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Critical Analysis of Arbitration Method Used In the Construction Industry in Sri Lanka

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Abstract

There is a rich tradition of disagreement among contracting parties in the construction industry,

which necessitates for creation and experimentation of alternatives to litigation. Over the recent

years, alternative dispute resolution methods have become popular in Sri Lanka. Disagreements

in the construction sector have increased and became more complex. They therefore require an

alternative dispute resolution method which is enforceable and flexible like arbitration to solve

them effectively. Arbitration seems to be the best alternative dispute resolution method which

has a mechanism for enforcement. The legal procedure for effectively conducting arbitration is

outlined in the Arbitration Act of Sri Lanka No. 11 of 1995. However, due to a number of

practical obstacles, the use of arbitration in both the private and public sectors has been limited.

This research will analyse the effective critical features that enable arbitration in the construction

sector, as well as an evaluation of how well these critical success elements are being met. Since

litigation and other alternative dispute resolution methods do not work the same, the study will

utilize critical paradigm. The aim of the study is to look into arbitration process in Sri Lanka and

suggest Improvements in order to establish flaws and examine their efficiency to make the

arbitration structure in Sri Lanka more successful and sustainable. Therefore, the research will be

done with the aim of ensuring social change hence critical paradigm will be employed.

More negative practical customs will be established and placed under the critical qualities as

being responsible for the ineffectiveness of specific attributes. Opinions of major participants in

the construction sector will also be incorporated in the research as recommendations and

suggestions for the difficulties that will be found.

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Introduction

There are different complex activities which occur in the construction industry. This complex

activities lead to disputes. Disputes are common in the construction industry. The disputes rise

due to different reasons which include time extensions, delay in payment, project delays and

contract terminations. The disputes are complex and intensive in nature1. The disputes in the

construction industry are unique and sophisticated. Several groups are involved in construction

and they all require coordination to function effectively. The groups have different goals and

each aims at maximising its own benefit. It is therefore easy for disputes to arise in the process

of managing the groups.

Brooker and Lavers (1997) through their study revealed that the complex activities that occur in

the construction industry lead to complex disputes. They found that the disputes in the industry

arise from the amount and difficulty of the work, contracts documents which are poorly

prepared, monetary issues and failure to plan well2. Since construction is not a continuing

process, there will be new challenges and different disputes every day. The issues are which arise

are complex and require new legal processes to get solution. The best method chosen to resolve

these issues should be able to detect the root causes of the disputes.

In Dawnays Ltd Vs. Minter Ltd [1971] 1 B.L.R. 1205, Lord Denning stated that litigation is

expensive and takes a long period. He was trying to suggest that alternative dispute resolution

methods which are fast and less expensive should be applied to resolve construction disputes3.

Majority of the stakeholders prefer alternative dispute resolution to litigation to resolve their
1
Li, Jennifer, David Greenwood, and Mohamad Kassem. "Blockchain in the built environment and construction
industry: A systematic review, conceptual models and practical use cases." Automation in Construction 102 (2019):
288-307.
2
Brooker, Penny, and Anthony Lavers. "Perceptions of alternative dispute resolution as constraints upon its use in
the UK construction industry." Construction Management & Economics 15, no. 6 (1997): 519-526.
3
Dawnays Ltd Vs. Minter Ltd [1971] 1 B.L.R. 1205
 4

disputes. They are less expensive, fast, flexible, and there is no much competition between the

parties. The shortcomings which arise from the use of litigation in solving construction disputes

necessitates the use of alternative resolution methods.

Construction contract conflicts are getting more widespread in the sector, and the number of

disputes in this area is continuing to rise. If the dispute resolution process becomes too costly or

too slow, or otherwise fails to meet the legal needs of the clients, they will become disappointed

and seek better opportunity elsewhere. Conflicts, on the other hand, are indicative of a

widespread state of antagonism between entities. According to the literature, the majority of

alternative resolution procedures have flaws that make them appear to be a waste of time,

money, and effort at times4. Apart from their respective benefits, the Alternative Dispute

Resolution approaches are expected to include drawbacks and risks.

Problem Statement

It is evident that there are shortcomings in the arbitration method practices in Sri Lanka and other

parts in the world according to literature findings. If the shortcomings are precisely identified

and proper actions taken to address the shortcomings, there is a possibility of establishing the

effective arbitration process in the construction sector in Sri Lanka5. As a result, the objective of

this study is to determine the ineffective aspects of existing arbitration methods as well as the

primary causes of ineffectiveness.

Research Problem

The disputes which arise in the construction industry are intensive and complex in nature.

Despite the fact that litigation is the most conventional method of resolving contractual issues,
4
Edwards, Harry T. "Alternative dispute resolution: Panacea or anathema." Harv. L. Rev. 99 (1985): 668.
5
Abeynayake, M. D. T. E. "Special features and experiences of the construction industry-arbitration in Sri Lanka."
Women’s career advancement and training & development in the (2008): 1227.
 5

Sri Lanka's judicial systems are incapable of meeting the construction industry's unique

requirements. Due to these limitations, other Dispute Resolution approaches are required to

address these requirements. There is need for an enforceable and flexible approach. Arbitration is

the best approach when it comes to flexibility and enforcement.

In light of this, the research problem addressed in this study is the efficiency of arbitration

procedures for addressing construction disputes in Sri Lanka, as well as the necessary changes to

the dispute resolution process to make arbitration more effective. As a result, the study problem

can be described as “which of the arbitration's success factors is most commonly violated, and

which practical limitations increase the arbitration's effectiveness?”

Hypothesis

This study is founded on the concept that in Sri Lanka, arbitration is the most successful method

of resolving conflicts, particularly in construction disputes. As a result, current procedures

should be determined, along with their flaws, and modified for effective use in all relevant areas.

Variables will be divided into dependent and independent variables. The critical arbitration

method factors, advantages and potential solutions of alternative dispute resolution methods will

be the dependent variables for this study. The causes of the disputes will be the independent

variables.

Aim

The purpose of this study is to look into the arbitration processes employed in the construction

sector in Sri Lanka. Improvements must be proposed in order to establish flaws and examine

their efficiency in order to make the arbitration system in Sri Lanka more successful and

sustainable.
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Objectives

The following are the objectives:

i. To determine the shortcomings and practical limitations of arbitration processes in

the Sri Lankan construction industry, as well as the causes of these issues.

ii. To assess the efficacy of arbitration processes in the Sri Lankan construction sector.

iii. To assess what solutions are needed and how arbitration processes might be

improved to be more effective in resolving construction conflicts.

Research Questions

The following research questions are identified in order to attain the stated objectives. The

following are the questions:

i. What are the contemporary issues in arbitration approaches?

ii. What are the effective features of construction industry approaches and strategies?

iii. To what extent do the effective features of arbitration apply in Sri Lanka?

iv. Which practical norms have a substantial effect on the effectiveness of arbitration?

v. What are the necessary suggestions for establishing an effective and equitable arbitration

system?

Research Methodology

To achieve the following goals and objectives, a literature review will be done to determine the

existing literature and the amount to which arbitration research has been conducted. To

investigate the effectiveness, critical factors, advantages and drawbacks of arbitration in the

construction sector, a literature research is necessary. However, according to the literature

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analysis, arbitration in the construction industry has not been thoroughly examined. There are

few publications in Sri Lanka connected to the aforementioned research subject.

Arbitration is a moderated method of dispute resolution as compared to litigation and other

alternative dispute resolution methods. Litigation does not have enforceability of decisions while

arbitration is enforceable and flexible.

The following attributes will be used in data collection: Speed, control, cost, confidentiality,

binding, remedy, enforceability, fairness, flexibility and privacy.

Questionnaire will be used to collect data in this study. The questionnaire will have three

sections. In section A, the respondent will be requested to fill their background information. This

will include name, type of organization, working experience and their experience in arbitration

techniques. Respondents will be asked to rate each critical factor indicated in the study problem

on a 7-point scale in section B (extreme ineffectiveness to extreme effectiveness). In section C,

respondents will be asked to rate the degree of the practical constraints in terms of how much the

arbitration's effectiveness is hampered by identified customs. The perception of the consumers is

intended to be derived using a 5-point scale method (from a very low degree of agreement to a

very high degree of agreement).

This study will employ purposeful selective sampling because the information needed in the

survey necessitates in-depth knowledge and practical expertise with arbitration processes. The

questionnaire will be given to each respondent individually. After providing the necessary

clarification, the researcher will collect the completed surveys.

The data collected from the survey will then be anlysed using statistical parameters. The

statistical parameters to be used are mean rating, standard deviation and T-test.
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Literature Review

The review of the literature on arbitration in Sri Lanka demonstrates other investigators'

conceptual work on the subject. Numerous works on arbitration have been completed, notably in

relation to dispute settlement in the construction sector. The majority of the research, on the

other hand, focuses on the achievements of arbitration and its use as an alternative dispute

resolution method. Shortcomings and customs go unreported, putting the successfulness of

arbitration in the construction sector in risk. The literature review looks into arbitration in a

global setting and the various aspects that influence arbitration. The literature review will be

utilized to conduct a critical assessment of the subject's publications in order to develop the

research topic and describe the goals and objectives. The selected literature will help in

highlighting the causes of disputes, their nature and complexity in the construction industry.

They will also highlight the application of different alternative dispute resolution alternative

methods including arbitration in dispute resolution.

Design flaw and alterations, complexity and the quantity of work, involvement of numerous

parties, poor planning, incompetent standards, transparency, and financial concerns, according to

Marzouk and Moamen (2009), can all contribute to disagreements. Whatever causes a dispute, it

has a greater impact on costs, communication, and relationships between the participants. The

construction process is hampered, and the project takes longer than anticipated6. The delay in the

process costs all parties involved, as well as the construction sector, a large amount of money. As

a result of the delays, there are disagreements about the increasing cost of supplies and labuor,

resulting in far higher costs than anticipated. The increase in price as a result of the delays harms

6
Marsoof, Saleem. "Issues of Jurisdiction, Choice of Law and Enforcement in International Commercial Arbitration:
A Sri Lankan Perspective." In Private International Law, pp. 391-408. Springer, Singapore, 2017.urnal Articles De
Zylva, Gowri, and Ruwanmali De Silva. "Anaesthetic considerations in epilepsy surgery." Sri Lankan Journal of
Anaesthesiology 19, no. 1 (2011).
 9

the parties concerned to the point where they are unable to resolve the problems in a timely

manner.

Conflict between contractual parties has a long history in the construction sector, according to

Abeynayake et al (2015), which leads to the creation of the exploration of different possibilities

in contrary to suit. Alternative Dispute Resolution (ADR) approaches in the construction sector,

such as mediation, intervention, negotiation, and arbitration, have had a variety of good results in

recent years in Sri Lanka. Construction issues require legally binding and responsive Alternative

Dispute Resolution, such as Arbitration, to resolve the issues efficiently7. Construction

disagreements become more sophisticated, consequential, multi-layered, and global in nature

than other business questions. Arbitration is a form of Alternative Dispute Resolution that has an

enforcement component.

In the construction sector, a variety of strategies are employed to resolve conflicts. Negotiation,

mediation, adjudication, and arbitration are some of the options. Arbitration is defined as

entrusting the resolution of disputes to a moderator or individual through legally enforceable

rulings. In Sri Lanka, the Arbitration Act No. 11 of 1995 sets a legislative framework for

controlling arbitration process. Arbitration, according to De Zylva (2011), should be fast,

inexpensive, neutral, open, adaptable, confidential, and occur with as little delay as possible. The

central character of the arbitration is agreeable and confidential in nature. Sri Lanka's subordinate

courts and the Commercial High Courts in Colombo hear many contractual issues8.

7
Abeynayake, M. D. T. E., and C. Weddikkara. "Critical analysis on success factors of adjudication and arbitration
practices in the construction industry of Sri Lanka." In proceedings of 9th International Conference on Business
Management 2012, 28 February-1March 2013, pp. 209-222. 2012.
8
Burman, Harold, and Jay Lawrence Westbrook. "United Nations Commission on International Trade Law: Model
Law on Cross-Border Insolvency." International Legal Materials 36, no. 5 (1997): 1386-1398.
 10

On August 1, 1995, the Sri Lankan Parliament enacted the Arbitration Act, which became law.

Arbitration is a valid alternative to litigation in today's Sri Lanka. It began as a technique of

quickly resolving disputes without resorting to the courts. Alternative Dispute Resolution (ADR)

is known for its efficiency, cheap, ease of use, and adaptability. The UNCITRAL Model Law

and the Arbitration Act No. 11 of 1995 both lay a great focus on the features listed above9.

Strength and adaptability are the most significant characteristics of a conflict resolution

alternative in the construction sector.

Arbitration is a legal arrangement for settling industrial dispute outside of the judicial system in

which all parties agree to abide by arbitrators' decisions. Arbitration is a method in which a

dispute is brought to one or more mediators, who will issue an obligatory decision. Immediately

after the hearing, the arbitrator issues a verdict.

Additionally, the arbitration is conducted in accordance with a set of rules that the members

agree on. The court is made up of arbitrators nominated or authorised by the parties based on

their familiarity of the dispute's particular field, according to K. Kanag-Isvaran (2011). The

parties can choose the mechanism by which the board will decide the disagreement, as well as

the location, dates, and language in which the proceedings will take place10. At the

commencement of the conflict resolution process, the parties may give their evidence to the

moderator in a less formalized setting than a court session, and witnesses may be cross-

examined.

9
Arbitration Act No. 11 of 1995
10
Hartwick, Michael, and Gwynne Jones. "Resolving disagreement during end of life care in the critical care unit:
The case for communication not arbitration." Clinical and Investigative Medicine (2010): E219-E222.
 11

Bibliography

Statues

Arbitration Act No. 11 of 1995

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Case Laws

Dawnays Ltd Vs. Minter Ltd [1971] 1 B.L.R. 1205

Journal Articles

Abeynayake, M. D. T. E. "Special features and experiences of the construction industry-

arbitration in Sri Lanka." Women’s career advancement and training & development in the

(2008): 1227.

Abeynayake, M. D. T. E., and C. Weddikkara. "Critical analysis on success factors of

adjudication and arbitration practices in the construction industry of Sri Lanka." In proceedings

of 9th International Conference on Business Management 2012, 28 February-1March 2013, pp.

209-222. 2012.

Brooker, Penny, and Anthony Lavers. "Perceptions of alternative dispute resolution as

constraints upon its use in the UK construction industry." Construction Management &

Economics 15, no. 6 (1997): 519-526.

Burman, Harold, and Jay Lawrence Westbrook. "United Nations Commission on International

Trade Law: Model Law on Cross-Border Insolvency." International Legal Materials 36, no. 5

(1997): 1386-1398.

Edwards, Harry T. "Alternative dispute resolution: Panacea or anathema." Harv. L. Rev. 99

(1985): 668.

Hartwick, Michael, and Gwynne Jones. "Resolving disagreement during end of life care in the

critical care unit: The case for communication not arbitration." Clinical and Investigative

Medicine (2010): E219-E222.

 13

Li, Jennifer, David Greenwood, and Mohamad Kassem. "Blockchain in the built environment

and construction industry: A systematic review, conceptual models and practical use cases."

Automation in Construction 102 (2019): 288-307.

Marsoof, Saleem. "Issues of Jurisdiction, Choice of Law and Enforcement in International

Commercial Arbitration: A Sri Lankan Perspective." In Private International Law, pp. 391-408.

Springer, Singapore, 2017.urnal Articles De Zylva, Gowri, and Ruwanmali De Silva.

"Anaesthetic considerations in epilepsy surgery." Sri Lankan Journal of Anaesthesiology 19, no.

1 (2011).