Introduction 

The construction sector in India is perhaps the second largest contributor to the economy. It accounts for upwards of 8% of India’s Gross Domestic Product (GDP) [1] It is also responsible for the second-highest inflow of Foreign Direct Investment (FDI) to the national economy. [2] This sector has one of the most robust employment numbers. The construction and development sector employs a total of 40 million people (including indirect employment) and generates an average of 2.7 new jobs for the investment of every one lakh rupee. [3] In 2012, the public-private partnership (PPP) model started by the government acquired a significant scale, with the World Bank’s Private Participation in Infrastructure (PPI) ranking India in the top draw of developing countries in this period. [4] As we progress, the demand for construction services will rise owing to urbanization, industrialization, rise in income and various Government initiatives like the Smart Cities scheme, the Housing for all by 2022 scheme, the Atal Mission for Rejuvenation and Urban Transformation scheme, etc.

The Indian construction industry is highly prone to litigation and disputes arising out of loopholes in contracts. The legal industry is no stranger to stretched-out legal battles and multiple claims of wrongdoing by subcontractors. It is thus that we undertake this work to introduce the Federation Internationale Des Ingenieurs (FIDIC) way of making contracts, its benefits in a country like India and its potential role in decreasing litigation in a country with overworked courts and a tremendous backlog of cases. As India maintains its course as one of the fastest developing countries, the infrastructure and construction sector witnessed a boom. To withstand this boom while creating a lucrative market for foreign investments, it is essential that India adopts a universally uniform format of construction contracts in the way of FIDIC handbooks.

While adopting FIDIC will help India eliminate petty disputes and claims preliminarily, a major relief will come in the form of a developed dispute resolution system for construction contracts. As tired and overworked India’s courts are, introducing dispute resolution (especially Arbitration) formally in the construction sector would be a breath of fresh air. International parties seeking to invest or develop in India, too, will feel much better about entering the market with a solid Arbitration channel for construction-related dispute resolution in place. Expanding on its current infrastructure of alternative dispute resolution is essential for India’s construction sector.

Construction Contracts

  • The Essentials of a Construction Contract

In the tricky sphere of construction disputes and contracts, having a solid, binding legal document at one’s behest often proves to be a savior. The essentials for a water-tight construction contract include detailed clauses on who shall be the parties to the contract, their rights and duties as well as their common objectives and exchanges during the period of association. Establishing rights and duties in a contract right from the beginning of any construction project makes the fulfillment of obligations at a more successful pace since rarely any dispute shall erupt as to “who shall be responsible for what” if the same has already been discussed and agreed upon.

The second and third most important clauses are well-defined works, times and dates. The definition of “works” should cover all basic and incidental elements such as site security, site services, power, piling, temporary infrastructure etc. It is essential to maintain and define this section as a lot of disputes arise from a lack of clarity about what “the works” include. Along with this, the time and date must also be specified and provisions for any delays or disasters to be made.

The most important part, perhaps, of any construction contract is the monetary compensation, its mode, and the timeline of payments. A lot of disputes arise in construction contracts over billing issues. To avoid that, both parties should have a consensus on a payment amount and a payment plan. Along with this, the builder’s information as well as the specifications of the materials used is to be made in the contract. In the end, to round off a solid construction contract, provisions for dispute resolution methods and admin nominations must be made clear. 

  • The FIDIC Contracts and their Importance in India

FIDIC or the Federation Internationale Des Ingenieurs- Conseils in French, or the International Federation of Consulting Engineers in English is an International Organization for consulting best known as the FIDIC family of contract templates. The FIDIC family was founded in 1913 by the three predominantly French-speaking countries- Belgium, France and Switzerland, and is headquartered in Geneva. FIDIC owns and publishes international contracts along with business practice documents to be used as guides and templates for contracts and agreements all over the world. The FIDIC organization is best known for its Dredgers contracts, Short Form of Contract, Construction Contracts, Plant & DB Contract, DBO Contract and the EPC/ Turnkey Contracts as well. In terms of its construction contracts, it also publishes Client/Consultant Model Services agreements, along with Sub-Consultancy Agreements and Joint Venture Agreements. [5]

In this article, we focus on the intricacies and importance of FIDIC’s construction contract templates in the Indian Construction industry. The first and perhaps the most important is their use in the deterrence of disputes. Currently, India has no uniform format or form of construction contracts. Seeing as construction is one of the most conflict and dispute-prone areas in a speedily developing country like India, it is essential to regulate construction contracts at a basic level to ensure smooth development of projects and fewer chances of a dispute. In regard to this, FIDIC publishes two books that are expansive and whole on the side of both the employer and contractor. The Red Book that dates back to 1957 is comprehensive on the building and engineering works of the employer, while the Yellow Book details the building and engineering works of the contractor. It is exhaustive in its enumeration of rights and duties, as well as a recommendation on clauses to include in a contract for a smooth building process and transaction.

Secondly, FIDIC as a uniform source of construction contracts also allows international firms to easily collaborate on construction projects in different countries. A FIDIC contract is all-inclusive and comprehensive along with being acceptable the world over, especially in European countries like UK, France, Germany and Switzerland. It also eliminated the need for constant legal involvement on both sides and eases the process of Joint Ventures or outsourcing by international companies seeking to build in India.

Thirdly, as construction involves a lot of manpower and is a long-term project, the main contractors often hire subcontractors to work on the site to do a particular task (for eg. hiring a painting agency, an electricity agency, etc.). These subcontractors are also covered under the FIDIC handbook. Despite the considerable protection given to subcontractors in the standard forms of subcontract and in common law, they were prepared to settle set-offs with which they were dissatisfied without initiating contractual proceedings which would have improved their situation. [6] It would appear from this study that subcontractors are reluctant to use their contractual entitlements either because of fears over the costs of disputing set-offs or because they fear that they will be denied opportunities to tender for work in the future. Until there is a culture shift in the industry, reliance on contractual conditions alone may be inadequate to meet the needs of subcontractors. [7] As illustrated in the study undertaken by them, it is evident that a large number of disputes arise out of the claims of subcontractors. Thus, it is essential to have a uniform code or format of construction contracts that safeguard the rights of subcontractors as is illustrated in the FIDIC handbooks.

Fourthly, as the FIDIC community says, “The key ingredient for success as an industry lies in their balanced approach to the roles and responsibilities of the main parties, as well as the allocation and management of risk. For this reason, the fundamental principle behind the FIDIC contracts is the use of General Conditions of Contract, deemed to be suitable in all cases, based on thousands of successful projects around the world. However, given that no two projects are the same, FIDIC does acknowledge that special conditions will be required for project-specific issues, on a case-by-case basis.” [8] FIDIC, in this way, not only acknowledges but also provides stipulations for individual project-based needs and the ever-changing roles and dynamics of the main parties to the contract by explicitly noting their rights and liabilities in every scenario.

Dispute Resolution

  • Disputes arising out of Construction Contracts in India

The long lifecycle of a construction project, mixed with the complex nature of documents and contracts involved, offers a breeding ground for disputes. Disputes can arise right from the beginning, from the stage of the formation of contracts to the existence of a valid contract. Interpretation of key provisions, inconsistent provisions coupled with shoddy drafting can lead to many disputes right from the inception. [9] Disputes in relation to bank guarantees, discharge of funds, strikes by workers and official permits can also cause a lag in the construction process. [10] In a speedily developing country like India, where zoning and rezoning laws are strict and ever-changing, and the system is ridden with corruption, disputes and disruptions are bound to arise. Fraud in tenders of large-scale projects is rampant too. However, the majority of construction disputes arise during the performance of these contracts. [11]

Time is of the essence in every construction project, yet most disputes arise out of delays in the completion of the whole or phases. Disputes arising during the completion of phases are perhaps the worst, as construction stops interim until the dispute is resolved, thereby delaying the whole project. Sites under major disputes are often sealed with equipment left on the plot leading to losses for the main parties, along with the subcontractors to whom the equipment belongs. [12]

Apart from these, the more obvious causes of disputes include breach of contract, wrongful termination, wrongful invocation of bank guarantees, wrongful withholding of retention amounts, non-rectification of defects during the defect’s liability period and/or arson with the intent of insurance fraud. [13] 

  • ADR and Construction Arbitration in India

As with every dispute arising out of a contract, resolution methods differ depending on the parties to the dispute. The focus of the dispute resolution mechanism lies primarily in optimum time and cost-saving. [14] Often enough, parties also defer to a private mode of dispute resolution to avoid public exposure. [15] Parties mostly go for multi-tier dispute resolution clauses built into the contracts, establishing dispute resolution boards, if these fail or don’t exist, the party’s steps into court. [16]

Some of the multi-tiered dispute resolution clauses (MTDRCs) are common with the arena of alternative dispute resolution (ADR), that parties often opt for. These include but are not restricted to-

1. Negotiation- This part of ADR is often the parties’ attempt to dispute resolution in a non-adversarial manner. The negotiations are meant to be direct, principal to principal and involving all stakeholders. Its primary objective is to avoid escalation of the dispute.

2. Conciliation and Mediation- The parties involve a neutral third party to act as the mediator or conciliator to mediate the dispute. This party is sometimes pre-decided upon.

3. Arbitration- This is the process of appointing a neutral third party, to whom submissions related to the dispute are made. The arbitrator then analyzes the submissions, issues involved in the dispute, any or all evidence and then makes an arbitral award. [17]

4. Expert Determination- This process involves the appointment of neutral experts to whom submissions of certain clauses regarding the dispute are made. The expert(s) then makes a decision based on the submissions before him/her. However, the decision is not binding unless the parties agree to it. 

Indian courts in Tulip Hotels Ltd. v Trade Wings Ltd, 2010 interpreted and enforced pre-arbitral steps in MTDRCs on multiple occasions. The enforcement of pre-arbitral steps, however, is contingent on the clause detailing the dispute resolution methods. This clause is to include non-exhaustive factors, which have been developed through the interpretation of courts. [18]

Apart from these various ADR steps under MTDRCs, courts are always an option for disputes not settled through ADR. [19] Unfortunately, currently, the Indian court system is overburdened, overworked and extremely slow. Litigation is expensive, time-consuming, and restrictive. Experts, researchers, and practitioners always recommend litigation as the last resort, if all other non-litigious resolution methods fail.

MTDCRs have been tagged as the future of dispute resolution as the trust of the legal community shifts towards ADR and methods that are quick, cheap, easier and can be agreed upon during the contractual stage. They also reduce hostility. 

  • The Construction Industry Development Council and its Dispute Redressal Society

The Niti Aayog jointly with the Indian construction industry set up the Construction Industry Development Council of India (CIDC) to undertake activities for the development of the Indian construction industry. [20] The Council provides organizational infrastructure and impetus to raise industry quality levels across the country to help secure wider awareness and appreciation for the interest of the construction business community by the government, industry, and societal peer groups.

Working under the CIDC is the Construction Industry Arbitration Council (CIAC). CIAC is a registered society headquartered in New Delhi, with the chief objective of promoting institutional arbitration in the Indian Construction Industry. The CIAC was primarily set up to ensure speedy disposal of disputes by the CIDC in association with the Singapore International Arbitration Centre (SIAC). [21]

Parties deferring to the CIAC under the CIDC recurve numerous advantages. These include established rules and procedures that ensure that arbitration gets off the ground and leads to a conclusion. CIAC also provides reasonable administrative assistance and monitors the progress of the case throughout the arbitration procedure. CIAC also has a panel of expert arbitrators from every field, who can be appointed in case the parties cannot agree on an arbitrator of choice. CIAC actively engages in promoting arbitration and convincing reluctant parties to take it up as an option in case of disputes. The Council boasts of both construction experts and legal professionals and facilitates physical and support services for arbitrations.

Conclusion

India is a litigation heavy society. There is reason to believe that several hundred crores of rupees are currently tied up in construction disputes across the country. The construction industry has time and again felt the need to introduce reforms to reduce disputes and new methods of dispute resolution. New contract formats like the FIDIC books can be a blessing to an industry rumbling with contractual disputes. FIDIC can also uniform the industry as a whole, as it is a meeting point where everyone’s interests lie- domestic and international.

What cannot be avoided by having uniformly formatted, airtight contracts must be eliminated by the means of low cost, less time consuming and private methods of multi-tiered dispute resolution clauses that include the alternative dispute resolution methods as well. Arbitration is being pushed as the flag bearer of all things non-litigation and has proven to be a fantastic alternative in several fields.

An illustrious combination of FIDIC and MTDCRs in India would set the stage for the burgeoning construction industry, that’s open to FDI and easy to invest in. As India takes up the task to become foreign investment friendly, it is perhaps time for it too loosen its tight procedural strings and allow for a structural change.

About the Author

Sonya Mohan is an Associate Advocate at Astrea Legal Associates LLP, Pune.

Adhya Sarna is a 3rd-year law student at the Amity Law School, Noida and is an Associate Editor at the Indian Journal of Projects, Infrastructure, and Energy Law (IJPIEL).

Editorial Team

Managing Editor: Naman Anand

Editors-in-Chief: Akanksha Goel & Aakaansha Arya

Senior Editor: Gaurang Mandavkar

Associate Editor: Adhya Sarna 

Junior Editor: Vidhi Saxena

Preferred Method of Citation 

Sonya Mohan and Adhya Sarna, “Pushing FIDIC Contracts and Arbitration in India’s Construction Industry” (IJPIEL, 5 July 2021) 

<https://ijpiel.com/index.php/2021/07/05/pushing-fidic-contracts-and-arbitration-in-indias-construction-industry/> 

Endnotes

[1] Shirish Sankhe, Anu Madgavkar, Construction and Manufacturing Could Be Our Growth Propellants, Mint (18th Oct. 2020). https://www.livemint.com/opinion/online-views/construction-and-manufacturing-could-be-our-growth-propellants-11603031302126.html

[2] FDI inflow touches $82 bn in FY21, The Hindu (25th May, 2021).

[3] Here’s why the Indian Construction Industry needs more skills in this fast-paced era, https://www.indiatoday.in/education-today/jobs-and-careers/story/here-s-why-indian-construction-industry-needs-more-skills-in-this-fast-paced-era-1645985-2020-02-13

[4] The State of PPPs Infrastructure Public-Private Partnerships in Emerging Markets & Developing Economies 1991-2015, World Bank Groups (2016).
https://ppiaf.org/documents/3551/download

[5] Turner and Townsend, The FIDIC Suite of Contracts, (2017).
https://fidic.org/sites/default/files/FIDIC_Suite_of_Contracts_0.pdf

[6] P. Kennedy, A. Morrison & D. O. Milne Resolution of disputes arising from set-off clauses between main contractors and subcontractors, CONSTRUCTION MANAGEMENT AND ECONOMICS, 527-537, (1997).
https://doi.org/10.1080/014461997372737

[7] P. Kennedy, A. Morrison and D.O. Milne in their paper ‘Resolution of Disputes Arising from set-off Clauses between Main Contractors and Subcontractors’ (2010)

[8] International Federation of Consulting Engineers, The Global Voice of Consulting Engineers
https://fidic.org/node/7089

[9] Binsy Susan, Akshay Sharma and Amogh Srivastava, Construction Arbitration: India, Global Arbitration Review (24th June 2020)
https://globalarbitrationreview.com/insight/know-how/construction-arbitration/report/india

[10] Construction Disputes in India, Nishith Desai Associates (2020) http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Construction-disputes-in-india.pdf

[11] M U Jagadeesha, Contract Disputes- Resolution Scenario in India, Vol. 3 Issue 19, IJERT (2018).https://www.ijert.org/contract-disputes-resolution-scenario-in-india

[12] P.M.Bakshi, Construction Contracts: Some Legal Aspects, ICAI India
https://www.icaindia.co.in/icanet/quterli/oct-dec2000/ICA_oct1.htm

[13] Construction Disputes in India, supra note 5.

[14] What are the advantages of construction arbitration? Construction Industry Authority of Phillipines, Department of Trade and Industry
https://ciap.dti.gov.ph/content/what-are-advantages-construction-arbitration

[15] Jason T. Strickland, Construction Arbitration: The Pros and Cons, Ward and Smith, P.A. (August 29, 2018).
https://www.wardandsmith.com/articles/construction-arbitration-vs-lawsuits

[16] Construction Disputes in India, supra note 5.

[17] Achintya Rawal, India: The Changing Landscape of Construction Arbitration, Mondaq (05 November 2019).
https://www.mondaq.com/india/arbitration-dispute-resolution/860526/the-changing-landscape-of-construction-arbitration

[18] (2010) 2 ArbLr 286.

[19] Gregory Cahill, Benefits (and Detriments) of Construction Arbitration, Construction Executive (July 14, 2018).
http://constructionexec.com/article/benefits-and-detriments-of-construction-arbitration

[20] Construction Industry Development Council of India (CIDC), Planning Commission, Government of India
http://www.cidc.in/

[21] Construction Industry Development Council of India (CIDC), Planning Commission, Government of India
http://www.cidc.in/activities1a.html