DISPUTE RESOLUTION IN EPC CONTRACTS

1. DISPUTE RESOLUTION IN EPC CONTRACTS Mohit Abraham, Partner, PXV Law Partners e-mail:mohit.abraham@pxvlaw.com STRICTLY PRIVATE – NOT FOR CIRCULATION

2. outline • ADR Mechanisms • Conciliation • Arbitration • Expert Determination • Multitiered Dispute Resolution • Dispute Resolution Boards • Best Practices • Writ Remedies in EPC Contracts STRICTLY PRIVATE – NOT FOR CIRCULATION

3. ADR MECHANISMS _ CONCILIATION

4. Conciliation • The Arbitration and Conciliation Act, 1996 ("Act") provides for recognition of conciliation in commercial disputes. [Section 61]. • Unless the parties have specifically excluded conciliation procedure, they are free to take recourse to conciliation even if agreed to arbitration. • Conciliation initiated by written request that must be accepted. • Confidential process. Proceedings cannot be relied in subsequent arbitration/litigation . Conciliator cannot be presented as a witness. • Restriction on initiating arbitral or judicial proceedings during conciliation proceedings, except for preserving rights. [Section 77] • A conciliator must act in an independent and impartial manner, and abide by the principles of objectivity, fairness and justice. Parties must act in good faith. • Conciliator can make proposals for settlement of the dispute at any stage of the conciliation proceedings. • Settlement arrived before the conciliator has the same status and effect as if it is an arbitral award.

5. ARBITRATION – KEY ASPECTS

6. Judicial intervention in arbitration • Making reference in a pending suit [Section 8]. • Passing interim orders [Section 9]. • Appointment of arbitrators [Section 11]. • Terminating mandate of arbitrator [Section 14(2)]. • Court assistance in taking evidence [Section 27]. • Setting aside an award [Section 34]. • Enforcement of an award by way of decree [Section 36]. • Entertaining appeals against certain orders [Section 37]. • Directing delivery of award [Section 39(2)]. • Reference of a dispute to arbitration in insolvency proceedings [Section 41].

7. Interim protection • Both the court and the arbitral tribunal have the power to grant interim protection. • Under section 9, court can allow interim protection before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36. • Section 17 the Act gives co-terminus powers to the arbitral tribunals to order interim measures of protection. However, parties have a right to prevent the tribunal to exercise such powers by mutual agreement. • Section 17 would operate only during the existence of the arbitral tribunal and its being functional – not pre or post arbitration. • If pre arbitration, notice invoking arbitration is required or the court must be satisfied that effective steps to commence arbitration would be taken. [Sundaram Finance Ltd. vs . NEPC India Ltd., AIR 1999 SC 565].

8. section 34 – SETTING ASIDE AN ARBITRAL AWARD • The power to set aside an arbitral award under Section 34 is very limited. • Incapacity • Arbitration Agreement invalid • No proper notice of appointment of arbitrator or arbitral proceedings • Arbitral award outside the scope of the agreement • Composition of arbitral tribunal or procedure not in accordance with agreement of the parties • Court finds that subject matter of dispute is not capable of settlement by arbitration under the law or arbitral award is in conflict with “public policy of India” • “Patently Illegal” or “illegality at the basis of the award” – [ONGC v. Saw Pipes, 2003] • Under section 34, a court cannot re-appreciate the evidence. [M/s. Arosan Enterprises Ltd. vs. Union of India & Anr. (1999) 9 SCC 449] • If a possible view has been taken in relation to the obligations of the parties based on construction of the terms of the agreement, then interference by the court is not justified. [Hind Builders vs. Union of India ,(1990) 3 SCC 338]

9. Employee arbitrators • Generally, in government contracts arbitration by employee of the government/ statutory bodies/public sector undertakings, is provided. Are employee arbitrators neutral? • In Indian Oil Corporation Ltd. and Ors. Vs. Raja Transport [(2009) 8 SCC 520], the Supreme Court held that a senior office of the government body who has nothing to do with execution of the contract are independent and impartial and not barred from functioning as arbitrators merely because their employer is a party to the contract. • However, Court suggests that it would be appropriate if governments/public sector reconsider policy of providing for arbitration by employee arbitrators in deference to the specific provisions of the Act which requires “independence” and “impartiality”

10. Incorporation by reference • The principles regarding incorporation of arbitration clause by reference has been summarised in M.R. Engineers and Contractors Pvt. Ltd. Vs. SomDatt Builders Ltd. [(2009) 7 SCC 696] as under: • An arbitration clause in another document, would get incorporated into a contract by reference, if the following conditions are fulfilled : • The contract should contain a clear reference to the documents containing arbitration clause; • the reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract; • The arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract. • General reference not helpful. Must be specific. • If referring contract states “in terms of execution and performance” – arbitration agreement does not follow. However, if it specifies a section of another contract, for e.g. “General Conditions to a Contract” and such Conditions, contain an arbitration agreement, then there is an incorporation by reference.

11. Governing law of arbitration • Dispute referred to international commercial arbitration can be subject to three different laws. • Landmark judgment: National Thermal Power Corporation Vs. The Singer Company and others [(1992)3SCC551], • Proper law – Law governing the substantive contract • Law governing the construction and validity of the arbitration agreement – Law governing the agreement to arbitrate and the performance of that agreement. • Procedural law of arbitration– Law governing the conduct of the arbitration. • In majority of cases, all three will be the same. But (1) will often be different from (2) and 3), and rarely, (2) may also differ from (3). • Where parties fail to choose the law governing the arbitration proceedings, it would be the country where the arbitration is held (seat). • Seat not to be confused with venue of arbitration.

12. foreign Arbitral Awards - • Part 1 applies to domestic arbitrations while Part II to foreign arbitrations. Constitution • In Bhatia International and Venture Global, Supreme Court had effectively held that for international commercial arbitrations, when a party sought to enforce an award under Part II, Indian courts would have jurisdiction and Part I would also apply. • Thus, problematic features of Part I are now incorporated into foreign arbitrations which fall under Part II. Routine challenges to foreign awards. • In Bharat Aluminum Co. v. Kaiser Aluminum Technical Service Inc.[2012 (8) SCALE 333] prospectively overruled the judgment in Bhatia International and Venture Global. The principles enunciated in Bharat Aluminumare as follow: • Part I is not applicable to international commercial arbitration held outside India. However, Part I would apply to international commercial arbitrations held in India. • In international commercial arbitrations held outside India, interim relief cannot be granted by Indian courts under Section 9 or any other provision of the Act. • Section 34 would apply only if the seat of arbitration is in India.

13. Foreign arbitral awards • Enforcement of awards rendered in international commercial arbitration held outside India would only be subject to the jurisdiction of the Indian courts when such award are sought to be enforced in India in accordance with the provisions contained in Part II of the Act. • The seat of arbitration will decide the applicable law of arbitration. • The venue of arbitration may change, but it will have no effect on the seat of arbitration. The seat of the arbitration remains the place initially agreed by or on behalf of the parties. • Bharat Aluminium to apply only post 06.09.2012. Therefore, any application for relief under Section 9 or 34 in respect of foreign seated arbitration will continue to be governed by the Bhatia principle. If existing international arbitration agreements are pre 06.09.2012, advisable to have them amended.

14. Enforcement of foreign award • Foreign awards under New York and Geneva Convention can be enforced under the Part II of the Act. • Foreign award cannot be set aside. The Indian courts may only enforce it or refuse to enforce it. • Conditions for enforcement: • The award must satisfy the definition of foreign award under section 44 (for New York Convention) and section 53 (for Geneva Convention). • A party applying for enforcement of a foreign award must produce before the court: • Original award or a copy of the award duly authenticated . • Original arbitration agreement or certified copy thereof. • Such other evidence as may be necessary to prove that the award is a foreign award.

15. Enforcement of foreign award • Enforcement can be refused on following grounds: • Incapacity • No proper notice of appointment of arbitrator or arbitral proceedings • Arbitral award outside the scope of the agreement • Composition of arbitral tribunal or procedure not in accordance with agreement of the parties • Award not yet binding on the parties or has been set aside by a competent court of another country. • Court finds that subject matter of dispute is not capable of settlement by arbitration under the law or arbitral award is in conflict with “public policy of India”

16. Enforcement of foreign award • A foreign award cannot be assailed on merits. [Glencore Grain Rotterdam B.V. Vs. ShivnathRaiHarnarain[2008 (4) ARBLR 497 (Delhi)] • Once the court determines that a foreign award is enforceable it can straightaway be executed as a decree. No separate application is required to convert the judgment into a decree. [M/s. Fuerst Day Lawson Ltd. vs. Jindal Exports Ltd. (2001) 6 SCC 356] • “Public Policy” in Section 48 is not as wide as in Section 34. ‘Patent Illegality’ is not a ground. Must be contrary to: • Fundamental policy of Indian law; • The interests of India; or • Justice or morality. Renusagar Power Co. Ltd. vs. General Electric Co. AIR 1994 SC 860

17. DISPUTE RESOLUTION BOARD

18. DISPUTE RESOLUTION BOARD • In large projects, quasi legal body commonly known as Disputes Resolution Board can be formed. • DRB is intended to provide a site based, less formal and optionally binding solution to disputes prior to the process of arbitration. • Generally, DRB is constituted at the time of commencement of contract. • Three stages of DRB: • Onset level: During the working of the project, period status meetings, discussions, etc. • Dispute arose level: If conflicts arises during the execution of the project, DRB could provide informal opinion on potential areas of disagreement so that they are solved before it eventually escalates to dispute. • Hearing Level: The hearing procedures allow both parties to explain their position as well as to respond on the issues involved in the dispute. The DRB will conduct the hearing and attend every issue in relation to the dispute. • Upon reaching a solution, Board members make a recommendation in writing to both parties.

19. DRB Problems • Ministry of Road Transport & Highways new EPC models places great emphasis on DRBs. Done away with mediation process. • A World Bank study (2007) on the operation of dispute resolution mechanisms for civil works in India concluded that the operation of DRBs had been ineffective. The DRBs took far longer than contractually mandated to make their recommendations and faced high rejection rate. • It was noted that the success of DRBs depended on the intent of the contract personnel to manage the contract professionally and efficiently. Where the DRBs had been established on time, site visits conducted regularly, and disputes referred by parties promptly, the results were positive.

20. EXPERT DETERMINATION

21. EXPERT DETERMINATION • Expert determination is an important method of dispute resolution preceding arbitration / litigation. Resolving disputes by experts can be very effective where technical issues are involved. • The procedure to be adopted by the expert should be outlined in the contract. • Expert does not act in a quasi judicial manner. • Expert functions according to the terms of the clause under which the matter is referred to him. • An arbitration agreement, on the other hand, attracts the application of statutory provisions and a rich body of case laws.

22. EXPERT DETERMINATION • Expert vs. Arbitrator • A contractual provision for dispute resolution by an expert does not amount to an arbitration clause even if it is termed as "arbitration clause". • An expert is different from an arbitrator and order passed by an expert cannot be termed as an award of an arbitrator. [Joint Investments Pvt. Ltd. v. Escorts, (2010) 170 DLT 487] • If no judicial inquiry is intended, the expert (valuer) is not an arbitrator. [VadilalChatrabhuj Gandhi vs. ThakorelalChimanlalMunshaw & Ors. AIR 1954 Bom 121]

23. EXPERT DETERMINATION • K.K. Modi vs. K.N. Modi & Ors. (1998) 3 SCC 573] laid down test to decide whether the agreement is to refer an issue to an expert or whether the parties have agreed to resolve disputes through arbitration; the tests are: • existence of disputes as against intention to avoid future disputes; • the tribunal or forum so chosen is intended to act judicially after taking into account relevant evidence before it and the submissions made by the parties before it; • the decision is intended to bind the parties.

24. MULTI-TIERED DISPUTE RESOLUTION

25. Multi-tiered dispute resolution • The process essentially involves resolving disputes through a multi-tiered dispute resolution clause which provides for separate dispute resolution processes at distinct and escalating stages. • ADR mechanism commonly incorporated into multi-tiered dispute resolution clauses include: negotiation, conciliation, expert determination, dispute resolution board and finally, arbitration. • Key Benefits: • Lower cost of dispute resolution; • filtering system- only the complex disputes result in arbitration; • can effectively deal with a range of conflicts with a minimum of disruption to the project.

26. Multi-tiered dispute resolution • The Courts in India have shown an inclination to enforce multi tier clauses. However, there is a conflict of view. • Stages preceding to arbitration / litigation can be waived by the parties. • Techman Shelters Pvt. Ltd. Vs. Sh. Vijay Choudhary and Ors. [2009]- “Merely because the parties had agreed to proceed arbitration with mediation cannot prohibit the remedies available to them in law and the clause in the agreement prohibiting the parties from approaching the Court till mediation, is found to be against public policy.”

27. Multi-tiered dispute resolution • The steps preceding the coming into operation of the arbitration clause though essential are capable of being waived. (M.K. Shah Engineers & Contractors v. State of Madhya Pradesh, (1999) 2 SCC 594.] ) • “when the parties agree for a specific procedure and mode for settlement of their dispute by way of arbitration and also prescribes certain precondition to be complied with for referring the matter to arbitration, the parties are required to comply with those pre-conditions and only then refer the matter to the arbitration” (Tulip Hotels Pvt. Ltd. vs. Trade Wings Ltd, 2008) • Validity of two tier arbitration clauses which envisages an initial domestic arbitration, and challenge to the domestic arbitration award before another arbitral tribunal pending consideration before a larger bench of Supreme in Court in Centrotrade Minerals Vs. Hindustan Copper Limited [(2006) 11 SCC 245]

28. DRAFTING ARBITRATION CLAUSES

29. DRAFTING DISPUTE RESOLUTION CLAUSES – Best practices, IBA GUIDELINES • The parties should decide between institutional and ad hoc arbitration. Benefits? • The parties should select a set of arbitration rules and use the model clause recommended for these arbitration rules as a starting point. • In the absence of special circumstances, the arbitration clause should be broadly worded. The scope of dispute subject to arbitration should not be limited. • The parties should select the seat of arbitration – practical and juridical factors. • Despite Bharat Aluminium, better to expressly exclude Part I if intention is for the same not to apply. • The parties should specify the number of arbitrators – impact on overall cost, duration and the quality of the arbitral proceedings. • The parties should specify the method of selection and replacement of arbitrators and, when ad hoc arbitration is chosen, should select an appointing authority.

30. DRAFTING ARBITRATION CLAUSES– Best practices • Where applicable, time limits for each event, for e.g. nominating arbitrator, should be specified. • The parties should specify the language of arbitration. Language of documentation, effect of choice on arbitrators/counsel must be considered. • The parties should indicate the rules of law governing the contract, venue, seat of arbitration, etc. • Alternative dispute resolution mechanisms such as conciliation, DRBs, expert determination, etc. should be clearly specified. • Parties may consider specifying the powers of the arbitral tribunal to grant interim relief.

31. Drafting of Multi-Tier Dispute Resolution Clauses • The clause should specify a period of time for negotiation or mediation, triggered by a defined and undisputable event (i.e. a written request), after which either party can resort to arbitration. • The clause should avoid the trap of rendering arbitration permissive, not mandatory. This happens when the parties provide that disputes not resolved by negotiation or mediation ‘may’ be submitted to arbitration. • The clause should define the disputes to be submitted to negotiation or mediation and to arbitration in identical terms. Disputes which are not intended to be subjected to mediation / conciliation should be explicitly mentioned.

32. Drafting of Multiparty Arbitration Clauses • The clause should address the consequences of the multiplicity of parties for the appointment of the arbitral tribunal. In a multiparty context, it is often not workable to provide that 'each party' appoints an arbitrator. • The clause should address the procedural complexities (intervention, joinder) arising from the multiplicity of parties.

33. Drafting multi-contract arbitration clauses • It is common for a single international transaction to involve several related contracts. Drafting arbitration clauses in a multi-contract setting presents specific challenges. Expert advice should be taken before drafting such clauses. • The arbitration clauses in the related contracts should be compatible. • The parties should consider whether to provide for consolidation of arbitral proceedings commenced under the related contracts.

34. WRIT REMEDY

35. Writ remedy in projects • Writ remedy is not a routine jurisdiction but an extraordinary jurisdiction meant for an extraordinary purpose. In contractual matters, the courts are reluctant to exercise their writ jurisdiction. • However, even in contractual matters the State and its instrumentalities are duty bound to act fairly and reasonably. If the impugned act of the State is arbitrary or unfair or unreasonable a writ is maintainable. [KumariShrilekhaVidyarthi vs. State of U.P. and Ors. ,(1991) 1 SCC 212] • Writ petition may not be an appropriate remedy when disputed questions of facts are involved and the parties are required to lead evidence. [Mrs. Sanjana M. Wig Vs. Hindustan Petro Corporation Ltd, (2005) 8 SCC 242.]  • Existence of arbitration clause in an agreement is normally a bar to the exercise of Writ Jurisdiction, however, not an absolute bar. There are certain exceptions where the writ jurisdiction can be invoked even in the presence of arbitration clause. • “Facts and circumstances” test. • Examples of effective use of writ remedy in projects

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