Status quo and problems faced by Indian infrastructural sector

RESEARCH METHODOLOGY

In enabling completion of the assignment, we have relied mostly on secondary resources, which include articles, journals and first-hand accounts provided by newspapers, legal luminaries by way of their speeches. A substantial contribution was made possible by way of the judicial pronouncements in the field. Most of the research has been done through online research platforms and journals available at our disposal.

AIMS & OBJECTIVES

The paper aims at:

1. Highlighting the status quo scenario of the Indian infrastructural sector (herein referred to as the ‘sector’)

2. Highlight the problems being faced by the sector.

3. Highlight the needs for dispute resolution mechanism in the sector.

4. Identify the best possible alternative dispute resolution mechanism.

HYPOTHESIS

• The working hypothesis of ADR is that it produces superior results compared to court judgments or conventional settlements.

• It permits a search for creative solutions in which both parties benefit.

• It minimizes difficulties arising from lawyers\’ self-interests.

• It can be more systematic than conventional settlement negotiations, and decisions are more likely to be based on the merits of the dispute.

• In addition, ADR reduces burdens both on the court and on the disputants in terms of time and costs.

• While the best use of ADR may be to resolve cases that are extremely difficult or costly, ADR techniques are also valuable in settling multiparty disputes that do not easily fit into the two-sided contour of the adversary system.

INTRODUCTION

In the global arena, the infrastructural industry involves a substantial amount of capital investment as well entails a huge proportion of employment generation. Such needs may be witnessed more for the rapidly developing economies like India, where the phenomenal growth rate in itself is indicative of the surge in the infrastructural projects. However, at the same time, India’s performance of being the fourth largest economy in the world in terms of purchasing-power parity is eclipsed by the lack of world-class infrastructure. It is estimated that, lack of proper infrastructure pulls down India’s GDP or Gross domestic product by 1-2% every year. The total investment exceeded $500 billion during the eleventh plan period alone. According to the Planning Commission, investments in infrastructure in the tenth plan were just over 5 per cent of GDP of which private investment accounted for about 1.2 per cent. In the final year of the eleventh plan, it may touch eight per cent of GDP.

Construction/infrastructure is one of the fastest growing sectors of the Indian economy, and millions of dollars are spent in construction related disputes. According to a surveyconducted in 2001 by the Construction Industry Development Council, the amount ofcapital blocked in construction sector disputes was over INR 540,000 million. Ad hocarbitration is still very popular in the construction industry.

WHAT KIND OF PROBLEMS MAY BE FACED?

Complex Contractual Arrangements

Infrastructural and Real Estate projects necessarily involve complex contractual arrangements between several parties, irrespective of whether they are meant for industrial, commercial or residential use.

Issue Of Nationality

In many instances, the parties belong to different nationalities. Such cases will not only make adjudication more difficult but also prolong the tenure, on the completion of which the parties will get relief.

Improper Codification Of Rights And Liabilities

There is of course a need to clearly lay down the rights and liabilities of financers, suppliers of materials, workers and the intended beneficiaries of such projects. Such contractual arrangements routinely include arbitration clauses that provide for the parties’ preferred means of dispute-resolution.

Surging Cost

Furthermore, the costs of contractual disputes, direct and indirect, are substantial. They are borne not only by clients, designers and contractors, but also by the community through, for example, additional taxation revenue needed to provide essential services, and the management of the taxpayer-funded Central and State court systems to deal with disputes. There are direct costs in disputes such as legal services, arbitration, consultants, courts and the diversion of in-house resources (both legal and non-legal) to manage dispute resolution processes – for clients, designers and contractors. When disputes proceed to arbitration or litigation, the direct costs can be significantly high and are often comparable to the amount of the claim itself.

There are also indirect costs incurred by the parties such as delays to the project, adverse performance of the project, distraction and over-burdening of staff on the project, reduced morale, erosion of confidence and trust in working relationships, adverse impact on the reputation of the parties, emotional impact on people involved, lost opportunities for future work, destruction of business relationships, and the loss of people to the industry because of wasted effort, disillusionment and frustration.  

NEED FOR DISPUTE RESOLUTION MECHANISM

Judicial Backlog And Need For ADR

For decades the Indian legal system has been mired by backlog in its outstanding caseload, the result of over elaborate, unenforced procedures, automatic appeals, and systemic vacancies from the bench, among other factors. The Indian Law Commission (“ILC”) has maintained that the reason for judicial delay is not a lack of clear procedural laws, but rather the imperfect execution, or even utter non-observance, thereof. Given the huge number of pending cases, the governance and administrative control over judicial institutions through manual processes has become extremely difficult resulting in systematic failure. The government’s Report on Strategic Plan for Implementation of ICT in Indian Judiciary argues that this has directly impeded judicial productivity leading to “disappointment and dissatisfaction among justice-seekers.” In other words, justice delayed is justice denied. The Supreme Court made it clear that this state of affairs must be addressed: “An independent and efficient judicial system is one of the basic structures of our constitution…It is our constitutional obligation to ensure that the backlog of cases is decreased and efforts are made to increase the disposal of cases.”

Despite years of reforms, there are still 20 million cases pending in Indian courts. Two and a half million are pending at the High Courts, and nearly 40,000 (down from 100,000 in 1990 thanks to computerization of the docket) at the Supreme Court. These figures may be compared with the 69 cases on the U.S. Supreme Court’s docket for 2006. From 2001–2004, on the average, the lower courts disposed of 13 million cases every year, and the High Courts, 1.5 million cases. The Supreme Court of India disposes of about 50,000 cases per year, while the Fast Track Courts disposed of 370,000 cases during the same period. Though the situation of the judiciary is now somewhat improved as a result of these fast track courts and LAs, delay remains a nearly insurmountable problem.

Judicial delay can have tragic effects, underscoring the urgent need for targeted reform. In 2001, a senior citizen who had invested his life’s savings in a non-banking financial company attempted self-immolation after a Delhi court granted yet another postponement of the proceedings for recovery of his savings from the defaulting company.

Already, the ADR movement is having real effects, and has become so successful it has led some to question its veracity. An unofficial survey found that in Chennai alone there are roughly 30,000 cases being resolved through arbitration annually. The rate of litigation is thus being reduced considerably. This movement to ADR will be further strengthened with more government disputes are delegated to LokAdalat, since the Government is the largest litigant in this country. However, justice must be imparted – it cannot be “hurried to be buried.” This passage raises the ugly possibility of coercion being behind at least some of India’s ADR success, which is significant since arbitration is now binding under the Indian Arbitration Act which empowers the arbitrator to settle dispute between the parties without the procedural protections inherent in courts of law.

Dispute Resolution Mechanism For Infrastructure Sector

The need for dispute resolution arises mostly in contract management stage. But possibility of a dispute arising cannot be ruled out even prior to that; say at the stage of procurement where the award of project may be challenged on grounds of arbitrariness and illegality before courts of law. This is in addition to the public policy issues relating to land acquisition and environmental clearance that government agency may have to sort out at an earlier stage. The judiciary in India has been candid in maintaining that judicial review cannot extend to policy matters, which are the prerogative of the government, and it is in public interest to expedite disposal of cases involving challenge to economic policies, as any delay will be counter-productive to public interest. The duty of the court, maintains the Supreme Court, is only to confine itself to the questions of illegality, irrationality and procedural impropriety. Hence, the courts have generally restrained themselves from interfering in matters relating to bidding and award of projects unless the arbitrariness and illegality is apparent on the face of it.

At the stage of Contract Management, disputes essentially relates to the validity, enforceability, interpretation or non-performance of a contractual obligation, or seeking injunctive relief, compensation, specific performance, etc., may come up and thus amenable to the original jurisdiction of a civil court of competent jurisdiction. However, litigation is not preferred as a mode of dispute resolution presumably due to factors like potential delay and the need for specialised knowledge. The need for expert adjudication in issues arising out of infrastructure projects have been emphasised by the hon’ble Supreme Court in UPSEB v. Banaras Electric Light & Power Co. Ltd.  

ARBITRATION IN INFRASTRUCTURE SECTOR

India of the 21st century has numerous goals to attain. Over the last four decades in India, there has been a great deal of infrastructure development activity both in the public and private sectors. Central and state governments, state instrumentalities and public and private companies have all been entering into contracts with builders as part of their commercial activities. The rights and obligations, privies and privileges of the respective parties are formally written. The central and state governments and instrumentalities of the states, as well as private corporations, have their own standard terms of contract, catering to their individual needs. Often, these contracts provide for remedial measures to meet various contingencies. Despite these extensive and time-tested contracts, disputes and differences often arise between the parties. To meet these situations, arbitration clauses are provided in the contract themselves, generally covering either all disputes arising from the contract or all disputes save a few ‘excepted matters.’

Unique Features

In the standard forms adopted by the government departments like the Central Public Works Department (CPWD), Military Engineer Services (MES) railways and public enterprises, although an arbitration clause may include within its purview all the possible disputes relating to the transaction, there are exemption clauses or exclusion clauses that make the decision of an authority named in the agreement, final and binding on the parties. Such clauses are included, as in construction and other infrastructure related contracts, situations arise for which immediate decisions on a point of difference or dispute is required to avoid costly delays. In these situations, the ‘excepted matters’ or ‘exclusion clauses,’ make the decision of a particular authority final and binding on both the parties, and not subject to arbitration.

There has been a series of judicial decisions, which have held that if a particular matter has been excluded from the purview of arbitration incorporating accepted matter clause/exclusion clause, the same shall not be re-agitated in arbitration.

In Food Corporation of India vs. Sreekanth Transport, the Supreme Court held that ‘excepted matters’ do not require any further adjudication, since the agreement itself provides a named adjudicator, and concurrence by the parties to the decision of the named adjudicator is obviously presumed by reason of unequivocal acceptance of the terms of the contract of the parties. ‘Exception’ can also operate differently.

There may be certain clauses in the contract, which empower either the engineer-in-charge or the consultant to take an on-the-spot decision regarding points of difference between the builder and the employer. Such clauses also provide a right of appeal to a superior officer within a particular time, and impose a liability on the officer to give a decision within a stipulated time. The clause further provides reference of the matter to arbitration, in case one of the parties is not satisfied with such decision, or if the officer does not render a decision. However, the provision expressly provides that if none of the parties opt for the choice to refer the matter to arbitration within the time limit thus prescribed, the decision last rendered shall be treated as final and binding upon both the parties.

Dispute Review Board

The concept of a Dispute Review Board (DRB) is quite common in the construction industry. The DRB is a panel of three experienced, respected and impartial reviewers. The DRB is organized before construction begins and meets periodically at the job site. The DRB members are kept abreast of the developments and progress in the job, and made familiar with the project procedures and the participants, and are provided with the contract plans and specifications. The DRB meets with the employer and the contractor representatives during regular site visits, and encourages the resolution of disputes at the job level. The DRB process helps the parties to solve problems before they escalate into major disputes. The proceedings of the DRB can be brought as evidence before an arbitral tribunal or other judicial forum. The board members could also be presented as witnesses.

Recommendations made by the three experts known for their reputation, accepted by both the parties at the start of the work as neutral persons and having thorough knowledge of the project will not normally be changed by any such tribunal. It would therefore become difficult to go against the tribunal. On this consideration, due acceptance is given to the system world wide, and almost no case goes up to arbitration. The statistics up to the year 2001 indicate that there were 818 projects with DRBs valued at US $ 41 billion; and that during that year, 1221 disputes were settled by the DRBs, and out of 1038 recommendations made, only 31 were taken by the parties to the arbitral tribunal.  

STATE ACTIVISM

The Indian government had made an important legislative intervention by way of the Arbitration and Conciliation Act, 1996 which largely incorporated international developments such as the ‘UNCITRAL Model Rules’ on arbitration and the ‘New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards’. However, despite several years of the operation of this statute, there is a distinct preponderance in favour of ad-hoc arbitration mechanisms. It is in this setting that it is important to educate the business community in India about the merits of relying on institutional arbitration mechanisms. By resorting to institutional mechanisms, parties can ensure that their disputes will be resolved under globally accepted and updated arbitration rules coupled with supervision by personnel with expertise in the area. Furthermore, reliance on recognized international arbitral institutions has a positive correlation with the recognition and enforcement of arbitral awards across different countries.

The infrastructure and construction sectors require the expertise of personnel from different backgrounds – such as engineering, earth sciences and finance among others. This implies that dispute-resolution in these sectors also needs arbitrators who themselves are attuned to the inputs from different disciplines. Arbitral institutions are well-equipped to identify and retain the services of arbitrators with such interdisciplinary expertise. Furthermore, their prior experience with similar categories of dispute resolution places them in a unique position wherein they can ensure the conduct of arbitration proceedings in a time-bound and transparent manner. In recent times, the Government of India has also indicated its’ willingness to encourage the use of Institutional arbitration mechanisms. The Union Ministry for Law and Justice has been in talks with representatives from the Permanent Court of Arbitration (PCA) with the objective of the establishment of a regional Centre by the latter. There are of course numerous arbitral institutions, which can expand their involvement with Indian parties and even think of establishing arbitration Centres in India. Some of these institutions are affiliated to trade associations while some are independent entities. One can easily recount the names of a few of these institutions such as the ICC International Court of Arbitration (Paris), the London Court of International Arbitration (LCIA), The Chartered Institute of Arbitrators (UK), the American Arbitration Association (AAA) and the National Arbitration Forum (USA) among others. With an increasingly globalizing legal profession, the importance of arbitral institutions has also been on the rise. With the continuous inflow of foreign investment into infrastructural and construction projects in India, there is a concomitant need for personnel who understand the intricacies of commercial arbitration. In this respect the retired members of the judiciary and the active members of the bar in India are well-equipped to participate in and conduct such proceedings. In fact India has the potential to emerge as a preferred arbitration destination in the Asia-Pacific region on account of its location and the possibility for cost-savings by parties seeking dispute-resolution. The growth of institutional arbitration mechanisms is indeed a welcome trend and the judiciary will also benefit from the same.  

EXTENT OF JUDICIAL INTERVENTION

One of the main objectives of the 1996 Act was to give more powers to the arbitrators and reduce the supervisory role of the court in the arbitral process. In effect, judicial intervention is common under the 1996 Act. Such intervention takes the form of determination in case of challenge of awards. Such a propensity to exercise their authority to intervene may be attributable to their skepticism that arbitration is not effective at resolving disputes or the judges’ vested concern that their jurisdiction will be adversely eroded. The decision of the Supreme Court in the Saw Pipes case exemplifies this inclination, and threatens to hamper arbitration’s progress toward speed and efficiency. In this case, the Supreme Court expanded the scope of ‘public policy’ from the earlier ratio laid down by a three bench judgment in the Renusagar case and that one of the grounds for challenge of an award under the 1996 Act is violation of ‘public policy’.

In the Saw Pipes case, the scope of public policy was widened to include challenge of award when such an award is patently illegal. Some arbitrators have viewed the judgment in the Saw Pipes case with concern. The main attack on the judgment is that it sets the clock back to the same position that existed before the 1996 Act, and it increases the scope of judicial intervention in challenging arbitral awards. It was also criticized on the grounds that giving a wider meaning to the term ‘public policy’ was wrong, when the trend in international arbitrations is to reduce the scope and extent of ‘public policy’. Jurists and experts have opined that unless the courts themselves decide not to interfere, the Arbitration and Conciliation Act, 1996, would meet the same fate as the 1940 Act. The Parliament, when enacting the 1996 Act and following the UNICITRAL Model Law, did not introduce ‘patent illegality’ as a ground for setting aside an award. The Supreme Court cannot introduce the same through the concept of ‘public policy of India.’

After the Saw Pipes case, some judicial decisions have tried to reign the effect of Saw Pipes. One instance of this is the Supreme Court decision in the case of McDermott International Inc.vs. Burn Standard Co. Ltd, where the court somewhat read down Saw Pipes. In respect of the Saw Pipes case, the Supreme Court held:

“We are not unmindful that the decision of this Court in ONGC case had visited considerable adverse comments but the correctness or otherwise of the said decision is not in question before us. It is only for a larger Bench to consider the correctness or otherwise of the said decision. The said decision is binding on us. The said decision has been followed in a large number of cases.”

A few High Court decisions have also sought to give a narrow reading of the Saw Pipes case on the ground that a literal construction of the judgment would expand judicial review beyond all limitations contained not only under the 1996 Act, but even under the 1940 Act. In the case of Indian Oil Corporation Ltd. vs. Langkawi Shipping Ltd, the court held that to accept a literal construction on Saw Pipes would be to radically alter the statutorily and judicially circumscribed limits to the court’s jurisdiction to interfere with arbitration awards. Following the aforesaid Bombay High Court decision, the High Court of Gauhati held in Dealim Industrial Co. vs. Numaligarh Refinery Ltd. held that the ONGC vs. Saw Pipes, Supra, does not intend to efface the time-tested legal propositions and judicial tenets on arbitration and thus ought not to be construed away from the well-established trend set by a string of decisions preceding the same.

DISPUTE AVOIDANCE CHECKLIST

Placing reliance upon the research conducted by Construction Innovation , it was found there are readily available opportunities to improve the performance of construction projects that could annually deliver an additional $7 billion of value to the country’s economy. Those opportunities require the elimination or minimization of causes of disputes within different phases of the project delivery process, and are reflected in the checklist below.

The power to influence the elimination or minimization of causes of disputes changes as projects unfold – clients and other project sponsors (financiers, end users, operators) have greatest ability to take advantage of opportunities at the beginning of projects. Designers and contractors assume control through the design and construction of projects.

Early in a project’s life the project sponsors’ visionary and strategic activities include deciding whether a need is best met by construction of an asset, settling on an approach to risk management, and deciding on a procurement strategy. It is here that clients and project sponsors have the greatest ability to minimise disputes and maximise value. Informed leadership decisions, supported by in-house or consultant construction project skills, have the ability to minimise the risk of disputes. They are similar to the decisions taken in the establishment of any ongoing enterprise.

The research identified a number of causes of disputes that occur again and again on construction projects. Some are in the control of the client or its advisers, whilst others are in the control of designers or contractors. Those causes, whether they lead to the need for formal dispute resolution or not, are wasteful and contribute to the inclusion of unnecessary “business as usual” contingencies in the cost structure of the industry.

Informed clients and other project sponsors (or “wise buyers”) understand that each construction project is essentially a prototype, and will be designed and constructed by a team of people brought together in a virtual organization specifically for that purpose. Unless key people in that team have previously worked together, and for the client, it is all but certain that there will be little if any trust between them, or between the client and the team.

Research shows clearly that the level of trust present has a direct impact on team relationships, and on the project environment or culture. If the project environment is characterised by poor team relationships, there is likely to be considerable wasted effort on the project, and the likelihood of disputes over technical or commercial matters is greatly increased.

There are strategic decisions that clients and other project sponsors can take during the earliest stages of project initiation to signal both a level of trust, and trustworthiness. This is done to reduce the risk of disputes, and minimize wasted effort.

In the right circumstances, designers and contractors will willingly respond to the client signaling trusting behavior, by bringing their skills to bear to reduce cost, shorten construction time, and optimise functionality. They will avoid opportunistic decisions that could otherwise be taken to force additional costs on the client.

There is nothing particularly complicated or difficult in the decisions those clients and other project sponsors, designers and contractors can take to create trusting relationships and a positive project environment.

CONCLUSION

The principle of profit maximization holds the key for investors when they partner with any other entity. Disputes mean delay and delay in turn would mean escalation of costs; and for an investor it would mean loss of earnings from the resources which he could have utilised otherwise.

Efficacy of dispute resolution mechanism thus holds significance. As the above discussion shows resolving disputes through amicable means like mutual discussions, conciliation, or mediation, at the earliest, holds the best solution in any infrastructure initiative. However, it is not so often that parties agree to merge their difference by mutual concessions and adjustments. When the parties fail to come to an agreement Arbitration is resorted which has many advantages including flexibility in procedures, binding nature of the award, the relative speed in which matter is resolved etc. However, as discussed above the way in which arbitration is practiced in the country has made it no better than litigation. Judicial intervention, delay and procedural rigidity of the tribunal have diminished its scope as the most effective mechanism in construction industry.

Adjudication by statutory expert bodies like the Electricity Appellate Tribunal seems to be a viable model for dispute resolution in PPPs. There are many advantages like expertise, efficiency in time, less interference by the judiciary, etc., which can be effectively used for structuring a dispute resolution mechanism. A harmonised system of dispute resolution with a single appellate authority at the centre would be a workable model for PPP in India in most of the sectors. Barring the jurisdiction of the civil courts and making provision for appeal only to the apex court in substantial questions of law would go a long way towards speedy disposal; while the presence of experts from diverse fields would ensure efficacy in such an arrangement. It may be hoped that the Government of India will make suitable changes in the Draft PPP rules of 2011 taking in to account the demand for a detailed framework for dispute resolution.

Source: Essay UK - http://www.essay.uk.com/essays/law/status-quo-problems-faced-indian-infrastructural-sector/


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