In PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation [2015] SGCA 30, the Singapore Court of Appeal held that parties under a contract containing the Red Book’s dispute resolution provision (clause 20.4) must comply with any decision by a dispute adjudication board in a prompt manner, even if the merits of the dispute have not been determined.

The Court of Appeal recently dismissed two appeals brought by the appellant, PT Perusahaan Gas Negara (Persero) TBK (“PGN“), against the respondent, CRW Joint Operation (“CRW“) which concerned:

  1. whether a majority arbitral award (“the Interim Award“) ordering PGN to pay CRW US$17,298,834.57 (“the Adjudicated Sum“) should be set aside; and
  2. whether an order of court granting CRW leave to enforce the Interim Award against PGN in the same manner as a court judgment (“the Enforcement Order“) should be set aside.

It has taken more than six and a half years to reach the stage where CRW is able to enforce the Interim Award against PGN in the same manner as a court judgment.

Background of the dispute

PGN engaged CRW to build a natural gas pipeline in Indonesia under a contract based on the 1999 edition of the Conditions of Contract for Construction: For Building and Engineering Works Designed by the Employer (“the Red Book“). The dispute arose over13 separate Variation Order Proposals (“VOPs“) that CRW submitted to PGN for variation works which CRW contended it had carried out. The parties referred their dispute over the 13 VOPs to a dispute adjudication board (“DAB“) pursuant to clause 20.4 of the contract. The DAB delivered several decisions on the 13 disputed VOPs. PGN accepted all of these decisions except the third decision (“DAB No 3“), under which PGN was required to pay CRW the Adjudicated Sum. PGN lodged a notice of dissatisfaction (“NOD“) against DAB No 3.

CRW made several requests to PGN for payment of the Adjudicated Sum awarded under DAB No 3, but to no avail. Taking the view that PGN was in breach of its obligations under the contract, CRW commenced arbitration claiming, essentially, a declaration that PGN had an immediate obligation to pay CRW the Adjudicated Sum and an order for “prompt payment” of that sum (“the 2009 Arbitration”).

2009 Arbitration

The tribunal in the 2009 Arbitration issued a final award providing for the prompt enforcement of DAB No. 3 and refused to consider the merits of PGN’s claims as, inter alia, PGN had not issued a counterclaim to set aside that decision.

The award in the 2009 Arbitration was subsequently set aside on the basis that: (1) the tribunal failed to consider the merits of the dispute before issuing a final award; and (2) the tribunal did not allow PGN to be heard, which was held to be a breach of natural justice.

2011 Arbitration

In 2011, CRW commenced a second arbitration (“the 2011 Arbitration”) seeking: (1) a final award on the merits of dispute; and (2) a partial or interim award to enforce DAB No. 3 pending a final resolution of the dispute. The tribunal in the 2011 Arbitration issued the Interim Award ordering PGN to “promptly” pay CRW the Adjudicated Sum.

Despite the issuance of the Interim Award, PGN maintained its refusal to pay CRW the Adjudicated Sum awarded under DAB No 3, prompting CRW to apply for and obtain leave to enforce the Interim Award in the same manner as a court judgment. PGN subsequently applied to set aside that order, as well as the Interim Award. Both applications were rejected by the High Court and PGN appealed to the Court of Appeal.

PGN’s case on appeal

PGN’s case on appeal consists of two arguments:

  1. the Interim Award is inconsistent with s 19B of the International Arbitration Act (“IAA“) because it is an award that only has interim finality; and
  2. the effect of clause 20.4 of the contract is that DAB No 3 ceases to be binding as soon as the 2011 Tribunal makes any award on the parties’ underlying dispute over the merits of DAB No. 3.

Decision

DAB’s decisions are to be complied with in a prompt manner

The Court held that clause 20.4 of the Red Book (identical to clause 20.4 of the underlying contract) imposes a distinct affirmative and contractual obligation on the parties to promptly comply with a DAB decision, which may be referred to arbitration without first invoking clauses 20.4 and 20.5 of the Red Book. This obligation to promptly comply is separate from the merits of a DAB decision, which may be subsequently revised by an arbitral tribunal. The Court reasoned that the intention underlying clause 20.4 would be “completely undermined if the receiving party were restricted to treating the paying party’s non-compliance as a breach of contract that sounds only in damages and must be pursued before the available domestic courts.” Importantly, the Court also observed that, as clause 20.4 evinces a clear intention for parties to promptly comply with a DAB decision, irrespective of any disagreement or dissatisfaction with it, clause 20.4 “…serves the vital objective of safeguarding cash flow in the building and construction industry, especially that of the contractor, who is usually the receiving party.”

Interim awards under section 19B of the IAA are final and binding

Appositely, the Court noted that section 19B(1) of the IAA was enacted to clarify the position that all awards, regardless of the stage of the arbitration at which they were made, would have the effect of being final and binding. Accordingly, section 19B operates to render the Interim Award final and binding vis-a-vis the matter at issue in the award: namely, PGN’s obligation to make prompt payment to CRW of the Adjudicated Sum awarded under DAB No 3.

The Court also observed, however, that PGN’s right to have the underlying merits of DAB No 3 reviewed at the 2011 Arbitration is in no way prejudiced by the fact that section 19B renders the issue determined under the Interim Award res judicata. This is because the Interim Award only deals with whether PGN had an obligation to promptly comply with DAB No 3 even though it had issued a NOD in respect of that decision, and that the Interim Award says nothing about the underlying merits of DAB No 3.

Interim Award not liable to be set aside once DAB decision ceases to be binding

The Court also rejected PGN’s second argument on appeal. The Court opined that although DAB No 3 is no longer binding once any award on its merits is made, it does not automatically render the Interim Award unenforceable or liable to be set aside. PGN bore the burden of demonstrating why this outcome should follow but it did not discharge that burden. The Court noted that it would not be commercially sensible to read clause 20.4 as entailing that DAB No 3 would cease to be binding as soon as the 2011 Tribunal made any determination on any aspect of the merits of the parties’ underlying dispute. It held that there had not been a final determination of the parties’ underlying dispute on the merits of DAB No 3 and nothing had transpired to invalidate or affect the Interim Award or CRW’s right to receive payment.

Commentary

The outcome of this protracted set of proceedings is a timely reminder of the enforceability of arbitral awards, and that an interim award may be final and binding.  Indeed, it is axiomatic that section 19B operated to render the Interim Award final and binding on the particular issue which that award was decided.

Another key take away is that a decision by a DAB constituted under clause 20.4 of the Red Book has to be complied with promptly, even if the merits of the dispute have not been determined. If this does not occur, the refusal to comply may be referred directly to arbitration.

Interestingly, the Court of Appeal stated that much of the confusion in this case stemmed from a failure to differentiate between, on the one hand, interim or partial awards, which entail a final determination of the parties’ substantive rights or a final determination of preliminary issues relevant to the resolution of the parties’ claims and, on the other hand, provisional awards, which neither entail nor aid in a final determination of the parties’ substantive rights.

The Court explained the difference between partial, interim, provisional and final awards, and reasoned that on no basis was the Interim Award a provisional award.  Instead, the Court held that it was a final determination of whether PGN had an immediate and enforceable contractual obligation to comply with DAB No 3, irrespective of whether it had issued a NOD in respect of that decision.

A copy of the judgment can be accessed here.