DAB UNDER THE FIDIC CONTRACT 1999 – IS IT MANDATORY OR OPTIONAL?

Abstract

In the field of construction, barring dispute resolution by Arbitration, the Dispute Adjudication Board (hereinafter referred to as “DAB”) is a common dispute mechanism chosen by the contractual parties. The provisions stipulating DAB have been explicitly recognized by the International Federation of  Consulting Engineers (Fédération Internationale des Ingénieurs–Conseils) under the FIDIC Contracts. To date, DAB has been stipulated under the construction laws in many countries, including Vietnam,[1] recognizing that the provisions of DAB facilitate more options for the contractual parties to resolve disputes efficiently and timely, as well as minimize the impact on the construction process.

According to the FIDIC Contracts 1999,[2] prior to a dispute being settled via arbitration, the dispute must be resolved by the parties via a DAB. Relative to dispute resolution by a DAB, the common issue that the parties must attend to is: “Are DABs a mandatory procedure or not? In which case(s) can the parties circumvent the DAB procedure to directly submit a dispute to the arbitration (or court) for resolution?”.

By interpreting the nature and the dispute resolution procedure by a DAB stipulated in the FIDIC Contracts 1999, as well as reasonings of several courts around the worldand specifically Vietnam, CNC is confident that this newsletter will effectively inform those parties involved in construction contracts and clarify the above mentioned issues.

Dispute resolution through DAB is a mandatory procedure

Based on the the process of dispute settlements stipulated in the FIDIC Contracts 1999, it is evident that dispute resolution via a DAB is compulsory before a dispute can be settled through arbitration. In particular, the process of dispute resolution through a DAB, as stipulated in Clause 20 of FIDIC Contracts 1999, can be summarized as follows:[3]

Step 1: A dispute arises.

Step 2: The dispute is referred to the DAB in writing for its decision under Sub-clause 20.4;

Step 3: The DAB announces its decision within 84-days (or otherwise proposed by the DAB and agreed upon by the parties); or it fails to give a decision within that timeframe.

Step 4: After the DAB announces its decision, it becomes final and binding upon the satisfaction of the parties. Whenever at least one of the parties is dissatisfied with the decision of the DAB; or with the DAB’s lack of decision, this party will notify the other party of its dissatisfaction and then the parties will resolve their dispute by amicable settlement.

Step 5: Within 56-days after the notice of dissatisfaction is given, and an attempt to amicably resolve the dispute fails, such dispute will finally be settled via international arbitration under the Rule of  Arbitration of ICC (under Sub-clause 20.6).

In the FIDIC Contracts 1999, Sub-clause 20.2 it stipulates that “Disputes shall be adjudicated by a DAB in accordance with Sub-clause 20.4 [Obtaining Dispute Adjudication Board’s Decision].” In addition, Sub-clause 20.4 (sixth paragraph) states that except as stated in Sub-clause 20.7 and Sub-clause 20.8, neither party will be entitled to proceed with arbitration of the dispute unless such notice of dissatisfaction (regarding the decision of dispute resolution by a DAB) has been given.

According to these provisions, it is clear that resolving a dispute through a DAB is required prior to dispute resolution through arbitration. In Divine Inspiration Trading 130 (Pty) Ltd. v. Aveng Greenaker & Ors, due to a dispute related to performing a payment obligation in a subcontract based on the FIDIC Red Book 1999, the subcontractor sued the main contractor in arbitration without first resolving the dispute through a DAB as prescribed in Clause 20 of the subcontract. After evaluating the contract, as well as communication and submissions of the parties, the arbitral tribunal held that it did not have jurisdiction to hear the dispute in which the DAB procedure had not yet been performed.[4]

Are there any exceptions in which the parties may directly submit a dispute for arbitration without going through a DAB procedure? Relative to this case, Sub-clause 20.8 [Expiry of Dispute Adjudication Board’s Appointment] prescribes as follows:

“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 expiration of the DAB’s appointment or otherwise:

20. Sub-clause 20.4 [Obtain Dispute Adjudication Board’s Decision] and Sub-clause 20.5 [Amicable Settlement] shall not apply, and
21. The dispute may be referred directly for arbitration under Sub-clause 20.6 [Arbitration].”

Accordingly, the parties in dispute may bypass the DAB procedure and amicable resolution as specified in Sub-clause 20.4 and Sub-clause 20.5 whenever the “expiration of a DAB’s appointment” or “otherwise” and submit the dispute for arbitration.

When is a DAB’s appointment considered to be expired?

Under the FIDIC Red Book 1999, the nature of a DAB is standing, while the DAB under the FIDIC Yellow and Silver Book 1999 is ad-hoc. Distinct in nature, as it leads to differences in the starting and ending times of the DAB’s appointment as specified in the FIDIC contracts.

Regarding the starting time of a DAB’s appointment under the FIDIC Red Book 1999, the parties appoint a DAB on the date stated in the Appendix of the Tender[5] which should be “28–days after the Commencement Date” according to the FIDIC Guide.[6] Meanwhile, the FIDIC Yellow and Silver Book prescribe that the appointment of a DAB is only conducted when a dispute arises.[7]

In the event that one of the parties delays the appointment of a DAB, Sub-clause 20.3 [Failure to Agree Dispute Adjudication Board] shall be applied. Accordingly, the appointment of a DAB will be performed by a third party prior to being agreed upon by the parties under the Particular conditions.

In connection to the expiration time of a DAB’s appointment, regarding to the FIDIC Red Book stipulates that the DAB’s appointment (including each member) shall only expire when the discharge referred to in Sub-clause 14.12 [Discharge] has become effective, unless otherwise agreed upon by the parties.[8] Meanwhile, the FIDIC Yellow and Silver Book state that the appointment of an ad-hoc DAB will terminate when the ad-hoc DAB provides a decision regarding the dispute, unless there are other agreements between the parties.[9] If a party desires to submit another dispute for resolution by the same ad-hoc DAB, such party must evaluate the professional suitability and determine the willingness of this ad-hoc DAB to adjudicate this dispute.

In accordance with the aformentioned provisions, regarding the FIDIC Red Book, the primary ground for the application of Sub-clause 20.8 related to the “Expiry of the Dispute Adjudication Board’s Appointment” (thereby skipping the step of resolving the dispute under the DAB’s procedures to directly file to arbitration), the existence of a dispute must be post completion of the payment obligation under Sub-clause 14.12 [Discharge] has come into effect (i.e the parties have agreed on all payment obligations under the contract). In fact, it is less likely that any dispute will occur in this case. Therefore, from our perspective, it is not common for the parties to apply “the expiry of the DAB’s appointment” under the FIDIC Red Book.

Regarding FIDIC Yellow Book and Silver Book, whenever a dispute occurs, an ad-hoc DAB will be appointed pursuant to Sub-clause 20.2 and Sub-clause 20.3 to settle the dispute. Consequently, applying “the expiry of the DAB’s appointment” under Sub-clause 20.8 to bypass the DAB’s procedure, which is only applied for a standing DAB in the FIDIC Red Book, seems to be inconsistent with the nature of an ad-hoc DAB.

How is “otherwise” under Sub-clause 20.8 interpreted to bypass the DAB procedure

Owing to the open and very vague expression of the word “otherwise” in the first paragraph of Sub-clause 20.8, to date, the application of this provision has been controversial as a result of varying interpretations and applications. To evaluate the interpretation and arguments of the contractual parties, we have analyzed 2 cases resolved by foreign courts and 1 case resolved by a Vietnam court as follows:

Switzerland: The Decision No.  4A 124/2014 of the Swiss Supreme Court

On 6 June 2006, the parties entered into a contract based on the FIDIC Red Book 1999. In March 2011, the Contractor notified the Employer of their intention to refer a dispute related to a claim for EUR 21-million to a DAB for resolution. However, since the parties were unable reach an agreement on the appointment of a DAB’s member (Dispute Adjudication Agreement, referred as “DAA”), there was no DAB in place as of July 2012. The dispute subsequently was filed for Court of Arbitration at the International Chamber of Commerce (“ICC Arbitration”). In Octorber 2012, regardless of the Employer’s suggestion to sign a DAA for dispute resolution by a DAB, the Contractor rejected this suggestion and explained that since the DAB was still not in place for approximately 18-months. The Employer then challenged the jurisdiction of the arbitral tribunal of the ICC Arbitration due to the failure of the Contractor to comply with the dispute resolution process as stipulated in the contract.

In January 2014, the arbitral tribunal issued an interim award on jurisdiction, in which, the tribunal argued that the DAB procedure is optional and one of the reasons was that Sub-clause 20.8 allowed direct recourse to arbitration without resolving through DAB procedure .

The Employer subsequently filed the a request to the Swiss Supreme Court to set aside the interim award for lack of the tribunal’s jurisdiction over dispute resolution. The Court made a decision to reject the Employer’s request, in which, the Court clarified the following two issues:

• Sub-clause 20.8 cannot be interpreted toward the approach that the DAB is not a mandatory procedure.

The Swiss Supreme Court argued that a dispute resolution mechanism through a DAB would no longer be meaningful if the tribunal’s approach to interpret the DAB procedure under Sub-clause 20.8 as an optional procedure if at the time arbitration proceedings were initiated, but the DAB had not yet been appointed or there was no DAB in place, no matter for what reason. Additionally, Sub-clause 20.8 should be interpreted in good faith since “otherwise” was literally understood and adopted in the broad interpretation (i.e all cases when disputes arise without a DAB) to bypass the DAB procedure, the “multi-tiered” dispute resolution process according to the purpose of the drafters of FIDIC had in mind would not be performed effectively. It originates that regarding an ad-hoc DAB, dispute always arises prior to the establishment of a DAB, in other words, “no DAB in place” at the time that disputes arise.

• “Good faith” is one of the factors to be considered when allowing the parties to bypass the DAB procedure.

The Court affirmed that the DAB procedure was mandatory and the parties had the obligation to conduct. However, the Court emphasized the importance of determining the parties’ intentions, dedication, and good faith during the process of appointing a DAB.

Regarding the Employer’s suggestion to sign a DAA after the Contractor filed the dispute to ICC Arbitration for the parties to return to dispute settlement through DAB, the Court held that the intentions and purposes of the parties must be considered. It took approximately 15 months from the time the Contractor notified of its intention to refer the dispute to the DAB to the time the dispute was filed to the ICC Arbitration, five times the period of 84 days – the usual time for conducting DAB procedures. During this period, the Contractor made a great effort to carry out DAB procedures despite the Employer’s “ignorance”. Therefore, in compliance with the principle of good faith, the Contractor could not be blamed for not signing the DAA, leading to the appointment of DAB is invalid. The court argued that the Employer’s suggestion to sign a DAA when the dispute had already been filed to arbitration breached the principle of good faith with the intention of deliberately delaying the resolution of the dispute.

England: Case Peterborough City Council vs. Enterprise Managed Services Ltd of the England and Wales High Court

In this case, a contract was signed between Peterborough City Council ( “the Employer”) and Enterprise Managed Services (“the Contractor’) relative to a solar energy plant. The contract was made on the FIDIC contract Silver Book 1999.

In 2014, there was a dispute arising out of the price reduction between the Employer and the Contractor, accordingly, the Contractor gave notice of its intention to refer the dispute to a DAB in accordance with the dispute resolution process specified in the contract. At that time, since there was no DAB established, the Contractor requested to appoint members of the DAB. However, the Employer filed to the England and Wales Hight Court for court proceedings to resolve the dispute and argued that the DAB procedure was optional. The Employer also assumed that in the event that the DAB was deemed as a mandatory procedure, the Employer believed the dispute should be settled by the court due to: (i) the efficiency; and (ii) costs.

Responding the arguments of the Employer, the court stated that if the term “otherwise” was interpreted whenever disputes arose without a DAB where the parties could skip the DAB procedure, then Sub-clause 20.2 and Sub-clause 20.3 would never apply. This is because according to Sub-clause 20.2 and Sub-clause 20.3, all disputes arise at the time in which there is no DAB. The court stated that Sub-clause 20.8, with a similar provision in 3 model contracts (Red Book, Yellow Book, and Silver Book), would only apply in case of a standing DAB, not for the appointment of an ad-hoc DAB after the existence of a dispute.

Furthermore, the court also affirmed that the DAB procedure was agreed upon by the parties and recognized in the contract. Therefore, regardless of matters related to efficiency or costs, the parties must fulfil the obligation to conduct the dispute resolution procedure through a DAB rather than directly submitting the dispute to the court.

Vietnam: Decision No. 02/2020/QD-PQTT of the People’s Court of Hanoi (Vietnam)

On Feb 09, 2012, the Government of Laos and the Vietnam National Chemical Group (“Respondent”) signed the “Agreement on the exploitation and processing of Potassium rock salt”. Subsequently, on August 12, 2015, between the Respondent’s authorized representative, Rock Salt HC and VL Co., Ltd and the consortium contractor, including TTCL– K-UTEC – CECO (“Claimant”) and 4 other members signed EPC Contracts (based on the FIDIC Silver Book 1999). According to Sub-clause 20.6 of the EPC Contract, all disputes must be settled by arbitration in Vietnam, under the Arbitration Rules of Vietnam International Arbitration Centre (“VIAC”).

Due to a dispute arising during the performance of the EPC contract, the Claimant filed a Request for arbitration to VIAC for dispute settlement. After the arbitral tribunal issued an award, the Respondent made a claim to challenge the jurisdiction of the arbitral tribunal, including the conditions for dispute resolution through arbitration stipulated in the EPC contract.

Regarding the conditions to resolve disputes through arbitration under the EPC contract, the Respondent argued that since the parties had yet to initiate the DAB procedure and amicable meditation, the arbitral tribunal did not have jurisdiction to hear the dispute.

In Decision No. 02/2020/QĐ-PQTT issued by the People’s Court of Hanoi on April 23, 2020, the court stated that there was no legal basis to accept the Respondent’s complaint regarding the jurisdiction of the arbitral tribunal; and the Respondent’s request was impossible. Despite a plethora of correspondence between the parties from September 2016 to January 2019, no consensus was achieved. Therefore, the determination of the Claimant to file the dispute with the VIAC without prior DAB procedure and amicable mediation “was not contrary to the agreement between the parties specified in the EPC contract”. The reasoning of the court protected the interests of the contractor. In particular, if the dispute had been prolonged, owing to the lack of a DAB appointment, the contractor would have suffered serious damages.

In this case, the explanation given by the Claimant (and subsequently accepted by the court) of bypassing the DAB procedure was that the parties were unable to achieve a consensus on the appointment of a DAB and amicable settlement for a long time, moreover, the fact that the Respondent requested 3-step resolution while being aware of its inefficiency, being a waste of time, and the damages to the parties.

This argument was similar to the one accepted by the Swiss Supreme Court in the above-mentioned case, relative to the “good faith” of the parties during the process of appointing DAB members. It can be seen that such explanation can be considered a reason for courts to accept the parties’ failure to conduct the DAB procedure and permit them to directly file disputes to arbitration.

Conclusion

Although dispute resolution through DAB must be treated as a mandatory procedure in the process of dispute resolution under FIDIC Contracts, this procedure may be passed whether by reason of the expiry of the DAB’s appointment or otherwise specifed in Sub-clause 20.8.

Due to the differences in the interpretation and application, the matter whether the DAB procedure is allowed to pass or not is controversial when the parties participate dispute resolution through arbitration (or court), typically in the cases mentioned above. Accordingly, the Swiss Supreme Court and the England and Wales High Court both agreed that settlement through the DAB was a mandatory procedure and the phrase “otherwise” in Sub-clause 20.8 cannot be interpreted in broad meanings that whenever a dispute arises but there was no DAB in place, the parties could skip the DAB phase. Such interpretation will conflict with the FIDIC’s goal when recognizing provisions specifying dispute resolution through DAB.

Additionally, in the event that a parties endeavour to implement the DAB procedure but the other is not in act in good faith, skipping the DAB procedure is allowed. That is the common perspective of the Swish Supreme Court and the Court of Vietnam.

However, in comparison to 2 cases resolved by foreign courts, the court of Vietnam has not clearly interpreted the characteristics “mandatory” of the DAB procedure but only argued that the failure of conducting pre-arbitration procedures to file case to arbitration is not the ground to assume that the dispute is not under the jurisdiction of the arbitral tribunal[10] or to set aside the award issued by the arbitration.[11]

In conclusion, by analyzing reasonings and positions of courts, it can be seen that provisions regarding the DAB procedure must be interpreted and applied in good faith in according to features, circumstances of particular cases to follow the spirit and meaning of dispute resolution through DAB.

Download PDF here: [PDF] ENG OF PDF DAB 1999

———————————————————-

[1] Article 45.2 of Decree No.37/2015/NĐ-CP with the stipulation of a Dispute Adjudication Board, however, with the role of mediation, rather than performing an “adjudication” role as the nature of DAB under the FIDIC Contracts 1999.

[2] To the extent of this newsletter, the mentioned FIDIC Contract 1999 include Red Book, Yellow Book, and Silver Book.

[3] (2005) Christopher R.Seppala “The arbitration Clause in FIDIC Contracts for Major Works”, ICLR Volume 22, Part 2.

[4] Divine Inspiration Trading 130 (Pty) ltd v Aveng Greenaker & Ors, http://www.saflii.org/za/cases/ZAGPJHC/2016/99.pdf

[5] Sub-clause 20.2. (first paragraph), FIDIC Red Book 1999.

[6] FIDIC Contracts Guide was first  punlished in 2000, guiding the provisions of Conditions of Contract for Construction, Conditions of Contract for Plant and Design Build, and Conditions for Turnkey/EPC Project.

[7] Sub-clause 20.2 ( first paragraph), FIDIC Yellow and Silver Book 1999.

[8]  Sub-clause 20.2. (tenth paragraph), FIDIC Red Book 1999.

[9] Sub-clause 20.2 ( eighth paragraph), FIDIC Yellow and Silver Book 1999.

[10] Article 44 Law on Commercial Arbitration 2010.

[11] Article 68.2 Law on Commercial Arbitration 2010.

———————————

CNC^© | A Boutique Property Law Firm

The Sun Avenue, 28 Mai Chi Tho, Phuong An Phu, District 2,

TP.HCM, Vietnam

T: (+84-28) 6276 9900 | H/L: (+84) 916 545 618

cnccounsel.com | contact@cnccounsel.com

cnclicense.com

hopdongmau.net