In September's Construction dispute avoidance newsletter1 [click here] we considered the long-awaited FIDIC Conditions of Subcontract for Construction of Building and Engineering Works designed by the Employer First Edition 2011 (the "2011 Subcontract").
Clause 20 of the 2011 Subcontract provides a dispute resolution procedure whereby disputes arising under the Subcontract are first referred to the Subcontract DAB (Dispute Adjudication Board) and thereafter to arbitration for final determination. The Guidance for the Preparation of the Particular Conditions of Subcontract (the "Guidance") gives two optional alternative dispute resolution provisions – the first being a simple dispute resolution procedure involving only arbitration; the second setting out a complex mechanism that is intended to make the Subcontractor bound by Main Contract DAB decisions and arbitration awards on disputes related to those under the Main Contract.
In this newsletter we provide a high-level overview of the second alternative clause 20 provisions and highlight particular areas which contractors and subcontractors should be concerned with.
The second alternative clause 20 – an overview
- The clause is separated into sub-clauses dealing with the Subcontractor's claims for extensions of time and/or additional payment under the Subcontract (sub-clauses 20.1 to 20.5) and disputes (sub-clauses 20.6 to 20.8).
- For claims for extensions of time and/or additional payment, the Subcontractor is required to give notice within 21 days of when it becomes (or should have become) aware of the event or circumstance giving rise to the claim (sub-clause 20.1).
- Such claims are then separated into "Related Claims" (claims that arise from circumstances which may also give rise to a claim under the Main Contract or otherwise concern existing claims or disputes under the Main Contract) and "Unrelated Claims". Any disagreement between the parties on whether a claim is "Related" or "Unrelated" will ultimately be referred to the ICC pre-arbitral referee procedure (sub-clause 20.2).
- For Unrelated Claims, the Subcontractor puts forward its detailed claim to the Contractor. If agreement cannot be reached in respect of the claim, the Contractor is required to make a "fair determination" (sub-clause 20.3).
- Under sub-clause 20.4, the Contractor is obliged to submit Related Claims to the Engineer under the Main Contract and must use "all reasonable endeavours" to secure the claim from the Employer. The Subcontractor is entitled to be involved in any meetings with the Engineer which concerns the Related Claim, although there is nothing in the Red Book2 that obliges the Engineer to allow the Subcontractor to be present. Unless the Subcontractor is present in those meetings, or refuses to attend where permitted to do so, the Contractor is not allowed to reach agreement with the Engineer on the Related Claim without "prior consultation" with the Subcontractor. Given that the sub-clause goes on to state that Subcontractors could be bound by that agreement if they do not serve a notice of dissatisfaction within a prescribed period, Subcontractors would no doubt want this wording to go further and prohibit the Contractor from reaching any agreement with the Engineer without its prior, written, approval.
- Sub-clause 20.4 goes on to state that, where the Engineer and Contractor reach agreement on the Related Claim, or the Engineer issues a determination, such that the Contractor is entitled to an extension of time and/or additional cost under the Main Contract, the Contractor is required to pass the share of the benefit applicable to the Related Claim to the Subcontractor. However, the Contractor is only liable to pass on monetary benefits if it first receives payment from the Employer, which is likely to be controversial. If the Contractor and Subcontractor disagree what the Subcontractor's share of the benefit will be, the Contractor will make a "fair determination", which the Subcontractor will be bound by if it does not issue a notice of dissatisfaction on time. If however the Engineer and Contractor agree, or the Engineer determines, that no additional payment and/or extension of time is due to the Contractor under the Main Contract, then the Subcontractor will be bound by this unless it serves a notice of dissatisfaction within the prescribed period.
- Similar to Claims, Subcontract Disputes are categorised into "Unrelated Disputes" and "Related Disputes". Disputes arising from "Unrelated Claims" and "Related Claims" automatically constitute "Unrelated Disputes" and "Related Disputes" respectively (sub-clause 20.6). A procedure is followed to determine the nature of disputes which do not arise out of either an Unrelated Claim or Related Claim, and any disagreement between the parties on this issue will again ultimately be resolved by the ICC pre-arbitral referee procedure.
- Under sub-clause 20.7, Unrelated Disputes can be referred by either the Contractor or Subcontractor for adjudication by the Subcontract DAB. If either party issues a notice of dissatisfaction in relation to the Subcontract DAB's decision the parties shall attempt to amicably settle the dispute or proceed directly to ICC arbitration.
The procedure for Related Disputes (sub-clause 20.8) is lengthy and more complex:
- Related Disputes are initially referred by the Contractor to the Main Contract DAB and the Contractor is required to "use all reasonable endeavours" to pursue the claim on the Contractor's and Subcontractor's behalf and for both their benefit.
- The Subcontractor is required to provide information and assistance to the Contractor to pursue the Related Dispute and is to be provided a reasonable opportunity to be involved in (amongst other things) preparing written submissions an making oral submissions to the Main Contract DAB. If the Subcontractor is not able to be involved in the Main Contract procedure in this way then (which is certainly likely given that, again, there is nothing in the Red Book that obliges the Employer to agree to this) the Contractor is not entitled to reach any settlement with the Employer on the Related Dispute without prior consultation with the Subcontractor. Again, this "prior consultation" wording is unlikely to be acceptable to Subcontractors, who will want more protection against the Contractor reaching agreement with the Employer that might ultimately be binding on the Subcontractor.
- The Contractor is required to notify the Subcontractor of the Main Contract DAB decision, which will in turn be binding on the Subcontractor unless it provides a notice of dissatisfaction within 7 days.
- If the Main Contract DAB finds in the Contractor's favour, then the Contractor has to use all reasonable endeavours to secure the relevant benefit from the Employer, and keep the Subcontractor updated as to its progress. As with the Related Claims provisions, receipt of payment from the Employer is a condition precedent to the Contractor's liability to the Subcontractor in respect of the same, and there is a similar provision in relation to determining the parties' respective shares of the benefit received.
- If the Subcontractor serves a notice of dissatisfaction with the Main Contract DAB's decision, the Contractor will need to serve a corresponding notice to prevent the Main Contract DAB's decision from becoming final and binding under the Main Contract. Under the Red Book, the Contractor's notice of dissatisfaction is a condition precedent to its entitlement to refer the dispute for final determination by ICC arbitration. The wording under the 2011 Subcontract is not so clear and contractors are best advised to tighten up the wording in this respect to ensure that, if the Subcontractor does not give a notice of dissatisfaction then it will be bound by the Main Contract DAB decision, otherwise the Contractor could find itself bound by the Main Contract DAB decision but still defending a Subcontract arbitration in relation to the same dispute.
- If the Contractor does not respond to the Subcontractor's notice of dissatisfaction, or does not serve a corresponding notice against the Main Contract DAB decision to prevent it from becoming final and binding under the Main Contract, then the dispute will be considered an Unrelated Dispute. Sub-clause 20.7 will then apply and the Subcontractor will essentially need to start again and refer the now Unrelated Dispute to the Subcontract DAB for a decision.
- If the Contractor does issue a notice of dissatisfaction under the Main Contract, it will first try to reach a settlement with the Employer and if, unsuccessful, will proceed to commence ICC arbitration proceedings against the Employer in respect of the Related Dispute under the Main Contract. The Subcontractor will be given the opportunity to be involved in the proceedings (although it will not be entitled to become a party to those proceedings). The award under the Main Contract arbitration is deemed to be binding on the Subcontractor to the same extent as it is binding on the Contractor. The contractual benefit of any award shall be shared with the Subcontractor to an appropriate extent to be determined by the Contractor. Any disagreement as to the level of the share shall be deemed an Unrelated Dispute to be settled by arbitration between the Contractor and Subcontractor.
A viable option?
This second alternative procedure outlined above is the first example of such type of provision to be included as an option within the FIDIC suite of contracts and will be an attractive option for Contractors as it has the potential advantage of removing the need for separate dispute resolution processes to take place under the Subcontract and Main Contract which deal with similar or related subject matters. As can be seen from the above, however, the drafting is not without problems. Even if the concept is acceptable to subcontractors, which may be unlikely in many projects, further drafting will be required to make these provisions truly workable.
Indeed, this would seem to be accepted by FIDIC themselves who, in the commentary to the second alternative wording in the Guidance, acknowledge the length and complexity of the suggested clauses, and state that they are being put forward on a "trial basis only". Users are recommended to consult arbitration specialists before using the suggested clauses to ensure that they operate successfully. Herbert Smith Freehills has considerable experience in this regard so please do contact us if you are considering adopting the second alternative procedure into your contract.
Multi-party arbitration as an alternative
In its earlier edition of the subcontract, the 1994 edition, FIDIC anticipated that parties might wish to agree a procedure for multi-party arbitration between the Employer, Contractor and the Subcontractor where disputes under the Main Contract related to the Subcontract Works. A properly drafted multi-party arbitration provision providing for consolidation of two arbitrations and/or joining additional parties into an existing arbitration could, in certain circumstances, provide a viable method for binding the Subcontractor to Main Contract determinations and awards and parties may wish to consider this as an alternative to the FIDIC 2011 Subcontract approach.
Again, drafting consolidation and joinder provisions is a complex exercise and we would strongly recommend obtaining legal advice in doing so.