The Singapore Court of Appeal recently gave a rare judgment by a court on the dispute resolution provisions found in many FIDIC construction contracts.  It is of wider relevance to contracts with clauses providing for disputes to be escalated through various stages before reaching arbitration.  

Background

  • The relevant contract was a FIDIC Red Book 1999 under which any dispute must be referred to a Dispute Adjudication Board before it can be referred to arbitration.  This is subject to a DAB being in place.  The contract envisages this happening from the outset.  This does not always happen even though a DAB’s familiarity with a project as it progresses is one of its key advantages in helping it decide disputes. 
  • Another advantage is the DAB gives its decision within 84 days of a dispute being referred to it (subject to extensions).  That decision is “binding” until there is a settlement or arbitral award on the underlying dispute.  (This contrasts with Dispute Review Boards which give non-binding recommendations, although they may become binding if a notice of dissatisfaction is not given on time.)
  • While in practice DAB decisions are often respected by both parties, when they have to be enforced it is usually necessary to do so by arbitration.  For even simple debt-type actions this can be a costly and time-consuming process.  Unfortunately this is because, as contracts are usually drafted, DAB decisions lack the status of arbitral awards and the help given to enforcing arbitral awards, in particular by the New York Convention

Facts

  • The contractor obtained a DAB’s decision requiring the employer to pay it US$17m.
  • The employer gave a notice of dissatisfaction within the 28-day time limit.  This notice prevented the decision being upgraded from “binding” to “final and binding” (which the contractor could have more readily enforced by arbitration).  It also meant that, unless the employer agreed otherwise, the contractor could not under the contract start arbitration until 56 days later – to allow for a possible settlement. 
  • After that 56-day period passed the contractor started an ICC arbitration (which had its seat in Singapore).  Fatally, it sought to limit that arbitration to the enforcement of the DAB’s decision.
  • The arbitral tribunal gave a Final Award enforcing the DAB’s decision.  It declined the employer’s request to review the underlying merits of the dispute that the DAB had decided.  The tribunal said that the employer could seek such a review in a separate arbitration.

The Judgments

The Singapore courts at first instance and now also on appeal set aside the Final Award.  The Court of Appeal interpreted clause 20.6 of the FIDIC Red Book 1999 as requiring that, where a DAB’s decision was subject to a notice of dissatisfaction, the subsequent arbitration must finally resolve the underlying dispute afresh.  As the arbitral tribunal had not done this it had exceeded its jurisdiction and breached the rules of natural justice thereby prejudicing the employer.  The court also declined to exercise a residual discretion (which it found it had) to enforce the Final Award anyway.

Helpfully the court confirmed that pending the arbitral tribunal’s decision on the underlying dispute the DAB’s decision should be complied with.  It added: “There appears to be a settled practice, in arbitration proceedings brought under sub-cl 20.6 of the 1999 FIDIC Conditions of Contract, for the arbitral tribunal to treat a binding but non-final DAB’s decision as immediately enforceable by way of either an interim or partial award pending the final resolution of the parties’ dispute”. 

The first instance court justified setting aside the Final Award on an alternative ground.  This was that the dispute that the contractor had referred to arbitration as to the enforceability of the DAB’s decision should have been referred first to a DAB.  This was implicitly rejected by the Court of Appeal in its interpretation of how the contractual dispute resolution regime works.

Comment

Contracts commonly require, first, any dispute to go to a DAB before it goes to arbitration and, second, a notice of dissatisfaction to be given to prevent the DAB’s decision from being upgraded from “binding” to “final and binding”.  This approach has been followed in the FIDIC suite since its Orange Book of 1995, while not specifying if a non-final but binding DAB’s decision is enforceable and, if so, how.

The third and critical ingredient in this case was the court’s interpretation of clause 20.6 (which is also found in the FIDIC Yellow and Silver Books 1999).  It provides that any dispute in respect of which the DAB’s decision has not become final and binding “shall be finally settled by international arbitration”.  The court emphasised the word “finally” (which is absent from the equivalent provisions of the 1996 Supplement to the 4th edition of the Red Book). 

Clause 20.6 is not as clear as it might be in saying what the court found it said.  That is, that when a party seeks to enforce a DAB’s decision by arbitration that party should also at the same time refer the underlying dispute to the tribunal.  However, clearly, where FIDIC contracts and similar provisions are used, it is safest for parties and tribunals to enforce DAB decisions (subject to valid jurisdictional or other challenges) by Interim or Partial Awards rather than Final Awards, which should be reserved for the underlying dispute. 

Reference: CRW Joint Operation v PT Persusahaan Gas Negara (Pereso) TBK [2011] SGCA 33 click here.