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Relevant Tendering, Contract & Dispute Resolution Issues in Indian Construction Projects

Kirindeep SinghPartner, Rajah & Tann28 September 2005

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Tendering

• Competitive Bidding – Owner calls for tender. Work awarded to the lowest bidder. Widely used method.

• Negotiated Contract – Owner selects contractor and proceeds to negotiate a contract. Usually for private projects.

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Tendering

• Competitive Negotiation:

Ø Contractors are pre-qualified based on their technical expertise and ranked in order.

Ø Bid of first ranked contractor is opened. If Owner satisfied with price, Contractor awarded job.

Ø If Owner is not satisfied, Owner negotiates price.

Ø If negotiation fails, Owner opens bid of the second ranked contractor etc.

Ø Process continues until contractor selected

Ø Fresh tenders often called if negotiation with third ranked contractor fails.

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Government Construction Agencies

Central Public Works Department (CPWD)

• Main construction agency of the Government of India for execution of Government’s Public Works Programme.

• Similar to our Building and Construction Authority.

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Contract Types• Build Only – Design provided by

owner/architect/engineer.

• Design-Build – Design and construction services provided by contractor.

• Turnkey – In addition to design and construction services, contractor obtains project financing, procures site and hands over to owner.

• Build-Operate – Transfer (BOT) - Like Turnkey but in addition, Contractor operates project for a while to recover costs and make profits before transferring to Owner. Other variations are Build-Own-Operate and Transfer (BOOT).

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Standard Form of Contract For India?• No Standard Indian Form.

• Forms commonly used – FIDIC and World Bank Form.

• Other Forms

Ø Maharashtra State Electricity Board Form (Conditions of Tender & Supply)

Ø Oil & Natural Gas Corporation Limited Form

Ø Maharashtra State Road Development Corporation Form

Ø Engineers India Ltd Form

Ø National Highways Authority of India Form

• MOSPI – CIDC Form (Standard Contract Clauses for Domestic Bidding Contract and Standard General Conditions for Domestic Contracts).

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FIDIC FORMFour Standard Forms of Contract published in 1999

Ø The Construction Contract: Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer.

Ø The Plant and Design/Build Contract: Conditions of Contract for Plant and Design-Build for Electrical and Mechanical plant and for Building and Engineering Works Designed by the Contractor.

Ø The EPC/Turnkey Contract: Conditions of Contract for EPC/Turnkey Projects.

Ø The Short Form: Short Form of Contract.

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Construction Industry DevelopmentCouncil (CIDC)

• Property of MOSPI – Ministry of Statistics & Programme Implementation Infrastructure & Project Monitoring Division.

• Government of India along with the Construction Industry set up CIDC to shape up the Indian Construction Industry.

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Construction Industry DevelopmentCouncil (CIDC)

• CIDC started functioning in August 1996 and has taken up several important projects such as:

Ø* Standardising Conditions for Domestic Bidding Documents.

ØComputation and publication of Construction Cost Indices.

Ø* Setting up the first Arbitration and Dispute Resolution Centre for Construction Contractors with SIAC (CIDC-SIAC Arbitration Centre in India).

ØDevelopment and Implementation of Grading System (in conjunction with BCA), introduction of CONQUAS grading concept of BCA.

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Breakdown of Conditions of Contract (CIDC)• Clause 1 – Definition.

• Clause 2 – Interpretation e.g. documents forming part of the Contract (Letter of Award, Conditions of Contract, Specifications, Bill of Quantities etc).

• Clause 3 – Language and Law (Specified in Contract Data).

• Clause 4 – Nodal officer (“NO”) or his nominee’s Decisions (equivalent of SO/Engineer who administers Contract, certifies payment, variations, extension of time and values compensation events).

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Breakdown of Conditions of Contract (CIDC)• Clause 11 – Employer’s risks.

Ø Frustration force majuere events e.g. wars, hostilities, invasions.

Ø Loss or damage due to Employer’s occupation of any Section or part of the Permanent Works.

Ø Loss or damage due to design, other than contractor’s design.

Ø Operation of Forces of Nature (Act of God events).

• Clause 12 – Contractor’s Risks.

Ø Risks of loss or damage to property and personal injury and death which arise in consequence of performance of the Contract.

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Breakdown of Conditions of Contract (CIDC)• Clause 13 – Insurance.

• Clause 14 – Site Investigation Reports.

• Clause 18 – Specification and Drawings for Temporary and Permanent Works subject to approval by NO.

• Clause 21 – Possession of the Site.

Ø Employer shall give possession of the Site free from encumbrances. If possession of Site not given by date stated in Contract Data, Employer deemed to have delayed start of the relevant activities (?) and this will be a Compensation Event.

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Breakdown of Conditions of Contract (CIDC)• Clauses 24 and 25 – Settlement of Disputes.• Clauses 27 to 32 – Time Control.Ø Clause 27: Program – To be submitted showing timing

of activities/cash flow. Program to be updated showing actual progress on each activity.

• Clause 28 – Extension of Time of Intended Completion Date.Ø Criteria: If Compensation Event occurs or variation

issued.Ø Time: NO to decide within 21 days of extension of

time request.

Note – Contractor must give Early Warning of delay (see Clause 32).

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Breakdown of Conditions of Contract (CIDC)• Clause 32 – Early Warning: Contractor to warn NO or nominee at

the earliest opportunity (?) of future events/circumstances thatmay delay works.

• Clauses 33 to 36- Quality Control.

Ø Clause 33 – NO should check Contractor’s work and identify defects.

Ø Clause 34 – NO can ask Contractor to carry out tests.

Ø Clause 35 – Correction of Defects: DLP Period.

§ Notice of defects to be given before DLP ends.

§ DLP can be extended.

Ø Clause 36 – Uncorrected defects – NO will assess cost of correcting defects and Contractor will pay this amount.

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Breakdown of Conditions of Contract (CIDC)• Clauses 37 to 54 - Cost Control.Ø Clauses 37 and 38 – Bill of Quantities.Ø Clauses 39 and 40 – Variations.§ Variations permitted should be ±25% in quantity of each

individual item and ±10% of total Contract price.§ Notice of claim to be given within 14 days of

instructions.Ø Clause 42 - Payment Certificates.§ To submit monthly statements of estimated value of

work less cumulative amount certified previously.§ NO to check monthly statement within 14 days and

certify amount payable (less credit or debit for materials supplied) including variations and Compensation Events.

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Breakdown of Conditions of Contract (CIDC)ØClause 43 – Payments§ 75% within 14 days.§ Balance amount within 28 days.§ Delay in payment, interest at a pre-specified rate (suggested rate

12%) to be paid.§ Final Bill to be submitted within 60 days of issue of DLP certificate.§ NO will check Final Bill and return it within 60 days of receipt with

corrections, if any, and 50% payment of undisputed amount.§ Contractor should re-submit bill with corrections within 30 days of

its return.§ Re-submitted bill should be checked and paid within 60 days§ Interest at pre-specified rate should be paid if bill not paid within

time limit specified above.§ If any amount is increased in a later certificate as a result of an

award by Conciliator/Arbitrator, interest shall be paid at pre-specified rate and shall be calculated from date increased amount would have been specified in the absence of dispute.

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Breakdown of Conditions of Contract (CIDC)ØClause 44 – Compensation Events§ Following are Compensation Events unless caused by

contractor:-

ü Failure to give access to Site or part of Site by Site Possession Date.

ü Employer modifies schedule of other contractors in a way which affects Contractor.

ü NO orders a delay or does not issue drawings/specifications/instructions on time.

ü NO instructs Contractor to uncover or carry out additional tests on works with no defects.

ü NO unreasonably disapproves sub-contracting .ü Unforeseen ground conditions.ü Delays caused by other contractors, public authorities or

Employer.ü Employer’s Risks.ü Unreasonable delay in issuing Certificate of Completion.ü Other events listed in Contract Data.

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Breakdown of Conditions of Contract (CIDC)ØClause 44 – Compensation Events.§ Result of Compensation Event – Contract Price shall be

increased and/or extension of time granted.

ØClause 48 – Retention.§ Proportion to be agreed and stated in Contract Data.§ Proportion to be retained from each payment due to

Contractor until Completion.§ Maximum 5% of Contract price.§ Retention to be refunded after issue of No Defects certificate

(Final Completion).§ In addition Contractor to furnish Performance Guarantee of

5% of Contract amount upon award.§ Total of Performance Guarantee and Retention money should

not exceed 10% of Contract amount.§ 5% Performance Guarantee refunded within 14 days of issue

of defects liability certificate (i.e. Substantial/Practical Completion).

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Breakdown of Conditions of Contract (CIDC)Ø Clause 49 – Liquidated Damages.

§ ½% of Contract price per week of delay.§ Subject to a maximum of 10% of Contract price.

Ø Clause 50 – Incentives or Bonus (optional Clause).§ ½% of Contract price per week of early completion

subject to maximum 5% of Contract price.

Ø Clause 51 – Advance Payment e.g. mobilisation advance, construction equipment advance.

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Breakdown of Conditions of Contract (CIDC)• Clause 59 – Termination

ØFor fundamental breach which includes but not limited to:§ Contractor stops work for 28 days when no stoppage of work

shown on Programme or ordered by NO.

§ NO instructs Contractor to delay Works and instruction not withdrawn within 28 days.

§ Employer/Contractor becomes bankrupt/go into liquidation

§ Payment certified by NO not paid within 50 days.

§ Notice that failure to correct defects a fundamental breach and Contractor fails to correct defects within a reasonable time.

§ Contractor does not furnish security.

§ Contractor delayed works by number of days for which maximum amount of liquidated damages can be paid.

§ Contractor engaged in corrupt or fraudulent practices.

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Breakdown of Conditions of Contract (CIDC)Ø Notwithstanding above, Employer may terminate

Contract for convenience subject to payment of compensation to the contractor including loss of profits on uncompleted works (shall be calculated on the same basis as variations).

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CIDC – Contract Data• Equivalent to Addendum/Particular Conditions (?).

• Contains details such as:-Ø Details of NO.Ø Details of Conciliator/DRB.Ø Intended Completion Date.Ø Documents that Form Part of Contract.Ø Site Possession Date(s).Ø Location of Site(s).Ø Minimum Insurance Cover.Ø Additional Compensation Events.Ø Law which applies.Ø Currency of Contract.Ø Fees of Conciliator/DRB.Ø Appointing Authority for Conciliator/DRB/Arbitrator (CIDC-

SIAC Arbitration Centre).Ø Formulae for adjustment of prices.Ø Retention Sum.Ø Advance Payments.

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Dispute ResolutionLegal System in India• Common law system, similar to Singapore’s.

• Like the English system, the judiciary is designed to be independent of the influence from the Executive and Legislative arms of the Government.

• Judgments in the Indian Courts have relied on English law while interpreting statutes and also when legislation is silent on a point/area.

• No particular law laid down for construction contracts. Many statutes are relied on e.g. Indian Contract Act 1872.

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Legal System in India

Supreme Court(Highest Court)

High Courts of Various States

District Courts ofVarious States

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Dispute Resolution• Avoid the Indian Courts:

Ø Long time before case is heard.

Ø Various levels of State/Federal Courts.

• Preferred route is arbitration and conciliation.

Ø Can select neutral third countries as venue for arbitration e.g. Singapore, London, Hong Kong.

Ø Can select arbitration rules that would apply.

Ø Arbitrators can also be neutral third party nationalities.

Ø New York Convention permits mutual enforcement of arbitration awards. Singapore and India are both signatories.

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Arbitration & Conciliation in India

A pre-requisite for submitting a dispute to arbitration is the existence of a written arbitration clause in the main contract or a separate arbitration agreement.

Following is the arbitration clause recommended by the Indian Council of Arbitration for inclusion in all commercial contracts by the parties:-

“Any Dispute or differences whatsoever arising between the parties out of or relating to the construction, meaning and operation or effect of this contract or the breach thereof shall be settled by arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration and the Award made in pursuance thereof shall be binding on the parties.”

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Arbitration & Conciliation in India

Appointment of arbitrator –

Ø A person of any nationality can be an arbitrator, unless otherwise agreed upon by the parties. The parties are free to agree on the procedure for appointing the arbitrator/arbitrators.

Ø The general trend followed is that each party appoints an arbitrator and the two appointed arbitrators in turn appoint a third arbitrator who acts as the presiding arbitrator.

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Arbitration & Conciliation in India

Enforcement of domestic arbitral award –

Ø An award is enforced in the same manner as if it were a decree of the Court.

Enforcement of foreign award –

Ø Every arbitral award made in a country which is a signatory to either the New York or Geneva Convention will be treated as a foreign award and enforced as if it were a decree of the Court.

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Arbitration & Conciliation in India

Conciliation may be defined as a method used by parties to a dispute to reach an amicable settlement with the assistance of an independent third person or institution.

Equivalent to our system of Mediation.

The provisions with regard to conciliation are based on the UNCITRAL Conciliation Rules.

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Arbitration & ConciliationCIDC – SIAC Arbitration Centre

• Target set up date – End 2005.

• Singapore Model (adapted to Indian Laws) is being adopted for the Centre.

• Important aspect of SIAC rules is time bound completion of the Arbitration process. Since Arbitrators would be accountable to the centre, great degree of discipline is expected to be observed.

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Arbitration & ConciliationCIDC – SIAC Arbitration Centre• Process of empanelment of Arbitrators has

commenced. First group of Arbitrators would be from among the “Grandfather” group. Minimum qualifications as follows:-

Ø Professionals having eminent position in Construction, Public Administration, legal framework.

Ø Tertiary education qualification.

Ø More than 35 years of age.

Ø Professional experience of at least 15 years.

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Arbitration & ConciliationCIDC Form – Dispute Resolution• ConciliationØ Disputes between Employer and Contractor shall first

be submitted to Conciliation.Ø Procedure outlined in Arbitration and Conciliation Act

1996.Ø Party initiating conciliation to send written invitation

to conciliate. If other party rejects invitation, no Conciliation Proceedings.

Ø One Conciliator unless parties agree to 2 or 3.Ø If parties reach settlement, they may draw up and sign

a written settlement agreement. Conciliator may assist upon parties’ request.

Ø Settlement agreement shall have same status and effect as if it is an arbitral award on agreed terms.

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Arbitration & ConciliationCIDC Form – Dispute Resolution

Ø If settlement not possible, Conciliator shall give a written declaration that further efforts on conciliation no longer justified and Conciliation Proceedings are then terminated.

Ø Following which party that initiated conciliation should refer the disputes to arbitration within 28 days of termination.

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Arbitration & ConciliationCIDC Arbitration• Arbitration shall be conducted in accordance with

Indian Arbitration & Conciliation Act 1996.• For Contracts up to Rs.10 crores, Sole Arbitrator

shall be appointed.• For Contracts more than Rs.10 crores, Committee of

Arbitrators should be appointed. Composed of 1 arbitrator appointed by Contractor, one by Employer and third arbitrator (Chairman) chosen jointly by 2 nominees, failing which by making reference to CIDC-SIAC Centre from their panel.

• Decision of majority of Arbitrators shall be final and binding.

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Arbitration & ConciliationCIDC ArbitrationAlternative – Dispute Resolution/Review Board (“DRB”)• Dispute to be referred to DRB.• Board to be established by agreement at the time Contract

signed.• Up to Rs. 3 crores – 1 Member, experienced in construction to

be appointed by President, Institution of Engineers at Employer’s request.

• All other cases – 3 Members (Employer shall select 1 member and Contractor the other, to be approved by each other. Third by 2 members appointed by parties and shall be Chairman).

• Either Employer or Contractor shall refer disputes to the DRB and DRB’s Recommendations shall be binding.

• If Recommendation not accepted or DRB does not issue Recommendation within 42 days, dispute may be referred by either party to arbitration.

• Reference to arbitration to be made within 14 days of Recommendation or day on which period of 42 days expired.

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Arbitration & Conciliation in IndiaOther Arbitral Organisations in India

Ø Federation of Indian Chambers of Commerce & Industry.

Ø The Indian Council of Arbitration.

Ø International Centre for Alternative Dispute Resolution (ICRA).

Ø Indian Merchants’ Chamber.

Ø Bengal National Chamber of Commerce & Industry.

Ø Iron Steel and Hardware Merchants’ Association.

Ø Bombay Chamber of Commerce & Industry.

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Arbitration & Conciliation in India

Possible Disadvantage

Arbitration awards can still take longer to enforce in India compared to Singapore. Enforcement can be difficult. Though the Courts tend not to entertain an appeal against award on grounds other than fraud or bias, process of enforcement can still be prolonged. This may be due to the availability of the higher courts of appeal and massive backlog of cases.

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