Adjudication mandatory step in FIDIC disputes, says Swiss court, but Romanian roads dispute allowed to proceed

Out-Law News | 03 Oct 2014 | 10:22 am | 3 min. read

Parties bound by a construction contract based on the FIDIC standard contract terms must first attempt to resolve disputes through adjudication, as set out in the contract, before they can proceed to arbitration for a final and binding decision, Switzerland's highest court has ruled.

However, the Federal Supreme Court upheld the arbitral tribunal's jurisdiction in a case where the dispute adjudication board (DAB) contemplated by the contract was "not in place" 18 months into the dispute. The dispute arose in 2011 between a French company and a Romanian state company over restoration work on a Romanian road, under two contracts governed by Romanian law which contained the FIDIC general conditions.

Construction disputes expert Frédéric Gillion of Pinsent Masons, the law firm behind Out-Law.com, said that the decision "shone some light" on the circumstances in which a DAB could be said to be "not in place".

"It is a common problem with DABs under the FIDIC Red Book for a DAB not to be appointed at the outset of the project, despite what the conditions of contract contemplate; and it is only some months later when a dispute first arises that a party seeks to appoint the DAB," he said. "At that point, the other party may try to stall the DAB proceedings by refusing to appoint the DAB."

"The Swiss court has ruled that, in the circumstances of this case, the DAB could not be said to be in place. However, any party who decides to proceed directly to arbitration on these grounds should be advised to take the necessary steps to appoint the DAB, as it is still a precondition to arbitration under the FIDIC Red Book," he said.

The FIDIC 'Red Book: Conditions of contract for construction for building and engineering works designed by the employer' is one of the most widely used forms of international construction contract.

FIDIC is the International Federation of Consulting Engineers, known by its French acronym. It is best known for its range of standard conditions of contract for the construction, plant and design industries. The FIDIC forms are the most widely used forms of contract internationally. Clause 20 of the FIDIC contracts sets out a multi-step dispute resolution procedure under which disputes must first be adjudicated by a DAB. The dispute should only be referred to arbitration if the DAB's decision does not become final and binding or if "there is no DAB in place". There are two types of DAB: a 'standing' DAB, appointed at the start of the contractual relationship; and an 'ad hoc' DAB, constituted only when a dispute arises.

In 2006, the French company in this case contracted with Romania to carry out restoration work on a 76km stretch of nationally-owned road. When a dispute arose in 2011 the French company initially sought adjudication through an ad hoc DAB. However, the Romanian company did not agree to the appointment of the DAB and the parties never signed a dispute adjudication agreement (DAA) as required by FIDIC.

After 15 months passed without an agreement being signed, the French company initiated arbitration at the International Chamber of Commerce (ICC). In January 2014, the arbitral tribunal confirmed that it had jurisdiction to rule on the dispute as the adjudication procedure was not mandatory. The Romanian company appealed to the award to the Swiss Federal Supreme Court.

In its judgment, which was handed down in July but has only now been translated into English by the Swiss Arbitration Decisions website, the court said that the arbitral tribunal had been wrong to say that adjudication was optional under the contract. This conclusion "would ultimately turn the alternate dispute resolution mechanism devised by FIDIC into an empty shell", the court said. However, the tribunal was correct to find that the DAB was not "in place" in this case, meaning that the French company was entitled to proceed directly to arbitration, it said.

"Considering the circumstances germane to the case at hand ... [the tribunal] cannot be criticised for failing to denounce [the French company's] failure to sign the DAA from the point of view of the rules of good faith," the court said in its judgment. "Pursuant to these rules and considering the process of constitution of the DAB, it is indeed impossible to blame [the French company] for losing patience and finally skipping the DAB phase despite its mandatory nature in order to submit the matter to arbitration."

"It must be pointed out that the procedure to constitute the DAB had started 15 months before [the French company] filed its request for arbitration ... which is a long time in the context of a dispute resolution mechanism supposed to be expeditious. Furthermore, the arbitral tribunal points out with regard to this time period that it is five times longer than the 84 days within which the DAB procedure must normally be conducted. While refusing to place responsibility upon one of the two parties, its factual findings in the award under appeal as to the way the process leading to the constitution of the ad hoc debate was conducted ... certainly do not permit blame to be placed on [the French company] for such procrastination," it said.

Construction disputes expert Nicholas Brown of Pinsent Masons said that the two-stage approach taken by the court in this case was "common enough, especially among arbitral tribunals - black-letter law followed by fact-specific avoidance".

"This decision also demonstrates that the distinction between jurisdiction and admissibility it still very much alive and kicking," he said.