Nature and articulated effects of the decisions of dispute adjudication boards

Construction Law International homepage  »  November 2019

 

 

Mauro Rubino-Sammartano
LawFed BRSA, Milan

 

Construction projects have historically been fertile grounds for disputes and conflicts. Due to the complex nature of risks on a project, whether on a large-scale commercial or residential project, along with myriad other factors, conflicts can develop between the parties to a contract leading, most often, to increased costs. To respond to this, the construction industry has adopted less adversarial methods of resolution. This article considers various dispute resolution processes in other jurisdictions in light of the relevant provisions in the FIDIC General Conditions.

 

Nature of Dispute Boards

The surplus value brought by the Dispute Board

The flourishing litigation, to which large construction projects have given birth, has necessitated the international construction community to look for alternative solutions to avoid or at least to reduce such litigation. Examples of these include mediation and partnering.

In the second half of the 19th century, the construction industry developed mechanisms which through time have acquired a more limpid dimension, including:

• Dispute Review Boards (DRB), which are tasked with making recommendations to the parties;

• Dispute Adjudication Boards (DAB), which at the end of their enquiry make a decision; and

• Combined Disputes Boards (CDB), which generally make recommendations, but which may also – upon request by one of the parties, not opposed by the other one – make a binding decision.

These developments in dispute avoidance and dispute resolution have been used since 1981 when the first Dispute Board was used in relation to the El Cajon Dam contract in Honduras.1

The remarkable advantage of the DAB is that it inserts itself in the dynamics of the relationship between the parties, reviewing the prior decision of the Engineer (who inevitably has the vocation to be and is the faithful custodian of the interest of the Employer, who has hired them).2 It amounts then to an additional step in the ladder to settle the disagreements within the internal level of the construction project.

The surplus value of the DAB is that because its members are generally appointed at the beginning of the works and can follow the progress of the works, should a disagreement arise the DAB is familiar with the works and is well known to the parties.

The decisions of the DAB

The DAB operates under instructions given to it by the parties to the construction contract. In the broad sense, the relationship of the DAB to the parties seems to be based on a joint mandate.

The nature of the DAB’s decision is characterised by it being treated as a decision of the parties themselves, since it is made under their mandate.

The FIDIC Conditions of Contract 2017 (the ‘FIDIC Conditions’) provide for two contractual mechanisms before a dispute may be referred to arbitration: a decision by the Engineer and a decision by the DAB. If a party is dissatisfied with the DAB’s decision, then the dispute may be referred to arbitration.

It has been debated whether the referral of a dispute to a DAB amounts to the commencement of legal proceedings. It is advocated here that its contractual nature excludes it from being characterised as legal proceedings.

To deepen this analysis, it is useful to compare the DAB with other dispute resolution methods.


The remarkable advantage of the DAB is that it inserts itself in the dynamics of the relationship between the parties, reviewing the prior decision of the Engineer.


Comparison between the DAB and other dispute resolution processes

DAB and arbitration

The DAB’s decision is totally different from an arbitral award, since it has a contractual nature while arbitrators are entrusted with making a decision that has the same nature and effect of a state court’s judgment.

A more specific remark as to the nature of a DAB’s decision is that the arbitral award, made as a result of the challenge of the DAB decision, may not be treated as an appeal against it, since the claims and defences of the parties before the arbitrators may, at least partly, be different from those raised by them in the proceedings before the DAB.

Expert determination

The DAB process is not dissimilar to expert determination, a dispute resolution process in which a neutral third party is entrusted by the parties with the task to use their experience to decide a disagreement between them, based on technical, factual or even legal issues.

Expert determination originated in the United Kingdom3 and tends to be used in other countries of the Commonwealth.

The general view is that whoever is entrusted with an expert determination must act as an expert and not as an arbitrator.4

Expertise amiable

Another dispute resolution method, similar to the DAB, is the expertise amiable, originating in France, which consists of instructions given by the parties to an independent third party to resolve a disagreement between them. Generally, technical or factual issues are submitted to them.

The distinction between the procedural nature of arbitration and the contractual world in which the expertise operates is straightforward.5

Schiedsgutachten

In Germany and Switzerland, another method of dispute resolution is used, the Schiedgutachten. This method operates at the contractual level and consists of the parties entrusting a neutral third party to solve issues of fact and sometimes points of law.

The Schiedsgutachten has no procedural effects and, to enforce it, the parties must enliven the jurisdiction of a competent state court.

Contractual expertise

In Italy, one frequently resorts in such circumstances to a perizia contrattuale in which the parties refer a dispute to a contractual expert, who has to provide a technical solution or to arbitrato irrituale.


Various laws are eligible to govern a DAB clause. The first and immediate candidate is the law of the relevant contract (lex contractus). Other candidates are the law that governs the arbitration clause and eventually the law of the state in which the construction project is located.


Arbitrato irrituale

Arbitrato irrituale is a specialty of the Italian jurisdiction and consists of the appointment by the parties of a neutral third party to settle a dispute.

From this originates its definition as a ‘joint mandate to settle’ which has previously been advocated by this author.6

An alternative object of a joint mandate to settle may consist of instructions by the parties to such a neutral third party to make a decision that will be treated by them as their own decision.

What is common in all such proceedings is that they are quite distinct from the procedural nature of arbitration.

In Cinisello Balsamo,7 the Court of Cassation, the last instance in the Italian judicial system, held that arbitrato irrituale and procedural arbitration are similar tools. Five years later, that decision was abandoned and it has been affirmed that while arbitrato irrituale has a contractual nature, the procedural arbitration was equated to a state court judgment.

Analysis of some aspects of the proceedings

Applicable law

Once it is established that the DAB’s decision is a contractual mechanism to resolve a dispute, which has the same effect as a decision made directly by the parties, its precise characterisation will necessarily depend on the applicable law.

On this basis, the DAB’s decision may be treated as corresponding to an arbitrato irrituale in the Italian system, to an expertise amiable, a Schiedsgutachten or to an expert determination in the various other jurisdictions.

Various laws are eligible to govern a DAB clause. The first and immediate candidate is the law of the relevant contract (lex contractus). Other candidates are the law that governs the arbitration clause and eventually the law of the state in which the construction project is located.

It is suggested that best practice is to exclude the law of the arbitration clause because the DAB is a step prior to arbitration which has just a contractual nature.

In the absence of a different reference in a given construction contract, the location of the construction site should not be the decisive element in making such choice.

In the absence then of a provision expressly governing the DAB, or the disputes clause, the safest choice seems to be the lex contractus.

The DAB as a precondition to arbitration

As it is well known, the referral of a dispute to a DAB is provided for by the FIDIC Conditions as a step prior to arbitration. It is therefore to be considered as a precondition to arbitration. The English House of Lords had no difficulty in Channel Group8 in asserting that when the parties have decided to refer a dispute to experts and then to arbitration, this is the proper course of action when a dispute has arisen.

Difficulties may arise when the DAB, which is provided for by the parties, is not in place.

Clause 20.8 of the FIDIC Conditions 1999 provides that parties may refer the dispute directly to arbitration if there is no DAB in place.

If the DAB has not been constituted because one party has not cooperated, it ought to follow from this that the non-cooperating party be foreclosed by its conduct from opposing the absence of a DAB.

If the non-constitution of a DAB is the result of lack of action by all the parties concerned, it is suggested that they have waived by conduct the right to constitute it and that the dispute may be directly referred to arbitration. The Swiss Federal Court has expressed support for this approach.9

Provisions that regulate the conduct of DAB proceedings

The DAB proceedings are generally not regulated by statutory provisions but depend on the terms agreed by the parties in the contract (or subsequently with the consent of the DAB). This gives much latitude to the DAB.

Even if the notion of due process does not apply to contractual proceedings, the DAB is nevertheless required to be impartial, to allow the parties to present their views, to oppose the position of the other parties and to provide evidence of its allegations, that is, to act fairly and expeditiously.

The DAB will also be entitled to decide whether it has the authority to make a finding on the issue submitted to it, either because there is a dispute or on other grounds.

Non-compliance with the duty to refer a dispute to a DAB

Non-compliance by a party with its duty to refer a dispute to the DAB, or conduct that should obstruct or prevent the DAB’s decision, will amount to a breach of a contractual commitment and make that party liable for damages.

From the point of view of the arbitrators with regard to cases of non-compliance with the precondition to refer the dispute to the DAB, they generally have an option to dismiss the referral to arbitration or to suspend it, until the DAB proceedings take place.

The authority of the arbitral tribunal when a DAB decision is challenged before it

In the absence of different governing provisions, the arbitral tribunal has the authority to review and revise any decision of the DAB.10

A common ground, by which an arbitral tribunal can set aside a decision of the DAB, is where there has been non-compliance with its fundamental duties to act impartially, fairly and expeditiously.

Effects of a DAB decision

On the aforementioned grounds, it is noted that the DAB’s decision has no procedural effect. Since the mandate of the parties to the DAB is to make a decision of the same nature as their own decision, such as a settlement agreement entered into directly by the parties, the remedy in case of non-compliance with the DAB’s decision seems to be to institute court proceedings in which to claim specific performance or damages or to treat the contract as repudiated. This remedy will be granted by a state court, unless the parties have agreed that the dispute be referred to arbitration.

The state court or the arbitrator may render an interim decision on this issue – instead of dealing with it in its final decision – or, as in England, issue a summary judgment or elect to decide it at the end of the project together with the merits of the dispute.


The starting position in the FIDIC Conditions is that the DAB’s decision is, from its issue, binding on the parties.


The FIDIC Conditions, which are the general conditions most used in international construction, regulate in quite an articulated way the effects of a DAB decision, which has given rise to different judicial interpretations.

The starting position in the FIDIC Conditions is that the DAB’s decision is, from its issue, binding on the parties (Sub-Clause 21.4.3).

The FIDIC Conditions provide that, in the absence of a Notice of Dissatisfaction by the parties with the DAB decision, it becomes final and binding (Sub-Clause 21.4.4). On the contrary, in the event of a party being dissatisfied with the DAB’s decision, a remedy is available to it, which FIDIC has identified as arbitration (Sub-Clause 21.6).

By reference to the aforementioned, since the DAB’s decision is always binding on the parties, they are bound to promptly comply with the decision, unless and until such decision is terminated or amended by a settlement agreement or by an arbitral award (FIDIC Conditions, Sub-Clause 21.4.3).

If a party does not comply with a decision of the DAB, which, as aforementioned, is always binding – even if not yet final – the other party is expressly entitled to refer the breach to arbitration (FIDIC Conditions, Sub-Clause 21.7). By comparison, under Sub-Clause 20.7 of the 1999 FIDIC Conditions, only ‘final and binding’ DAB decisions are expressly provided for.

This aspect of the 1999 FIDIC Conditions has given rise to large discussions regarding non-compliance with a DAB decision, which was just binding, but not final and binding and has given birth to the Persero11 saga, which consists of two separate arbitral proceedings.

The construction literature has dealt twice with the Persero case.12 Relevantly, an arbitral tribunal was constituted arising out of a dispute between the Employer and the Contractor relating to the construction of a pipeline and an optical fibre system in Indonesia, namely of the challenge of a DAB decision. The DAB ordered the Employer to immediately pay to the Contractor the amount decided by the DAB, even if it had been challenged.

Both the Singapore High Court and then the Court of Appeal (which is the last instance in such jurisdiction)13 held – even if on different grounds – that the arbitral tribunal had erred, since before ordering the Employer to pay the Contractor, it should have re-examined the DAB decision.

The second Persero litigation14 started with a referral by the Contractor to another arbitral tribunal, in line with the finding of the Court of Appeal in the first litigation, of its claim that the Employer be ordered to comply with the DAB decision and that the entire dispute be re-examined.

The High Court considered the various options, consisting of the alternative between conducting two separate arbitral proceedings, one to enforce the DAB decision and the other one to review the merits of such litigation, and deciding them in only one proceeding.

The High Court held that both issues had to be decided in the same proceedings and that, in the first phase of such arbitral proceedings, an interim or partial award concerning the compliance with the DAB decision could be made.

The Court of Appeal, before which the judgment of the High Court was challenged, has clearly stated that the decision of the DAB was binding independently from the result of the decision on the merits and that the interim award, which had ordered the Employer to make the payment decided by the DAB, was valid and dismissed the challenge.

The 2017 FIDIC General Conditions have then expressly provided (Sub-Clause 21.7) that even a merely binding DAB resolution, if not promptly complied with, entitles the other party to refer the matter to arbitration to obtain an order that the failure to comply with it be sanctioned.

Such new clause and the Persero saga seem to give an adequate response to queries concerning the rights of a party when faced with a lack of immediate compliance with a DAB decision by the other contracting party.

 

Notes

1 C Seppala, Recent Case, Law on Dispute Boards, International ICC Disputes Resolution Bulletin, September 2012, 4.

2 M Rubino-Sammartano, ‘The Role of the Engineer – Myth and Reality’, end ed, Transnational Dispute Management, Vol 14, Issue 2, May 2017.

3 J Bailey, Construction Law, Vol 3, Informalaw, London, 2011.

4 C Freedman, ‘Expert Determination’, in De Ly and Gelinas, eds, Dispute Prevention and Settlement Through Expert Determination and Dispute Boards, ICC, Kluwer Law International, Vol 15.

5 M De Boisseson, Le droit français de l’arbitrage interne et internationale, GLN-Joly, 1990, 182.

6 M Rubino-Sammartano, Il Diritto dell’Arbitrato (Disciplina Comune e Regimi Speciali), CEDAM, VI ed, 2010.

7 Comune di Cinisello Balsamo c. Azienda Energetica Municipale SpA, Cass. Sez. Un., 1 agosto 2000, n. 527, Foro pad. 2001, I, 42.

8 Channel Group v Balfour Beatty Construction Ltd [1993] AC 334.

9 Swiss Federal Court, 7 July 2014, Docket No 4A-124/2017.

10 See Sub-Clause 21.6 of FIDIC Conditions 2017.

11 CRW Joint Operation (Indonesia) v PT Perusahaan Gas Negara (Persero) TBK (‘Persero I’) (CA) [2011] SGCA 33, [2011] 4 SLR 305.

12 See C Seppala, ‘How not to interpret the Fidic Disputes Clause. The Singapore Court of Appeal Judgment in Persero’, International Construction Law Review, 29, 2012, id. ‘Commentary on Recent ICC Arbitral Awards Dealing with Dispute Adjudication Boards under Fidic Contract’, ICC Dispute Resolution Bulletin, 2015; F Gillion, Enforcement of DAB Decisions under the 1999 Fidic Conditions of Contract. A Recent development: (CRW Joint Operations v PT Perusahaan Gas Negara Persero TBK, International Construction Law 2011, 388); id. ‘The Court of Appeal decisions Persero II: Are We Not Clear About the Steps to Enforce a Non Final Dab Decision Under Fidic?’, International Construction Law Review 2016, 4.

13 ICC Case no 16948.

14 PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation (Indonesia) (‘Persero II’) (CA) [2015] SGCA 30.

 

 

Mauro Rubino-Sammartano is Chairman Emeritus of IBA Committee T (now International Construction Projects Committee), Co-Founder of the European Society of Construction Law, Chartered Arbitrator, Advocate in Milan and in Paris. He can be contacted at mauro.rubino.brsa@lawfed.com.

 

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