Why arbitration has not worked

It has been almost a year since the government moved a step closer to addressing the logjam in the road sector. As of March 31, 2015, the National Highways Authority of India (NHAI) had pending arbitration awards worth ~2,20,000 crore with its concessionaires.

The government had approved various measures to revive the “stressed” construction space, including a cabinetapproved proposal that allowed government agencies to deposit up to 75 per cent of an arbitral award amount in an escrow account against a margin-free bank guarantee in cases where the award is challenged. However, legal experts say the move is yet to deliver the desired results.

According to the NHAI, just 65 claims, worth ~26,300 crore, have been submitted by road developers in 19 cases. As of May 26, ~9,800 crore has been released or settled against the margin-free bank guarantees.

A recent report by India Ratings and Research (Ind-Ra) points out that the settlement of arbitration claims has been slow because of the inability of road developers to provide bank guarantees and open escrow accounts. The government’s initiative to release 75 per cent of the locked amount in arbitration awards has had a limited impact on the liquidity of developers as banks have been wary of taking exposure through bank guarantees without adequate margins or collateral, according to the report.

The scheme was approved by the Cabinet Committee on Economic Affairs in August last year and the NHAI started accepting claims from December last year.

According to legal experts, there are various reasons why it has not been easy for project developers to take the arbitration route. “The big part of the problem is in the ambiguities in the project definition at the time of bidding, misleading site status and preparedness mentioned in the RFP (Request for Proposal), vagueness in the concession agreement and the illogical transfer of some risks to the developers/contractors when they are in no position to manage such risks,” says Ramesh Vaidyanathan, managing partner, Advaya Legal.

The quality of arbitrators appointed was another reason, say some experts. There has been a tendency to appeal most of the awards, largely out of fear of investigation by vigilance departments. Until recently, there was no mechanism to identify the bona fides of claims and push for an amicable settlement. A conciliation structure has been put in place recently and its efficacy still needs to be tested, say experts.

Some critics are of the view that the NHAI should not have taken the arbitration route at all. “Arbitration to begin with was not needed. Why should a company be compensated if the project is delayed?” says another legal expert.

An NHAI official points out that since arbitration disbursement is subject to the submission of a bank guarantee (BG), some companies are giving BGs in a piecemeal manner, which is causing a delay in the process.

According to the plan, the escrow account could be used to repay bank loans or meet commitments in ongoing projects. This was seen as a major step that will allow recoveries of loans by banks while enabling construction companies to speed up execution. This was also expected to increase the ability of construction companies to bid for new contracts in a competitive environment, helping government to contain the cost of public works.

The plan also drew up a specific standard operating procedure (SOP) that the NHAI had to follow at the time of arbitration. Arbitration was applicable to all NHAI projects in which the concessionaire and the Authority entered into an agreement, and in which the Arbitral Tribunal has passed the arbitral award in favour of the concessionaire and the NHAI has challenged it.

In cases where the arbitration proceedings are under process under the provisions of the pre-amended Arbitration Act, the Authority would send a communication to the contractor to give their consent within the period specified to switch to the amended provisions of the Arbitration Act. There is also a robust monitoring mechanism for all cases in which funds have been disbursed by the Authority against a bank guarantee.

Another government intervention — looking at why arbitration has not worked for the stressed road projects — may be par for the course.