Transnational Construction Arbitration

Renato Nazzini

Document

Page 220

CHAPTER 14 Enforcement of DAB decisions under the FIDIC 1999 Forms of Contract

Introduction

14.1 This chapter focuses on enforcement of DAB decisions under FIDIC 1999 Contracts.1 A brief introduction of Dispute Boards is given prior to focusing on the issues concerning enforcement. A simple definition of a Dispute Board is as follows: ‘A Dispute Board is a tribunal which is established to endeavour to avoid or resolve any disputes which may arise between the parties to a particular contract.’2 14.2 There are two types of Dispute Board adopted by FIDIC:

(a) A ‘standing’ dispute board which becomes familiar with a project from its inception3 and can help resolve disputes early, either informally, by giving opinions that might be adopted by the parties, or formally, by giving a binding decision following the referral process; or
(b) An ‘ad-hoc’ dispute board, which is formed to resolve a particular dispute at the time a dispute arises between the parties.

14.3 The FIDIC 1999 Red Book embraces the concept of a ‘standing’ Dispute Adjudication Board (DAB) and the FIDIC 1999 Yellow and Silver Books, an ‘ad-hoc’ DAB. 14.4 The rationale of the DAB is that it can assist the parties to settle or resolve its disputes at an early stage and often during the currency of the project. When a formal referral is issued to the DAB, it has to give a quick decision4 and the parties can then use that decision as a springboard to settle the dispute in the amicable settlement period5 thus avoiding the expensive process of arbitration to resolve the dispute.

Page 221

14.5 The DAB is central6 to the dispute resolution mechanism of the FIDIC 1999 Forms of Contract7 and, for it to work effectively, it is suggested that there are two essential elements:

(a) Members of the DAB are required to be impartial and independent of the parties8 as reflected by the consensual appointment process;9 and
(b) the DAB’s decision is temporarily binding and should be promptly (immediately) payable by the parties.10

14.6 Accordingly, fundamental to the successful operation of a DAB system in an international construction project under the FIDIC forms of contract, is for the parties to have not only an obligation to comply with the DAB decision pending arbitration, but a working and effective mechanism to enforce that obligation should it be disregarded. Absent such a mechanism, a party, usually an employer, can wantonly disregard the DAB’s decision and there will be no incentive for the parties to settle in the amicable settlement period. The employer is in a much stronger negotiating position if it can withhold payment until the final award, due to inevitable cash-flow considerations that all contractors have. 14.7 In the FIDIC 1999 forms, there is express wording included in the contract at Sub-Clause 20.4(4) that the parties ‘shall promptly give effect to [the DAB decision]’, but no corresponding clear enforcement mechanism should that obligation be disregarded after one party issues a notice of dissatisfaction (NOD). 14.8 On 1 April 2013, FIDIC finally acknowledged the shortcomings of the FIDIC 1999 forms and issued a Guidance Memorandum that recommends that when new FIDIC 1999 contracts are entered into, alternative wording for Sub-Clause 20.7 ought to be substituted with more robust wording11 that provides a clearer contractual enforcement mechanism to ensure enforceability of ‘non-final’ DAB decisions. 14.9 This chapter will consider the issues that arise under the FIDIC 1999 forms in relation to the enforcement of ‘non-final’ DAB decisions. It is suggested that the issues

Page 222

discussed in this chapter are not entirely redundant if the FIDIC form is amended in line with the Guidance Memorandum as even with a clear contractual mechanism to enforce the DAB’s decision, questions still arise as to what sort of award should be issued by an arbitrator. 14.10 In this chapter, particular focus is given to the later cases in the Singapore Persero 12 litigation.

The FIDIC 1999 wording

14.11 Sub-Clause 20.4 provides that:

(a) a DAB shall give a decision within 84 days (unless the parties agree to revise that period);
(b) the decision is binding (all DAB decisions are binding);
(c) the decision becomes final if no NOD is given with 28 days of receipt of the decision (in such circumstances the DAB’s final decision can be enforced via Sub-Clause 20.7);13
(d) If a timely NOD is given, the DAB’s decision remains binding but is not final and the underlying dispute (‘primary dispute’) can be referred to arbitration under Sub-Clause 20.6 after expiry of the 56-day amicable settlement period.

14.12 The ‘secondary dispute’ arises if a DAB adjudges that a sum should be paid (‘the adjudicated sum’), a NOD is issued (hence the DAB decision does not become final) and one of the parties fails to pay that adjudicated sum. 14.13 Sub-Clause 20.7 gives express wording enabling the enforcement of a ‘final’ DAB decision. There is no express wording allowing for the enforcement of a DAB decision that has not become final as a result of one or other party issuing a NOD. This lack of express wording became known as ‘the gap’ and was first highlighted by Professor Nael Bunni in an article he wrote in 2005.14

Page 223

14.14 Since the gap was first identified, many courts, arbitral tribunals15 and commentators have sought to elucidate whether parties who have entered into a FIDIC 99 form can enforce the DAB decision notwithstanding the lack of clear wording. 14.15 This chapter seeks to identify the practical issues, the theoretical issues and the solutions put forward. It should be emphasised that the issues discussed in this chapter are very much live issues and, whilst there is authority from the highest Court of Singapore that may put the matter to rest in Singapore,16 the said judgment will not necessarily be followed or be considered binding elsewhere in the world, particularly as there was a comprehensive dissenting judgment from the former Chief Justice of Singapore.

The issues

14.16 This chapter will focus on six issues:

(a) What is the contractual obligation of a party in relation to compliance with a DAB’s decision?
(b) Does the ‘failure to pay’ amount to a dispute that can be referred to arbitration under Sub-Clause 20.6?
(c) What effect, if any, does a NOD have on the contractual obligation on a party to give prompt effect to the DAB’s decision? It has been argued that the giving of a NOD absolves the paying party from complying with the DAB’s decision.
(d) Is it necessary for the parties to refer both the primary (the merits of the underlying dispute) and secondary (dispute concerning non-payment of the DABs decision) disputes in a single arbitration?
(e) What sort of award? Partial? Interim? Final? Provisional?
(f) Has the wording in the Gold Book/Guidance Memorandum resolved issues?

What is the contractual obligation of a party in relation to compliance with a DAB’s decision?

14.17 This is not controversial. The wording of Sub-Clause 20.4(4) is clear: ‘The decision shall be binding on both Parties, who shall promptly give effect to it unless and until it shall be revised in an amicable settlement or an arbitral award as described below.’ 14.18 A party must promptly comply with the DAB’s decision. In a case where the DAB orders the payment of money, a contractual obligation arises to pay that money promptly.17 In South Africa, ‘promptly’ was considered to mean within 28 days of the decision being given.18

Page 224

Does the ‘failure to pay’ amount to a ‘dispute’ that can be referred to arbitration under Sub-Clause 20.6?

14.19 The opening words of Sub-Clause 20.4 allow a dispute to be referred to the DAB: ‘if a dispute (of any kind whatsoever) arises between the parties in connection with or arising out of, the Contract … either Party may refer the dispute in writing to the DAB for its decision’. 14.20 In the normal course of a construction or engineering project under a FIDIC contract, the way in which a dispute arises is when one party makes a claim, the engineer rejects it in a Sub-Clause 3.5 determination and the party that wishes to pursue that claim rejects the engineer’s rejection. At that point, a dispute arises that is capable of referral to the DAB. 14.21 After a DAB has given a decision on that (primary) dispute, that same dispute can then be referred to arbitration for ‘final’ settlement under Sub-Clause 20.619 provided a NOD in relation to the DAB decision is given20 and the 56-day amicable settlement period has expired.21 14.22 There is also an obligation under Sub-Clause 20.4(4) to comply promptly with the DAB decision. If the DAB orders a party to pay and there is a failure to pay, is the dispute capable of referral under Sub-Clause 20.6 and what cause of action arises?

Is the dispute capable of referral under Sub-Clause 20.6?

14.23 This issue did not trouble the Court of Appeal majority in Persero 2 but it troubled the Court of Appeal dissenting judge in Persero 2 who explored in detail whether such a dispute was referable to arbitration under Sub-Clause 20.6 as:

this is not the kind of dispute contemplated by cl 20.6 because of the use of the words ‘shall be finally settled by international arbitration’ in relation to a dispute which is not settled amicably. Those words, in my view can only refer to a factual dispute such as the parties’ primary dispute. To reiterate, a dispute over a question of law cannot be settled amicably in the context of cl 20.6 – i.e. PGN and CRW cannot settle among themselves whether, as a matter of law, DAB No.3 is enforceable by an interim award pending the resolution of the primary dispute by arbitration. That dispute (viz the enforceability dispute) can only be decided by a tribunal or a court. The concept of amicable settlement in cll 20.4 and 20.5 is meant for factual disputes, and not legal disputes such as the enforceability dispute.22

The rest of this document is only available to i-law.com online subscribers.

If you are already a subscriber, click Log In button.