Dispute Resolution Singapore Client Alert June 2015 Singapore Court of Appeal affirms the principal of temporary finality in construction arbitrations In a rare split amongst the judges of the Court of Appeal, the majority in PT Persuhaan Gas Negara (Persero) TBK v CRW Joint Operation  SGCA 30 ("PGN v CRW") held that where there was an agreement to arbitrate construction disputes under the FIDIC Red Book, the binding but non-final decision of a Dispute Adjudication Board for the interim payment of a sum of money could be enforced in a separate arbitration, prior to the final resolution of the dispute in a subsequent arbitration. Background The appellant employer ("PGN") had engaged the defendant contractor ("CRW") to design and install a natural gas pipeline. The terms of the contract largely adopted, with modification, the standard provisions of the 1999 FIDIC Red Book and was governed by Indonesian law. The dispute resolution mechanism in the contract contemplated the following. (a) If a dispute arose, parties would first refer their dispute to a Dispute Adjudication Board ("DAB") which would make a determination. (b) The DAB shall render a reasoned decision within 84 days of the dispute being referred to it, which decision shall be binding on both parties and both parties "shall promptly give effect to it unless and until it shall be revised in an amicable settlement or an arbitral award". (c) If either Party was dissatisfied with the DAB's decision, it could give a notice of dissatisfaction ("NOD") setting out the matter in dispute and the reasons for dissatisfaction within 28 days of the DAB's decision, failing which the DAB decision would become final and binding on the parties. No party could commence arbitration unless it had given an NOD. (d) If an NOD had been given, parties shall then attempt to settle the dispute amicably within 56 days. (e) If the dispute was not amicably settled, any dispute in respect of which the DAB's decision has not become final and binding shall be finally settled by arbitration. Parties had referred various disputes to the DAB, of which PGN accepted all of the DAB's decisions save for one (the "DAB decision") where the DAB decided that PGN was required to pay CRW the sum of approximately US$17.2 million (the "Adjudicated Sum"). PGN served an NOD with respect to the DAB decision and took the position that it was not obliged to pay the Adjudicated Sum since it had served an NOD. CRW brought an arbitration in 2009 (the "2009 arbitration"). The only relief sought in the 2009 arbitration was a declaration that PGN had an immediate obligation to pay CRW the Adjudicated Sum and an order for prompt payment of that sum. PGN did not file any counterclaim seeking the setting aside of the DAB decision or seeking For further information please contact Chan Leng Sun, SC +65 6434 2703 email@example.com Jennifer Fong +65 6434 2692 firstname.lastname@example.org Baker & McKenzie.Wong & Leow 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1 Singapore 018981 www.bakermckenzie.com 2 Client Alert June 2015 a hearing of the merits of the claim but in its defence, it requested the tribunal to "open up, review and revise" the DAB decision. The tribunal in the 2009 arbitration issued an "Final Award" to enforce the DAB decision and held that PGN should commence a new arbitration to review and revise the DAB decision (i.e determine the underlying merits of the dispute). The award in the 2009 arbitration was ultimately set aside by the Singapore Court of Appeal. In its 13 July 2011 judgment in relation to the 2009 arbitration, the Court of Appeal held that it was valid for PGN to have raised the issues which it wished the arbitral tribunal to consider by way of a defence and it was not necessary to file a counterclaim. By issuing a final award which upheld the DAB decision without going into the substantive merits of the parties' dispute when this had been raised and by further defining "final" as "conclusive or unalterable", the tribunal had both exceeded its jurisdiction and breached the rules of natural justice. However, the Court of Appeal commented obiter that the tribunal should have made an interim award in favour of CRW for the amount assessed by the adjudicator and then proceeded to hear the parties' substantive dispute afresh before making a "final” award. Relying on the Court of Appeal's interpretation, CRW then brought a further arbitration in 2011 (the "2011 arbitration") seeking a final determination of the underlying merits of the dispute as well as an interim or partial award seeking payment of the Adjudicated Sum with interest. The tribunal in the 2011 arbitration issued an Interim Award awarding the payment of the Adjudicated Sum (the "Interim Award"), and stating that the Interim Award was final pending the resolution of the dispute. PGN argued that the Interim award could not be enforced as such an award was merely a provisional award and was not final and binding on the parties. As such, the usual enforcement provisions in the International Arbitration Act which applied to final awards could not be applied to enforce the Interim Award. Subsequently, the 2011 tribunal also issued a Partial Award which purported to "revise" the Interim Award by dismissing two of the claims which comprised part of the Adjudicated Sum. The result was that the Adjudicated Sum of approximately US$17.2 million was revised downwards to approximately US$13.6 million. Issues before the Court of Appeal The Court of Appeal therefore had to decide: (a) whether the Interim Award was inconsistent with Clause 19B of the International Arbitration Act ("IAA") (which provides that an award is final and binding and the tribunal shall not vary such an award) because the Interim Award would be subject to future variation; and (b) whether Clause 20.4 of the relevant conditions of contract ("Agreement") agreed between parties which stated that the DAB decision "shall be binding on both parties, who shall promptly give effect to it unless and until it shall be revised….by an arbitral award" meant that the DAB decision ceased to be binding as soon as the tribunal in the 2011 arbitration made any award on the parties' underlying dispute on the merits of the DAB decision and therefore the issuance of the Partial Award caused the DAB decision not to have any binding effect. Decision and Observations 3 Client Alert June 2015 The majority of the Court of Appeal (Chief Justice Sundaresh Menon and Justice Quentin Loh) held that the Interim Award was indeed final and binding on the question of whether PGN had to make immediate payment of the Adjudicated Sum and dismissed PGN's appeal. The majority clarified that there were three types of awards made prior to the final disposition of all issues in an arbitration, namely: (a) a partial award, which finally disposes of part, but not all, of the parties' claims; (b) an interim award, which does not dispose finally of a particular claim but decides a preliminary issue relevant to the disposal of such a claim, e.g. choice of law, liability, and construction of a particular provision; and (c) a provisional award, which is issued to protect a party from damage during the course of the arbitral process. Interestingly, the majority held that the term "final award" could be understood in a number of ways and that even provisional awards could be "final" in the sense that they finally disposed of a particular request for relief. On the facts, the majority held that the Interim Award was final and binding with regard to the particular issue which that award decided, namely PGN's obligation under Clause 20.4 of the Agreement to make prompt payment of the Adjudicated Sum, and would not be varied by future awards. Further, the majority held that PGN had to make payment of the Adjudicated Sum awarded under the Interim Award as there had not been a final determination of the parties' underlying dispute causing the DAB decision to cease to be binding. Moreover, even if the DAB decision was not binding, this did not automatically render the Interim Award unenforceable or liable to be set aside and PGN had not discharged its burden to show why the Interim Award should not be enforced. The majority also disagreed with the views expressed in the earlier 13 July 2011 Court of Appeal judgment in relation to the 2009 arbitration insofar as the earlier Court had stated that PGN need not have filed a counterclaim to challenge the DAB decision. The majority was of the view that if PGN wished to challenge the DAB decision, it was incumbent on PGN to pursue a counterclaim to challenge the underlying merits of the DAB decision or lodge a fresh request for arbitration in relation to the underlying merits of the dispute. In a 96-page dissenting judgment, Senior Judge and former Chief Justice Chan Sek Keong fundamentally disagreed on how the dispute resolution of the 1999 FIDIC Red Book (as it was then drafted) should be construed. Although he agreed that PGN had an immediate obligation to comply with the DAB decision prior to a final determination, he held that the 1999 Red Book did not expressly confer a right on a winning party to refer to arbitration the losing party's failure to comply with a binding but non-final DAB decision. This omission in the FIDIC Red Book was deliberate because when the first version of the Red Book was published in 1957, it was contemplated to operate in the context of the English judicial system, which provided an avenue of enforcement in the form of summary judgment. At that time, international arbitration was not foremost in the minds of the drafters of the Red Book. It was only subsequently on 1 April 2013 that FIDIC recommended new provisions through a Guidance Memorandum which, if incorporated, will 4 Client Alert June 2015 allow parties to refer the failure to comply with the DAB's decision to arbitration and thereby obtain an arbitral award to enforce it. Chan SJ reasoned that between 1957 and 1 April 2013 (when the FIDIC issued its Guidance Memorandum), the FIDIC Red Book did not cater to a "pay now, argue later" regime because contractors did not have economic power to incorporate such contractual provisions. This was why legislatures in Australia, UK and Singapore intervened by introducing statutory security of payment regimes to protect contractor's cash flows post 1957. However, these developments did not mean that a security of payment scheme could therefore be retrospectively read into the 1999 FIDIC Red Book by treating the FIDIC Guidance Memorandum as a clarification. As a result, Chan SJ held that the tribunal in the 2011 arbitration had no mandate to issue the interim award to enforce the DAB decision, because under the contractual regime of the FIDIC Red Book, parties were not entitled to refer the dispute over the enforceability of the DAB decision to arbitration. Further, Chan SJ defined a provisional award as one that was subject to alteration, revision or nullification after a full hearing on the merits of the dispute which was the subject matter of the arbitration. On the facts, Chan SJ found that the Interim Award was a provisional award. Therefore, the Interim Award was not enforceable under Section 19 of the IAA in the same manner as a judgment. Comments CRW and PGN had taken over six and a half years from the issuance of the DAB decision on 18 November 2008 to resolve a dispute over whether the Adjudicated Sum should be paid. In this regard, the decision of the majority of the Court of Appeal, which now makes it clear that contractors can obtain arbitral awards specifically to enforce the payment of adjudicated sums, is arguably in recognition of the need to minimise long-drawn strategic battles over issues which did not finally dispose of the merits. The majority's decision also affirms the principle of "temporary finality" with respect to adjudicated sums in construction disputes. On the other hand, the dissent further highlights the ongoing tension between employers and contractors, and the odd end result of PGN having to pay some US$17.2 million to CRW when the 2011 tribunal had in the Partial Award already reduced the Adjudicated Sum to US$13.6 million. ©2015 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.