DISPUTE RESOLUTION IN THE ROAD CONSTRUCTION INDUSTRY

The provisions of the NH Act and the SAROD rules make arbitration in the road construction industry different from other arbitrations, writes Krrishan Singhania & Srishti Singhania, K Singhania & Co.

The industry has been severely impacted by the onset of the looming pandemic. The lockdown, ensuing economic crisis and inadequate workforce has made timely completion of construction projects a distant dream . Some issues being faced by the road construction industry are as follows:

• Loss in Toll Revenue: The low mobility, due to the lockdown, has resulted in tremendous losses for the National Highway Authority of India (NHAI) in terms of toll revenue, estimated around INR 3700 crores .
• Debts: Each month of delay in repayment of loans, on the part of the developers, is expected to accrue around INR 3000 crores as the quantum of interest. This would be debilitating for the road construction industry, even with the moratorium in place.
• Reduction in Monetization: One of the key ways in which NHAI generated revenue was by monetizing publicly funded highways. The bidding for Toll-Operate-Transfer (TOT) bundles has been extended and this may affect the monetization plans of NHAI. Moreover, the loss in toll revenue has made it difficult to find investors and also valuate the toll-collection rights.
• Delays: Delays in completion of the construction projects may lead to: the contract becoming voidable at the option of the non-defaulting party; invocation of liquidated damges in certain cases; or breach of the contract where 'time is of the essence'.
• Invocation of Force Majeure (FM): With Covid-19 being declared as a pandemic, many contractors are resorting to the invocation of the FM clauses in their contracts in order to suspend their obligations. However, not all FM clauses may be broad enough to cover the pandemic giving rise to contentious issues. Even though the Ministry of Road Transport and Highways has declared Covid-19 as a FM event, the NHAI has not issued a similar notification. This has resulted in local field officers to act as per their discretion and reject Covid-19 as a FM event in certain cases .

Dispute Resolution methods in the Road Construction Industry

Arbitration

Arbitration between the contractor and the NHAI is governed by the Arbitration and Conciliation Act, 1996 (Arbitration Act). However, disputes relating to land acquisition for highway projects and compensation need to be resolved by  institutional arbitration provided under Section 3G(5), the National Highway Act, 1956 (NH Act).

In case of institutional arbitration under the NH Act, cases must be filed by the aggrieved party within 3 years. The central government alone is competent to appoint arbitrators and usually has a panel of arbitrators who are experts in the field of land administration and revenue, and may be retired state officers of the Ministry of Road Transport & Highways (in the Land Acquisition Division). The parties may also apply under Section 33 of the Arbitration Act in case the award requires correction or interpretation, within 30 days of passing of the award. If any of the parties is aggrieved by the award, they may take recourse under Section 34 of the Arbitration Act within 3 months of the award being passed.

In August 2013, NHAI set up a Society for Affordable Redressal of Disputes (SAROD) to conduct arbitration in a cost effective and time-bound manner and ensure dispute resolution by technical experts. The scope of disputes that can be governed by the rules of SAROD is much wider than NH Act and is not limited to only land acquisition cases. SAROD also has a list of empanelled arbitrators, who are field experts. Under SAROD rules, any dispute under INR 3 crores will be resolved by a single arbitrator appointed from the panel. If the dispute is worth more, parties shall appoint an odd number of arbitrators, but the presiding arbitrator must be from the panel maintained by SAROD. The SAROD rules also ensure neutrality and independence of the arbitrators by having a code of conduct and disallowing the arbitrator to make a unilateral agreement with any of the parties.

It is important to note that the provisions of the NH Act and the SAROD rules make arbitration in the Road Construction Industry different from other arbitrations.

Conciliation

The NHAI also encourages conciliation and has set out a Conciliation and Settlement Mechanism for disputes arising out of projects of Ministry of Road Transport being executed through State PWDs and PIUs/ ROs of the Ministry. In December 2019, a panel of independent experts was constituted and three Conciliation Committees of Independent Experts (CCIEs) were established . Parties which have opted for arbitration earlier can also voluntarily opt for conciliation later. In case parties fail to reach a settlement, they can still go back to arbitration / court. But if the process succeeds and they sign a settlement agreement, then it is binding on both the parties under Part III of the Arbitration Act.

In January 2020, the NHAI resolved its dispute with IL&FS through conciliation.  The NHAI has also been using video-conferencing during lockdown to resolve about 180 of its arbitration cases involving a sum of about INR 80,000 crore through reconciliation.  Apart from these two well-established processes, parties may also opt for Dispute Resolution Boards, mediation, adjudication or litigation as per the nature of the dispute, their needs and terms of the contract.

Leading Cases with Respect to NHAI Arbitration

Judicial decisions have added new dimensions to arbitration in the construction industry. Thus, we discuss a few important case laws that the parties should keep in mind when arbitrating with NHAI or in any construction-related arbitration:

• Arbitration gives the parties the freedom to choose an arbitrator. However, what if, the person who is tasked to appoint an arbitrator, is himself ineligible to act as one? Would the appointment be bad in law, then? The Supreme Court (SC) answered this question in affirmative. A person who is ineligible to be appointed as an arbitrator cannot be tasked with the responsibility to appoint an arbitrator. Hence, principles of neutrality and impartiality need to be followed.
• In the decision of NHAI v. Sayedabad Tea Estate , it was held that NH Act would have an overriding effect over the Arbitration Act, as the NH Act is a special statute.
• In the case of Gammon Engineers and Contractors v. NHAI , the SC held that fees of the arbitrator decided between the parties would prevail over the Schedule 4 of the Arbitration Act. This case upheld party autonomy, which is the cornerstone of arbitration.
• The SC has also held that a former employee of either party would not be disqualified from becoming an arbitrator. There were questions raised by the respondents about the impartiality and independence of the arbitrator appointed by the appellant as he was a former employee with the appellant. But the SC struck down these contentions saying that the objection of reasonable apprehension of bias was unfounded and unjustified as the arbitrator had left the job 10 years back.
• In 2019, Gammon India filed a writ petition against Section 87 of the ArbitrationAct, which provided for a stay on arbitral awards as soon as they were challenged. Gammon argued that it was being pushed into liquidation even when the NHAI owed it INR 6,000 crores. The SC struck down Section 87 and allowed Gammon's plea on the reasoning that staying arbitral awards was counter-productive.
• The Delhi High Courthas also held that NHAI should not challenge arbitral awards mechanically and casually, especially when the objections are not substantial. It made a very important observation that thelarge number of NHAI disputespending before the court was evidence of the fact that most awards were being challenged by NHAI. The Court also strictly directed NHAI to make a policy-level decision and ensure that Dispute Resolution Board's recommendations were evaluated before matters proceed to arbitration. This decision shows how the judiciary is keeping a check on NHAI and ensuring that they adopt an efficient dispute resolution policy, without causing any disruption to the infrastructural projects.

Conclusion

Dispute resolution in the roads and highways sector can be riddled with complex procedural issues. Thus, it is important to properly decide upon a dispute resolution mechanism at the time of drafting or entering into the contract. In case parties decide to opt for arbitration, the following should be kept in mind:

-      NH Act is a special statute. Thus in case your arbitration is governed by the provisions of NH Act, they will prevail over the provisions of the Arbitration Act.

• The arbitrator to be appointed for deciding the disputes should be an impartial and neutral arbitrator and should not be appointed by someone who is ineligible to be appointed as an arbitrator.
• The arbitration law and rules and the seat should be clearly mentioned in the arbitration clause.

Apart from the judiciary ensuring that disputes with the NHAI are resolved efficiently, the government and NHAI, too are trying to minimize disputes by bringing out clearer procedures. For instance, the government has resolved that the work will not be awarded where 80 per cent of encumbrance free land is not made available for the project.  This is a welcoming step as in most cases delay in land acquisition gives rise to arbitration claims. It is also important to note that as NHAI alone has been given the authority to appoint the arbitrator in certain arbitration cases, the arbitrator appointed should be neutral and independent person having field expertise. Steps could be taken to allow the contractor or the other party to choose from the panel of arbitrators maintained by NHAI /  SAROD in order to respect the principle of party autonomy and ensure a fair dispute resolution.

¹https://www.roadtraffic-technology.com/news/highway-projects-india-resume/

²https://www.financialexpress.com/infrastructure/roadways/covid-19-and-highway-sector-take-the-highway-to-recovery/1933537/

³https://www.moneycontrol.com/news/business/economy/covid-19-impact-highway-builders-in-a-bind-over-force-majeure-notification-5166461.html

⁴https://morth.nic.in/sites/default/files/circulars_document/Conciliation%20%26%20settelment%20Machanism%20for%20disputs%20Panel%20of%20Independant%20Experts%20conciliation%20committee%20reg_compressed.pdf?utm_source=Master+List&utm_campaign=46caaa017e-EMAIL_CAMPAIGN_2020_04_03_01_41&utm_medium=email&utm_term=0_218b52fdff-46caaa017e-517880153

⁵https://m.economictimes.com/markets/stocks/news/nhai-clears-ilfs-claims-of-rs-902-crore/articleshow/73603318.cms

⁶https://economictimes.indiatimes.com/news/economy/infrastructure/nhai-turns-lockdown-into-opportunity-to-redress-disputes-review-projects-on-war-footing/articleshow/75233505.cms?from=mdr

7Bharat Broadband Network Limited v. United Telecom Ltd., AIR 2019 SC 2434; TRF Ltd. v. Energo Engineering Pvt. Ltd., AIR 2017 SC 3889.

⁸2019 (11) SCALE 520.

⁹Civil Appeal No. 5384 of 2019, Supreme Court of India.

¹⁰The Government of Haryana PWD Haryana (B and R) Branch v. M/s G.F. Toll Road Pvt. Ltd and Ors ., 2019 3 SCC 505.

¹¹Hindustan Construction Company Limited & Another v. Union of India & Another, Writ Petition (Civil) No. 1074 of 2019, Supreme Court of India.

¹²Gammon India Limited v. National Highways Authority of India, I.A. 7751/2009 in OMP 319/2009, Delhi High Court, 2nd July 2019.

¹³https://auto.economictimes.indiatimes.com/news/industry/over-300-highways-arbitration-cases-with-rs-78653-cr-claims-ongoing-gadkari/72492955

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