First published in Construction Law

In the Swiss Federal Supreme Court's decision dated 7 July 2014 (4A_124/2014), the court upheld the multi-tiered dispute resolution system in cl 20 of FIDIC 1999. The court held that the Dispute Adjudication Board (DAB) was a mandatory pre-arbitration tier but that in some instances the principle of good faith allowed an exception such that a party could not object to arbitral proceedings due to absence of a DAB decision.

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In this case the appellant and respondent entered into two contracts for the respondent to restore 76km of road which included the FIDIC 1999 Conditions. On 10 March 2011, the respondent advised that it was to bring a dispute to a DAB for 21,086,612 euros. Clause 20.2 and 20.8 FIDIC 1999 Conditions suggest that the DAB is a mandatory pre-arbitration tier.

The constitution procedure for the ad hoc DAB and entry into the adjudication agreement continued for over a year and on 27 July 2012, the respondent filed a request for arbitration at the ICC notwithstanding that the adjudication agreement had not been signed and the DAB had not rendered a decision.

The appellant argued that the dispute resolution procedure had not been followed and the arbitral tribunal issued a majority partial award accepting jurisdiction over the respondent's claim and rejecting the appellant's jurisdictional objections. The appellant then filed a civil law appeal for annulment of the partial award.

The Swiss court rejected the appellant's challenge and upheld the tribunal's decision but did not agree with the tribunal's reasoning. Contrary to the tribunal, which had held that the cl 20 DAB procedure was optional, the Swiss Court held that the DAB was a mandatory pre-arbitration tier, but that in some instances the principle of good faith allowed an exception such that a party could not object to arbitral proceedings due to the absence of a DAB decision.

The Swiss court placed considerable significance on the rationale behind FIDIC's multi-tiered dispute resolution system and also relied upon what it considered to be the correct interpretation of cl 20. It noted that construction is one of the areas most prone to disputes and that FIDIC had instituted a multi-tiered system of dispute resolution, with the DAB constituting one of the steps in the system, to empower the parties to manage disputes in an efficient, economical and swift manner. Regarding the interpretation of cl 20, the court noted that the English verb 'shall' in cl 20.2 corresponded to an obligation and that the FIDIC Gold Book provides that '”shall” means that the Party or person referred to has an obligation under the Contract to perform the duty referred to'. Notwithstanding the mandatory recourse to the DAB prior to arbitration, the court held 'the rule permits some exceptions…the exception is a case in point of the principle of good faith, which governs the procedural behaviour of the parties…Depending upon the circumstances, the principle will therefore prevent one of them from objecting on the basis of the absence of a DAB decision.'

The mandatory nature of reference to the DAB has been confirmed in Peterborough CC v Enterprise Managed Services Ltd [2014] EWHC 3193 (TCC), where the English court, unable to rely on a doctrine of good faith like the Swiss court, granted a stay of litigation proceedings to allow an adjudication to proceed, despite its expressed reluctance to force the parties to submit to a procedure which was unlikely to be determinative.