Over the past few years, India has shown significant improvement on parameters such as the ease to conduct business, getting credit, seeking construction permits, and conducting trade across borders. India’s rank has improved from 77 to 63 in World Bank’s Ease of Doing Business report. Over the last 6 years, India’s ranking has improved 79 places from 142nd in 2014 to 63rd in 2019, a record for any major economy.
However, the ability to enforce contracts remains one of the biggest issues in India, wherein the country continues to exhibit dismal performance. According to the World Bank’s Ease of Doing Business Index, it takes about four years (1,445 days) 2 to resolve a dispute in India with expenses reaching up to 31% of the claim value.
In this article, we will share insights on challenges faced in managing commercial disputes in the construction industry.
The construction sector is characterised by a multi-layered contract structure with a large number of stakeholders working together. The interdependencies created as a result of this structure, along with the requirement to comply with government regulations and obtain various permits gives rise to certain inherent challenges impacting outcomes in the sector – for both Principals and Contractors – across the project lifecycle. Some of these challenges are listed below.
Some of the above challenges can result in typical actions of delay, scope creep, violation of payment terms in construction projects, finally resulting in a dispute.
The objective of a business partnership is to ensure that value is created for stakeholders and society. Construction sector businesses tend to have a magnified impact on stakeholders and the community, should projects be poorly managed. To prevent such instances from occurring, organisations can consider the following measures.
Organisations can start with a precontract protocol of exchange of information around the project. Setting expectations right will help the parties in designing definitive and agreeable terms.
As part of the pre-contract negotiations, it is essential to undertake due diligence for the contracting party, perform feasibility study of the project, chart out a detailed construction plan, and also discuss resolution mechanisms, should a dispute arise. These can include alternative dispute resolution (ADR) mechanisms in case of foreseen delays/force majeure.
We have observed an increasing reliance on Alternative Dispute Resolution (ADR) mechanisms in the wake of time and cost considerations involved in litigation. Businesses are opting for ADRs ranging from informal negotiations or settlements to more formal mediation or arbitration.
The choice of dispute resolution mechanism may also be strategic, depending on the intent and stakes involved.
Lastly, it is important to execute a clearly defined contract, preferably with appropriate allocation of commercial risks
Continuous monitoring throughout a contract’s lifecycle can assist in the timely detection of malpractices or fraud and encourage appropriate record keeping. Factors such as technology and economic or regulatory changes, and internal issues such as a change in business plan can have an impact on the effective implementation of a project. This exposes the project to a change in scope. However, scope change can be managed by capturing the scope change matrix, conducting an impact analysis, and updating the plan to include new objectives.
Other project monitoring mechanisms, such as deployment of external consultants (to monitor progress), use of construction software, and maintenance of site diary or record keeping, can also be used to improve stakeholder management, increase transparency, and enhance the ability to measure performance.
Traditionally, the speed of dispute resolution has been slow and the cost of disputes tend to be high. The cost mainly depends on both the parties’ willingness to solve the core issue.
The parties should try to effectively use the dispute management ecosystem— ranging from consultation with experts (legal/technical to assess the merits of the dispute or claim) to use of technology (forensic technology for the detection of malpractices or evidence gathering)—early on in the process to determine the optimal dispute resolution strategy, and save time, and cost.
Given the increasingly technical nature of issues (such as valuation, design, specification, and performance) over which parties tend to land up in disputes, the appointment of experts is becoming common place.
Independent assessment by experts with the relevant expertise and experience, can provide valuable assistance in the settlement of disputes – in both ADR and non-ADR situations.
Arbitration mechanisms allow for the appointment and cross-examination of experts, thereby lending credibility to the assessment undertaken. In addition, the provision for submission of joint expert reports can help in narrowing the areas of dispute and thereby, allowing faster resolution.
An interesting development is the expected increase in use of mediation to resolve commercial disputes. The recent amendment to the Commercial Courts Act prescribes that a suit that does not contemplate any urgent relief shall not be instituted unless the plaintiff exhausts the remedy of pre-institution mediation.
India has set an ambitious goal of becoming a USD 5 Trillion economy by 2024. One of the focus areas identified by the Prime Minister in enabling this growth is the construction and infrastructure sector. Development of large scale infrastructure and well executed construction projects can help the country meet those objectives and set benchmarks for future development activity. The role of strong project management and clear dispute resolution mechanisms can no longer be discounted.
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