Can Construction Disputes Be Settled through Mediation?
Key Takeaways
- Construction disputes involving payments, delays, variations, defective work, extension of time, liquidated damages and other contractual issues can generally be settled through mediation in India.
- Construction and infrastructure contracts, including tenders, fall within the definition of commercial disputes under the Commercial Courts Act, 2015.
- Section 12A of the Commercial Courts Act may require pre-institution mediation before filing certain commercial suits that do not contemplate urgent interim relief.
- Mediation may take place before litigation, under a contractual mediation clause, during court proceedings or even while arbitration proceedings are pending.
- A mediator facilitates negotiations between the parties but does not decide liability or impose a settlement.
- Construction mediation can accommodate technical, financial and commercial solutions, including revised project timelines, payment arrangements, rectification work and settlement of multiple interconnected claims.
- Mediation is not suitable for every construction dispute, particularly where urgent judicial protection is required or the dispute involves rights that cannot legally be settled privately.
What Are Construction Disputes?
Construction disputes are disagreements arising from construction, engineering, infrastructure or development projects. They may arise between an employer and contractor, main contractor and subcontractor, developer and consultant, supplier and contractor, or several parties involved in the same project.
Construction projects usually involve detailed contracts, technical specifications, drawings, timelines, payment schedules and several interconnected responsibilities. Even a relatively small disagreement can therefore affect project cost, completion and the relationship between the parties.
Add LawBhoomi as your preferred source on Google.
Common construction disputes include:
- Payment disputes: These may involve unpaid running account bills, final bills, retention money, certified amounts or disagreements regarding deductions from payments.
- Delay disputes: Questions may arise regarding responsibility for delayed completion, extension of time, prolongation costs and liquidated damages.
- Variation claims: Changes to drawings, quantities, specifications or the original scope of work frequently lead to disputes regarding additional payment and time.
- Defective construction claims: Parties may disagree over whether the work satisfies contractual specifications, engineering standards or agreed quality requirements.
- Cost escalation disputes: Significant changes in material, labour or other project costs may result in claims where the contract contains escalation provisions.
- Termination disputes: Disagreements may arise over whether suspension or termination of the construction contract was legally justified.
Many of these issues concern contractual and commercial rights. This makes them particularly suitable for commercial mediation.
Can Construction Disputes Be Referred to Mediation in India?
Construction disputes can generally be referred to mediation where the dispute concerns rights that the parties are legally permitted to settle.
Mediation as an alternative dispute resolution mechanism is a consensual dispute resolution process in which an independent mediator assists the parties in identifying issues, communicating their concerns and exploring possible settlement terms. The mediator does not decide which party is legally correct and does not impose a solution.
Learn at your own pace with LawBhoomi's recorded law courses.
Construction mediation can take place:
- before any court or arbitration proceedings begin;
- under a mediation clause contained in the construction agreement;
- during pending litigation;
- before commencement of a qualifying commercial suit;
- during arbitration proceedings; or
- through voluntary negotiations after a dispute has arisen.
A successful mediation depends on the parties eventually agreeing to the settlement. If no agreement is reached, the dispute can ordinarily proceed through the applicable adjudicatory mechanism.
Are Construction Disputes Commercial Disputes?
Construction disputes may qualify as commercial disputes under the Commercial Courts Act, 2015.
Section 2(1)(c) of the Act defines a commercial dispute and specifically includes disputes arising out of construction and infrastructure contracts, including tenders. Consequently, disputes relating to qualifying construction contracts may come within the jurisdiction of commercial courts where the other statutory requirements are satisfied.
This classification is significant because the Commercial Courts Act also contains provisions relating to pre-institution mediation.
For example, a dispute relating to payments due under a construction contract, contractual delays or interpretation of infrastructure tender conditions may constitute a commercial dispute if it falls within the statutory definition.
Is Mediation Mandatory Before Filing a Construction Suit?
In certain commercial disputes, pre-institution mediation under the Commercial Courts Act, 2015 may be mandatory before filing a suit.
Section 12A of the Commercial Courts Act provides that a suit which does not contemplate urgent interim relief cannot ordinarily be instituted unless the plaintiff has exhausted the remedy of pre-institution mediation.
Explore the latest legal opportunities for law students and lawyers.
Since construction and infrastructure contracts fall within the definition of commercial disputes, Section 12A can apply to qualifying construction cases.
Patil Automation v Rakheja Engineers
The Supreme Court clarified the mandatory nature of Section 12A in Patil Automation Private Limited v Rakheja Engineers Private Limited.
The Court held that pre-institution mediation under Section 12A is mandatory where the provision applies. A commercial suit instituted without complying with the requirement may therefore face rejection of the plaint under Order VII Rule 11 of the Code of Civil Procedure, 1908.
The decision is particularly relevant to construction disputes because parties frequently approach commercial courts for recovery of contractual payments, damages and other construction-related claims.
Exception for Urgent Interim Relief
Section 12A contains an important exception where the suit contemplates urgent interim relief.
Construction projects can sometimes involve situations where immediate judicial protection is necessary. Examples may include circumstances involving an urgent injunction, preservation of property, protection of contractual securities or another situation where delaying court intervention may cause serious consequences.
The Supreme Court has clarified that courts can examine whether the claimed urgency is genuine by considering the plaint, documents, cause of action and circumstances of the case. Merely describing a matter as urgent does not automatically remove the statutory mediation requirement.
How Does the Mediation Act, 2023 Apply to Construction Disputes?
The Mediation Act, 2023 creates a comprehensive statutory framework intended to promote mediation in commercial and other disputes.
The Act recognises mediation agreements, institutional mediation, online mediation, mediated settlement agreements and other mechanisms designed to strengthen mediation in India. It also adopts the definition of “commercial dispute” contained in the Commercial Courts Act.
Explore practical law courses to build career-ready legal skills.
This means that construction disputes falling within the Commercial Courts Act naturally form part of the broader commercial mediation framework contemplated by the legislation.
However, an important distinction must be kept in mind. The Mediation Act has been brought into force only in stages. The notification dated 9 October 2023 commenced specified provisions, including Sections 1, 3 and 26, Sections 31 to 38, Sections 45 to 47, Sections 50 to 54 and Sections 56 and 57. Several substantive provisions of the Act have not yet been brought into force.
Therefore, the complete scheme of the Mediation Act should not be treated as fully operational merely because the legislation has been enacted.
Can a Construction Contract Contain a Mediation Clause?
Yes. Construction agreements can contain mediation clauses requiring parties to attempt mediation before proceeding to arbitration or litigation.
A mediation agreement records the parties’ intention to submit an existing or future dispute to mediation. Such an agreement may form part of the principal construction contract or exist as a separate agreement.
Many sophisticated construction contracts use a multi-tier dispute resolution clause. A simplified structure may operate as follows:
Negotiation → Mediation → Arbitration
Such clauses attempt to resolve disputes at progressively more formal levels.
At the first stage, project representatives may attempt direct negotiations. If negotiations fail, an independent mediator may assist. Arbitration or litigation may then follow if settlement remains impossible.
Even where the original construction contract contains no mediation clause, the parties may agree to mediation after the dispute has arisen.
Can Construction Disputes Be Mediated During Arbitration?
Yes. Commencement of arbitration does not necessarily prevent mediation or negotiated settlement.
Section 30 of the Arbitration and Conciliation Act, 1996 expressly recognises settlement during arbitral proceedings. With the agreement of the parties, the arbitral tribunal may use mediation, conciliation or other procedures to encourage settlement.
This can be particularly useful in construction disputes because arbitral proceedings may continue for substantial periods while the commercial relationship or project itself remains active.
Suppose a contractor claims ₹5 crore for additional works while the employer raises a counterclaim for delay. Instead of waiting for the tribunal to decide every claim, the parties may attempt mediation and agree upon a revised payment, withdrawal of selected claims and a revised completion schedule.
If a settlement is reached during arbitration, the tribunal may terminate the proceedings. At the request of the parties and with the tribunal’s acceptance, the settlement may also be recorded as an arbitral award on agreed terms.
Can Courts Refer Construction Disputes to Mediation?
Courts may facilitate settlement of suitable civil and commercial disputes through alternative dispute resolution processes.
Section 89 of the Code of Civil Procedure provides a statutory framework for referring disputes to alternative dispute resolution where appropriate.
One of the important Supreme Court decisions concerning this framework is Afcons Infrastructure Ltd. v Cherian Varkey Construction Co. (P) Ltd.
Interestingly, the dispute itself arose in a construction setting involving subcontracted work relating to roads and bridges. While deciding the matter, the Supreme Court discussed the scope of Section 89 CPC and the circumstances in which disputes could be referred to different alternative dispute resolution mechanisms.
Afcons Infrastructure Ltd. v Cherian Varkey Construction Co. P. Ltd. remains an important decision for understanding court-referred mediation in civil disputes and the broader role of settlement-oriented procedures.
What Types of Construction Disputes Can Be Mediated?
A wide range of private contractual construction disputes can potentially be mediated.
Delayed Payment Claims
Contractors frequently raise claims relating to unpaid invoices, certified bills, retention money and final payments.
Mediation may help parties agree upon the admitted amount, disputed portion, payment schedule and treatment of deductions without litigating every individual invoice.
Extension of Time Claims
Delays may result from late drawings, changes in design, shortage of materials, restricted site access, weather conditions or contractor-related issues.
Instead of only arguing about responsibility, mediation can explore a revised completion programme and appropriate allocation of delay-related costs.
Variation and Additional Work Claims
Construction projects often change after commencement.
A contractor may claim that particular work falls outside the original scope, while the employer may argue that the work was already included in the agreed price. Mediation allows both contractual interpretation and commercial considerations to form part of settlement discussions.
Defective Work Disputes
Disagreements regarding quality may involve significant technical questions.
A settlement may provide for rectification of identified defects, appointment of an independent engineer, reduction in price or another commercially acceptable solution.
Liquidated Damages
Employers may impose or seek liquidated damages because of delayed completion, while contractors may dispute responsibility for the delay.
Mediation can address both the legal basis of the claim and the practical possibility of reducing or restructuring the disputed amount.
Termination and Suspension Disputes
Disputes following suspension or termination may involve unpaid work, site materials, equipment, bank guarantees, mobilisation advances and competing claims for damages.
Mediation may assist the parties in resolving several connected consequences under one settlement arrangement.
Why Is Mediation Useful in Construction Disputes?
Construction disputes are particularly suitable for mediation because legal rights are often only one part of the disagreement.
Commercial Solutions Are Possible
A court or arbitral tribunal generally determines claims according to law and contract. A mediator can facilitate broader commercial solutions.
Parties may agree to revise project timelines, restructure payments, reduce claims, complete corrective work or modify future contractual obligations.
Ongoing Projects Can Continue
Construction litigation can seriously affect an ongoing project.
Mediation allows parties to attempt settlement without necessarily ending the contractual relationship. In some cases, preserving the project may be commercially more valuable than securing a determination on a particular claim.
Several Claims Can Be Considered Together
Construction disputes rarely involve a single isolated issue.
Claims for variations, delay, payments, escalation and defects may all be interconnected. Mediation can address these matters together rather than deciding each dispute independently.
Confidential Discussions Are Possible
Construction disputes may involve pricing arrangements, engineering information, project delays and commercially sensitive documents.
A mediation setting allows settlement discussions to take place in a structured environment rather than through open courtroom proceedings.
What Is the Role of Technical Experts in Construction Mediation?
Technical expertise can be extremely important in construction mediation.
A mediator’s role is not to decide whether one engineering interpretation is correct. Instead, the mediator facilitates communication and assists the parties in identifying areas where agreement may be possible.
However, the dispute may involve complex technical material such as:
- architectural and engineering drawings;
- bills of quantities;
- construction programmes;
- critical path and delay analysis;
- variation orders;
- measurement books;
- technical specifications;
- inspection reports; and
- certificates issued by engineers or consultants.
Engineers, quantity surveyors, architects, delay experts and other consultants may therefore assist parties in understanding the technical aspects of disputed claims.
The Mediation Act, 2023 also recognises the involvement of advisers, consultants and technical experts within the mediation framework contemplated by the legislation.
Can Multi-Party Construction Disputes Be Mediated?
Construction projects frequently involve several parties rather than only two contracting parties.
A project may involve the employer, developer, principal contractor, several subcontractors, architects, engineers, suppliers and specialist consultants.
For example, defective waterproofing may lead to allegations between the developer, main contractor, waterproofing subcontractor and design consultant.
Mediation may allow interconnected claims to be discussed within a coordinated process where all necessary parties agree to participate.
This can reduce the risk of multiple proceedings reaching inconsistent or commercially impractical outcomes.
When May Mediation Not Be Appropriate for Construction Disputes?
Although many construction disputes are capable of mediation, mediation is not appropriate in every situation.
It may be less suitable where:
- immediate and urgent judicial protection is genuinely required;
- the dispute involves rights that cannot legally be compromised through private settlement;
- serious allegations require authoritative adjudication;
- an important question of legal status or public law requires determination;
- a necessary party refuses to participate; or
- one party seeks a binding judicial or arbitral determination rather than negotiated settlement.
The Mediation Act, 2023 also contains a First Schedule identifying categories of disputes that are treated differently from ordinary mediable disputes.
Therefore, the nature of the right involved must be examined rather than assuming that every dispute arising from a construction project can automatically be settled privately.
What Happens If Construction Mediation Is Successful?
Where mediation succeeds, the agreed terms should be properly recorded in a written settlement.
The legal effect of the settlement depends upon the mediation framework under which it was reached.
For example, a settlement reached through Section 12A pre-institution mediation under the Commercial Courts Act receives special statutory recognition. Enforcement of commercial mediation settlements therefore becomes an important consideration when drafting the final settlement terms.
Where litigation is already pending and the dispute is settled through court-referred mediation, the settlement ordinarily returns to the referring court so that appropriate orders can be passed and the pending proceedings can be formally disposed of.
Clear settlement terms are particularly important in construction cases because obligations may involve payment instalments, completion dates, rectification work, withdrawal of claims, return of guarantees or future performance of the construction contract.
Mediation vs Arbitration for Construction Disputes
Mediation and arbitration serve different purposes.
In mediation, the mediator assists the parties in negotiating but cannot impose a result. Settlement occurs only when the parties agree.
In arbitration, the arbitrator examines evidence and legal arguments and delivers a binding decision.
Mediation therefore focuses on agreement, whereas arbitration focuses on adjudication.
Construction contracts frequently use both mechanisms. Mediation may be attempted first, followed by arbitration when settlement fails.
This combination can preserve an opportunity for commercial resolution while ensuring that a binding dispute resolution process remains available.
Conclusion
Construction disputes can be settled through mediation in India, particularly where they concern payments, delays, variations, defects, extension of time, damages or other contractual rights. Construction and infrastructure contracts are expressly recognised as commercial disputes under the Commercial Courts Act, and Section 12A may require pre-institution mediation before certain commercial suits.
Mediation can also take place voluntarily, under contractual dispute resolution clauses, during litigation or even after arbitration begins. Its flexibility is particularly useful in construction projects because settlements can address technical, financial and commercial concerns together. However, urgent matters and disputes involving rights that cannot legally be compromised may still require adjudication. Mediation is therefore an important, but not universal, mechanism for resolving construction disputes in India.
Join LawBhoomi’s 100K+ Community
