UK: FIDIC Dispute Adjudication Boards

Last Updated: 12 January 2015
Article by Jeremy Glover

Of all the provisions to be found in the FIDIC form, those of clause 20 have attracted by far the most comment. One of the potential hurdles that need to be overcome with clause 20 is the appointment of the Dispute Adjudication Board or DAB itself. This is dealt with in sub-clause 20.2 of the standard Red and Yellow FIDIC forms and sub-clause 20.3 of the Gold Book. One particular feature of the FIDIC form of contract is that obtaining a decision from a DAB is generally a precondition to a party being entitled to commence arbitration. This can often result in two conflicting questions:

  1. What can I do if the other party to the contract refuses to assist in the appointment of the DAB? How do I resolve my dispute if there is no DAB and no DAB decision? Can I go straight to arbitration?
  2. Do I have to go through the DAB process? The contract is at an end. Obtaining a decision of the DAB is just an unnecessary duplication of costs.

Interestingly there have been two recent decisions which address these issues, one from England and one from Switzerland. It is therefore possible to compare and contrast the approach of the Civil Codes and Common Law.

Switzerland: Decision 4A_124/2014

This was a decision of the Swiss Supreme Court.

The attempts to set up a DAB

On 6 June 2006, the parties entered into a contract based on the FIDIC Red Book. In March 2011, the Contractor notified the Owner of its intention to refer to a Dispute Adjudication Board (DAB) a claim for €21 million.

It was not until 2 May 2011 that both parties had appointed their respective adjudicators.

In October 2011, the prospective chair of the DAB was provisionally agreed. However, no formal appointment was made because the DAB Agreement was not itself agreed.

In March 2012, the prospective chairman disclosed a conflict of interest.

A further chairman was not agreed until 14 June 2012. That second prospective chair requested that the parties produce a draft agreement by letter dated 2 July 2012.

On 27 July, the Contractor filed a request for arbitration with the ICC and a three-member Tribunal was appointed, the seat of the arbitration being in Geneva.

On 13 September 2012, the prospective chair of the DAB circulated a draft Dispute Adjudication Agreement (DAA). On 18 October 2012, the Owner suggested some changes and invited the Contractor to sign the Dispute Adjudication Agreement.

The Contractor replied the following day, noting that as the DAB was still not in place some 18 months after it had first tried to initiate proceedings, it had initiated the arbitration procedure to protect its rights.

The Owner challenged the jurisdiction of the Arbitration Tribunal on the failure of the Contractor to follow the DAB procedure required by the contract.

The Decision of the Arbitral Tribunal

On 21 January 2014, the Arbitration Tribunal made an award, by a majority, holding that the DAB procedure contemplated by clause 20 of the FIDIC form was:

"not mandatory in that it would be a precondition to the right to initiate arbitration or that failure to observe it would lead to inadmissability".

The majority of the Tribunal noted that in the FIDIC Contracts Guide the commentary on sub-clause 20.8 states that one of the reasons that there may not be a DAB in place is because of a "party's intransigence", and pointed out that the FIDIC General Conditions do not set a time limit to constitute a DAB, which they said would argue against the mandatory nature of the prior procedure of dispute settlement established by FIDIC. The approximately 15 months (March 2011 to July 2012) it took for the parties to succeed in constituting such a body in the case at hand, without either party being entirely responsible for the delay, was said to be irrefutable evidence of that.

On 26 February 2014, the Owner filed a request to set aside the interim award for lack of the Tribunal's jurisdiction.

The Decision of the Swiss Supreme Court

First of all, the court considered whether the pre-arbitration procedure was mandatory. The court was of the view that it was. The word "shall" was an obligation or duty and means that the action to which the verb applies must be undertaken. FIDIC itself made this clear in the definitions section of the Gold Book where it states at sub-clauses 1.2(e) and (f ):

"'shall' means that the Party or person referred to has an obligation under the Contract to perform the duty referred to ... whilst 'may' means that the Party or person referred to has the choice of whether to act or not in the matter".

In the view of the court, the DAB dispute resolution proceeding foreseen by clause 20 of the General Conditions is mandatory insofar as it must be finished for an arbitration procedure to begin. However, the court also looked at the approach of the Employer or Appellant, noting that:

"The DAB contemplated was more similar to an arbitral tribunal of first instance rather than an actual DAB, considering that it would intervene so late in the development of the contractual relationships and even after they were extinguished, when the respective positions of the parties were already fixed and the opponents doubtlessly irreconcilable. Therefore, even though it was proscribed by the General Conditions in principle, its implementation may no longer have been absolutely necessary in view of the economy of the system because it was unlikely that it would avoid the initiation of the arbitral procedure reserved by Sub- Clause 20.6 of the General Conditions. Seen in this perspective, the Appellant's will to obtain a DAB decision no matter what appears questionable at the very least."

Further, the court noted that the procedure to constitute the DAB had started 15 months before the Respondent filed its request for arbitration (10 March 2011 to 27 July 2012), which is a long time "in the context of a dispute resolution mechanism supposed to be expeditious": five times longer than the 84 days within which the DAB procedure must normally be conducted. The court noted that, after initiating the process, the Contractor tried several times to restart the process despite the Employer's "passivity", a role it shook off only after the filing of the arbitration notice.

Swiss Court Conclusion

Accordingly, the court concluded that: "In this respect, considering the circumstances germane to the case at hand ... they cannot be criticized for failing to denounce the Respondent's failure to sign the DAA from the point of view of the rules of good faith. Pursuant to these rules and considering the process of constitution of the DAB, it is indeed impossible to blame the Respondent for losing patience and finally skipping the DAB phase despite its mandatory nature in order to submit the matter to arbitration."

Thus, although the court agreed that the DAB procedure was mandatory, it also took into account the reasons why there had been no DAB. Here it would be a breach of good faith for the Owner to insist on the mandatory nature of the DAB procedure, given the substantial delay in constituting the DAB for which it was primarily responsible. In addition, the court did question whether in circumstances where the project was over, the ad hoc DAB would in reality be similar to an arbitral tribunal at first instance. Would holding a DAB "have been absolutely necessary in view of the economy of the system"?

England: Peterborough City Council v Enterprise Managed Services Ltd1

Here, following completion of a project, Peterborough alleged that the plant had failed to achieve the required power output and claimed the Price Reduction. On 6 January 2014 Peterborough issued a letter of claim under the Pre-action Protocol. EMS responded that in accordance with the Contract terms the dispute ought to be referred to a DAB. Mr Justice Edwards-Stuart was therefore asked to consider whether or not the terms of the Contract required a dispute to be referred to adjudication by a DAB first as a pre-condition to any court proceedings. If that was correct, should the court exercise its discretion and order that the Council's proceedings be stayed?

On the first issue the Judge decided that upon a proper interpretation of the Contract, sub-clause 20.8 would only apply to give Peterborough a unilateral right to opt out of DAB adjudication if the parties had agreed to appoint a standing DAB at the outset. Accordingly, given that sub-clause 20.2 provided for ad hoc DAB appointments, the Judge accepted EMS's argument that the Contract required the determination of the dispute through DAB adjudication prior to any litigation. The right to refer a dispute to adjudication arises under sub-clause 20.4 as soon as a DAB has been appointed, whether under sub-clause 20.2 or 20.3.

Peterborough then argued that sub-clause 20.8 provided an opt-out from DAB adjudication but that if reference of a dispute to a DAB was mandatory, the court proceedings should be allowed to continue on the grounds that:

  1. what was a complex dispute was unsuitable for a "rough and ready" DAB adjudication procedure; and
  2. any DAB adjudication would be an expensive waste of time as it was inevitable that the losing party would go to court.

Peterborough submitted that any decision by the DAB would almost inevitably provoke a notice of dissatisfaction from one or other party. Accordingly, to embark on the fairly lengthy (and therefore expensive) adjudication procedure under the contract would be a wholly or at least largely unproductive exercise. The dispute raised complex questions of construction and application of legislation, mandatory codes and standard industry practice and would require extensive disclosure. Therefore the "rough and ready" process of adjudication was entirely inappropriate to resolve this dispute.

However, the Judge noted that this was nothing new: the complexity of a potential dispute about when the required power output was achieved was foreseeable from the outset, yet nevertheless the parties chose to incorporate the adjudication machinery in the FIDIC form of contract. Both parties therefore agreed to the "rough and ready" adjudication procedure.

That said, in circumstances where the parties had not yet invested time or money in the DAB adjudication, the Judge was sympathetic to Peterborough's case that the court proceedings should not be supplanted by adjudication.

However, the overriding principle, as illustrated by the English legal authorities, clearly showed a presumption in favour of leaving parties to resolve their disputes in the manner they had agreed to in their contract. Accordingly, the Judge ordered that the court proceedings were to be stayed.

The Swiss and English decisions compared

Although the circumstances of the cases were very different, both the English and the Swiss courts emphasised that DAB procedures must be treated as mandatory.

One of the main differences between the two decisions was the attitudes of the parties. In the Swiss case, the Employer was essentially trying to frustrate the entire dispute resolution process, first by moving very slowly when it came to the appointment of the DAB and then using the lack of a DAB to allege that the arbitration tribunal did not have jurisdiction. In the English case, the Employer did not really want to have a DAB, preferring to go straight to a final resolution of the case. This may, to a limited degree, have had an influence on the decision.

Thus whilst both courts did agree that the DAB was a condition precedent to arbitration, in England this meant that the parties had to submit to the DAB, even though the Judge recognised that there was a real risk of duplication of costs. This was not a case where either party had invested any time or money on the preparation for or conduct of an adjudication, and so it can fairly be said that it was better to have one dispute resolution procedure, even if more expensive and extensive, than to take the real risk that this will be required in any event in addition to an adjudication.

However in the Swiss case, the Supreme Court, perhaps because the Swiss Civil Code, like that of Romania, makes provision for the parties to act in accordance with the principles of good faith, looked at the whole circumstances of the disputes between the parties. Here the Contractor spent some 18 months trying to bring about the appointment of a DAB before resorting to arbitration. An Employer could not then in good faith insist on the mandatory nature of the DAB procedure it had done so much to frustrate in the first place. This is rather helpful for contractors who are faced with an employer who is apparently trying to prevent what is seen as a legitimate dispute from being resolved through the DAB process.

Footnotes

1. [2014] EWHC 3193 (TCC)

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