Out-Law Guide 5 min. read

Construction disputes and FIDIC: tackling the enforcement gap

The updated 2017 FIDIC Red Book incorporates enhanced dispute board provisions, designed to assist the parties in dispute avoidance as well as dispute resolution.

The refocused dispute adjudication board (DAB) under the 1999 FIDIC Red Book has been renamed the dispute avoidance / adjudication board (DAAB). The changes introduced in 2017 go some way towards tackling the difficulties parties may experience when enforcing DAB decisions under the 1999 FIDIC Red Book in circumstances where the other party refuses to comply with that decision.

This is clear from the new title of the board as a dispute avoidance / adjudication board (DAAB) rather than merely a dispute adjudication board as under the 1999 FIDIC Red Book.

Read more on construction disputes under the FIDIC Red Book

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

Construction disputes and FIDIC: enforcement through emergency arbitration

Differences between the DAB and DAAB include:

  • a standing DAAB is appointed at the start of the project within an agreed time or else 28 days after the Contractor’s receipt of the Letter of Acceptance according to Sub-Clause 21.1 (as opposed to appointment by an agreed date pursuant to Sub-Clause 20.2 under the 1999 FIDIC Red Book).
  • under the dispute board appointment process FIDIC is the default appointing official, unless otherwise agreed, in the case of parties’ failure to appoint a DAAB member (Sub-Clause 21.2). This overcomes the common scenario under 1999 Red Book where a party’s failure to agree upon an appointing entity or official results in the breakdown of the DAB appointment mechanism under the contract.
  • the DAAB has new duties, functions and powers to facilitate dispute avoidance, such as carrying out regular site visits and meetings with the parties, providing informal assistance to resolve issues or disagreements upon request (Sub-Clause 21.3).

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

The disputes resolution mechanism under the 2017 FIDIC Red Book essentially retains the same multi-tiered process found in the 1999 FIDIC Red Book, although it is now split over two clauses (Clauses 20 and 21):

  • Engineer’s decision (Clause 20): either party first notifies the engineer of its claim - generally 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. After receiving a claim, the Engineer will give its initial response and after receiving a fully detailed claim or interim claim a decision.
  • Reference of dispute to the DAAB (Sub-Clause 21.4): a disputed Engineer’s decision on a notified claim can be referred to the DAAB for adjudication. There are specified situations where a dispute is deemed to have arisen (which is not subject to an engineer’s decision) such as non-payment of a Payment Certificate and non-payment of financing charges, which can be directly referred to the DAAB for decision.
  • DAAB decision (Sub-Clause 21.4.3): the DAAB is then to give a reasoned decision within 84 days (or as otherwise agreed) of the dispute being referred to it.
  • Notice of Dissatisfaction (NOD) (Sub-Clause 21.4.4): if the DAAB does not give a decision, or either party is dissatisfied with the DAAB’s decision, that party is entitled to give a NOD within 28 days.
  • Amicable settlement (Sub-Clause 21.5): if a NOD is given, the parties are required to attempt to settle the dispute amicably before either party may commence arbitration of the dispute.
  • Arbitration (Sub-Clauses 21.5 & 21.6): if a dispute has not been resolved by a final and binding DAAB decision or an amicable settlement, then it is to be referred to arbitration. Unless otherwise agreed, the dispute may be referred to arbitration 28 days after the giving of NOD even if there has been no attempt at amicable settlement.

Sub-Clause 21.4.3 confirms that both parties are required to promptly comply with a DAAB’s decision regardless of whether a NOD is given, and any payment required as a result of a DAAB decision is immediately due and payable absent a NOD.

Enforcement of a DAAB decision

Sub-Clause 21.7 is the key clause under the 2017 FIDIC Red Book that addresses the inherent problems with enforcing compliance with a DAB decision under the 1999 FIDIC Red Book, allowing immediate enforcement of a dispute board’s decision that is binding but not final.

This clause provides that:

“[i]n the event that a Party fails to comply with any decision of the DAAB, whether binding or final and binding, then the other Party may, without prejudice to any other rights it may have, refer the failure itself directly to arbitration…[t]he arbitral tribunal…shall have the power…to order, whether by an interim or provisional measure or an award (as may be appropriate under applicable law or otherwise), the enforcement of that decision…[i]n the case of a binding but not final decision of the DAAB, such interim or provisional measure or award shall be subject to the express reservation that the rights of the Parties as to the merits of the Dispute are reserved until they are resolved by an award”.

Sub-Clause 21.7 now makes it clear that:

  • if either party fails to comply with a DAAB decision, whether it is final or not, the other party may directly refer that failure itself to arbitration without the need to first refer the same to DAAB or attempt to resolve it through amicable settlement;
  • the arbitral tribunal has the power to enforce the decision whether by an interim or provisional measure or an award; and
  • such measure or award is still subject to the express reservation of the parties’ rights as to the merits of the underlying dispute until finally resolved by an arbitral award.

Compliance with this multi-tiered dispute resolution process under both the 1999 and 2017 versions of the FIDIC Red Book is a condition precedent to arbitration. If the process, including the DAB or DAAB process, is not adhered to, depending on the governing law of the arbitration agreement, this could be considered an issue of jurisdiction or an issue of admissibility.

In states where this is considered a jurisdictional issue, the arbitral tribunal simply does not have the jurisdiction to hear and determine the dispute referred to it. In states where it is an admissibility issue as opposed to a jurisdictional issue, this is less of a problem. Here, the tribunal will have jurisdiction to hear the dispute and can determine the issue of admissibility arising from the failure to comply with the agreed multi-tiered dispute resolution process.

Other contractual remedies available

There may be other contractual remedies or modes of recourse available in the case of the other party’s non-compliance with a DAAB decision.

For instance,  a contractor may suspend or reduce the rate of work to encourage compliance with the DAAB decision (Sub-Clause 16.1(d)); an employer may encash a performance security to claim for the amount payable by the contractor under a DAAB decision (Sub-Clause 4.2.2(b)); and either party may terminate the contract (Sub-Clauses 16.2.1(d) and 15.2.1(a)) or obtain a further DAAB decision to enforce the initial decision.

Where there is a payment security in place, the contractor may be able to make a demand for the amount payable by the employer under the DAAB decision. Similarly, the employer may be able to recover its damages, losses or expenses arising from the contractor’s failure to comply, pursuant to a surety bond or a parent company guarantee if one has been procured. The availability of such other contractual remedies ultimately depends on the wording of the contract.

Co-written by Grace Fok of Pinsent Masons.

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