circumstances and also the conduct
of contracting parties. An implied term may not be read or interpreted to negate any express
terms of a contract and must only come into play in case of a strict necessity.

Courts in India have relatively accorded more weightage to an express term than an implied term
while adjudicating contractual disputes.

 Nabha Power Limited v Punjab State Power Corporation Limited & Another1

that case which involved a dispute emanating from a construction contract, the Supreme
Court has cautioned commercial courts from relying on implied terms in a contract. After
having analysed national and international jurisprudence on implied terms, the Supreme
Court laid down guidelines in relation to interpretation of implied terms in a contract and
affirmed the ‘five condition test’ laid down in BP Refinery (Westernport) Proprietary Ltd v
Shire of Hastings2. These include:

 it must be reasonable and equitable to imply terms;

 it must be necessary to give business efficacy to the contract, so that no term will be
implied if the contract is effective without it;

 it must be so obvious that ‘it goes without saying’ (Officious Bystander Test);

 it must be capable of clear expression; and

 it must not contradict any express term of the contract.

 There are no specific requirements for formation of a construction contract. As per the Indian
Contract Act 1872, any agreement which is enforceable by law is a contract. The essential
requirements of a construction contract are similar to any other contract under Indian Law – i.e,
(i) there should be an offer and an unconditional acceptance on part of the employer and
contractor respectively, (ii) the parties should be competent to contract, (iii) there must be a
valid consideration and (iv) the object or subject matter of the contract should be lawful.

A ‘letter of intent’ is not defined or used under any legislation. However, courts have interpreted
it to mean ‘an agreement to enter into an agreement’ and is generally not enforceable nor does it
confer any rights upon the parties. However, a letter of intent may amount to acceptance of the
offer resulting in a concluded contract between the parties.

State of UP v Combined Chemicals Company 3

1
(2008) 11 SCC 508,

2
1977 UKPC 13
3
(2011) 2 SCC 151).
The question whether the letter of intent is merely an expression of an intention to place an order
in future or whether it is a final acceptance of the offer thereby leading to a contract, is a matter
that can be decided with reference to the terms of the letter and/or the conduct of the parties
subsequent to the issuance of the letter of intent. 

Parties are free to choose the law of the arbitration agreement; the seat of arbitration; arbitral
rules; anyone to act as an arbitrator; the language of the contract and the arbitration. Generally,
there are no limitations on choice of arbitrator except factors set out in Fifth and Seventh
Schedule of the Arbitration and Conciliation Act 1996, that affect the independence and
impartiality of an arbitrator. Any person falling under the categories in the Seventh Schedule of
the Act would be ineligible to be appointed as an arbitrator, such as: if an arbitrator is a lawyer in
the same law firm that is representing one of the parties, a close family member of the arbitrator
has a significant financial interest in one of the parties or an affiliate of one of the parties, etc.
The grounds stated in the Fifth Schedule of the Act shall determine whether circumstances exist
that give rise to justifiable doubts as to the independence or impartiality of an arbitrator. The
grounds for challenge to appointment of arbitrators is dealt with in section 12 of the Arbitration
& Conciliation Act 1996.

TDM Infrastructure Private Ltd v UE Development India Pvt Ltd4 

In this case,under Indian Law where two Indian parties may choose a foreign seat of the
arbitration, they cannot choose to contract out of Indian law and choose a foreign governing law
as it would appear to be against ‘public policy’ However, no such restriction applies if one of the
contracting parties is a foreign entity 5. 

RESOLUTION OF ARBITRATION DISPUTES IN CONSRUCTION CONTRACTS 

Under Section 13 of the old Act, the Arbitrators has to decide disputes according to law and
cannot mis-apply it. But under the new Act, Section 28(2) provides  

"The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties
have expressly authorised it to do so."  

What it means is that the arbitral tribunal if the parties agree, shall decide according to equity and
conscience or are authorised to abate something However, Section 28(3) provides that - 

"in all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and
shall take into account the usages of the trade applicable to the transaction."  

So, the parties have a choice of a decision by the arbitral tribunal by applying the rules of fair
play and equity. It is upto them to make the choice. 

So, it can be concluded that, according to a press report dated 17th May 2013, the Prime Minister
has asked the Planning Commission of India to draft a new legislation to establish institutional
4
2008 (14) SCC 271)
5
see definition of ‘international commercial arbitration under section 2(f) of the Arbitration and
Conciliation Act 1996’.
mechanism to resolve disputes in public contracts. This is specifically in relation to infrastructure
disputes where foreign investment is getting hampered due to lack of proper dispute resolution
mechanism. Essentially the proposal is to have a fast-track mechanism with timelines for the
entire process. As per a Government report, the money stuck in construction disputes has
increased over three times from US$ 10 billion in 2001-02 to US$ 25 billion in 2009-10. The
draft legislation would aim to provide quicker and more amicable solution compared to the
present regime. However, further details are not yet available in the public domain.