ANALYSIS TO IDENTIFY THE PREVAILING CAUSES THAT LEADS TO ARBITRATION IN CONSTRUCTION CONTRACTS

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International Journal of Civil Engineering and Technology (IJCIET) Volume 8, Issue 4, April 2017, pp. 2069 2076, Article ID: IJCIET_08_04_236 Available online at http://www.iaeme.com/ijciet/issues.

1 International Journal of Civil Engineering and Technology (IJCIET) Volume 8, Issue 4, April 2017, pp , Article ID: IJCIET_08_04_236 Available online at ISSN Print: and ISSN Online: IAEME Publication Scopus Indexed ANALYSIS TO IDENTIFY THE PREVAILING CAUSES THAT LEADS TO ARBITRATION IN CONSTRUCTION CONTRACTS P. Jagannathan Educational Consultant, Department of Civil Engineering, SRM University, Kattankulathur Campus, India Herenz Nidhi Post Graduation Student, Construction Engineering and Management, SRM University, Kattankulathur Campus, India ABSTRACT Construction industry being so vast, it plays a predominant role and contributes a huge amount towards a country s economy. Contracts are being entered into in both public and private sector for the construction of all types of major and minor projects. But on a daily basis, various reasons induce the difference in opinion among the personnel involved in the contract. Such disagreements when not resolved by mutual discussion by the personnel, leads to conflicts and disputes which is required to be resolved at the earliest. The main objective of this study is to find out the common causes of disputes leading to arbitration, which party is mostly responsible for it and to suggest some remedial measures to minimise the arbitration cases. As part of the study, 30 cases were referred out of which 24 related cases were studied. From this, 42 factors were identified and a questionnaire survey was conducted. The obtained data was ranked using Relative Importance Index (RII) method and analysed using SPSS software and the most common causes for arbitration in construction contracts were identified. The final result obtained from ranking stated that delay in payment, loss to contractor and client, loss due to incomplete land acquisition, change in scope of work were the top ranking reasons leading to arbitration. From SPSS analysis, it can be inferred that for almost all of the reasons, there was no significant difference among the responses obtained from contractors, engineers and arbitrators except for the non-settlement of bills. Also, from arbitrator s response, it can be stated that both contractors and clients are equally responsible for arbitration. Key words: Arbitration; Alternative Dispute Resolution (ADR); Construction contracts; Disputes; Relative Importance Index (RII). Cite this Article: P. Jagannathan and Herenz Nidhi, Analysis to Identify the Prevailing Causes that Leads to Arbitration in Construction Contracts. International Journal of Civil Engineering and Technology, 8(4), 2017, pp editor@iaeme.com

2 P. Jagannathan and Herenz Nidhi 1. INTRODUCTION 1.1. General Present era is going through a phase of constant transformation in the industrial sector, economy, technology, as well as in the construction industry, for which major parts of construction projects are done through contracts. According to Building and Construction Authority (BCA), the approximate worth of construction contract awarded in the year 2016 was between $27 billion and $34 billion [1]. With the advancement in technology, uncertainty during the course of different construction stages are becoming complex [2]. Also with increase in demand and complexity in the design and involvement of different parties, the chances of occurrence of conflicts and disputes are unavoidable. Efforts should be made to avoid such disputes or to effectively manage and resolve them [3]. Management should be responsible for resolving them for which Alternative Dispute Resolution (ADR) methods like arbitration, adjudication, negotiation, mediation, litigation etc. serves as useful tools [4]. Resolving complex disputes may be a difficult task and many of these ADR techniques may be time consuming and expensive [5]. This is where the method of Arbitration will be helpful, which is the third most widely used method for dispute resolution [6] Arbitration Arbitration, one of the most efficient alternative dispute resolution methods, resolves the disputes outside the court room [7] in which a technical person or a group of people having good knowledge about the construction project are appointed to investigate and give an unbiased arbitration award. It is a better way of dispute resolution than discussing it in a court room because here the case is investigated by experts of the field, who have a better understanding of the project as well as the situation under which the dispute might have started [8]. Arbitration was devised to fill the voids between the normal and public procedure of resolving dispute, without which the process becomes slow and expensive [9]. Also if any of the two parties of the contract is not satisfied with the arbitration award given by the arbitrator or the panel of arbitrators, they can make an appeal to a higher court. Time and cost overrun can be said to be the most common reason for disputes that leads to arbitration. But even the various stages of arbitration tend to consume considerable time and also noticeable cost is incurred in the procedure. This again is a problem which cannot be left unnoticed and effective measures should be taken to resolve the differences in the initial stage itself and minimise the arbitration cases. 2. METHODOLOGY The study for the identification of causes leading to arbitration in construction contracts is done in two stages. The first one is the study of cases related to public sector construction contract arbitration. Depending upon the results obtained from the case study and from literature review, a questionnaire is prepared and distributed among contractors, engineers and arbitrators. Associated causes for arbitration from both case study and questionnaire survey are listed and ranked using Relative Importance Index (RII) method. Results obtained through questionnaire survey are further analysed using SPSS software to determine the correlation of the responses of contractors, engineers and arbitrators Case Study As part of the study, a total of 30 cases were referred out of which 24 cases related to construction contract arbitration of Highway Department, Indian Railways and Public Works Department were studied. All these cases are associated with public sector contracts in editor@iaeme.com

3 Analysis to Identify the Prevailing Causes that Leads to Arbitration in Construction Contracts Chennai and the surrounding areas. The common causes leading to arbitration are identified by a detailed study of these cases. Table 1 shows the summary of cases from the three departments. Table 1 Summary of the cases from the three departments S.No. Name of the department No. of cases Percentage of cases 1 Highway Department Indian Railways Public Works Department Total Questionnaire Survey After the study of collected arbitration cases and other related research papers [2][6], a questionnaire is developed consisting of 42 reasons leading to arbitration in construction contracts are listed. This questionnaire was distributed among contractors, engineers and arbitrators associated with arbitration cases. Table 2 shows the summary of the number of responses from the three groups of respondents. Table 2 Summary of number of responses S.No. Respondent group No. of respondents Percentage of responses 1 Contractors Engineers Arbitrators Total No. of respondents Arbitrators 21% Engineers 36% Contractors 43% Contractors Engineers Arbitrators Figure 2 Percentage share of respondents editor@iaeme.com

4 3. RESULTS AND DISCUSSION P. Jagannathan and Herenz Nidhi 3.1. Relative Importance Index (RII) The concept and formula of Relative Importance Index (RII) method is employed to determine the relative importance of each factor listed in the questionnaire and also to rank them accordingly based on the RII value of each factor. The RII value of each reason ranges from 0 to 1 and this can be computed using the formula mentioned below. Relative Importance Index (RII) = (3.1) ( ) Where, = sum of all the weightage of a particular reason by all the respondents, A = maximum weightage value and N = total number of respondents Evaluation of Arbitration Cases The collected 24 arbitration cases are studied and the associated reasons leading to arbitration in each case is listed. By the analysis of those reasons using the Relative Importance Index method, each reason is ranked based on their RII value. Table 3 shows the top ranking reasons based on the case study and their related RII values. Table 3 Top ranking reasons and their related RII values Rank Reasons for arbitration RII value 1 Delay in execution of the project Non-settlement of bills by the client Delay in completion of the project Price variation Delay in approvals by the client Loss to the contractor Delay in execution of the project Non - settlement of bills Delay in Price variation completion of the project Delay in approvals by the client Loss to the contractor Figure 3 Top ranking reasons of case study editor@iaeme.com

5 Analysis to Identify the Prevailing Causes that Leads to Arbitration in Construction Contracts 3.3. Evaluation and Ranking of Questionnaire Survey Response In the responses collected from the questionnaire survey, the surveyed respondents rated each reason mentioned in the questionnaire from 1 to 5, where 1 = strongly agree and 5 = strongly disagree. Based on these ratings, the total weight age of each reason by all the respondents is calculated and thus Relative Importance Index (RII) of each reason is computed using the equation (3.1). All the reasons leading to arbitration in construction contracts are then ranked based on their RII values. Table 4 shows the top 10 ranking reasons according to the questionnaire survey. Table 4 Top 10 ranking reasons based on questionnaire survey and their RII values Rank Reasons for arbitration RII value 1 Delay in payment Loss to the contractor Loss to the client Loss due to incomplete land acquisition Change in scope of work Increase in contract value due to revision in scope of work Delay in completion of the project Non-settlement of bills due to slow progress of the project Delay in execution of the project Delay in approvals by the client Delay in payment Loss to the contractor Loss to the client Loss due to incomplete land acquisition Change in scope of work Increase in contract value due to revisions in scope of work Delay in completion of the project Non-settlement of bills due to slow progress of the project Delay in execution of the project Delay in approvals by the client RII value Figure 4 Top 10 ranking reasons based on questionnaire survey editor@iaeme.com

6 P. Jagannathan and Herenz Nidhi 3.4. Person Responsible for Arbitration To identify who among contractors and client, is mostly responsible for arbitration, a related additional question was added to the questionnaire for which, only the responses obtained from arbitrators were considered to get an unbiased opinion. From the responses obtained, using the mode function, it was identified that both clients and contractors were equally responsible for arbitration. Table 5 shows the distribution of opinion obtained from arbitrators ion this connection. Table 5 Summary of response from arbitrators S.No. Person responsible for arbitration Response from arbitrators 1 Client 5 2 Contractor 2 3 Both client and contractor 10 Arbitrator's response Both 59% Client 29% Contractor 12% Client Contractor Both Figure 5 Percentage share of arbitrator s response 4. ANALYSIS The ratings of the 42 reasons given by the surveyed groups of contractor, engineers and arbitrators are analysed using the SPSS statistics software. The responses thus obtained through the questionnaire survey are grouped into three categories of contractors, engineers and arbitrators and the responses of each category is compared with that of the other two categories so as to identify their relation among groups and within groups and to determine if there exists any statistically significant difference between the means of the three independent groups. The method of one-way ANOVA is used for comparing the means of the three independent categories i.e. contractors, engineers and arbitrators. Table 5 shows the analysis results of the top ten ranking reasons editor@iaeme.com

7 Analysis to Identify the Prevailing Causes that Leads to Arbitration in Construction Contracts Top ranking reasons for arbitration Delay in payment Loss to the contractor Loss to the client Loss due to incomplete land acquisition Change in scope of work Increase in contract value Delay in completion of the project Non-settlement of bills Delay in execution of the project Delay in approvals by the client Table 5 ANOVA table Category of respondents Contractors Engineers Arbitrators Mean Std.deviation Mean Std.deviation Mean Std.deviation Mean Std.deviation Mean Std.deviation Mean Std.deviation Mean Std.deviation Mean Std.deviation Mean Std.deviation Mean Std.deviation F - value p - value * * * * * * * ** * * (*) indicates that there is no significant difference among the categories of respondents with respect to the corresponding reasons for arbitration since p-value is greater than (**) indicates that there is a significant difference among the categories of respondents with respect to the corresponding reason(s) for arbitration since p-value is less than CONCLUSION In this article, the common causes leading to arbitration are identified. If effective measures are taken to avoid the common causes like delay in payment, loss to contractor and client, loss due to incomplete land acquisition, change in scope of work, the number of arbitration cases may be minimised as most of the cases are due to these common factors. By minimising the number of arbitration cases, considerable time and expenses may be saved which are utilised to solve these arbitration cases. Also construction projects may be carried out in a smooth manner. 6. SUGGESTIONS Apart from the case study and questionnaire, few expert interviews were also conducted based on which it can be suggested that better collaboration of client and contractor along with better labour management and mechanisation of construction work can be employed for the smooth functioning of any construction project with fewer disputes and fewer arbitration cases. Also, in time payment, in time drawings and permissions to do the work may be helpful in reducing the number of arbitration cases in construction contracts editor@iaeme.com

8 P. Jagannathan and Herenz Nidhi A method of two-tier system integrating mediation and arbitration may be employed in which mediation is followed by arbitration [10]. Class arbitration may be employed for resolving a dispute in one forum in which multiple parties are involved [11]. Cost incurred in the process of arbitration can be minimised by effectively managing the resources and the stages of arbitration process [12]. REFERENCES [1] (19 January, 2016), Up to $34b worth of construction contracts expected in 2016, with highest share of demand from public sector in 14 years, The Straits Times [2] Sai-On Cheung and Karen Hoi Yan (January 2013), Anatomy of Construction Disputes, Journal of Construction Engineering and Management [3] Timothy Hill and Colin J.Wall (July 2008), Arbitration temporary binding and tiered dispute in construction and engineering Hong Kong experience, Journal of Professional Issue in Engineering Education and Practice [4] Chia Kuang Lee, Tak Wing Yiu and Sai On Cheung (January 2016), Selection and use of Alternative Dispute Resolution (ADR) in construction projects- past and future research, International Journal of Project Management [5] Sai-On Cheung, Henry C.H.Suen and Tsun-Ip Lam (October 2002), Fundamentals of Alternative Dispute Resolution processes in Construction, Journal of Construction Engineering and Management [6] A.A.Elziny, M.A.Mohamadien, H.M.Ibrahim and M.K.Abdel Fattah (June 2015), An expert system to manage dispute resolution in construction projects in Egypt, Ain Sham Engineering Journal [7] The Arbitration and Conciliation Act (1996) [8] Christopher Dancaster (April 2008), Construction Adjudication in United Kingdom past, present and future, Journal of Professional Issue in Engineering Education and Practice [9] Mohammad Nevisandeh (2016), The nature of arbitration agreement, Procedia Economics and Finance [10] K.W.Chau (April 2007), Insight into resolving construction disputes by mediation/arbitration in Hong Kong, Journal of Professional Issue in Engineering Education and Practice [11] William R.Wildman and Laura J.Stipanowich (2016), Class Arbitration and construction dispute: Analysis of current jurisprudence and practical tips for the construction practisioners, Journal of Legal Affairs and Dispute Resolution Engineering and Construction [12] Kathleen M.J.Harmon (October 2004), Cost effective strategies for Arbitration, Leadership and Management in Engineering editor@iaeme.com

REVIEW ON ALTERNATIVE DISPUTE RESOLUTION STRATEGY SELECTION

REVIEW ON ALTERNATIVE DISPUTE RESOLUTION STRATEGY SELECTION Milan G. Patel 1, Rushabh A. Shah 2 PG Student, Construction Engineering & Management, SNPITRC, Umrakh, Gujarat, India 1 Assistant Professor,