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Meeting half way: Arbitration can sometimes seem never-ending
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Amidst a global credit crisis, disputes involving construction projects will only be on the rise. Many of these will be referred to arbitration.

But given the uncertainty following the recent Supreme Court decisions, Shourav Lahiri, a partner in the Projects and International Construction group of the international law firm Pinsent Masons LLP, looks at whether mediation can offer a welcome alternative to arbitration.

The winter chills didn’t bite so much as the Supreme Court did in the Venture Global Engineering vs Satyam Computer Services. The apex body’s verdict in January 2008 has made the international community sit up and look for options while doing business with India.

The Venture Global decision has now made it possible for Indian courts to subject international arbitration awards to the same level of scrutiny as domestic arbitration awards. This decision is leading a number of companies to re-look at arbitration clauses in their present and future contracts.

Though the Venture Global ruling is unlikely to have a major impact on the construction industry within India where most contracts are governed by Indian laws and are subject to arbitration in India, it is a harkening back to the 2003 Supreme Court decision in the ONGC vs Saw Pipes where a similar wide berth was given to a challenge to arbitration awards on the grounds of public policy (Section 34(2)(b) of the Arbitration and Conciliation Act 1996 (the ACA).

The Saw Pipes decision, cited universally as being unwelcome, remains of significant relevance to the construction industry as it seriously increases the risk of an arbitration award not being final and binding. As this risk applies equally to both parties in a dispute, it is timely to consider whether there is a simpler, more effective way in which parties can resolve their disputes.

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Also, an arbitrator has to operate under strict procedural and legal guidelines to ensure that his award is immune from challenge. This leads most arbitrators to conduct arbitration like quasi-litigation: with witnesses and expert evidence, cross-examination, submission by legal counsel and the writing of a reasoned award. All of this results in a lengthy and expensive process and may not deliver the finality desired.

There is another factor that needs to be thrown into the mix: the tightening of the credit market. Not only are projects being moth-balled, construction projects that are already underway are also being impacted.

Experience in the international contracting market in the late 1980s and the East-Asian recession in the late 1990s stand testament that when money is in short supply, disputes come increasingly to the fore.

As the present malaise is likely to affect both procurers and suppliers in the industry, it is in no one’s interests to subject their disputes to a long and expensive resolution process culminating in an award, the finality of which could be suspect.

Mediate, not arbitrate

Enter the panacea: mediation. Mediation, as a concept, is not new in India. Though widespread statutory incorporation of mediated settlement as a method of resolution for commercial disputes is relatively recent (for example, by way of amendment to Section 89 of the Civil Procedure Code in 1999 and the introduction of conciliation as a method under the ACA in 1996) the practice of negotiating a settlement of a dispute through the assistance of a neutral third party (the mediator) is deep-rooted in communities in India. Resolution of a dispute by a panchayat is a classic example of mediation.

As lawyers to the construction and engineering industry in India and internationally, our experience over the past 40 years has shown us that a very small percentage of construction disputes that go to litigation or arbitration actually relate to a legal or contractual principle that requires adjudication by a third party.

Most disputes relate either to the valuation of additional work executed, or the time that should properly be allowed for the carrying out of the work originally contracted for, and both sides to a dispute often have a fair idea of their entitlement and liability in relation to these matters.

The real difference in assessment of liability and quantum between the parties is generally not very large but it is obscured largely by personalities, misunderstandings and positions taken during the project that have become ‘stakes in the ground’.

This is why construction disputes are so well suited to resolution through mediation.

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