Dispute Avoidance/Adjudication Board: Shift in Dispute Resolution of EPC Contracts

A peek into the pending and ever rising litigation in India reveals that the Government of India (‘GOI’) is the biggest litigant when the GOI’s function is not to litigate but to govern and administer.

The recent bitter experiences pertaining to disputes arising out of high value construction/ EPC contracts, where GOI’s agencies have suffered unanimous arbitral awards coupled with far reaching interest liability and other penal consequences, cannot be overlooked. Resultantly, as a precautionary measure, GOI has taken proactive steps in the form of the Mediation Act, 2023; Vivad Se Vishwas I Scheme dated February 6, 2023; Vivad Se Vishwas II Scheme dated May 29, 2023 being a one-time settlement Scheme, “Vivad se Vishwas II (Contractual Disputes)” and the most recent being the Office Memorandum dated June 3, 2024 titled ‘Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement’, to name a few.

While it is the GOI’s duty to ensure that large scale infrastructure is implemented for the betterment of the public within the shortest span of time while maximizing marginal utility of public funds – the GOI agencies have been saddled with meandering litigations which not only chokes the project or its timely progress and implementation, but also is a drainage of public money.

While the proactive steps of the GOI are a stride towards ensuring that disputes are settled and not litigated keeping in view the functioning of GOI agencies and to ensure interest and penal liabilities are avoided - as more often than not, interest/penal liabilities turn out to be more than the principal amount - while traversing the course of litigation, it is also paramount upon the GOI to develop a mechanism inbuilt in construction/ EPC contracts which puts in checks/ balances to ensure the avoidance of disputes rather than going through the adjudication of disputes.

One such measure, which has paved its way is the introduction of Dispute Adjudication Board (DAB) or Dispute Avoidance/Adjudication Board (‘DAAB’) or Dispute Board (DB) agreement in contracts, albeit not in its true spirit or intent yet.

DB was first introduced in United States in 1970s as an alternate to “engineer’s adjudication” where an engineer would be unilaterally appointed by the employer. Later, this novel form of dispute avoidance found its way in standard bidding documents of the World Bank and was subsequently adopted by the International Chamber of Commerce, International Federation of Consulting Engineers (‘FIDIC’), etc.

DB is an adjudicatory mechanism aimed at resolving disputes before resorting to mediation/ arbitration/ litigation. DB operates as a neutral body comprising of industry experts tasked with providing project oversight and/ or resolution services throughout the project lifecycle.

DB is a creature of contract between the parties/ stakeholders bereft of any legislative/ statutory support. DB is neither an arbitration tribunal nor a conciliator nor a mediator. The object of having DB is dispute avoidance and dispute adjudication by preventing and/ or resolving disputes as and when they arise during the life cycle of the project and simultaneously ensuring uninterrupted flow of work.

DB has been a hallmark to mitigate risks associated with disputes. It has proved to be an effective alternate offering and a win–win situation for the parties. However, the success of DB depends much on the context of legal framework of the jurisdiction where DB decision will be enforced.

The sanctity of a DB clause in a contract and the requirement of it as a condition precedent to trigger/ resort to arbitration has received recognition in Indian Courts in the recent times as well. [Capacite Infraprojects Ltd. v. T. Bhimjyani Realty Pvt. Ltd. (2023 SCC OnLine Bom 1657); Union Territory of J&K v. S.P. Singla Constructions Pvt. Ltd (2023 SCC OnLine J&K 1343)]

Though the GOI’s Central Public Sector Enterprises (CPSEs) have adopted DB, the same has not been espoused in its true sense and certainly not as per international practice or as intended by FIDIC contracts. The implementation of DAB/DAAB or DB clause put in force results in a Catch 22 situation for the GOI:

• A typical clause vests DB with power to give binding decisions.

• Contract contains provisions for ‘Notice of Dissatisfaction’ by party vexed by the decision.

• Contract differentiates between a ‘binding’ DB decision and one that is ‘final and binding.'

• If a Notice of Dissatisfaction is given within the stipulated time, DB decision remains binding only and finality must be given to it by settlement or arbitration.

• The effectiveness of a DB decision is accentuated by a clause on ‘Failure to Comply with DB’s Decision’ under which the failure of defaulting party to comply with DB decision can itself be referred to arbitration.

• Arbitration under ‘Failure to Comply with DB’s Decision’ has narrower scope since the reference is limited to the aspect regarding the failure to comply.

The modus of adoption has allowed DB decision to not be final, that is, DB decision can be challenged by way of arbitration, etc. Any challenge will lead to the opening up of fresh litigation which otherwise could have started earlier, had there been no DB in existence at all. The true object of DB to curtail/ circumvent litigation is thus lost in sight.

Contractual trends suggest that DB usage in India has increased manifold and gained recognition. While National Highways Authority of India’s  (NHAI) Press Release dated April 6, 2022 shows that the NHAI has constituted 97 DBs, the Railway Board vide Clause 63.2 of General Conditions of Contract has included a provision for the settlement of disputes through DB in tenders valued upwards of ₹50 crores. Further, the Ministry of Power by Notification dated September 27, 2021 (Model Contract Provision for "Dispute Avoidance Mechanism" through 'Independent Engineer' (IE) in the Construction Contracts of CPSEs executing Hydro Power Projects) and Addendum dated October 18, 2023 on Model Contact Provision for "Dispute Avoidance Mechanism" through 'Independent Engineer' (IE) in the Construction Contracts of CPSEs executing Hydro Power Projects, has also expanded the horizon of DB to cover all power sectors and not just hydro power projects.

DB offers a proactive and non-adversarial means to resolve disputes swiftly while maintaining the project momentum. Such an approach is not only beneficial to tackle India's legal backlog and the adversarial nature of dispute resolution, but also promotes the advancement and progress of the country. Such a measure is in tune with the New ‘National Litigation Policy’, which has been placed before the Cabinet during June 2024, with the aim to avoid unnecessary litigation.

Caution must be taken to ensure that constructions/ EPC contracts, if they have provisions for DB, make DB decisions final and binding with no scope to challenge. Seeds of elements that could lead to the possibility of litigation must be discouraged so that the effect and purpose of DB is not frustrated. However, if the scope for challenge is to be kept, then the same should be subject to deposit of the disputed amount in an escrow account, subject to final determinations/ outcome of the dispute.

About the authors: Amit Meharia is the Managing Partner of MCO Legals (Meharia & Company). Sambhav Choudhary is an Associate at the firm.

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