South Africa: Engineering Contracts – Tubular Holdings And FIDIC

Last Updated: 27 November 2013
Article by Nikita Lalla, Khaya Mantengu and Zama Ngcobo

Most Read Contributor in South Africa, September 2016

The dispute resolution terms of engineering contracts can cause problems. An example is the recent case of Tubular Holdings (Pty) Ltd v DBT Technologies (Pty) Ltd, an unreported decision of South Gauteng High Court.

DBT Technologies – a subcontractor  to Eskom in the Kusile Project – further contracted to Tubular Holdings in a deal worth some R1.3 billion.  ContractFIDIC's clause 20 governs the dispute resolution procedure.

Clause 20.4(4) of FIDIC provides that the decision of the Dispute Adjudication Board (DAB) 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'. Clause 20.4(5) provides that if either party is dissatisfied with the DAB's decision it can give a notice of dissatisfaction within 28 days.  Clause 20.4(7) says that a DAB decision becomes final and binding if neither party files a notice of dissatisfaction within the 28-day period. And Clause 20.6(1) says that in cases where the DAB's decision has not become final and binding the matter shall be resolved by arbitration or agreement.

What happened here was that there was a dispute between the parties, the dispute went to the DAB, the DAB made a decision, and DBT Technologies  gave notice of dissatisfaction within the 28-day period. The legal issue that arose was this: was DBT Technologies obliged to give effect to the DAB's decision pending the decision of the arbitrator?  Tubular Holding obviously argued that it was, but DBT Technologies took the position that the filing of the notice of dissatisfaction undid the effect of the DAB's decision.

The court had little difficulty with this one.   It said that the parties must promptly give effect to the DAB's decision,  that either party is entitled to file a notice of dissatisfaction within 28 days of the DAB's decision, but that the notice of dissatisfaction in no way detracts from the obligation to give prompt effect to the decision because this obligation precedes the notice of dissatisfaction. This means that the DAB's decision is binding unless and until it has been  revised by arbitration or agreement. In other words, the DAB's decision only loses its binding effect if and when it is revised.

The judge summarised this as follows:  'The parties must give prompt effect to a decision. If a party is dissatisfied he must nonetheless live with it but must deliver his notice of dissatisfaction within 28 days, failing which it becomes final and binding. If he has given notice of dissatisfaction he can have the decision reviewed in arbitration. But until that has happened the decision stands and he has to comply with it.'  He added this:  'The final sentence of clause 20.4(4) requiring the contractor to continue to proceed with the works, underscores the intention of the parties to the effect that life goes on and is not interrupted by a notice of dissatisfaction.'

The judge found support for this interpretation in case law. In the earlier unreported decision of Esor Africa (Pty) Ltd/Franki Africa (Pty) Ltd JV and Bombela Civils JV (Pty) Ltd, the same court held that a notice of dissatisfaction suspends neither payment nor performance, and that a company that has given notice of dissatisfaction is obliged to make payments in terms of the DAB's decision.   The judge said that he had to follow this earlier decision unless he was convinced that it was based on 'some manifest oversight or misunderstanding', or that a 'palpable mistake' had been made. He was not convinced of either of these things.

The judge referred to other cases too. He said that a similar approach had been taken in the case of Stocks & Stocks (Cape) (Pty) Ltd v Gordon and Others, where the court held that there was no objection to giving effect to an agreement in terms of which interim payments were made, if it was clear that it would be followed by an adjustment of account and a claim for repayment should the arbitrator set aside the opinion of the mediator.  .'

The court concluded by saying that the terms of the contract were not only clear, but also 'entirely consistent with other forms of contract and ... indicative of a practice currently existent in the construction industry to the effect that dissatisfied parties are required to give promptly effect to the decisions of adjudicators in question despite their notices of dissatisfaction; those notices merely allow a possible revision of these decisions without affecting their interim binding nature'.

The court therefore ordered DBT Technologies to give effect to the DAB's decision, and it declared that this decision would endure unless it was reviewed by agreement or arbitration. It also dismissed DBT Technologies' claim that, because the DAB's decision that the contract was 're-measurable' in respect of the eight particular claims that it had considered, the contract was re-measurable in respect of those eight claims only – the court said that the whole contract was a re-measurable one rather than a lump sum contract. DBT Technologies was therefore required to re-measure and  pay the 'Interim Payment Certificates' presented  by Tubular Holdings.

A further indication of the fact that this clause in FIDIC does cause problems is  the 'FIDIC Guidance Memorandum to Users of the 1999 Conditions of Contact'.  This documents deals with FIDIC's realisation that the DAB clauses – as drafted – lack teeth.  As drafted, it allows the losing party to avoid complying with the DAB's decision and to force the winning party to start from scratch; ie by having to refer the non-compliance with the DAB's decision back to a DAB.

FIDIC suggests that the following sentence be added to Clause 20.4 to clarify the position: 'If the decision of the DAB requires a payment by one Party to the other party, the DAB may require the payee to provide an appropriate security in respect of such payment.' FIDIC also suggests that Clause 20.7 be replaced with a clause that says that if a Party fails to comply with an order which is either binding or final and binding, the aggrieved party can refer that failure to comply to arbitration for summary or expedited relief. The Tubular Holdings decision, as well as the changes suggested by FIDIC, clarifies the rights of parties engaged in an adjudication under FIDIC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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