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Disputes under FIDIC contracts

Are proceedings before the Dispute Adjudication Board a necessary condition for seeking arbitration?

In a case before the Supreme Court of Poland, the contracting authority argued that the purpose of the FIDIC dispute resolution procedure is “to do everything possible to prevent the dispute from going to court.” Thus, in the case decided on 19 March 2015 (IV CSK 443/14), counsel asserted, “The amicable procedures cannot be avoided. They are mandatory.” On this basis, they sought to set aside an award issued by the Court of Arbitration at the Polish Chamber of Commerce in a dispute under a contract governed by the FIDIC contract, issued without prior proceedings before the Dispute Adjudication Board.

Meanwhile, the reason for providing for appointment of a Dispute Adjudication Board (DAB) in contracts governed by the conditions published by the International Federation of Consulting Engineers (FIDIC) is to ensure the participants in the construction process a tool enabling efficient resolution of disputes arising during the course of performance of the work, in a manner that does not threaten continued performance, and in other words should be fast and effective.

To resolve this issue, the Supreme Court analysed clause 20 of the FIDIC Conditions of Contract to determine whether these provisions require the parties to seek a decision from the DAB before seeking arbitration, and whether participation in the DAB under the FIDIC dispute resolution model is mandatory.

In this case, the Supreme Court did not decide whether the successive stages of dispute resolution according to the FIDIC terms, including DAB involvement in the dispute, are mandatory or optional. The court merely ruled that under the facts of the case, the parties had effectively modified the FIDIC general terms to agree that if no DAB was appointed, they could submit the dispute to arbitration immediately.

The ruling by the Supreme Court is not controversial, because it is based only on a determination of the mutual intent of the parties to the specific contract concerning modification of the general conditions. The holding does not apply across the board to all contracts using the FIDIC forms.

This makes it particularly worthwhile to consider the recent ruling by the Federal Supreme Court of Switzerland (judgment of 7 July 2014, Case 4A_124/2014). The court in that case examined whether proceedings before the DAB are a necessary condition before a case is submitted to arbitration under the standard wording of clause 20 of the FIDIC terms.

The Swiss case involved a dispute arising out of a contract between a French contractor and a Romanian public authority responsible for construction of motorways. The contract was concluded under the FIDIC terms (the court did not say which “colour” book was used). In 2011, after completion of the work, the contractor notified the contracting authority that it intended to submit a dispute to an ad hoc Dispute Adjudication Board under clause 20, after which the parties spent months back and forth trying to empanel the board. Three persons were ultimately selected to serve on the DAB, but the Dispute Adjudication Agreement required for the board to act was never signed. Finally, in 2012, 15 months after initially raising the dispute, the contractor commenced ICC arbitration. The contracting authority objected to the arbitration court’s jurisdiction, arguing that arbitration could not be sought until after the dispute was heard by the DAB. The arbitral tribunal issued a partial award upholding its own jurisdiction, and the contracting authority sought review by the Swiss federal court.

According to the Federal Supreme Court of Switzerland, the wording of clause 20 of the FIDIC terms indicates that proceedings before the DAB are a necessary condition for bringing arbitration. However, the court recognised that there are exceptions to this requirement which were applicable in the present case.

In its interpretation of clause 20, the court focused mainly on its literal wording, but also interpreted it as a whole, in light of the purpose of the provision. The court also pointed out that even though it is a form contract, it should be interpreted individually in light of the facts of the specific case.

The court thus held that the phrase in clause 20.2, “Disputes shall be adjudicated by a DAB…” means that submission of disputes to the DAB is a requirement, not an option. The court rejected the reasoning of the arbitral tribunal that the phrase in clause 20.4 stating that if a dispute arises, “either Party may refer the dispute in writing to the DAB for its decision,” is a special provision in relation to clause 20.2, and thus, according to the court, this provision does not suggest that proceedings before the DAB are optional. The court took the view that the word “may” in this context simply emphasises that this stage of dispute resolution is available to both parties.

The Swiss court also rejected the arbitral tribunal’s expansive interpretation of the exceptions under clause 20.8, which states that the DAB provisions (20.4) and the settlement provisions (20.5) shall not apply, and the dispute may be referred directly to arbitration, “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.” The arbitral tribunal had found that the dispute may be referred directly to arbitration anytime there is no DAB in place at the time the dispute arises. The court found that this interpretation was inconsistent with the FIDIC dispute resolution mechanisms, particularly in instances where (as here) the contract provided for appointment of an ad hoc DAB—which by definition could be appointed only after the dispute arises.

The court nonetheless held that there are exceptions to the obligation to refer a dispute to the DAB for decision. These arise out of clause 20.8 as well as the general principle of good faith: “Special circumstances, whether objective or not, must be reserved in which resorting to the pre-arbitration DAB procedure could not be imposed upon the party wishing to submit the dispute with its contractual counterpart to arbitration. Considered from the opposite perspective, the exception is a case in point of the principle of good faith, which governs the procedural behaviour of the parties as well. Depending upon the circumstances, the principle will therefore prevent one of them from objecting on the basis of the absence of a DAB decision. Yet, saying in advance and once and for all when it may be applied is impossible because the answer to the question depends upon the facts germane to the case at hand.”

The court pointed out that “the DAB system established by FIDIC was conceived above all with a view to constituting a permanent DAB and not an ad hoc DAB, the idea being to facilitate speedy disposition of the disputes arising during the performance of the project without jeopardising its continuation and having disputes decided by specialists appointed at the beginning of the contract and able to follow its implementation from the beginning to the end.” But here the referral occurred after completion of the work, when the positions of the parties were already fixed and irreconcilable and it was thus unlikely that the DAB procedure would head off arbitration. Moreover, the DAB was incapable of acting for a period of 15 months—5 times longer than the 84-day period provided in the FIDIC terms for issuance of a decision by the DAB.

Finally the court held that failure to sign a Dispute Adjudication Agreement (required under clause 20.2 for the DAB to act) meant that there was “no DAB in place” for purposes of clause 20.8, which justified resort to clause 20.8(b), i.e. referring the dispute directly to arbitration.

State courts rarely have occasion to interpret the FIDIC conditions of contract. Because the FIDIC terms are followed broadly around the world, this ruling is important also for contracts performed outside Switzerland under non-Swiss law.

The most important aspect of the reasoning by the Swiss court is that when determining whether proceedings before the Dispute Adjudication Board are mandatory or optional, the key is the purpose behind the FIDIC dispute resolution system, namely for the parties to obtain effective resolution of disputes. The ruling thus indicates that bad-faith attempts to block proceedings before the DAB will not deprive the other party of the right to proceed directly to arbitration.

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