Practical Law

In the typical FIDIC scenario, the dispute resolution provisions sound delightfully straightforward. However, what happens if one of the parties doesn’t comply?

A typical FIDIC claim: engineer, DAB, dissatisfaction

A typical claim may go something like this…

The contractor refers a variations claim to the engineer. If the contractor does not like the engineer’s determination of that claim, it refers what is by that stage the “dispute” to the dispute adjudication board (DAB). The DAB then makes a decision.

If the DAB decides the employer should make payment to the contractor, clause 20.4 of the FIDIC Red Book 1999 requires the employer to “promptly give effect to [the DAB’s decision] unless and until it shall be revised in an amicable settlement or an arbitral award.”

If the employer is “dissatisfied” with the DAB’s decision, it can give notice of its dissatisfaction. The parties then try and settle the dispute amicably. If that is not possible, the parties can refer the dispute to arbitration.

Two difficulties

Two difficulties can arise in this scenario:

• The problem of enforcing the DAB decision, if the employer does not pay.
• The relationship between the dispute that is referred to the DAB and the dispute that is referred to arbitration.

This blog looks at the first difficulty. The second difficulty will be the subject of my next post.

Enforcing the DAB decision if the employer does not pay

The DAB decision is binding but not final. This means that the employer must honour the DAB’s decision, even if it has given a notice of dissatisfaction. Otherwise, the contractor could end up funding disputed variations, whose cost in a large project may be very significant.

However, contractors sometimes encounter employers who give notices of dissatisfaction, but then refuse to make the additional payment ordered by the DAB. The employer will be in breach of contract, but what practical steps should the contractor take in these circumstances?

Court of Appeal in Singapore: interim award to enforce DAB decision

The actions a contractor should follow were discussed last summer by the Court of Appeal in Singapore in CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK. Following the typical scenario outlined above, the court said that the contractor should “secure an interim or partial award from the arbitral tribunal in respect of the DAB decision pending the consideration of the merits of the parties’ dispute(s) in the same arbitration”.

This means that the contractor should commence arbitration and then require the arbitral tribunal to issue an interim award for the sum ordered by the DAB to be paid immediately, without investigating the merits of the claim. The arbitration would then deal with the overall merits of the dispute in its final award and the sum ordered by the DAB could be adjusted upwards or downwards.

Advantages and disadvantages

From the contractor’s perspective, this has some attraction, as claims presented to a DAB are sometimes prepared in tight timescales that do not allow sufficient time to investigate all aspects of the matter. This may be reflected in the DAB’s decision.

However, this approach also creates problems for a contractor. For example, the arbitral tribunal must be persuaded to issue an interim award. Not every arbitral tribunal will follow the suggestion in CRW. It will also take time to obtain any such award, which, if not honoured by the employer, must be enforced. Enforcement may not be straightforward. Additionally, the contractor may not want to commence arbitration proceedings, particularly as this could prompt an unwanted counterclaim from the employer, which might not otherwise be made.

FIDIC’s approach in future?

Interestingly, FIDIC are alive to this problem. In the most recent edition of the FIDIC Gold Book, there are provisions that make it harder for the employer to argue (with any credibility) that it is not required to honour DAB decisions that are binding but not final.

Those who draft contracts can do all they can to anticipate and solve these problems. However, the commercial reality of life is that, if employers do not behave themselves and breach the contract, life will be far from straightforward.