Construction disputes and FIDIC: how the 1999 Red Book deals with disputes

If a DAB is formed and a decision made, the parties are required to “promptly give effect to [the decision of the DAB] unless and until it shall be revised in an amicable settlement or an arbitral award”. However, problems arise if one party is dissatisfied with the DAB’s decision.

Read more on construction disputes under the FIDIC Red Book

Construction disputes and FIDIC: tackling the enforcement gap

Construction disputes and FIDIC: enforcement through emergency arbitration

Updates to the Red Book in 2017 go some way towards tackling these issues. However, some contractors continue to use the 1999 Red Book for their projects.

Dispute adjudication boards in the 1999 FIDIC Red Book

A DAB is a specific type of dispute board created under the 1999 FIDIC Red Book. Dispute boards, made up of a panel of independent and impartial experts, provide a contemporaneous determination of disputes that arise during the execution of a construction project, before the parties resort to arbitration or litigation.

As a DAB is effectively a creature of contract, enforcement of a DAB decision is akin to enforcing a right under the contract. This is to be contrasted to the enforcement of an arbitration award, which is normally supported by legislation and the New York Convention (the international treaty of the United Nations), that provides a framework for the recognition and enforcement of foreign arbitral awards. 

It is our experience that the take-up of DABs, and dispute boards more generally, differs by jurisdiction. For instance, the use of dispute boards has been embraced in Australia and New Zealand. In many Asian countries, parties appear to prefer other forms of dispute resolution for various reasons, including the extra costs of setting up and maintaining a dispute board and the shortage of available board members. FIDIC is widely used in the Middle East, yet the use of dispute boards is less common there as it is often seen as an unnecessary step for parties to take before having disputes dealt with through arbitration or litigation.

The DAB’s place in the tiered dispute process ahead of arbitration

Within the FIDIC tiered dispute resolution mechanism, the DAB process sits between the engineer’s decision and arbitration. There are essentially five steps to be taken to resolve disputes relating to claims under the 1999 FIDIC Red Book:

• Engineer’s determination (sub-Clause 20.1): The contractor first notifies the engineer of its claim within 28 days after it became aware or should have become aware of the event, followed by full particulars of the claim within 42 days after becoming aware of the event. Within 42 days after receiving a claim, the engineer will give its determination on the principles of the claim.
• DAB decision (Sub-Clause 20.4): A disputed engineer’s determination on the claim can be referred to a DAB for adjudication, if a DAB has been formed. The DAB is then to give a reasoned decision within 84 days, or as otherwise agreed, of the referral of the dispute. Sub-Clause 20.4 confirms that both parties are required to promptly give effect or comply with a DAB’s decision.
• Notice of Dissatisfaction (NOD) (Sub-Clause 20.4): If the DAB does not give a decision, or either party is dissatisfied with the DAB’s decision, that party is entitled to give a NOD within 28 days, which would render the DAB’s decision “binding but not final”, meaning that the parties are required to comply with the decision but the decision is subject to final determination in arbitration.
• Amicable settlement (Sub-Clause 20.5): If a NOD is given, the parties are required to attempt to settle the dispute amicably before commencement of arbitration.
• Arbitration (Sub-Clause 20.5 & 20.6): If a dispute has not been resolved by a final and binding DAB decision or an amicable settlement, then it may be referred to arbitration. Unless otherwise agreed, the dispute may be referred to arbitration 56 days after the giving of NOD even if there has been no attempt at amicable settlement.

The DAB enforcement gap

The unfortunate reality is that parties may experience difficulties when enforcing DAB decisions under the 1999 FIDIC Red Book in circumstances where the other party refuses to comply with that decision.

To enforce a DAB decision that is not complied with, a party must initiate arbitration or litigation proceedings. This will in most cases result in additional costs, risks and delays. Ultimately enforceability will depend on the recognition of DAB decisions, and the availability and effectiveness of enforcement mechanisms, in the relevant jurisdiction.

The inherent problem with 1999 FIDIC Red Book is that a literal interpretation of the provisions leads to the conclusion that there is a gap in the drafting:

• Where a party has not issued a NOD within 28 days, according to Sub-Clause 20.4, the DAB decision will become final and binding. A decision is “not final and binding” only where a NOD has been issued under Sub-Clause 20.4 and the dispute has not been settled amicably under Sub-Clause 20.5.
• According to Sub-Clause 20.6, a party may only refer the underlying dispute to arbitration under the contract if the relevant DAB decision “has not become final and binding” (emphasis added), or in other words where an NOD has in fact been issued.
• Sub-Clause 20.7 then provides that a dispute relating to a party’s failure to comply with a decision may be referred to arbitration only in circumstances where no NOD has been issued and the DAB’s decision is final and binding.However, Sub-Clause 20.7 does not permit reference of the dispute to arbitration in respect of a party’s non-compliance, in circumstances where a NOD has in fact been issued.
• It is clear that there is no right under the contract to refer to arbitration the dispute in respect of a party’s failure to comply with a decision where a NOD has been issued - it is only permissible to refer the underlying dispute in these circumstances under Sub-Clause 20.6, and consequently, that there is no immediate mechanism to enforce compliance with a DAB decision where a NOD has been issued. Some opinions suggest that this defeats the very purpose of DAB in the first place, which is intended to provide parties with a contemporaneous binding decision that can facilitate continuation of works and cash flow.
• Significantly, there are no other contractual mechanisms in place to enforce compliance with a DAB decision or impose any specified consequences in case of failure to comply.

This enforcement ‘gap’ was specifically addressed in the Singapore case PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation in 2010. The case concerned a DAB decision made under a modified first Edition 1999 FIDIC Red Book for payment to the contractor arising out of the construction of a gas pipeline in Indonesia. The employer issued a NOD and refused to pay: the decision was therefore binding but not final. After almost seven years and two sets of proceedings in court, the Singapore Court of Appeal finally clarified that a paying party’s failure to comply with a binding but non-final DAB decision is capable of being directly referred to arbitration under Sub-Clause 20.6, without having to take the dispute in respect of that non-compliance first through the procedures of Sub-Clause 20.4 (DAB Decision) or 20.5 (Amicable Settlement).

The majority ruling effectively enforced a binding but not final DAB decision. This indicates the Singaporean court’s desire to give effect to FIDIC’s intention to require the paying party of a binding but non-final decision to pay first to facilitate the contractors’ cash flow. Whilst this case is binding under Singaporean law, and likely carries some weight in other common law jurisdictions, we are yet to see this interpretation being applied in other jurisdictions.

In an attempt to avoid similar lengthy proceedings, FIDIC issued a guidance memo proposing amendments to users of the 1999 FIDIC Red Book and in other FIDIC forms, before the issue was rectified in the 2017 FIDIC Red Book.

Co-written by Grace Fok of Pinsent Masons.