How construction disputes are resolved under the FIDIC Red Book

There are some issues with enforcement of dispute adjudication board (DAB) decisions in the 1999 FIDIC Red Book. The 2017 FIDIC Red Book’s dispute resolution processes aimed to tackle those problems. There are also some issues with the potential enforcement of dispute board decisions by way of emergency arbitration.

Dispute boards have been created to make the resolution of dispute more efficient in time and money terms, when problems arise during the construction of international infrastructure contracts.

Dispute boards provide a contemporaneous determination of disputes that arise during the execution of the project, before the parties resort to arbitration or litigation. The potential benefits of the use of dispute boards include: 

• facilitating cooperation between the parties, potentially avoiding costly arbitration; 
• obtaining a binding and potentially final decision from a knowledgeable and experienced person, chosen by the parties;
• facilitating the continuation of the works and cash flow; and preserving parties’ right to seek a final and binding resolution of the dispute in arbitration.  

A dispute board is a panel of normally one or three independent and impartial experts, usually engineers or construction professionals, who are appointed and remunerated by the parties to the contract. It is also a creature of contract, meaning that a dispute board only has the powers and functions that the parties have agreed to give it under the dispute resolution clause of the contract.

The take-up of Dispute Boards differs by jurisdiction. For instance, the use of dispute boards has been embraced in Australia and New Zealand. In many Asia 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 1999 FIDIC Red Book 

A dispute adjudication board (DAB) is a specific dispute board created under the 1999 FIDIC Red Book. 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.

As the DAB is effectively a creature of contract, enforcement its decision is like enforcing a right under the contract. This in contrast 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. 

The DAB as a step leading to arbitration  

Within the 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 its claims:

• Engineer’s decision (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 decision on the principles of the claim.
• DAB decision (Sub-Clause 20.4): A disputed engineer’s decision 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.
• 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 20.6): 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.

Sub-Clause 20.4 confirms that both parties are required to promptly give effect, or comply, with a DAB’s decision.

Inherent problem with the 1999 FIDIC Red Book 

The unfortunate reality is that parties may experience difficulties when enforcing DAB decisions under the 1999 FIDIC Red Book, typically 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 decision and the availability and effectiveness of enforcement mechanisms in the relevant jurisdiction.

In some cases, a DAB decision is binding but not final, such as when a NOD has been issued within 28 days, but a party has refused to comply with the DAB decision according to Sub-Clause 20.4. According to Sub-Clause 20.6, the other party can refer the underlying dispute to arbitration, which means a NOD has been issued under Sub-Clause 20.4 and the dispute has not been settled amicably under Sub-Clause 20.5. However, there is no immediate mechanism under the contract to enforce the non-compliance with the DAB decision, an outcome that has been referred to as a 'gap'.

If a DAB decision is final and binding, for example if no NOD has been issued within 28 days, but a party has refused to comply with the DAB decision according to Sub-Clause 20.4, the other party can only refer the failure to comply with the DAB decision itself, not the underlying dispute, to arbitration under Sub-Clause 20.7. In other words, even where a DAB decision for the employer to pay the contractor is final and binding the only way for the contractor to enforce the decision is to refer the failure to comply to arbitration, however, there is no immediate mechanism under the contract to enforce the non-compliance with the DAB decision, which is also considered to be a “gap”.

Some commentators suggest that the existence of the 'gap' 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. 

Closing the ‘gap'

The ‘gap' was specifically addressed in the Singapore case PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation. 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, making the decision 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 carry weight in other common law jurisdictions, we are yet to see this interpretation being applied in other jurisdictions.

To avoid similar lengthy proceedings, FIDIC proposed amendments in its guidance memo to users of the 1999 FIDIC Red Book and in other FIDIC forms prior to the “gap” being rectified in the 2017 FIDIC Red Book.

Co-written by Grace Fok of Pinsent Masons.