Many standard form international contracts – specifically, the FIDIC suite of contracts, NEC3 and ICE Contracts – each contemplate the resolution of disputes through submissions made to a Dispute Board.1 While the process will vary from contract to contract, in general terms, the process is that:
- A dispute will arise on the relevant project regarding the contract or the execution of the works.
- One party will typically have an election to refer a dispute to a dispute board and that election is typically made by giving notice to the other party.
- Once the dispute board has been established (if not previously established)2 notice is then given to the board referring the dispute for determination.
- Both parties are then required to 'promptly' make submissions to the dispute board. This will require the provision of all relevant information, access to the Site and appropriate facilities so that the dispute board can make its decision.
- The contract will usually specify a time period for that decision to be given. Unless one party has any suspension or termination rights that arise in the meantime, the contract works must continue in accordance with the contract program.
- Unless a longer period is permitted by the parties, the dispute board will provide its decision within the time stated in the contract.
- On receipt of that decision, the contract will permit one party (the losing party) to give to the other a 'notice of dissatisfaction' with the decision. This notice must be given within a period specified under the contract – usually 28 or 30 days.
From this point, the dispute board's decision will fall into one of the following three categories.
Category 1 decisions are a non-binding recommendation. This means that the decision will not be binding until some subsequent event occurs, usually the expiry of a 28 or 30 day period, without the losing party serving a notice of dissatisfaction regarding the decision.
Category 2 decisions will be similar to Category 1 decisions, except that the decision will be binding when it is issued. While this decision may be challenged by the service of a notice of dissatisfaction within a prescribed period of time (usually 28 or 30 days), the decision remains binding – and must be complied with – until it is overturned at the conclusion of an arbitration.
Category 3 decisions are Category 1 or Category 2 decisions where the period for serving a notice of dissatisfaction has expired without a notice of that kind being served. In situations of this kind, the contract will almost always prescribe the decision to be 'final and binding'.
As to which category of decision you have at any point in time will depend on what the contract says. Sometimes, the expression of what is intended is not that clear.
To what extent are each of these decisions enforceable?
The contract will commonly state that the dispute board is not making its decision as arbitrator. 3 As a result, the decision of the dispute board itself cannot be enforced as an arbitral award, and there will commonly need to be some form of arbitration, or local court litigation (where the contract permits it), that follows.4 In that arbitration, however, what are the arbitrators empowered to do? Do they hear the merits of the dispute again or do they simply give their imprimatur to the dispute board's decision so that the decision can be enforced as an arbitral award?
Arbitral awards are enforced domestically and internationally under local legislation in the jurisdiction where assets are located. Commonly, particularly in relation to foreign arbitral awards, that legislation will follow the Model law5 in permitting awards to be set aside in three broad circumstances: a) where the tribunal's award exceeds the jurisdiction given under the contract (jurisdictional grounds); b) the tribunal has not followed a fair process or procedure in reaching its decision (procedural grounds); and c) the award is in some way substantively deficient according to the laws of the place of recognition or enforcement – for example the award contravenes public policy (substantive grounds).
With this in mind, each of the three categories identified earlier are considered in turn.
Category 1: Non-binding recommendations
By their nature, 'non-binding recommendations' are non-binding either at all, or until some other event occurs – such as the expiry of the prescribed period to issue a notice of dissatisfaction without one being issued. As a consequence, while the specific question of rights will always depend on the contract itself, the decision itself is unlikely to be enforceable at the point that the decision is given.6
This does not mean that there is no benefit in obtaining 'non-binding recommendations' where the contract permits them. Non-binding recommendations can be a chance for a party to obtain an external perspective on a dispute, and to assess whether it is worth pursuing a formal dispute over. In addition to this, under some contracts, a 'non-binding recommendation' may be a mandatory gateway to obtaining a binding recommendation (through, for e.g. the expiry of the 28 or 30 day period without a notice of dissatisfaction being issued), or to access the arbitration process. Finally, submissions made to a dispute board by a party can be admissible in any later dispute, and therefore it does impose some restrictions on a party's ability to 'change its story' in any later dispute process.
As a result, non-binding dispute processes can serve a variety of useful purposes.
Category 2: Interim Binding Decisions
'Interim binding decisions' can be the most difficult of the three. The FIDIC contracts, for example, each contemplate 'interim binding decisions'.
Cl.20.4 of the Red Book, is in the following terms:
[the Dispute board's] decision shall be binding on both Parties, who shall promptly give effect to it unless and until it shall be revised in an amicable settlement or an arbitral award…
Cl.20.5 (Red Book) provides for the parties to negotiate to try and reach a settlement for a period of 56 days from the day the notice of dissatisfaction was given, following which the merits of the dispute can be re-litigated from the start again by arbitration.
But what happens to the dispute board's decision before the arbitration has been completed? Cl.20 provides that the obligations of the parties and the dispute board are not altered just because an arbitration is being conducted. Can the decision be enforced in the meantime?
The issue has become quite controversial in recent times, as we shall see, and it arose in the recent Singapore decision of PT Perusahaan Gas Negara (Persero) TBK (PGN) v CRW Joint Operation (CRW).7 In that case a dispute arose between the parties regarding the amount payable on account of some variations to the contract works on the project. The dispute was referred to a dispute board under the parties' contract – which was the 1999 FIDIC Red Book – and following the dispute board's decision in favour of payment to CRW, PGN issued a notice of dissatisfaction within the prescribed 28 days. In due course, CRW demanded payment in accordance with the dispute board's decision, but PGN refused to make any payments. As a result, CRW filed a request for arbitration.
CRW's request for arbitration was important because in the referral to arbitration the dispute was not the existing dispute over the merits of the underlying dispute about the variation, but it was a new dispute about whether CRW was entitled to the payment of that money ordered by the dispute board. PGN contested this, submitting that the underlying dispute must be revisited before any award of that kind could be made. As a result of this disagreement regarding the scope of the arbitration, the arbitral tribunal issued a preliminary determination on the point.
In that preliminary determination, the arbitral tribunal issued a final award ordering PGN to make payment of the sum referred to in the dispute board's award, and held that the merits of the dispute could not be considered in that arbitration but could only be revisited in a new arbitration. Was the arbitral tribunal right in finding that it was not to consider the merits of the underlying dispute?
According to the Singapore Court of Appeal, who set aside the Tribunal's award, they were so required. The reason for that was because:
- The contractual provision pursuant to which the dispute was referred to arbitration (cl.20.6) conferred an unfettered discretion on the tribunal to re-open and review each and every finding by the dispute board; and
In making a final award without reviewing the merits of the dispute board's decision, the Tribunal:
- Ignored the language of the contract (cl.20.6) which required it to 'finally settle' the dispute between the parties; and
- as a consequence, and in failing to conduct a rehearing, the Tribunal exceeded its jurisdiction and breached the rules of natural justice – i.e. the Tribunal committed jurisdictional and procedural error.
What the Tribunal should have done, according to the Singapore Court of Appeal, was to make an interim order in accordance with the dispute board's decision, and then, in that same arbitration, re-heard the parties' substantive dispute in its entirety before making a final award.8
While the Court of Appeal's decision has been criticised since it was handed down, parties facing the enforcement of a dispute board's decision that is contested (by a notice of dissatisfaction) are raising this argument to avoid enforcement.
In recent times, FIDIC's position appears to be that the Court of Appeal's decision was contrary to FIDIC's intentions regarding the operation of the general terms. On 1 April 2013, FIDIC issued a guidance memorandum in which it clarified that it intended the general terms to operate so that:
in the case of failure to comply with [dispute board decisions], the failure itself should be capable of being referred to arbitration under …cl 20.6, without cl 20.4… and cl 20.5… being applicable to the reference. This intention has been made manifest in the FIDIC [Gold Book] by the equivalent cl 20.9.
As a result, in the memorandum, FIDIC suggested changes that users should make to clause 20 of the Conditions of Contract for the Red, Yellow and Silver books to rectify this issue in their own contract.9
This is helpful for future contracts, in that it more clearly facilitates the winning party doing what CRW tried to do in referring the fact of non-payment to the arbitral tribunal. But it does not cure all issues that will arise from any attempt at enforcement. For example, following FIDIC's amendments means that there will potentially be two inconsistent 'final' awards: one 'final' award regarding the non-payment of amounts ordered by the dispute board, and another 'final' award regarding the merits of the underlying dispute, which could have the effect of revising the first 'final' award. An arbitral tribunal may struggle to find the existence of incompatible final awards to be the intention of the parties in agreeing to the contract's general conditions. As a result, even with FIDIC's amendments, while the prospect for enforcement has certainly improved, the potential for problems remain.
In addition to this, the amendment cannot help parties that have already contracted according to FIDIC's general terms without these amendments being made. In circumstances of this kind, the criticism that the award does not finally dispose of the matter – as the Singapore Court of Appeal suggested is the case with awards of this kind – remains an obstacle to a party's enforcement prospects.
These difficulties with the FIDIC contract are likely to apply generally to dispute board processes in other contracts that contemplate the enforcement of either 'binding but not final' orders, or conflicting final orders. While arguments can certainly be made in favour of enforcement, contracting parties may face considerable difficulty in enforcing the decisions of this kind.
It may be that the parties are better off concentrating on arbitrating the substantive dispute.
Category 3: Uncontested Decisions
What of those decisions issued where no notice of dissatisfaction has been given? The FIDIC Red book is typical of contracts of this kind, and it provides that unless a notice of dissatisfaction is issued within the prescribed period for doing so under the Contract, the dispute board's decision will become 'final and binding' on both parties.10
A 'final and binding' decision of a dispute board is not enough (on its own) for enforcement purposes, however. In addition to this 'final and binding decision', there needs to be some mechanism in the contract for the dispute board's decision to be converted into an arbitral award. For example, cl.20.7 of the FIDIC Red Book provides for the enforcing party to refer the counterparty's 'failure' to comply with the dispute board's decision to arbitration. The conventional view is that this clause permits an arbitration to proceed to enforce the dispute board's decision by way of summary determination.11 That means that the arbitral tribunal is simply composed to give effect to the award, and does not hear the merits of the underlying dispute.
In referring these disputes for arbitration, some care must be taken in formulating the specific orders the arbitral tribunal is asked to make. That is, once there has been a failure to pay in accordance with a dispute board's determination, the arbitral tribunal may be asked to order specific performance of the dispute board's decision. The power to award specific performance, however, will only exist where either: the contract vests the tribunal with this power, the relevant institutional rules vest the tribunal with this power, or the governing law permits tribunals to make orders of this kind. 12 Where there is doubt, there may be a dispute about whether the tribunal can give the requested award. Accordingly, advice should be taken on this point and damages should be considered in the alternative request for relief, even if this may mean that issues arise regarding proof of their quantification.