Those familiar with previous editions of the FIDIC red book (the Conditions of Contract for Construction for Building and Engineering Works designed by the Employer) will know that Engineer's powers in relation to resolving disputes have been somewhat watered down. The Engineer no longer has a single point of responsibility for dispute resolution as there is now a Dispute Adjudication Board (DAB). But is a referral to a DAB a prerequisite to arbitration? Also what does a party need to do to challenge a decision by a DAB?

Unlike the silver and yellow books where a DAB is only appointed once a dispute arises, a DAB under the red book is to be appointed at the outset of a project. There are a number of issues that the red book expressly deals with:

  • The Board may have 1 or 3 members (default is 3)
  • If the Parties fail to agree on the appointment of a member (or members) either party may file a request to the FIDIC President to seek appointment
  • The Board shall begin its activities following the signing of a Dispute Adjudication Board Agreement incorporating General Conditions of Dispute Adjudication Agreement and the Procedural Rules.
  • The Board members are independent experts who cannot assign or subcontract any of their services or duties.
  • The Board shall visit the Site and meet with representatives of the Parties and the Engineer at regular intervals, at times of critical construction events, at the written request of either party.
  • When a dispute is referred to the DAB it will hear the case and make a decision within 84 days.
  • It has jurisdiction for all disputes which arise out of the Contract or in connection with the Contract, or the execution of the works.
  • The Board is authorised to investigate the merits (unlike say an arbitrator).
  • Typically there will be a hearing (on Site or other convenient location).
  • Decision given and it must be reasoned.
  • A Board may typically open up, review and revise any certificate, determination, instruction, opinion or valuation of the Engineer (Red & Yellow Book) or Employer´s Representative (Silver & Gold Book).

Crucially a party that wants to challenge a decision must serve a Notice of Dissatisfaction within 28 days otherwise the Decision becomes automatically final and binding upon the Parties.

The obligation to use the DAB procedure under clause 20 prior to referring a dispute to arbitration, has recently come under the spotlight both in Switzerland and in England. Sub-Clause 20.2 provides that "Disputes shall be adjudicated by the DAB in accordance with Sub-Clause 20.4" (emphasis added) whilst Sub-Clause 20.4 states that "If a dispute (of any kind whatsoever) arises between the Parties…either Party may refer the dispute in writing to the DAB.." (emphasis added). As such the conflicting use of the words “shall” and “may” in sub-clauses 20.2 and 20.4 respectively created debate as to whether a party was obliged to refer a dispute to the DAB, prior to commencing an arbitration.

Starting with the recent case heard by the Swiss Supreme Court (case no. 4A_124/2014)

This case concerned a French construction company (the Contractor) and a state-owned entity responsible for the construction of a national highway (the Owner). The Contractor notified the Owner of its intention to refer to a DAB and although the process began and progressed slightly, the appointment of the chairperson was delayed for various reasons, for which the Owner was primarily responsible. Consequently, the Contractor filed a request for arbitration. The arbitral tribunal decided that the DAB procedure was simply one of the dispute resolution options available to the party, but it was not mandatory. The Owner sought to get the arbitral award set aside.

The Swiss Supreme Court disagreed with the tribunal deciding that, whilst clause 20 permits some exceptions, the procedure is indeed mandatory. It relied primarily on the use of the term “shall” in sub-clause 20.2, a systematic interpretation of clause 20 as a whole and the fact that should the procedure be optional, it would undermine FIDIC’s dispute resolution mechanism. Nevertheless, the court decided that clause is subject to the principal of good faith and due to the substantial delay caused by the Owner in the facts of the case, the Swiss Court used this principle to uphold the tribunal’s award. Absent an express contractual provision, the issue of good faith is one that is not yet settled in English law [1] so the Swiss Decision may not be relevant but, in any event, there is a very recent case which deals with similar issues under English law, and was under the FIDIC silver book.

Peterborough City Council v Enterprise Managed Services Limited [2014] EWHC 3193 (TCC) QBD

Concerns a dispute between the Council and EMS which had agreed to design supply, install, test and commission a 1.5 MW solar energy plant on the roof of a Council owned building. It was a term of the Contract that EMS was to provide plant generation a minimum id 55kW by 31 July 2011 failing which, it was to pay liquidated damages in the region of £1.3m. In this case the Technology and Construction Court in London concluded that, within the meaning of clause 20 of the FIDIC Conditions of Contract for Design-Build and Turnkey, a referral of a dispute to a DAB under FIDIC is indeed mandatory and a precondition to commencing an arbitration. As such, a claim was stayed in order to enable the DAB to determine the dispute first.

However, despite the Peterborough case the position is not entirely free from doubt. That is because in this case the dispute resolution mechanism was litigation, in the standard FIDIC form it is arbitration (absent any contract amendment). Counsel for Peterborough Council argued that there is a "gap" in the FIDIC provisions, which arises when the DAB has made a decision and one of the parties has served a Notice of Dissatisfaction which, in turn, makes the DAB decision binding but not final.

The issue

Absent a litigation provision pursuant to which specific performance can be sought, a party who has been successful in a DAB but is faced by non-compliance by the other party can only (or so it is said) refer the non-compliance to another DAB, thereby potentially entering into circular DABs in the sense that a party can continuously refuse to comply with a DAB decision thereby making somewhat of a mockery of the entire process. This issue is to be contrasted with the Swiss Decision which recognises the duty of faith.

So whilst it seems we have reached some form of conclusion on the mandatory nature of the dispute mechanism envisaged by FIDIC, the position is not entirely free from room for manoeuvre. No doubt there will be more on this issue to come.