As Ahmed Ibrahim discusses, multi-tiered dispute resolution clauses are a common feature of construction contracts. These clauses require the parties to exhaust one or more stages of alternative dispute resolution mechanisms before they are permitted to invoke the “ultimate” dispute resolution process, generally arbitration or litigation. The typical pre-arbitration (or litigation) steps called for include a period of amicable settlement, referral to a committee comprising the senior management of both parties, and adjudication before independent third parties which may be binding or non-binding.
Commonly used forms in the Middle East
Perhaps the best-known international examples of multi-tiered dispute resolution clauses are clause 67 of the FIDIC 1987 Red Book and clause 20 of its 1999 Rainbow Suite of Contracts, both of which are familiar to arbitrators and other legal practitioners in the MENA region being the most commonly used standard forms in that region1.
Under clause 67 of the 1987 FIDIC Red Book, all disputes are to be referred to the Engineer in the first instance for a decision, which is final and binding upon the parties unless and until the dissatisfied party proceeds to arbitration. The 1999 FIDIC Suite kept the Engineer, but then added a dedicated, impartial, Dispute Adjudication Board (“DAB”) under clause 20, which could be standing or ad hoc - appointed only when a dispute arose.
The result is that there is a distinction between the referral of disputes to the Engineer under the 1987 edition and seeking the Engineer’s determination of claims for extension of time or additional payment as required under sub-clause 20.1 of the 1999 edition.
Under the FIDIC 1987, it is only after the Engineer has made a decision on the dispute under clause 67 that it could it be referred to an outside dispute resolver for amicable settlement or arbitration. This has been changed in the FIDIC version of 1999, where the DAB and Amicable Settlement are the stated precondition to any reference to arbitration. Sub-clause 20.1 of the 1999 FIDIC which deals with referring claims to the Engineer is a completely different territory. First, it is about claims (not disputes), and secondly, it is limited to two types of claims, namely extension of time and additional payment where the Engineer is required to make a determination pursuant to sub-clause 3.5.
The advantage of this multi-tier process is to give the parties a genuine chance to have their disputes resolved without the need for lengthy, costly and complicated legal proceedings, either in arbitration or court litigation. It also allows those involved in the project from day one, e.g. the contract administrator or standing DAB members, the opportunity to have a say in the dispute. This plays a significant role in improving the prospects of achieving an early settlement of what might be a major complex dispute. Even if the parties fail to settle their dispute entirely, the process may result in a narrowing down of the issues to be arbitrated or litigated.
Failure to comply
Contractually, the referral of a dispute to the Engineer/DAB should be treated as a condition precedent to the right of recourse to arbitration. This includes, for example, the requirement to notify the other party of the intention to commence arbitration under the FIDIC Red Book 1987.
But what if one party chooses to “skip” any of these mandatory referrals and commences arbitration straightaway? Aside from (rightfully) complaining of a breach of contract, in practical terms, what can the other party do?
In general, courts in the MENA region will enforce multi-tiered dispute resolution clauses, and, in particular, expect parties to comply with any preconditions to arbitration they have agreed upon. On many occasions, the UAE courts have nullified an arbitral award in circumstances where the claimant has failed to satisfy pre-arbitration requirements. This is particularly so where the wording of the dispute resolution clause is clear that the pre-arbitration steps constitute jurisdictional conditions precedent.
In the Court of Cassation, decision number 124/2008 Commercial, the Court stated that:
“it is established in this court that according to the general principles of contracts; the parties to it may stipulate any condition that they find appropriate as far as it is not against public policy. The parties may agree conditions precedent that must be followed before recourse to arbitration. If the condition precedent is not satisfied the request for arbitration should be inadmissible.”
However, it should not always be taken as a given rule that the local courts will regard every pre-arbitral step or process as being a condition precedent to arbitration or, at least, mandatory. For instance, the steps or processes should be clearly defined in terms of what the parties are expected to do and possibly be subject to some sort of time limit. If the courts find the pre-litigation or arbitration step(s) insufficiently described in the contract (perhaps due to vague or poor drafting), they may be minded to decline its enforcement on grounds of uncertainty.
In the context of a contract based on the 1999 FIDIC Forms, if a DAB is in place, then a respondent should have little difficulty convincing a tribunal that arbitration is premature and, consequently, the tribunal would be without jurisdiction. Failing that, courts in the region would be unlikely to hesitate in setting aside arbitral awards rendered under these circumstances.
If, on the other hand, a DAB is not in place, the position is arguably less clear.2 A FIDIC DAB process (or similar adjudication procedure) may become difficult or impossible to implement when a dispute arises for a variety of reasons, for example if the parties are unable to agree on the adjudicator/DAB members, there are disagreements as to the adjudicator/DAB members’ remuneration, or if one party is simply intransigent and refuses to sign the agreement appointing the adjudicator/DAB (known in FIDIC terminology as the “DAA”).
This last possibility – one party refusing to sign the DAA – can be especially troublesome, given the nature of clause 20 of the FIDIC 1999 Forms. However, sub-clause 20.8 of which potentially provides an uncooperative party with an “escape” clause and a route straight to arbitration.
The English3 and Swiss4 courts have recently had to deal with the issues set out in the previous paragraph; both courts confirmed the centrality of the DAB to the FIDIC dispute resolution process and that reference to the DAB was indeed mandatory. Importantly however, the Swiss courts also recognised that a party could not use this as an excuse to frustrate the DAB process and then say that an arbitration referral was invalid because of a failure to follow that process. This was contrary to the principles of good faith – an approach likely to be followed in the UAE.
In a recent decision, the Dubai Court of Appeal upheld the agreement to refer a dispute to a DAB as a condition precedent.5 In that case, the court rejected the appointment of an arbitrator before the parties had exhausted the contractual DAB process.
In the meantime, however, what are the options available to arbitrators confronted with one party’s failure to comply with a mandatory pre-arbitration step? In general, the safest course of action would be for the tribunal simply to dismiss the claim for inadmissibility or lack of jurisdiction, whichever the case may be, i.e. the arbitration would in this case be filed prematurely. However, this may seem harsh, particularly in circumstances where the defaulting party’s conduct was unintentional.
To address this, an emerging trend is for arbitrators to order the suspension of the proceedings pending the fulfilment of any pre-arbitration steps, rather than dismissing the claim outright. This has the advantage of saving time and costs for the parties, as the tribunal would still be in place.
This trend is in line with common law approaches. In a recent case before the TCC, Ohpen Operations UK Ltd v Invesco Fund Managers Ltd, Mrs Justice O’Farrell noted a “‘clear and strong policy’ in favour of enforcing alternative dispute resolution provisions and in encouraging parties to attempt to resolve disputes prior to litigation. Where a contract contains valid machinery for resolving potential disputes between the parties, it will usually be necessary for the parties to follow that machinery, and the court will not permit an action to be brought in breach of such agreement.” On that basis, the court found it appropriate to stay the proceedings to enable a mediation to take place.
However, arbitrators sitting in the Middle East should consider whether they have the power to do so under the applicable procedural law and/or relevant institutional rules, as, in many MENA jurisdictions, there is no express statutory provision which entitles arbitrators to suspend proceedings in these circumstances.
Parties to construction contracts should understand how the dispute resolution mechanism under their contract works. In the case of express wording that certain steps should be concluded as a jurisdictional condition precedent, the party who wishes to initiate arbitration must make sure that they follow the multi-tiered process. Failure to do so might result in the claim being dismissed for lack of jurisdiction. There might be cases where the arbitral tribunal finds it necessary, upon the request of either party, to suspend the arbitration proceedings pending the satisfaction of pre-arbitration requirements.