The fact that the FIDIC suite of contracts, at clause 20, provides for disputes to be resolved by dispute adjudication board (DAB) prior to commencing arbitration proceedings means that disputes arising out of FIDIC contracts rarely come before the courts. However, two recent decisions provide helpful clarification on the operation of the provisions of clause 20.
Amended FIDIC Silver Book provided for DAB and litigation
In Peterborough City Council v Enterprise Managed Services Ltd, the contract in question was a FIDIC Silver book for a project which involved the design, supply, installation, and testing of a 1.5MW solar energy plant by Enterprise Managed Services (EMS) on the roof of a building owned by Peterborough City Council (the Council). The works were completed late and failed to achieve the stipulated power output. As a result, the Council claimed it was entitled to a price reduction, a fact disputed by EMS.
In Peterborough, Clause 20 of FIDIC Silver Book provided that disputes were to be referred to a DAB, whose decision was to be final and binding unless a notice of dissatisfaction is given, following which (in an amendment to the standard wording) the dispute was to be settled by the courts of England and Wales. Following an unsuccessful attempt to resolve the dispute by mediation, EMS gave notice under the contract that it intended to refer the dispute to adjudication, whereas shortly afterwards the Council issued and served its court claim. EMS issued an application for the court proceedings to be stayed so that the dispute could be referred to the DAB.
Clause 20.2.1 provided as follows:
“Disputes shall be adjudicated by a DAB in accordance with Sub- Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision]. The Parties shall jointly appoint a DAB by the date 28 days after a Party gives notice to the other Party of its intention to refer a dispute to a DAB in accordance with Sub-Clause 20.4.”
It is clear that the DAB was to be the ‘ad hoc’ variety, convened to deal with a dispute as and when it arose, not the ‘standing’ variety, which is in place from the outset of the project. EMS contended that the requirement for disputes to be resolved by a DAB under clause 20.2.1 was mandatory, and accordingly the Council’s issue of proceedings was premature and amounted to a breach of contract. Any alternative reading would, EMS submitted, render the subsequent sub-clauses (20.2 to 20.7) redundant.
Clause 20.8.1 defined circumstances when use of the DAB was disapplied:
“If a dispute arises between the Parties in connection with, or arising out of, the Contract or the execution of the Works and there is no DAB in place, whether by reason of the expiry of the DAB’s appointment or otherwise:
- Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply, and
- the dispute may be referred directly to the courts of England and Wales under Sub-Clause 20.6 [Final Settlement].”
Was clause 20.8 a general ‘opt-out’ provision?
The Council argued that the provisions of clause 20.8 effectively allowed an ‘opt-out’ for a party that did not wish to use the DAB procedure and wanted to go straight to court. In scrutinising the operation of the procedure under clause 20, consideration was given to a perceived flaw in the FIDIC dispute resolution procedure. This occurs where a DAB decision has been given, and one party has given a notice of dissatisfaction, rendering the decision binding but not final. In those circumstances, if the unsuccessful party fails to comply with the decision, arguably the only remedy available to the other party is to refer the dispute arising from the non-compliance to a further DAB. This could lead to a course of consistent non-compliance from one party, thus depriving the other party of an effective remedy.
Court conflicted over forcing parties to submit to DAB
Mr Justice Edwards-Stuart acknowledged that this point was arguable where the standard wording was left intact and an arbitration clause was included, because of the limitations on arbitrators to order specific performance. However, in the present case where the forum for final resolution of the dispute was litigation before the English courts, it was possible for the court to intervene. The judge considered that clause 20.8 was intended to apply to those situations where a ‘standing’ DAB had been convened, but had, by the time of the dispute, ceased to be in place for some reason. It did not confer a unilateral right on a party to opt out of the adjudication provisions. Accordingly, the judge went on to find that a stay of the proceedings should be granted in order to allow the contractual machinery to be operated, although he had sympathy for the Council’s arguments and reservations about forcing the parties to submit to a DAB procedure which was unlikely to be determinative. It is therefore fairly clear, that under English common law, the obligation to refer a dispute to a DAB is a mandatory one.
Open to abuse?
An interesting point raised in the case was the potential ability of the parties to abuse the dispute resolution procedure to avoid compliance. It should however, be remembered that FIDIC is an international contract used in numerous jurisdictions, many of which have civil codes which enshrine the concept of ‘good faith’ which does not exist under English common law. A recent Swiss case has looked at the relationship between ‘good faith’ and operation of the FIDIC dispute resolution procedure, and in doing so considered the same provisions as the English court.
The case in question, Decision 4A_124/2014, heard by the Swiss Supreme Court, considered the jurisdiction of an arbitral tribunal to hear a dispute under a FIDIC contract which had not previously been referred to a DAB. It involved two contracts between a French construction company (the Contractor) and a state-owned entity (the Owner) for construction of part of a national highway. The contracts incorporated the 1999 FIDIC conditions of contract, with the law of the contracts being Romanian law.
Unacceptable delay in constituting DAB led to arbitration
The Contractor claimed to be entitled to approximately EUR 21 million, and notified the Owner of its intention to refer the matter to a DAB in March 2011. Each party nominated an adjudicator but appointment of the DAB chairperson was prolonged for a variety of reasons. By June 2012 they had finally agreed on the chairperson, but had yet to conclude the dispute adjudication agreement (DAA). The following month, the Contractor made a request for arbitration to the ICC and a tribunal was appointed. A couple of months later, in September 2012, the DAB chair circulated a draft DAA. The Owner commented on this in October 2012, suggesting some amendments and inviting the Contractor to comment or confirm its agreement. The Contractor responded that an 18 month period had elapsed since it had first tried to refer its claim to the DAB, and it had thus been forced to pursue the matter via arbitration without first using the DAB. The Owner challenged the arbitral tribunal’s jurisdiction because the DAB procedure had not been followed.
Was the DAB procedure mandatory or optional?
The parties agreed that the arbitral tribunal should deliver a preliminary award on the issue of its jurisdiction to hear the dispute. This it did, and in January of this year, (almost 3 years after the Contractor had first notified its claim) the tribunal confirmed its jurisdiction. The tribunal found that the procedure at clause 20 was optional rather than mandatory because:
- Although the use of ‘shall’ in clause 20.2 was ‘general’ the use of ‘may’ in clause 20.4 indicated the DAB procedure was only optional
- Clause 20.8 allowed the parties to go to arbitration if there had been an attempt to resolve a dispute using the DAB but no DAB was in place
- The lack of a timescale for convening the DAB gave credence to the idea that the DAB tier was optional (although this was obiter)
In February 2014 an application was made to the Swiss Supreme Court to set aside the tribunal’s interim award based on a lack of jurisdiction, relying on provisions contained in the Swiss Private International Law Act.
The Swiss Supreme Court rejected the Owner’s challenge, although it disagreed with the tribunal’s reasoning. In considering the nature of the provisions at clause 20 it applied a two-stage test, established in previous decisions, as follows:
- Firstly, an assessment of whether the pre-arbitral tier was mandatory
- Secondly, if so, whether the party challenging the tribunal’s jurisdiction was acting in good faith
The court went on to disagree with the tribunal’s finding that the DAB was optional, instead confirming that it was a mandatory pre-arbitration stage. In support of this conclusion it relied on:
- Use of the word ‘shall’ in clause 20.2
- A systematic interpretation of clause 20.2
- The fact that interpreting clause 20.8 as an opt-out allowing a party to resort to arbitration whenever no DAB was in place would undermine FIDIC’s dispute resolution system
How do obligations of ‘good faith’ affect the position?
In spite of this, it found that the failure to determine the dispute using a DAB before going to arbitration was not fatal to the tribunal’s jurisdiction, and in doing so relied on the principle of good faith enshrined in Swiss law. In particular, the Owner’s insistence on the mandatory nature of the DAB process was against good faith when it had been primarily responsible for the delays in constituting the DAB, whereas the Contractor had acted in good faith. The court questioned the purpose of forcing the parties to proceed with a DAB at this stage, when the project was over, given that the FIDIC system seemed to favour a standing DAB for resolution of disputes during the project.
Understanding how to manage the DAB procedure
It is clear from these two decisions that the requirement to submit to the DAB procedure in FIDIC contracts is a mandatory one, which cannot be opted out of by relying on the provisions of clause 20.8. It will only be in exceptional cases that the parties will be able to circumvent the DAB procedure in order to go straight to arbitration. Interesting questions are raised by these decisions, in particular, how an English court would deal with the question of inordinate delay and/or bad faith on the part of one party, given the absence of a good faith concept. In addition, how does one address the difficulties of dealing with a party intent on not complying with a binding, but not final, decision, where the ultimate dispute resolution procedure is an arbitral tribunal with limited powers. There are solutions available by amending the original contract wording, for example to provide that the DAB procedure is only to be operated during the course of the project, and once completion has been achieved the parties may choose to refer a dispute straight to arbitration. The problem of non-compliance with a DAB decision may be addressed by opting for litigation, rather than arbitration, so that appropriate orders may be sought. Some parties may prefer not to have a mandatory interim DAB procedure, and remove it altogether. It is useful to at last have consistent judicial guidance on the operation of these provisions from common and civil law courts.