UK: The Role Of Dispute Adjudication Boards Under FIDIC: A View From The Courts

The fact that the FIDIC suite of contracts, at clause 20, provides for disputes to be resolved by dispute adjudication board (DAB) prior to commencing arbitration proceedings means that disputes arising out of FIDIC contracts rarely come before the courts. However, two recent decisions provide helpful clarification on the operation of the provisions of clause 20.

Amended FIDIC Silver Book provided for DAB and litigation

In Peterborough City Council v Enterprise Managed Services Ltd, the contract in question was a FIDIC Silver book for a project which involved the design, supply, installation, and testing of a 1.5MW solar energy plant by Enterprise Managed Services (EMS) on the roof of a building owned by Peterborough City Council (the Council). The works were completed late and failed to achieve the stipulated power output. As a result, the Council claimed it was entitled to a price reduction, a fact disputed by EMS.

In Peterborough, Clause 20 of FIDIC Silver Book provided that disputes were to be referred to a DAB, whose decision was to be final and binding unless a notice of dissatisfaction is given, following which (in an amendment to the standard wording) the dispute was to be settled by the courts of England and Wales. Following an unsuccessful attempt to resolve the dispute by mediation, EMS gave notice under the contract that it intended to refer the dispute to adjudication, whereas shortly afterwards the Council issued and served its court claim. EMS issued an application for the court proceedings to be stayed so that the dispute could be referred to the DAB.

Clause 20.2.1 provided as follows:

"Disputes shall be adjudicated by a DAB in accordance with Sub- Clause 20.4 [Obtaining Dispute Adjudication Board's Decision]. The Parties shall jointly appoint a DAB by the date 28 days after a Party gives notice to the other Party of its intention to refer a dispute to a DAB in accordance with Sub-Clause 20.4."

It is clear that the DAB was to be the 'ad hoc' variety, convened to deal with a dispute as and when it arose, not the 'standing' variety, which is in place from the outset of the project. EMS contended that the requirement for disputes to be resolved by a DAB under clause 20.2.1 was mandatory, and accordingly the Council's issue of proceedings was premature and amounted to a breach of contract. Any alternative reading would, EMS submitted, render the subsequent sub-clauses (20.2 to 20.7) redundant.

Clause 20.8.1 defined circumstances when use of the DAB was disapplied:

"If a dispute arises between the Parties in connection with, or arising out of, the Contract or the execution of the Works and there is no DAB in place, whether by reason of the expiry of the DAB's appointment or otherwise:

(a) Sub-Clause 20.4 [Obtaining Dispute Adjudication Board's Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply, and

(b) the dispute may be referred directly to the courts of England and Wales under Sub-Clause 20.6 [Final Settlement]."

Was clause 20.8 a general 'opt-out' provision?

The Council argued that the provisions of clause 20.8 effectively allowed an 'opt-out' for a party that did not wish to use the DAB procedure and wanted to go straight to court. In scrutinising the operation of the procedure under clause 20, consideration was given to a perceived flaw in the FIDIC dispute resolution procedure. This occurs where a DAB decision has been given, and one party has given a notice of dissatisfaction, rendering the decision binding but not final. In those circumstances, if the unsuccessful party fails to comply with the decision, arguably the only remedy available to the other party is to refer the dispute arising from the non-compliance to a further DAB. This could lead to a course of consistent non-compliance from one party, thus depriving the other party of an effective remedy.

Court conflicted over forcing parties to submit to DAB

Mr Justice Edwards-Stuart acknowledged that this point was arguable where the standard wording was left intact and an arbitration clause was included, because of the limitations on arbitrators to order specific performance. However, in the present case where the forum for final resolution of the dispute was litigation before the English courts, it was possible for the court to intervene. The judge considered that clause 20.8 was intended to apply to those situations where a 'standing' DAB had been convened, but had, by the time of the dispute, ceased to be in place for some reason. It did not confer a unilateral right on a party to opt out of the adjudication provisions. Accordingly, the judge went on to find that a stay of the proceedings should be granted in order to allow the contractual machinery to be operated, although he had sympathy for the Council's arguments and reservations about forcing the parties to submit to a DAB procedure which was unlikely to be determinative. It is therefore fairly clear, that under English common law, the obligation to refer a dispute to a DAB is a mandatory one.

Open to abuse?

An interesting point raised in the case was the potential ability of the parties to abuse the dispute resolution procedure to avoid compliance. It should however, be remembered that FIDIC is an international contract used in numerous jurisdictions, many of which have civil codes which enshrine the concept of 'good faith' which does not exist under English common law. A recent Swiss case has looked at the relationship between 'good faith' and operation of the FIDIC dispute resolution procedure, and in doing so considered the same provisions as the English court.

The case in question, Decision 4A_124/2014, heard by the Swiss Supreme Court, considered the jurisdiction of an arbitral tribunal to hear a dispute under a FIDIC contract which had not previously been referred to a DAB. It involved two contracts between a French construction company (the Contractor) and a state-owned entity (the Owner) for construction of part of a national highway. The contracts incorporated the 1999 FIDIC conditions of contract, with the law of the contracts being Romanian law.

Unacceptable delay in constituting DAB led to arbitration

The Contractor claimed to be entitled to approximately EUR 21 million, and notified the Owner of its intention to refer the matter to a DAB in March 2011. Each party nominated an adjudicator but appointment of the DAB chairperson was prolonged for a variety of reasons. By June 2012 they had finally agreed on the chairperson, but had yet to conclude the dispute adjudication agreement (DAA). The following month, the Contractor made a request for arbitration to the ICC and a tribunal was appointed. A couple of months later, in September 2012, the DAB chair circulated a draft DAA. The Owner commented on this in October 2012, suggesting some amendments and inviting the Contractor to comment or confirm its agreement. The Contractor responded that an 18 month period had elapsed since it had first tried to refer its claim to the DAB, and it had thus been forced to pursue the matter via arbitration without first using the DAB. The Owner challenged the arbitral tribunal's jurisdiction because the DAB procedure had not been followed.

Was the DAB procedure mandatory or optional?

The parties agreed that the arbitral tribunal should deliver a preliminary award on the issue of its jurisdiction to hear the dispute. This it did, and in January of this year, (almost 3 years after the Contractor had first notified its claim) the tribunal confirmed its jurisdiction. The tribunal found that the procedure at clause 20 was optional rather than mandatory because:

  • Although the use of 'shall' in clause 20.2 was 'general' the use of 'may' in clause 20.4 indicated the DAB procedure was only optional
  • Clause 20.8 allowed the parties to go to arbitration if there had been an attempt to resolve a dispute using the DAB but no DAB was in place
  • The lack of a timescale for convening the DAB gave credence to the idea that the DAB tier was optional (although this was obiter)

In February 2014 an application was made to the Swiss Supreme Court to set aside the tribunal's interim award based on a lack of jurisdiction, relying on provisions contained in the Swiss Private International Law Act.

The Swiss Supreme Court rejected the Owner's challenge, although it disagreed with the tribunal's reasoning. In considering the nature of the provisions at clause 20 it applied a two-stage test, established in previous decisions, as follows:

  • Firstly, an assessment of whether the pre-arbitral tier was mandatory
  • Secondly, if so, whether the party challenging the tribunal's jurisdiction was acting in good faith

The court went on to disagree with the tribunal's finding that the DAB was optional, instead confirming that it was a mandatory pre-arbitration stage. In support of this conclusion it relied on:

  • Use of the word 'shall' in clause 20.2
  • A systematic interpretation of clause 20.2
  • The fact that interpreting clause 20.8 as an opt-out allowing a party to resort to arbitration whenever no DAB was in place would undermine FIDIC's dispute resolution system

How do obligations of 'good faith' affect the position?

In spite of this, it found that the failure to determine the dispute using a DAB before going to arbitration was not fatal to the tribunal's jurisdiction, and in doing so relied on the principle of good faith enshrined in Swiss law. In particular, the Owner's insistence on the mandatory nature of the DAB process was against good faith when it had been primarily responsible for the delays in constituting the DAB, whereas the Contractor had acted in good faith. The court questioned the purpose of forcing the parties to proceed with a DAB at this stage, when the project was over, given that the FIDIC system seemed to favour a standing DAB for resolution of disputes during the project.

Understanding how to manage the DAB procedure

It is clear from these two decisions that the requirement to submit to the DAB procedure in FIDIC contracts is a mandatory one, which cannot be opted out of by relying on the provisions of clause 20.8. It will only be in exceptional cases that the parties will be able to circumvent the DAB procedure in order to go straight to arbitration. Interesting questions are raised by these decisions, in particular, how an English court would deal with the question of inordinate delay and/or bad faith on the part of one party, given the absence of a good faith concept. In addition, how does one address the difficulties of dealing with a party intent on not complying with a binding, but not final, decision, where the ultimate dispute resolution procedure is an arbitral tribunal with limited powers. There are solutions available by amending the original contract wording, for example to provide that the DAB procedure is only to be operated during the course of the project, and once completion has been achieved the parties may choose to refer a dispute straight to arbitration. The problem of non-compliance with a DAB decision may be addressed by opting for litigation, rather than arbitration, so that appropriate orders may be sought. Some parties may prefer not to have a mandatory interim DAB procedure, and remove it altogether. It is useful to at last have consistent judicial guidance on the operation of these provisions from common and civil law courts.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.