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BE 5414Construction Arbitration

1.0 Issue

Ben & Co. entered into a contract with Ann Construction (Pvt.) Ltd. to construct mixed
development complex. It includes contractual provision as arbitration is a alternative dispute
resolution method in any dispute arising out of and or in connection with or in relation. It is in
accordance with arbitration act No. 11 of 1995.

Ann Construction (Pvt.) Ltd. submitted a performance guarantee for a sum of Rs. 10 Mn. Due to
several delays in executing the works stipulated in the contract, Ben & Co. terminated the
contract. Ann construction disputed on ground of termination of contract and referred the dispute
to arbitration. However, Ben & Co. took a step to encash the performance guarantee submitted
by Ann Construction. Can Ann Construction take a measure to prevent of encashing of
performance guarantee? If arbitration award is in favor of one party, can other party challenge?

2.0 Arbitration

Arbitration is one of the out-of-court formal dispute settlement methods which have a legal
support in Sri Lanaka. Awards from arbitration are enforceable as same as judgments from
courts. Also its peculiarity for construction disputes makes it to be acceptable internationally. It
secures the privacy of the parties in the dispute. It is flexible and can be adapted to the needs of
the particular dispute. It also gives full freedom for the parties to choose a suitable person to be
an arbitrator. Generally it is one of the best alternative dispute resolution methods being used in
the world.

In international regime, the rules of arbitration were firstly published in UNICITRAL in 1976. It
provides an acceptable framework for administrating the arbitration within flexible limitations.
The New York Convention on the Recognition and Enforcement of International Arbitration
Awards 1958, can be considered as the most influential and effective international commitment
on arbitration because it has been ratified by most of the major trading nations of the world.
Therefore, it is more convenient to enforce arbitration awards between parties if they are
signatories and have already complied with the conventional. Sri Lanka Arbitration Act very
largely follows the UNCITRAL Model law. At the same time, certain departures from, or
additions to, the rules given in the Model Law have been considered necessary.

3.0 Interim Relief

It is the general practice in Sri Lanka for parties to an arbitration agreement to seek interim relief
from a court of law pending the constitution of an Arbitral Tribunal. Obtaining such interim
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BE 5414Construction Arbitration

relief may be crucial for parties resorting to arbitration to preserve the status quo of the subject
matter of the dispute, so as to ensure that the arbitration process does not become futile.
However, given that an arbitration agreement seeks to give effect to the intention of parties to an
arbitration agreement to resolve disputes outside courts, it is necessary to reconsider the
appropriateness of judicial intervention in granting interim relief. This brief comment seeks to
identify some important thoughts on the issue of interim measures in the context of arbitration in
Sri Lanka.
The Sri Lankan Arbitration Act provides for a mechanism by which a party could obtain interim
relief. However, this procedure could be invoked only after the constitution of the Arbitral
Tribunal and the commencement of arbitral proceedings. The relevant provision is Section 13(1)
of the Arbitration Act which provides that:

“An arbitral tribunal may, at the request of a party, order any other party to take such interim
measures as it may consider necessary to protect or secure the claim which forms the subject
matter of the dispute. The arbitral tribunal may also order the party making such request to
provide the party ordered to take such interim measures, with security for any expense, loss or
damage that may be caused in taking such interim measures.”
The Arbitration Act further provides in Section 13(2) that:

“An order of an arbitral tribunal requiring the taking of interim measures may be enforced by the
High Court, on an application made therefor, by the party requesting the taking of such interim
measures.”
Thus, once an Arbitral Tribunal is constituted, any party to the arbitration may seek interim relief
which may be enforced in the High Court. Having set out the mechanism by which and the
forum in which an interim award of an Arbitrator may be enforced, it is now appropriate to
consider an important provision in the Constitution that deals with injunctions. Article 143 of the
Constitution dealing with the jurisdiction of the Court of Appeal provides that the Court of
Appeal shall have the power to grant and issue injunctions to prevent any irremediable mischief
which might ensue before a party making an application for such injunction could prevent the
same by bringing an action in any Court of First Instance.

Moreover, reference must be made to Section 13(3) of the Arbitration Act. This Section provides
that “an application to the High Court, under subsection (2), for the enforcement of interim
measures, shall be deemed not to be incompatible with section 5 or the arbitration agreement or a
waiver of the agreement.” Section 5 of the Arbitration Act provides that “where a party to an
arbitration agreement institutes legal proceedings in a court against another party to such
agreement in respect of a matter agreed to be submitted for arbitration under such agreement, the

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BE 5414Construction Arbitration

Court shall have no jurisdiction to hear and determine such matter if the other party objects to the
court exercising jurisdiction in respect of such matter”. Thus, if the legislature thought it
necessary to enact a deeming provision which expressly provides that enforcement proceedings
in the context of an interim order of an Arbitrator shall not be incompatible with Section 5, it
might be logically concluded that for all purposes, such enforcement proceedings are to be
regarded as “legal proceedings”.
In Backsons Textiles Industries Ltd v. Hydro Industries Ltd. it was observed that a final order
resolving any dispute or an interim order is made by the Arbitrator, a party is entitled to come
before the Court and obtain interim relief to maintain the status quo. Accordingly, it has been the
practice for parties to an arbitration agreement to seek out an interim injunction pending the
constitution of an Arbitral Tribunal.

In case of K. P. Projects International Pvt Ltd v. National Water Supply and Drainage Board and
another, Court accepted the proposition that Article 143 of the Constitution applied to situations
pending the constitution of the Arbitral Tribunal, and it was the Court of Appeal (and not the
District Court or the Commercial High Court) that had jurisdiction to issue injunctions pending
the constitution of the Tribunal. This was a case where the Plaintiff, K.P. Projects International
Pvt Ltd, sought to restrain the National Water Supply and Drainage Board (1 st Defendant) from
calling on a performance bond issued by the People’s Bank (2nd Defendant).

However, in a subsequent decision in Swiss Singapore Overseas Enterprises Pvt Ltd v. Ceylon
Fertilizer Company Ltd1 bearing similar facts to the case of K. P. Projects International Pvt Ltd
the same Court held itself to be bound by Backsons Textiles Industries Ltd thus concluding that
the Commercial High Court (just as the District Court) was vested with inherent powers to grant
injunctive relief pending the constitution of an Arbitral Tribunal.

In Backsons Textiles Industries Ltd v. Hydro Industries Ltd. it was observed that before final
order made by the arbitrator or arbitration tribunal, interim relief can be obtain from the court. In
case of K. P. Projects International Pvt Ltd v. National Water Supply and Drainage Board and
another, K. P. Projects International Pvt Ltd took an injunction order to prevent encashing the
performance bond. Thus, Ann Construction can take an interim measure to prevent of encashing
performance bond in accordance with the section 13 of the Arbitration Act. It says that part can
take interim measure before making a decision by arbitrator or arbitrational tribunal. Ann
construction can go to high court and take injunction order to prevent encashing the performance
bond.

4.0 Challenge the Award

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Normally in any judicial system a first appeal against a Court Judgment is a right of the party
and hence the first appellate court needs to once again look into the merits of the case and pass a
reasoned judgment. This is because the parties never have the right to choose their judge or their
qualification or knowledge on particular filed of business. But in the arbitration cases the parties
choose their arbitrators, knowledge and qualification. Thus, some arbitration act does not provide
facilities to challenge the aberration award. However, Section 32 of Sri Lankan Arbitration act
specify the grounds to challenge the arbitration award. In Southern Group Civil Constructions v.
Ocean Lanka (Pvt.) Ltd (2002) case Supreme Court held that section 32 of Arbitration Act
clearly indicates the grounds which arbitral award can be set aside. Such grounds are:

(a) Where the party making the application furnishes proof that

i. A party to the arbitration agreement was under some incapacity or the said agreement
is not valid under the law to which the parties have subjected it or failing any
indication on that question, under the law of Sri Lanaka; or

ii. The party making the application was not given proper notice of the appointment of
an arbitrator or of the arbitral proceedings or was otherwise unable to present his
case; or

iii. The ward deals with a dispute not contemplated by or not falling within the terms of
submission to arbitration, or contains decisions on maters beyond the scope of the
submission to arbitration; or

iv. The composition of the arbitration tribunal or the arbitral procedure was not in
accordance with the agreement of the parties, unless such agreement was in conflict
with the provision of the act, or in absence of the agreement, was not in accordance
with the provision of this act; or

(b) Where the high court find that:

i. The subject matter of the dispute is not capacity of settlement by arbitration under
law of Sri Lanka; or

ii. The arbitral award is in conflict with the public policy of Sri Lanaka.

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According to the arbitration act, there are several grounds which can be challenge to arbitral
award. In this scenario, the arbitration tribunal heard both parties and made award in favour of
Ann Construction. According to section 32 of arbitration act, Ben & Co. can challenge to set
aside the arbitral award.

If Ben & Co. can prove the incapacity of a party or invalidity of arbitration agreement under
section 32 (1) (a) (i), they can challenge the arbitration award. Incapacity arises due to death,
insolvency or dissolution. In Krisley (Pvt.) Ltd. v. Timber cooperation (2002), the court applied
this provision and held that only where there was an incapacity to which the parties was subject
to when arbitration contract was made and not to any other later incapacity. The supreme court
held that arbitration clause is not displaced or abrogated by repudiatory breaches of the contract
unless the contract or arbitration clause thereof is invalid in case Hotel Galaxy (Pvt.) v.
Mercantile v Hotels Management Ltd. (1987).

Under section 32 (1) (a) (iii), the competent court may set aside or refuse to recognize or enforce
any award which falls outside the scope of submission to arbitration, unless decision matters
beyond the scope of submission. In HNB v. Kiran Atappattu, the arbitral tribunal overstepped the
limit of its mandate and has sought to deal with a dispute not contemplated by or not falling
within the terms of submission to arbitration. If the award is made out of the scope of the
submission, in this scenario Ben & Co. can challenge to set aside the award.

As well as if the subject matter of the dispute is not capable of settlement by arbitration under
law of Sri Lank, under section 32 (1) (b) (i), parties can challenge to the arbitral award. It means
the arbitration award in conflict with the public policy of Sri Lanaka.

Thus, Sri Lanakan Arbitration Act No. 11 1995 provides the grounds which can be challenged to
arbitral award in section 32. If Be & Co. wishes to challenge to set aside the arbitral award, it is
needed to approve a party to the arbitration agreement was under some incapacity or agreement
is not valid or the party making application was not given proper notice of the appointment of an
arbitrator or decision on matters beyond the scope of submission or arbitration procedure is not
accordance with the agreement and arbitration act or such award is in conflict to public policy of
Sri Lanka. If Be & Co. can prove one of above mentioned fact, they can make an application to
High Court to set aside the arbitration award.

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5.0 References

Hotel Galaxy (Pvt.) v. Mercantile Hotels Management Ltd. (1987) 1 SLR 5

Krisley (Pvt.) Ltd. v. Timber cooperation (2002) 1 SLR 225

Southern Group Civil Constructions v. Ocean Lanka (Pvt.) Ltd (2002) 1 SLR 190

Stephenson, D. A. (2001). Arbitration Practice (5th ed.). UK: Alden Press.

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