Many countries recognise the need to protect building contractors from poor payment practices and lengthy dispute resolution processes. The United Kingdom Housing Grants Construction and Regeneration Act 1996, and the Security of Payments Acts in Australia, Singapore and New Zealand all recognise the importance of cash flow in the construction industry. The key provision in all these legislation is a form of statutory guarantee of payment, combined with an expedited settlement mechanism in the form of adjudication.
Adjudication allows disputed payment claims to be handled speedily and with interim finality so that work under the live contract may continue without interruption and without imposing too much hardship on the parties involved. In order to achieve this, abbreviated time frames are stipulated for the exchange of payment claims, payment schedules, adjudication applications and adjudication responses. The mechanism also limits the time that adjudicators have to make their decisions on what may be extremely complex claims involving very substantial volumes of documents.
The dispute board, used in international construction contracts, is a corresponding private version of this legislative public remedy. All versions of the Fédération Internationale Des Ingénieurs-Conseils (International Federation of Consulting Engineers or "FIDIC") forms provide for quick interim decisions, particularly on how much is due to the contractor, to be obtained in the course of a project. Section 67.1 of FIDIC Part I mandates all disputes to be referred in the first instance to a body other than an engineer, effectively replacing the traditional contractual position of the engineer as arbiter of first instance with a dispute board.
However, the growing use of adjudication and dispute boards has led to problems with the very reason for their effectiveness: their speedy resolution of potential disputes.
Speed versus procedural fairness
As more contractors avail themselves of the benefits of the various Security of Payment Act regimes, criticism has arisen that these provide a rough and ready or even draconian measure tilted away from thoroughness and in favour of timeliness. In Singapore, parties dissatisfied with the balance of speed against the requirements of natural justice and procedural fairness have resorted to litigation. Unable to exclude this statutory right from construction contracts, employers have instead applied to the courts to set aside or vary the adjudicators' determinations. Singapore has seen a slew of such cases recently:- Sungdo Engineering & Construction (S) Pte Ltd v Italcor Pte Ltd  3 SLR 459, Chua Say Eng (formerly trading as Weng Fatt Construction Engineering) v Lee Wee Lick Terence (alias Li Weili Terence)  SGHC 109, Cathay Decoration & Construction Pte Ltd v Universal Marmi Graniti Pte Ltd  SGDC 486 and SEF Construction Pte Ltd v Skoy Connected Pte Ltd  1 SLR 733.
Correspondingly, the popularity of the FIDIC Dispute Adjudication Board ("DAB") has also waned. At a poll taken at the Dispute Resolution Board Foundation meeting in May 2009, half of the 140 delegates agreed that the dispute board rulings should be less enforceable. Further, response to a query posted on the International Construction Projects-Net indicated considerable reluctance on the part of employers (and contractors in some jurisdictions) to utilise the DAB provisions in a FIDIC contract. Many from Hong Kong, India and the ASEAN countries responded that DAB clauses are often deleted or otherwise emasculated, sometimes even where it has been included to satisfy World Bank or Asian Development Bank requirements.
Contradictory roles: the PT Perusahaan Gas Negara case
It would seem that the mechanism intended to ensure the quick settlement of progress payments disputes has now expanded to encompass additional, perhaps contradictory roles. The DAB (and other dispute boards) are now tasked with:-
- preventing disputes;
- resolving disputes; and
- recognising each party’s rights and enforcing them.
The recent case PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation  4 SLR 672 highlights the tension between the roles now expected of a DAB. Disputes between the employer PGN and contractor CRW arising over variations to the pipeline were submitted to the DAB under the FIDIC conditions of contract. The DAB found for CRW and awarded the contractor US$17.3 million. PGN filed a notice of dissatisfaction against the DAB decision within the FIDIC stipulated time and refused to make payment.
CRW filed for arbitration and succeeded in persuading the tribunal to limit itself to only considering whether CRW was entitled to the sum awarded by the DAB without re-examining the merits of the DAB decision. The tribunal's award upheld the DAB's decision ordering PGN to pay. CRW then began High Court proceedings in Singapore to enforce this award.
PGN in the meantime commenced a separate arbitration, claiming the DAB decision was flawed because the DAB did not apply Indonesian law, the governing law of the contract, and made several errors by double counting.
The High Court refused CRW’s application to enforce its arbitral award as a debt. When CRW appealed, the Court of Appeal took on the task of determining:-
- the true nature of a DAB and a DAB decision;
- the importance of making a distinction between "binding" and "final and binding"; and
- how an arbitral tribunal should properly act when faced with parties dissatisfied with a binding, but not final DAB decision.
V K Rajah JA (delivering the judgment of the court) first noted the essential character of the DAB. It is, he quoted, a "job-site" process that was contractually agreed between the contractor and its employer. The DAB is inquisitorial, can freely make its determination and obtain its own evidence, and is unbound by any fixed rules of procedure.
As such, parties adopting the provisions in the 1999 Red Book should accept a DAB decision as a contractually binding and interim obligation between themselves. However, until a DAB decision becomes "final and binding", it is not one that is "unalterable and not open to further review".
Clauses 20.4 and 20.7 of the 1999 Red Book clearly provide when a DAB decision transitions from "binding" to "final and binding":-
- when all parties accept the DAB decision; or
- when the party dissatisfied with the DAB decision fails to object within the time limit.
At all other times, particularly when the dissatisfied party has submitted a timely and correct notice of dissatisfaction pursuant to Clause 20.6 as PGN had done, the Court of Appeal held that the DAB’s decision, while contractually binding, is far from final. There is no treaty or legislation based on which a binding DAB decision can be enforced as final by either an arbitral tribunal or the courts. Thus, when PGN did not comply with the binding but not final DAB decision, what CRW could have done was to treat PGN as a non-compliant party, in breach of the contractual term, and liable for damages or to seek an interim or partial arbitral award. Instead, what CRW did was to seek immediate enforcement of the DAB decision in the form of a final arbitral award (without asking for the merits of the decision to be reviewed during the arbitration) and to apply for enforcement of the award as if it were an order of the court to that effect.
Role of the arbitral tribunal in enforcing interim adjudication decisions
With this reasoning, the Court of Appeal held that the earlier High Court decision was correct: the arbitral tribunal should have opened, reviewed and revised the merits of the DAB’s decision. Instead of providing the parties with a rehearing so that the entirety of the parties’ disputes can be finally resolved afresh, the Court of Appeal found the tribunal to have:-
- ignored the clear language of the 1999 Red Book; and
- abruptly enforced the DAB decision without reviewing its merits as "conclusive and unalterable".
The Court of Appeal found PGN to have suffered real prejudice from the arbitral tribunal’s failure to consider the merits of the DAB decision and making an award in excess of its jurisdiction. Further, in examining the specifics of this case, the Court of Appeal also found a breach of natural justice when PGN was deprived of the opportunity to defend its position against the DAB decision.
Statutory adjudication and dispute boards were set up to ensure the proper flow of progress payments and to remove impediments to project cash flow. However, by expecting more than what these mechanisms were set up to do, parties have come to see these bodies, particularly DABs, as enforcing agents of rights on par with arbitral tribunals and courts. The decision in this latest case achieves a rebalancing between the right of a contractor to be paid in time for work done, and the rights of all parties to a fair hearing based on the merits of their claims. The former does not supplant the latter.