Revision of dispute resolution procedure in FIDIC construction contracts

By Helena Chen, CIETAC
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Helena-Chen-is-an-arbitrator-at-the-China-International-Economic-and-Trade-Arbitration-Commission-(CIETAC)-and-Pinsent-Masons’-China-joint-head-of-office.

The construction contracts for many international projects use a FIDIC construction contract as the basis, with the provision of Particular Conditions as required by the parties in order to specify the specific demands of the project. In December 2017, FIDIC announced revised versions of the Conditions of Contract for Construction (Red Book), the Conditions of Contract for Plan and Design-Build (Yellow Book) and the Conditions of Contract for EPC/Turnkey Projects (Silver Book), a major event that drew the attention of the industry (the three documents are hereinafter collectively referred to as the “New Versions” and the previous versions of the FIDIC construction contracts are hereinafter referred to as the “Old Versions”).

With respect to the dispute resolution procedure, one of the major revisions made by the New Versions is the renaming of the original Dispute Adjudication Board (DAB) to the Dispute Avoidance/Adjudication Board (DAAB), accompanied with related revisions, and further clarifying the role and the effectiveness of the decisions of a DAAB, points well worth our attention.

Firstly, in practice, there was a debate as to whether DAAB was a prior mandatory procedure before arbitration. A Swiss court in the Colas SA v Compania Naţională de Autostrăzi şi Drumuri Naţionale din România SA (4A_124/2014) and UK courts in the Peterborough City Council v Enterprise Managed Services Ltd ([2014] EWHC 3193) case and the Al Waddan Hotel Ltd v Man Enterprise Sal (Offshore) ([2014] EWHC 4796) case held that, pursuant to the Old Versions, DAB should be construed as a prior mandatory procedure that parties were required to carry out before arbitration or litigation. The New Versions follow the spirit that, in principle, before referral to arbitration, all disputes should first be submitted to a DAAB for handling, and that DAAB is a prior mandatory procedure before arbitration.

Secondly, with respect to the timing of the establishment of a DAAB, the Old Version of the Yellow Book specifies that, “The parties shall jointly appoint a DAB by the date 28 days after a party gives notice to the other party of its intention to refer a dispute to a DAB”. In contrast, the Old Version of the Red Book provides that, unless otherwise provided by the parties, a DAB is to be constituted within 28 days after the commencement of construction. In general, a DAB in the former situation (i.e., the constitution of a DAB only after a dispute has arisen) is known as an “ad hoc DAB”, whereas one in the latter situation (i.e., a DAB constituted after the commencement of construction) is known as a “standing DAB”. However, after a dispute arises, the parties often find it difficult to communicate, making agreement on the constitution of a DAB largely impossible. To avoid such a situation, the New Versions make the following revision: unless otherwise provided by the parties, a DAAB is to be constituted within 28 days after the contractor receives the Letter of Acceptance (pursuant to the Red Book and Yellow Book) or within 28 days after the parties sign the contract agreement (pursuant to the Silver Book), both of which are standing DAAB.

Thirdly, the New Versions clarify the effectiveness of the decision rendered by a DAAB: in principle, an amount that a DAAB decides that a party is required to pay to the other party is a due and payable amount that requires no other certificate or notice. If neither party submits a notice of dissatisfaction in respect of the DAAB’s decision within 28 days after the receipt thereof, the decision is binding on the parties and final, and even the arbitration tribunal has no power to review or modify the same. In contrast, if either party submits a notice of dissatisfaction with the DAAB’s decision within 28 days after receipt thereof, the decision remains binding on the parties, but is not final, as the arbitration tribunal could subsequently render a different decision thereon.

Fourthly, if either party fails to comply with the DAAB’s decision, whether the other party could directly refer such failure to comply with the decision for arbitration and request that the arbitration tribunal take interim measures to enforce the decision, or was required to again submit the same to the DAB for handling, was a subject of considerable debate in the past. The New Versions expressly provide that, “In the event that a Party fails to comply with any decision of the DAAB, then the other Party may, without prejudice to any other rights it may have, refer the failure itself directly to arbitration”. Furthermore, it may petition the arbitration tribunal to take, to the extent permitted by law, interim measures to enforce the decision. If the decision does not have final binding force, it is required to expressly state in the interim measure that the content of the final award will prevail in respect of the rights of the parties as to the merits of the dispute.

Fifthly, the Old Versions specified that, “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 Dispute may be referred by either Party directly to arbitration”. However, there was in the past in practice a debate as to whether a failure to constitute a DAB constituted “there is no DAB in place”. Given that the New Versions directly revise the relevant portion to read as follows, if “there is no DAAB in place (or no DAAB is being constituted), whether by reason of the expiry of the DAAB’s appointment or otherwise … the dispute may be referred by either party directly to arbitration”, this should put a stop to the debate.

In short, it can be seen that, as the recent revisions to the Dispute Avoidance/Adjudication Board procedure were the result of taking into consideration the numerous debates that existed in practice over the years and summarization of pertinent experience, they should be of assistance in permitting parties to better use the Dispute Avoidance/Adjudication Board procedure and in avoiding disputes, to the extent possible, or resolving them as soon as possible.

Helena Chen is an arbitrator at the China International Economic and Trade Arbitration Commission (CIETAC) and Pinsent Masons’ China joint head of office.