South Africa: FIDIC – Proactively Preserving The Contractual Relationship

The FIDIC suite of contracts has gone through extreme lengths to equip construction contractual parties with the tools to not only resolve disputes, but as far as possible to avoid disputes and preserve the contractual relationship between them.

Not only has FIDIC paved out a roadmap for parties in the form om a two-tier process to follow as a pre-condition to referring disputes to arbitration, it has also made these clauses in its contracts a golden principle which means that parties may not alter these provisions to bypass the two-tier process and refer the dispute directly to arbitration. The view is taken that not only is effective dispute resolution important for future contractual relationships in the construction industry, but dispute avoidance is a further attempt to better preserve the contractual relationship between parties and smooth out the bumps that an arbitration cannot.

FIDIC GOLDEN PRINCIPLE NO.5

In 2019, FIDIC published its 5 golden principles to regulate the use of its contracts: with the specific intention to prevent the abuse and misuse of the FIDIC contracts by parties making substantial changes to the provisions of the contracts through inserting special conditions – sometimes to the point where the contract could no longer be seen to represent the FIDIC contracts.

For purposes of this article, the FIDIC golden principle number 5 is the most important principle to take note of. Golden principle number 5 reads as follow: "Unless there is a conflict with the governing law of the contract, all disputes must be referred to the Dispute Avoidance/Adjudication Board ["DAAB"] for a provisionally binding decision as a condition precedent to an arbitration."

The most popular FIDIC contract used by parties wishing to enter into construction agreements is the FIDIC Redbook published in 2017 under FIDIC's rainbow suite of contracts ("the FIDIC Redbook"). The FIDIC Redbook is mostly used when the employer will provide the design of the works to the contractor.

Through FIDIC golden principle number 5, it is clear that FIDIC has taken a proactive approach to dispute resolution by encouraging and enforcing an approach of dispute avoidance between the parties. The fact that FIDIC decided to make this one of their golden principles and to restrict parties from altering their agreements to exclude the DAAB shows how serious they are about their stance to dispute avoidance.

THE DAAB

In terms of the FIDIC Redbook, the parties should appoint a DAAB within 28 days from receipt of the letter of acceptance, which means that the DAAB should be appointed at inception of the contract.

The idea is to have a DAAB selected to act as a further dispute avoidance function after the determination of the engineer. As evident from the provisions of the FIDIC Redbook contract, it is also the drafters' intention for a DAAB to be appointed from inception of the contract to act as standing board for the purposes of providing informal recommendations to encourage good contract management and timeously avoid disputes arising between the parties.

The FIDIC Redbook provides for the resolution of disputes according to a defined sequence with parties having to refer the disputes to two tiers of mandatory determinations before reverting to arbitration where the arbitrator will make a binding and final decision.

TWO TIERS OF DETERMINATION

The first tier of determination is for the parties to refer the dispute to the engineer. The engineer must consult with both parties in an endeavor to assist the parties to reach an agreement or resolve the dispute within 42 days of referral. If no such agreement could be reached, the engineer must make a determination within a further 42 days. It is important to note that in terms of the FIDIC Redbook, the engineer is required to act neutrally in these proceedings and must respond with a determination within a certain period – which prohibits them from leaving disputes unanswered or pending indefinitely.

Should one of the parties not be satisfied with the engineer's determination or the agreement reached between the parties, the aggrieved party should, within 28 days of such determination or agreement, give notice of dissatisfaction. The dispute shall be referred to the appointed DAAB within 42 days after the notice of dissatisfaction was issued. Should no notice of dissatisfaction be given, the engineer's determination will become binding on the parties.

The second tier of determination is for the parties to refer the dispute to the appointed DAAB. The DAAB will adjudicate on the dispute regarding the claims and make a determination that is binding (even if not final) on all parties, including the engineer, and compliance with the DAAB's determination should be ensured.

Should either party, or the engineer, fail to comply with the DAAB's determination, the aggrieved party may refer the dispute to arbitration. The dispute can also be referred to arbitration should either party give notice of dissatisfaction with the DAAB's determination.

As a means of further dispute avoidance, the FIDIC Redbook contract requires the parties to wait 28 days (described as the amicable settlement period) before referring the dispute to arbitration by way of a notice of dissatisfaction, during which parties are encouraged to attempt to settle the dispute and avoid arbitration.

If there is a failure to comply with the DAAB'S decision, the 28-day period does not apply and it can immediately be referred to arbitration.

After a party has given notice of dissatisfaction with the DAAB's decision, a period of 182 days has passed and no arbitration has commenced, the notice of dissatisfaction shall be deemed to have lapsed and the DAAB's determination becomes final.

CONCLUSION

It is a general issue that arises often in the construction industry that, as soon as a dispute reaches the stage of arbitration, the relationship between the parties has reached such a stage of disintegration that there are no prospects in salvaging it and to enter future contracts with one another. This is the biggest reason why contractors fail to note issues with the employer as they are wary of where the relationship might end should the issue become a dispute and reach arbitration stage.

The intention behind the defined sequence which parties should navigate with regards to their disputes in relation to their claims, is for the parties to be assisted in obtaining fast and inexpensive relief. By utilising dispute avoidance and acting proactively in relation to disputes, parties can eradicate (or at least significantly reduce) the costs of litigation by resolving the dispute before resorting to arbitration. This is why dispute avoidance is regarded as an extremely important provision in the FIDIC suite of contracts, and why golden principle number 5 is worth its weight in gold.

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.