Reed Smith Client Alert

Authors: Elinor Crowther

On 1 April 2013, FIDIC issued guidance on how to deal with a contracting party who has failed to comply with a ‘binding’ decision of a Dispute Adjudication Board

The standard FIDIC form of contract contains a tiered dispute resolution provision (clause 20). The first step is a referral of a dispute to a Dispute Adjudication Board (‘DAB’) whose role it is to make independent and impartial decisions. Where no notice of dissatisfaction has been served by a party, the decision of the DAB is said to be ‘final and binding’ and the decision can be enforced summarily through arbitration (clause 20.7). However, where a notice of dissatisfaction has been served, the decision of the DAB is said to be ‘binding’ (such that the parties must promptly give effect to it) but it is not ‘final’, since the underlying dispute may still be referred to arbitration for final determination (clause 20.6).

There has been some uncertainty as to how parties and how arbitral tribunals should treat a ‘binding’ decision in circumstances where one party chooses to ignore the decision and where there has been no final determination of the dispute by a tribunal. In short, if a party wishes to enforce a ‘binding’ decision, should a tribunal help it do so summarily, thus turning it into an arbitral award which is enforceable under the New York Convention, or should the tribunal review the decision of the DAB first?

This very issue came to be tried in Singapore in CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK. The Singapore Court of Appeal held, amongst other things, that an arbitral tribunal which summarily enforced a binding, but not final, DAB decision without hearing the merits of the dispute first had no jurisdiction to do so and the arbitral award was set aside.

On 1 April 2013, the FIDIC Contracts Committee issued guidance memorandum to address this issue.

The FIDIC guidance memorandum states that whether a DAB decision is ‘final and binding’ or simply ‘binding’ a failure to comply with that decision may be referred directly to arbitration and summary or expedited relief should be available

The guidance memorandum is designed to make explicit the intentions of FIDIC in relation to clause 20. At the same time, FIDIC has recognised the uncertainty of its own drafting and has provided a recommendation on how clause 20 should be amended to avoid the uncertainty.

In FIDIC’s view, ‘binding’ as well as ‘final and binding’ decisions of a DAB should be summarily enforced by a tribunal. However, this does not mean, and should not mean, that all DAB decisions are now expressed to be final: where a notice of dissatisfaction has been served (and the decision is not ‘final and binding’), the underlying merits of the dispute can still be examined later by an arbitral tribunal and the DAB decision opened up, reviewed and revised.

In providing guidance, FIDIC is seeking to ensure that the rationale behind DABs is maintained and parties who succeed before a DAB are able to enforce decisions quickly.

An obvious working example of a DAB decision and its binding effect is in relation to variations. If an employer disputes that there has been a variation to the scope of work but the DAB decides that there has been a variation for which the employer must pay, the employer must comply with the DAB’s decision and pay, even if it has given a notice of dissatisfaction. Otherwise, the contractor could end up funding disputed and costly variations for a long period until such disputes are finally resolved at arbitration. If an arbitral tribunal later decides the decision of the DAB was incorrect, it can, of course, make an award in favour of the employer. Although that may seem harsh on the employer during the interim period (and is one reason why tribunals and courts have appeared reluctant to allow summary enforcement), FIDIC has now provided a means whereby the employer might be given at least some protection (as discussed below).

To make clear FIDIC’s intentions, the FIDIC guidance memorandum recommends parties should now amend clause 20 of the general conditions (by including a new clause 20.4, replacing the wording of clause 20.7 and adding wording to clauses 14.6 and 14.7).

The new clause 20.4 gives the DAB the power to require a party to provide security where that party is to receive a payment as part of the DAB decision. Thus, if an arbitral tribunal reaches a different conclusion to the DAB, the party who has received a payment following the DAB decision should be able to recover the payment it made without difficulty. Of course, whilst the DAB can make such an order, enforcement of that part of the decision may still require the assistance of an arbitral tribunal. It will be interesting to see how many DABs are prepared to require security in the future.

The key change, however, is clause 20.7. FIDIC recommends the existing clause 20.7 be deleted in its entirety and replaced with the following:

“In the event that a Party fails to comply with any decision of the DAB, whether binding or final and binding, then the other Party may, without prejudice to any other rights it may have, refer the failure itself to arbitration under Sub-Clause 20.6 [Arbitration] for summary or other expedited relief, as may be appropriate. Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply to this reference.”

Substituting this provision means that, whether or not a notice of dissatisfaction has been served, the failure of a party to comply with any DAB decision may be referred to arbitration and summary or expedited relief may be given by the tribunal without the need to investigate the merits of the underlying dispute. Where, however, a notice of dissatisfaction had been served – and assuming the underlying dispute is referred to arbitration – an arbitral tribunal may later make its own determination of that dispute and, if necessary, “unwind” any previous decision.

Finally, the new wording at clauses 14.6 and 14.7 provides that any amount to be paid through the decision of a DAB should be included within the engineer or employer’s representative’s assessment of payment and the Interim Payment Certificate.

The guidance is only guidance at this stage

The guidance memorandum states that it is “highly recommended” that the new clauses and wording should be used in the Red Book, Silver Book and Yellow Book after 1 April 2013. The most recent edition of the FIDIC Gold Book has already dealt with this issue and it is extremely likely that the guidance will be incorporated into the new editions of the Red, Yellow and Silver books, when they are published.

What is clear is that contracts ought to be amended in order to clarify the position. The memorandum will therefore support a party wishing to make such amendments going forward. The guidance may, in contrast, be less helpful for those who have already entered into FIDIC based contracts with the un-amended wording since the guidance memorandum will, no doubt, be used to suggest the un-amended version of FIDIC must mean something different otherwise there would have been no need to amend the wording at all.

Even with the guidance, not all problems will be resolved

Even with the guidance, and amendments to the contract, not all problems will be resolved. DAB decisions cannot be directly enforced in the same manner as court judgments or arbitral awards, hence the need for them to be enforced through arbitration proceedings (or, if applicable, through a court) first. Commencing arbitration for a failure to comply with a binding DAB decision may create more difficulties than it resolves. First, the arbitral tribunal will still have to be persuaded to give summary or expedited relief, and not all arbitrators will be comfortable doing that. Secondly, obtaining an award to enforce a DAB decision will take time and will cost money. Thirdly, even where the arbitral tribunal makes such an award, it may not be ‘honoured’ by the losing party thus making enforcement proceedings necessary under the New York Convention. Fourthly, it will always be the case that a binding, but not final, decision of a DAB can later be the subject of arbitral proceedings, meaning that, even if the DAB decision is initially enforced, that decision may later be over-turned.

For this reason, where notices of dissatisfaction are served in relation to DAB decisions, contracting parties may continue to wait until the end of the project before starting arbitration with a view to resolving all decisions which are the subject of notices of dissatisfaction.

Client Alert 2013-130