Dispute Adjudication Board: Professional decision-making or a costly formality? | In Principle

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Dispute Adjudication Board: Professional decision-making or a costly formality?

The FIDIC contract terms provide that disputes between the investor and the contractor are to be decided by a Dispute Adjudication Board. But in Poland the board’s rulings are often ignored by parties who disagree with them.

The contract conditions published by the International Federation of Consulting Engineers (FIDIC) are commonly recognised in Poland as a consistent and comprehensive set of rules governing the dealings between the investor in a construction project and the contractor, enabling projects to be carried out using proven global standards for the construction process. But because the FIDIC terms are drawn from the common-law system, not all of the institutions introduced by the FIDIC terms exist in Polish law. The FIDIC general conditions are by nature universal, which requires a number of FIDIC institutions to be adjusted in the specific conditions of the contract to reflect local law and practice. Without such adjustment, it may turn out that the consequence of following the FIDIC form is the opposite of what was intended: instead of simplifying and bringing order to the construction process, it can introduce formal requirements with unclear legal consequences.

One of the provisions which the parties to the contract often accept unchanged concerns the Dispute Adjudication Board (DAB). The board operates at the authorisation of the parties under a procedure regarded as a form of alternative dispute resolution. The legal nature of this procedure and its final determination is not addressed by any Polish regulations. Consequently, a party dissatisfied with the ruling by the DAB will often feel that it is not bound by the decision and will then wait for the other party to commence a judicial or arbitration proceeding to finally resolve the dispute. This creates a situation as if the board had not issued a decision at all, which in turn throws into question the sense of having the DAB institution and conducting proceedings before the DAB.

Binding nature of DAB rulings

The legal commentaries in Poland do not recognise ADR decisions in general as either binding or non-binding. The most complete statement on this general point, which appears to be correct, is as follows: “Opinions formulated by experts, depending on the agreed contractual provisions, may be in the nature of recommendations, or decisions that are binding on the parties, although in the latter case the binding force of a decision may be set aside later in an arbitration proceeding, in which the parties dissatisfied with the decision may prove that it was defective (e.g. was issued in violation of the terms of the contract or provisions of law, or is not supported by the state of facts).” (G. Wujek in A. Szumański (ed.), System Prawa Handlowego. Arbitraż handlowy (System of Commercial Law: Commercial Arbitration), vol. 8, p. 773, n. 11))

It follows that whether a decision is binding or non-binding is determined by the intent of the parties expressed in their contract. Thus the FIDIC terms should be examined in more detail.

Dispute resolution is provided for in the FIDIC terms (e.g. the Conditions of Contract for Construction, known as the “Red Book”) in clause 20 (Claims, Disputes, Arbitration), and more specifically clause 20.4 (Obtaining Dispute Adjudication Board’s Decision) and clause 20.6 (Arbitration). An analysis of these provisions leads to the conclusion that a DAB decision is binding, based on the following arguments.

The task entrusted to the DAB by the parties is to resolve a dispute (clause 20.2), which occurs pursuant to clause 20.4, i.e. by obtaining a decision from the DAB. The wording used demonstrates that the determination issued by the board should be binding on the parties. Otherwise, the contract would different terms, such as “proposed resolution,” “recommendation,” or “suggestion.” But the contract terms categorically refer to resolution of a dispute by the DAB.

Consequently, the fourth paragraph of clause 20.4 provides, “The decision shall be binding on both Parties, who shall promptly give effect to it….”

Under general rules of contract interpretation (Civil Code Art. 65 §§ 1 and 2), words should be given the meaning they commonly carry. Under the rules set forth in the contract, the dispute which the DAB has addressed by issuing a decision should be regarded as resolved.

Significantly, the FIDIC terms provide for a procedure for setting aside a DAB decision, which strengthens the view that the ruling is binding in nature. It is indicated that a condition for regarding the ruling as binding is that the dissatisfied party is given a right to initiate arbitration, under clauses 20.4 and 20.6.

To set aside the binding force of a DAB decision, it is not sufficient merely to give notice of dissatisfaction or rejection of the decision under the fifth and sixth paragraphs of clause 20.4. Such notice permits the party dissatisfied with the board’s decision to reserve its right to question the decision in the future. If such notice is not issued within 28 days, there would be no possibility of challenging the decision at all, and in addition to being binding the decision will also become final. This is referred to in clause 20.4 (“If the DAB has given its decision as to a matter in dispute to both Parties, and no notice of dissatisfaction has been given by either Party within 28 days after it received the DAB’s decision, then the decision shall become final and binding upon both Parties.”)

Under clause 20.4, only an arbitration award (or settlement) will cause the decision by the board to cease to be binding, and then the parties must comply with the arbitration award (“The decision 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…”).

This means that so long as an arbitration award has not been issued concerning the dispute decided by the DAB, the DAB’s decision is binding on the parties.

Before commencing arbitration

But what about the situation where one of the parties gives notice of dissatisfaction with the decision of the Dispute Adjudication Board, but then fails to commence arbitration?

There is nothing in the FIDIC terms providing that while awaiting commencement of arbitration, the decision by the board is regarded as a nullity and loses force.

More specifically, the first paragraph of clause 20.6 does not dispel the binding nature of the DAB’s decision. This point only sets forth a typical arbitration clause, and in no way eliminates the binding nature of the board’s decision, stating that the dispute “shall be finally settled” by arbitration. The word “finally” assumes that there is already an earlier existing ruling (i.e. the DAB decision), but it is not yet final and therefore may be set aside.

The FIDIC terms do not provide a separate procedure for the parties’ ratification or approval of a decision by the DAB. The decision exists regardless of the subsequent intent of the parties, and resolves the dispute. Through their actions (notice of dissatisfaction or rejection), the parties may only make it possible for the decision to be revised in arbitration. But a condition for the decision to be revised is commencement of arbitration.

Enforcement of DAB decisions

In the literature and case law from the ICC International Court of Arbitration, it is stressed that the wording of the decision of the Dispute Adjudication Board is part of the content of the contract, and therefore a party’s failure to comply with the decision is regarded as a breach of contract (ICC Case 10619; T. Dedezade, “Are ‘Binding’ DAB Decisions Enforceable?”)

A consequence of this approach, however, is that DAB decisions are not grounds for execution in the manner in which judgments or administrative decisions are enforced.

Thus the possible mechanisms for compelling the parties to comply with DAB decisions depend on the wording of the contract. Clause 20.7 of the Red Book governs the failure to comply with a DAB decision, but does not introduce any mechanism for enforcement of the obligation to comply with a decision when notice of dissatisfaction has been given but no award or judgment has been issued yet.

Nonetheless, the absence of such a mechanism should not be regarded as weakening the binding force of a DAB decision. This lack of a mechanism is commonly referred to in the FIDIC literature as the “gap” in clause 20.7 (N.G. Bunni, “The Gap in Sub-Clause 20.7 of the 1999 FIDIC Contracts for Major Works,” International Construction Law Review 2005, vol. 22 no. 3 p. 11), but this is not regarded as exerting any negative effect on the binding nature of the decision.

If a party regards the decision by the DAB as unfavourable and treats it as a nullity, and thus proceeds to interpret and perform the contract on the basis of a position conflicting with the decision, in practice this will create another dispute between the parties directly tied to the dispute already resolved by the board.

Necessary clarification in the specific conditions

Despite delay in commencing arbitration and despite the view that the delay is in bad faith, the FIDIC general conditions do not provide any deadline by which arbitration must be commenced.

In consequence, a party may postpone initiation of arbitration so long that the claim under the contract becomes time-barred (in Poland, two or three years). This is a fairly long time, considering the average duration of construction projects, for the party that agrees with the DAB’s decision to continue relying on the decision during performance of the contract while waiting for a final resolution.

In such case, it is as if the burden of commencing arbitration is shifted to the party that prevailed in the DAB decision, rather than resting on the party dissatisfied with the DAB decision and presumably interested in seeking review of the DAB decision. In addition to the need for the party who prevailed in the DAB decision to have to commit resources to arbitration, seeking arbitration also entails the risk of unfavourable revision of the decision.

The problem of parties in Poland ignoring decisions by the Dispute Adjudication Board is common enough in practice to make it desirable for the parties to introduce a relevant modification in the specific terms of the contract at the stage of contract negotiation. The specific conditions would then contain wording providing for a reasonable period in which a party dissatisfied with a DAB decision must commence arbitration. The rules under which a DAB decision is binding on the parties should also be specified, as well as rules concerning liability for failure to comply with the decision, in a way that reflects the issues raised in the FIDIC contract terms and the commentaries.

Mirella Lechna, Infrastructure & Transport and Public Procurement & PPP practices, Wardyński & Partners