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Out-of-court is better for both

Comment

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.

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.

Why mediation fits

First, because mediation is consensual in nature. As is the position in relation to conciliation under the ACA (see section 62), mediation is a consensual procedure.

Parties must agree to mediate; neither party can be forced to do so. By agreeing to subject their dispute to mediation after a dispute has arisen, parties take ownership of the manner in which their dispute is to be resolved.

This empowerment can smooth the way towards burying of hatchets and the finding of common ground and settlement.

The optional nature of mediation is not so in all jurisdictions. In Hong Kong, for example, standard form contracts for government works require parties to submit a dispute to mediation before they can proceed to arbitration and compulsory mediation is also finding its way into the new civil procedure rules.

If there is a mediation agreement written-in into construction contracts, and one party does not make a proper attempt to mediate but merely pays lip service to mediation, that conduct may provide a ground for challenge to the jurisdiction of the arbitral tribunal subsequently constituted.

Secondly, because parties have complete control on how they wish the mediation to proceed. Unlike arbitration and conciliation, both of which have statutory oversight by the ACA, mediations can be structured as the parties wish.

Once an in-principle agreement has been reached, a mediation agreement is drawn up. The mediator is often a party to this agreement.

This agreement deals with matters such as the ability of the mediator to meet with parties in caucus (in addition to conducting joint sessions), the confidentiality of the mediation proceedings, the confidentiality of the discussions between the mediator and a party in caucus, the barring of the disclosure of documents produced and discussions conducted during mediation proceedings to a third party or in any subsequent proceedings, and a cut-off date for mediation after which either party is entitled to refer the dispute to arbitration.

Quick and efficient

Parties can agree on the level of proof and effort that will be required of the other party to prove its case: will evidence of cost be required to support valuations, will an as-planned impacted programme be adequate or should a time-slice analysis be carried out, should engineering experts be brought in to give a view on a design issue, and matters of this nature? The flexibility given to parties and the mediator can be very conducive to a quick and efficient resolution of a dispute.

Thirdly, because the mediator has a lot more latitude to broker a settlement than an arbitrator has.

Regardless of the views an arbitrator has on the merits of a party’s case and the prospects of a settlement, he is not permitted to announce those views during the course of the arbitration unless the parties expressly authorize him to do so (section 30(1) of the ACA).

A mediator is not so constrained; indeed, a skilled mediator’s modus operandi is to dampen the expectations of the claiming party, and introduce doubt in the defending party’s mind as to the strength of its defence, by commenting on the merits of a party’s case either openly or privately.

This constant ‘lowering of the ceiling’ and ‘raising of the floor’ approach is aimed at narrowing the gap between the parties, making a settlement more likely. A mediator is not bound even to follow the rules of natural justice (unless the mediation agreement requires him to); his only objective is to bring the parties closer together so that a settlement becomes likely.

Then why hesitate?

The two principal barbs that are aimed at mediation are the difficulties in ensuring true confidentiality of mediation discussions if the dispute proceeds to arbitration and the absence of an enforceable award.

These are legitimate concerns. But on both aspects, the advantage that arbitration awards are supposed to provide appears to be somewhat diluted in the Indian context.

The ACA does not provide that arbitration awards in India are to be confidential (the position in relation to conciliation, which is expressly stated to be confidential (section 75 ACA)).

Unless expressly agreed in the arbitration agreement, confidentiality of an arbitration award or proceedings is not guaranteed. Indeed, the prospects of a challenge to an award in the courts, and the subsequent reporting of a challenge in publicly available journals, remove any cloak of confidentiality from an arbitration award.

Ironically, a mediation agreement entered into after a dispute has arisen may be better able to deal with confidentiality issues.

Mediation either results in settlement, or it fails. There is no award issued by a mediator that can be enforced.

The lack of an enforceable award may lead some to discount mediation as a potential method for resolution of their dispute. Given that mediation is appropriate really for parties who have an intention to settle their dispute and are only searching for the right level of settlement, rather than for those who are seeking (or require, for transparency purposes) a ‘who is to blame’ award, mediation may be a blunt tool for some.

It is surprising though how often parties who commence mediation with a conviction that there are irresoluble issues of principle find themselves signing a settlement agreement after the weaknesses in their position and the risks inherent in litigation are explained to them by the mediator.

The argument of skeptics against mediation is that parties who are already in dispute are unlikely to agree on even the day of the week, let alone to go to mediation. However as the cold spell of current market conditions begins to squeeze under doors of India’s construction industry, it may well be mediation that helps in the wintering of all discontent.

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