Two recent cases have provided welcome guidance on the issue of whether or not the FIDIC forms of construction contracts provide that it is mandatory to first refer disputes to the Dispute Adjudication Board (the "DAB") before proceeding to arbitration.
Overview of the relevant FIDIC clauses
The FIDIC 1999 Conditions of Contract for Construction (the "Red Book"), Plant and Design-Build (the "Yellow Book") and EPC/Turnkey Projects (the "Silver Book") all require disputes to be adjudicated, in the first instance, by a DAB. A key distinction between the three contract forms is the type of DAB envisaged; the Red Book provides for a standing DAB that will be appointed by a date stated in the Contract, whereas the Yellow and Silver Books anticipate the use of an "ad hoc" DAB that will be appointed if and when a particular dispute arises. The procedure for the referral of a dispute to the DAB is drafted on largely similar terms and is set out in Sub-Clauses 20.2 to 20.4 of all three FIDIC books. SubClause 20.6 establishes that a decision by a DAB is a pre-condition to the initiation of arbitral proceedings. However, Sub-Clause 20.8 goes on to provide that, if a dispute arises and there is no DAB in place, whether because the DAB appointment has expired "or otherwise", then the dispute may be referred directly to arbitration.
A v B, Civil Law Court Switzerland, 7 July 2014 (the "Swiss Case")
The Swiss Case concerned a FIDIC Red Book-based contract, governed by Romanian Law. While the contract provided for a standing DAB to be convened at the outset, this was not done. A dispute arose and only then did the parties seek to agree the candidates for the DAB. The Employer was uncooperative and after more than a year of correspondence between the parties the parties had still not confirmed the candidates for the DAB. The Contractor filed a request for arbitration with the ICC and this appears to have provoked the Employer into confirming the appointment of the members of the DAB and to finalise the Dispute Adjudication Agreement. However, FIDIC refused to appoint a DAB on the basis that the arbitration procedure had been initiated. The arbitral tribunal accepted jurisdiction over the claim.
The Employer appealed the tribunal's decision in the Swiss courts. The court noted that the FIDIC forms have a long-standing system of adjudication of disputes before final determination by arbitration; initially by the engineer, and in the 1999 suite by a DAB. The court highlighted that Sub-Clause 20.2 contains obligatory wording that disputes "shall" be adjudicated by a DAB, while Sub-Clause 20.6 establishes that a DAB decision is a pre-condition to starting arbitration.
As for Sub-Clause 20.8, the court decided that it refers to a situation where the "mission" of a standing DAB has expired prior to a dispute arising. The inclusion of the words "or otherwise" suggests that there might be other causes for the expiry of the DAB's "mission", such as the intransigence of the parties. The court considered that Sub-Clause 20.8 refers in general terms to special circumstances where parties wishing to refer a dispute to arbitration should not be required to revert to a DAB first.
The court was critical of the Employer's behaviour, describing the Employer's sudden desire to obtain a DAB decision, after over a year of prevaricating over the DAB's appointment, as "questionable at the very least". The only remedy that a party has in such a situation is to refer the dispute directly to arbitration. Therefore, the court considered that the arbitrators were right to find that the DAB was not in place when the arbitration request was filed and the appeal was dismissed.
Peterborough City Council v Enterprise Managed Services Ltd, 10 October 2014 (the "Peterborough Case")
This second case concerns a contract entered into on the FIDIC Silver Book terms for a solar energy plant in the UK. The contract provided for disputes to be first adjudicated by an ad hoc DAB, and final determination by litigation. The Employer alleged that the plant had failed to achieve the required output and therefore that it was entitled to a price reduction (as liquidated damages) under the contract, which the Contractor denied.
In July 2014 the Contractor gave notice of its intention to refer the dispute to adjudication by the DAB. However, a few weeks later the Employer issued its claim in the English court. The Contractor applied to the RICS (the nominating body named in the contract) who appointed the adjudicator for the DAB, and then made an application to the English court to stay the Employer's court action. The Employer submitted that Sub-Clause 20.8 was an "opt out" that enabled a party to refer the dispute to court if it did not wish to have a dispute resolved by the DAB. The words "or otherwise" was wide enough to include a situation where the Dispute Adjudication Agreement ("DAA") had not been executed and therefore there was no DAB in place. The Employer also argued that the DAB provisions at Sub-Clauses 20.4 to 20.7 should be unenforceable for lack of certainty, on the basis that if the unsuccessful party refuses to comply with a DAB decision the only remedy apparently available to the other party is to refer the dispute concerning the refusal to comply to yet another adjudication, giving rise to persistent noncompliance with DAB decisions and thereby depriving the other party of any effective remedy.
The court said that this issue might be arguable had the contract provided for arbitration, but in this contract the forum for final resolution of any dispute was litigation. There would be no problem with the court ordering specific performance of the obligation to comply with a decision of the DAB. Further, it did not matter that no DAA had been concluded, since all the relevant terms were in place once the Appendix to the Contract Conditions was completed. There would be an implied term of that agreement that the adjudicator was entitled to his reasonable fees. In any event, if either party refused to sign the DAA the court could compel it to do so by an order for specific performance.
The court rejected the Employer's arguments on Sub-Clause 20.8. It considered that Sub-Clause 20.8 "probably" applies only in cases where there is a standing DAB, rather than to a procedure for appointing an ad hoc DAB after a dispute has arisen. In relation to an ad hoc DAB, the court considered that the right to refer a dispute to it arises as soon as it has been appointed, since a dispute cannot be referred to a DAB that is not in place. The court exercised its discretion and ordered a stay on the basis that this would uphold the parties' contractual agreement as to how disputes would be determined.
In both cases the courts upheld the mandatory nature of the DAB provisions, but the outcomes were the reverse. The crucial difference in the two cases was in respect of how Sub-Clause 20.8 should operate in the case of a contract for a standing DAB and for an ad hoc DAB. The Swiss court was highly critical of the Employer's intransigence and ultimately decided that the Contractor in the circumstances was entitled to proceed direct to arbitration. While the Swiss court's decision is, of course, only of persuasive interest in other jurisdictions, it may serve to indicate the type of circumstances in which parties could refer disputes directly to arbitration rather than first to the DAB.
In the Peterborough Case the court upheld the mandatory nature of the DAB provisions on much the same grounds as the Swiss Case. The court's ruling on the Employer's argument that the DAB clauses should be unenforceable for lack of certainty provides welcome English precedent in situations where the contract provides for litigation rather than arbitration for final determination. Where contracts provide for arbitration, the position is still unclear; although the Singaporean Perusahaan case may be of persuasive influence (please see our October 2014 newsletter).