Taking arbitration to next level

More and more parties to dispute are looking at the calculation of damages more proactively in the initial phases of the case to administer the arbitration proceeding more effectively and efficiently.

The fundamental reason for such a change is that a robust damage calculation helps the arbitrator to understand the value of claim as well the assumptions used in the calculation of the claim amount.

One of the advantages of institutional arbitration as a dispute resolution mechanism is its speed and accuracy. More often than not, arbitration disputes involve a sizeable sum of money which is claimed as damages suffered by either or both the parties. In India, construction has been the second largest economic activity after agriculture and has witnessed unprecedented growth.

Delays in completion

However, the construction sector is highly fragmented. This is partially because any construction project has several stakeholders such as contractors, sub-contractors, engineers, supervisor consultants, design consultants, and so on.

Further, projects are not completed within the agreed timelines due to various reasons which may vary from changes made by the project owner to improper planning by the contractor.

The delay in completing a project gives rise to disputes between the parties and the project generally remains unfinished till a satisfactory resolution is arrived at.

Claims that may arise on account of delay in a construction project could be because of reasons like cost of idle labour and machinery, unabsorbed overheads, increased material prices, and so on. Consequentially, it means locking-up of substantial funds as well as loss to the Government/corporate.

Any lawyer or an arbitrator is witness to the fact that they do not have an all round financial expertise to calculate delay claims or loss profits. Some of the aspects which may be considered for valuing delay claims, inter-alia , are:

Substantial completion : It is critical in evaluating delay claims. The factors that are considered for this purpose are extent of defects in the work, ease in correcting the defects, etc.

Liquidated damages: When a party seeks to claim liquidated damages, they should calculate it when substantial part of the contract is not completed even after the expiration of the contract period.

There can be no claim for liquidated damages if it is an excusable delay as the other party would then raise a counter claim for acceleration in cost.

Concurrent delay claims: When there are concurrent delays occurring in a contract, the claimant has to classify the concurrent delays as excusable and non-excusable, delays that occurred on account of its actions and that of the other parties, to claim damages. The tribunal may not award damages for concurrent delays.

As it is said, time is money; parties to a construction contract should be pro-active while entering into a contract.

Few quick points can be considered for inclusion in the contract to facilitate a smooth arbitration proceeding in the event of a dispute:

Listing down he items or scenarios under which one party can make claim on account of delay by the other party;

When the performance is in process and any delay occurs, notifying the party causing the delay, seeking reasons thereof, expected costs that would be incurred during the delayed period;

Agreeing upon the expert who would determine claims arising out of delays;

Agreeing upon the arbitration panel.

(The author is Leader, Forensic Services. Kunal R. Gupta, Associate Director, Forensic Services, PwC India, also contributed to the article.)

COMMENT NOW