Regular users of the FIDIC contracts will be aware of the multi-tiered dispute resolution process, which requires a Dispute Adjudication Board (DAB) to make a binding decision on a dispute before it can be referred to arbitration. A recent decision of the Swiss Supreme Court has upheld the requirement to comply with FIDIC’s pre-arbitration requirements.
The question that often arises is what the parties should do where a DAB has not been constituted, especially in circumstances where one of the parties is attempting to delay and disrupt the constitution of an ad hoc DAB that has to be put in place to resolve a particular dispute (as opposed to a standing DAB that is appointed at the outset of a project). If there is no DAB, how can a dispute be referred to it? Can the dispute be referred straight to arbitration instead?
The provisions of the FIDIC contract do not provide a clear answer to these questions. However, it has been suggested by some that an answer could be found in clause 20.8. Despite being entitled “Expiry of Dispute Board’s Appointment”, which could be interpreted as applying only where a DAB was already implemented, the clause says that the provisions relating to the DAB do not apply and a dispute may be referred directly to arbitration in circumstances where “there is no [DAB] in place, whether by reason of the expiry of the [DAB’s] appointment or otherwise.” It is the “or otherwise” part of this clause that offers a potential answer to the question, although it is by no means a clear-cut one.
One effect of this uncertain situation is that a party on the receiving end of a notice of arbitration will often challenge the arbitral tribunal’s jurisdiction, if only as a tactical point to be taken in settlement discussions or to buy them more time to prepare their defence in the arbitration.
A recent decision of the Swiss Supreme Court has provided some further guidance about how this clause will be interpreted, at least in a jurisdiction that is commonly selected as a seat for international arbitrations. In this case, which concerned two contracts governed by Romanian law between a French company and a Romanian state company for the restoration work on a Romanian highway, the parties had attempted to constitute a DAB, but the process had been delayed by over a year and the DAB was not operative by the time the claimant had lost patience and decided instead to file a request for arbitration under the ICC Rules. The respondent challenged the tribunal's jurisdiction on the basis that complying with the DAB procedure under the FIDIC contract was a condition precedent to the issue of a valid request for arbitration.
Following a decision by the arbitral tribunal that it did have jurisdiction, a challenge was made to the Swiss Supreme Court. It had therefore to consider the issue of whether the DAB procedure in the FIDIC contract was mandatory and, if so, what were the consequences of a failure to comply with the requirement.
The Swiss Supreme Court's decision contains helpful analysis of the relevant FIDIC provisions (including reference to the English case of Doosan Babcock and various articles and text books), which could be applied equally in other jurisdictions. As part of this analysis, the Swiss Supreme Court considered the wording of clause 20.8. The words “or otherwise” were described by the Swiss Supreme Court as a “very vague expression” but it said “interpreting it literally and extensively would short-cut the multi-tiered alternative dispute resolution system imagined by FIDIC when it came to a DAB ad hoc procedure because, by definition, a dispute always arises before the ad hoc DAB has been set up, in other words, at a time when ‘there is no DAB in place’, however such interpretation would clearly be contrary to the goal the drafters of the system had in mind.”
The conclusion of the Swiss Supreme Court was therefore that, at least for international arbitrators sitting in Switzerland, the DAB procedures under the FIDIC contract must be treated as mandatory. An arbitration may not be initiated without going first to the DAB if the contract provides for this. However, in the particular circumstances of this case, where an ad hoc DAB had not been constituted 18 months after it was requested, a situation arises in which the respondent can no longer rely on the mandatory nature of the DAB procedure to prevent the resolution of the dispute by arbitration.
Although the original decision was published in French, an English translation can be found here courtesy of Charles Poncet of CMS Switzerland.