DAAB and Dispute Resolution Under the 2017 FIDIC Forms of Contract

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1 DAAB and Dispute Resolution Under the 2017 FIDIC Forms of Contract Eugenio Zoppis PhD Researcher, Centre for Construction Law and Dispute Resolution King s College, London Abstract This article has been prepared for the ICC DRBF Conference in Sofia on 27 th 28 th September It provides an overview on the evolution of dispute resolution in FIDIC Contracts and deals with the terms of Dispute Adjudication and Avoidance in 2017 FIDIC Forms of Contract, testing the proposition that FIDIC 2017 provides tools to avoid disputes which outweigh the drawbacks, if any, of the prescriptive claims and dispute procedures. The conclusions will remain theoretical until practically tested by FIDIC users, and then time will tell. Introduction FIDIC has given a contractual voice to the ideas in dispute resolution, keeping in step with the Zeitgeist of changing times. The toolkit for dispute resolution provided by FIDIC contracts has evolved from the direct recourse to arbitration after the Engineer s decision, through the first dispute resolution boards that could provide recommendations, to the dispute adjudication boards in FIDIC The new suite of contracts issued in 2017 considered the importance of dispute boards as means of avoiding disputes, now called DAAB, i.e. Dispute Adjudication/Avoidance Board as defined in Sub-Clause , and dedicated two separate clauses 20 and 21 respectively to claims and disputes resolution. This paper provides an overview of the evolution of dispute resolution in FIDIC Contracts and deals with the terms of Dispute Adjudication and Avoidance in 2017 FIDIC Forms of Contract. The analysis focuses on the role of DAAB in the 2017 Edition and compares it with the Dispute Adjudication Board in the 1999 Edition, testing the proposition that FIDIC 2017 provides tools for avoiding disputes which outweigh the drawbacks, if any, of the prescriptive claims and dispute procedures. 1

2 Dispute Resolution under FIDIC Contracts, before 1999 A two tiered approach to dispute resolution was included in the 1 st Edition of FIDIC Red Book 1 since 1957 (Baker et al. FIDIC Contracts: Law and Practice, 2009, Informa, p 505). After the Engineer s Decision there was no access to Arbitration before the completion of the Works, which made the Engineer the Captain of the contractual ship, leaving any unsettled disputes to brew until the end. Under the Red Book 2 nd Edition in 1969, arbitration became possible also before completion, opening the way to an early, ad hoc, final settlement of disputes. Under the Red Book, FIDIC 4 th Edition 1987, the settlement of disputes on any matter is, in the first place, entrusted to the Engineer who has to make a decision within 84 days from the date of referral under Sub-Clause Such Decision has to be made impartially and the parties have to promptly give effect to such decision, unless and until the same is revised by amicable settlement or arbitration. Then, there are 70 days to accept or express dissatisfaction with the Engineer s Decision, or the decision either becomes final and binding or the dispute must be referred to arbitration by means of a notice to commence arbitration. Arbitration may commence on/after a cooling period of 56 days in which the parties make an attempt to reach an amicable settlement (Sub-Clause 67.2). The amicable settlement clause was by then innovative, but embodied the dichotomy of being both mandatory (shall) and yet enabling arbitration to commence whether or not any attempt at amicable settlement has been made (Sub-Clause 67.2). The procedure gives the opportunity to finally settle disputes through arbitration as they arise, after the Engineer s Decision. In 1995, the Orange Book (Design Build and Turnkey) included a three-tiered provision for dispute resolution with a full-term dispute adjudication board giving binding decisions 2. In the same year, also the World Bank Standard Bidding Conditions imposed the parties to incorporate a Dispute Review Board (DRB) under the particular conditions of contract which made recommendations that could bind the parties only if there were no objections. 3 In the author s personal experience, this advisory system effectively prompted the parties to reach an amicable settlement. 1 Clause 66 2 No later than the fifty-sixth day after the day on which it received such reference, the Dispute Adjudication Board, acting a a panel of expert(s) and not as arbitrator(s), shall give notice of its decision to the parties (Sub-Clause 20.4) 3 If the Board has issued a Recommendation to the Employer and the Contractor within the said 56 days and no notice of intention to commence arbitration as to such dispute has been given by either the Employer or the Contractor within 14 days after the parties received such Recommendation from the Board, the Recommendation shall become final and binding upon the Employer and the Contractor. [Emphasis added]. 2

3 The initiative of the World Bank was a turning point to have dispute boards in FIDIC and, in 1996, FIDIC adopted the Dispute Board in the supplement to FIDIC 4 th Edition of Red and Yellow Books (Baker et al. 2009, p ). As a matter of fact, and without suggesting any direct connection, in 1994 Sir Latham published in England an influential report, Constructing the Team, recommending that Adjudication should be the normal method of dispute resolution and promoting the idea of referring disputes immediately and to a neutral adjudicator. 4 In 1996, under the jurisdiction of England and Wales adjudication had become a statutory right, fast (28 days) and available at any time. 5 Dispute Resolution under FIDIC Contracts, 1999 Suite In FIDIC 1999, the duty to act impartially has been redefined: the Engineer makes fair determinations under Sub-Clause 3.5. Clause 20 regulates Claims Disputes and Arbitration. In case the Contractor considers himself entitled to an extension of time or additional payments, he is obliged to give notice of claim under Sub-Clause 20.1 and keep contemporary records 6, followed by detailed particulars in 42 days. However, the contract does not always call for a Sub-Clause 20.1 notice, and not all claims are subject to notice under Sub-Clause 20.1 e.g. Sub-Clause 12.3, 13.3, The Engineer is obliged to respond to a claim within 42 days with approval, disapproval or comments. Without a clear procedural link with the foregoing or any time limit, Sub-Clause 20.1 provides that The Engineer shall proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine (i) the extension (if any) of the Time for Completion in accordance with Sub-Clause 8.4 [Extension of Time for Completion] and/or (ii) the additional payment (if any) to which the Contractor is entitled under the Contract. In fact, there is no predefined time limits for the Engineer to issue a Determination in reply to Contractor s claims under Sub-Clause 3.5. There is however a notional limit under Sub- Clause 1.3 [Communications] which states that determinations shall not be unreasonably withheld or delayed. 4 Latham, Constructing the Team, 1994, HMSO, Chapter 9. 5 Housing, Grants, Construction and Regeneration Act, 1996, Section Contemporary records mean original or primary documents, or copies thereof, produced or prepared at or about the time giving rise to the claim, whether by or for the contractor or the employer [Her Majesty's Att.-Gen. for the Falkland Islands v Gordon Forbes Construction (Falklands) Ltd] 3

4 Under the Red, Yellow and Silver books, Sub-Clause 2.5 requires the Employer to give notice with particulars as soon as practicable after he becomes aware (not when he ought to), and then the Engineer shall proceed to make a Determination under Sub-Clause 3.5. In the DBO (Design, Build, Operate) Gold Book of 2008 there is no separate Sub-Clause 2.5 for the Employer s claims but the claims of both parties are determined under the same Sub-Clause 3.5. The MBD Harmonized Pink Book, FIDIC 2010, includes a separate procedure for the Employer s claim under Sub-Clause 2.5, but provides that a 28 days notice shall be given by the Employer as well as the Contractor. In the FIDIC Suite 1999, Sub-Clause 3.5 requires the Engineer to consult both parties in the endeavor to reach an agreement, without any positive obligation to make any such effort and assigns to the Engineer, who is an Employer s Personnel without any duty to be neutral or impartial, the task of finding an amicable solution between his employer and the Contractor. Any Determination then becomes binding to both parties until and unless revised under Clause 20. Sub-Clause defines the DAB as "The person or three persons so named in the Contract, or other person(s) appointed under Sub-Clause 20.2 [Appointment of the Dispute Adjudication Board] or Sub-Clause 20.3 [Failure to Agree Dispute Adjudication Board]" The DAB may give advice and opinions when requested by both Employer and the Contractor (Sub-Clause 20.2, Red Book only). The contract provides no further details, but this advice and opinions are not binding. The idea is that by providing its opinion on the matter in contention or on the disagreement the Dispute Adjudication Board may throw a revealing light on the rights and obligations of the parties and thus prevent a matter from becoming a dispute (Bunni, The FIDIC Form of Contract - Third Edition, 2005, Blackwell, p 625). Clause 20.4 [Obtaining Dispute Adjudication Board s Decision], provides that in front of a dispute of any kind in connection with, or arising out of the contract, either party may refer the dispute to the DAB, that will give its decision within 84 days after the referral. The decision is binding and must be promptly given effect. However, each party may give a notice of dissatisfaction within 28 days as a condition precedent to commence arbitration and, if no such notice is given, the Decision becomes final and binding. In order to activate this provision, the claim must have evolved in a dispute, and the contract does not define what a dispute is. Therefore, a definition must be searched at law, with the 4

5 possibility of finding different answers under each jurisdiction. For example, the English law provides the following guidance: A dispute can only arise once the subject-matter of the claim, issue or other matter has been brought to the attention of the opposing party and that party has had an opportunity of considering and admitting, modifying or rejecting the claim or assertion. 7 This definition 8 is important because the no dispute defence to defer dispute resolution is not unusual. Sub-clause 20.5 [Amicable Settlement] provides a 56 days cooling off period, imposing an obligation (shall) on the parties to attempt to settle the dispute amicably and then the dispute may be referred to arbitration. 9 If the DAB s Decision is not given effect by any one of the parties, then the dispute may be referred directly to arbitration without falling back into the dispute adjudication loop 10. While this provision has been stated under Sub-Clause 20.7 [Failure to Comply with DAB Decisions], after the Persero case 11 FIDIC issued a Guidance Memorandum 12 closing the gap and directing that also binding but non-final Board s decisions may be referred directly to arbitration. Sub-clause 20.8 [Expiry of Dispute Adjudication Board s Appointment] sets out that disputes arising when the DAB is not in place may be referred directly to Arbitration, which is a way of resolving disputes when the other reluctant party is frustrating the appointment of the DAB. 7 Fastrack Contractors Limited v Morrison Construction Limited, [2000] EWHC Technology 177, at The definition given in Fastrack v Morrison, was strengthened in Halki Shipping Corporation v Sopex Oils Ltd which clarifies that it includes any claim which the other party refused to admit or did not pay whether or not there was an answer to the claim in fact or law. This position was again confirmed in London & Amsterdam Properties Ltd v Waterman Partnership Ltd. [2003] EWHC 3059 (TCC). 9 At English law a similar clause is enforceable and may be condition precedent (Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm); [2015] 1 W.L.R. 1145) 10 Peterborough City Council v Enterprise Managed Services Ltd [2014] EWHC 3193 (TCC) at [24];: In relation to the provisions of sub-clause 20.4 to sub-clause 20.7 as a whole, Ms. Sinclair submitted also that they were unenforceable for lack of certainty. She identified what has been described as "the gap" in those sub-clauses, which arises when the DAB has made a decision and one party has given a notice of dissatisfaction - with the result that the DAB's decision, whilst binding, is not final. The problem then is that if the unsuccessful party refuses to comply with the decision of the DAB, as it is required to do by sub-clause , the only remedy (it is said) available to the other party is to refer the dispute occasioned by the refusal to comply to yet another adjudication. This can have the effect, Ms. Sinclair submitted, that the party in default can embark on a course of persistent non-compliance with DAB decisions and thereby deprive the other of any effective remedy. 11 PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation [2010] SGHC [2011] SGCA FIDIC Guidance Memorandum to Users of the 1999 Conditions of Contract dated 1st April

6 Under the FIDIC 1999 Red Book, the Dispute Adjudication Board is appointed on a standing basis. In the Yellow and Silver Books, the Dispute Adjudication Board is appointed on ad-hoc basis on each dispute, with the effect that the board gets called in only when the claim has already become a dispute between the parties, practically excluding any proactive, prevention role of the DAB. Another drawback of calling an ad-hoc DAB, is the time lost in putting the DAB in place when a dispute is ongoing, and the difficulties of getting the board appointed if one of the parties has a tactical interest in postponing a DAB s Decision on a dispute. In the author s experience, the advantage of avoiding the situations mentioned above, outweigh any expenses that may be saved in comparison with a standing board. Under the Blue Book Dredging and Reclamation Contract that was issued in 2006, there is no stand-alone procedure to refer Contractor s claims to engineer s determinations, but disputes may be referred to a full-term Dispute Adjudication Board. In the DBO (Design, Build, Operate) Gold Book of 2008 there is no separate Sub-Clause 2.5 for the Employer s claims. This form of contract provides for a standing Dispute Board and, unlike the other contracts, includes a Sub-Clause 20.5 called Disputes Avoidance, and involving the action of the DAB that recites as follows: If at any time the Parties so agree, they may jointly refer a matter to the DAB in writing with a request to provide assistance and/or informally discuss and attempt to resolve any disagreement that may have arisen between the Parties during the performance of the Contract. Such informal assistance may take place during any meeting, Site visit or otherwise. However, unless the Parties agree otherwise, both Parties must be present at such discussions. The Parties are not bound to act upon any advice given during such informal meetings, and the DAB shall not be bound in any future Dispute resolution process and decision by any views given during the informal assistance process, whether provided orally or in writing. [emphasis added] FIDIC 2010, MBD Harmonized Pink Book, provides for disputes to be referred to a full term Dispute Adjudication Board, in case of dissatisfaction with the Engineer s determinations. This form of contract did not take up the innovation of the Gold Book, but reverted to the usual format of Amicable Settlement under Sub-Clause

7 Disputes Resolution under FIDIC Contracts 2017 Edition. The new FIDIC suite issued in December 2017, has addressed many of the points mentioned above, such as the need for reciprocity between the obligations of the parties, albeit opening other points for discussion, e.g. the prescriptive nature of the dispute procedure. In 2017, the Clause 20 of FIDIC 1999 has bifurcated in two clauses, separating the procedure for claims from that for disputes 13 : Clause 20: Claims Clause 21: Disputes and Arbitration The route to better clarity starts from the Definitions, where Claim (Sub-Clause 1.1.5) means a request or assertion by one party ( ) for an entitlement or relief ( ) in connection with, or arising out of the Contract or the execution of the Works, and Dispute (Sub-Clause ) means a situation where: a) One Party makes a claim. b) The other party rejects the claim. c) The first party does not acquiesce by giving a NOD under Sub-Clause (Dissatisfaction with the Engineer s Determination) or otherwise. Therefore, the contract incorporated a situation like that described in Fastrack v Morrison, where the Engineer s rejection is sufficient to declare that a Dispute has arisen. Clause 20 includes both Employer s and Contractor s Claims, with reciprocal obligations, as explained in Sub-Clause 20.1, describing that a Claim may arise if either (a) the reduction of the contract price as well as an extension of DNP or an extension of time respectively, or to any other relief against the other party; there is even a party-neutral term: the claiming party. The claims described in (a) and (b) have to be notified to the Engineer under Sub-Clause as soon as practicable and no later than 28 days after the claiming party becomes aware or should have become aware of the event or circumstances, or such entitlement shall be lost (Sub-Clause ). The Claim may arise also in a third case (c) as the result of disagreements of any other entitlement or relief whatsoever from either party, not described in (a) or (b). The issue will then have to be referred to by giving a notice as soon as practicable, to the Engineer s Agreement or Determination under Sub-Clause 3.7. It appears that these claims may escape the 28 days period to give notice under Sub-Clause There is a world of difference between a claim as opposed to a dispute (ICC Arbitration Case No as reported by Dr. Bunni in The FIDIC Forms of Contract, p 811). Such difference is that debated in Fastrack v Morrison, Halki and London & Amsterdam Properties v Waterman, all of them cited above. 7

8 Under Sub-Clause the Engineer must respond within 14 days, stating whether the notice of claim was given in time and if it is valid or not, in order to prevent a late defense of a time bar. In case of silence, it is deemed to be valid notice. Under Sub-Clause , the claiming party must submit a fully detailed claim within 84 days, save for valid justification, or the notice of claim might elapse subject to another notice by the Engineer within 14 days. Sub-Clause regulates claims of continuing effect, which provides for a first fully detailed but interim submission within 84 days as per Sub-Clause , followed by monthly submissions and a final fully detailed claim within 28 days after the continuing event has ceased its effects. Under the Red and Yellow Books, after receiving the fully detailed claim, the Engineer shall proceed under Sub-Clause 3.7 to agree or determine the entitlements of the claiming party with a two stage procedure: : Consultations, which are mandatory to encourage discussions and endeavor to reach a binding agreement within (a) 42 days or (b) until the parties advise that agreement is impossible : Determination, to be reached within 42 days or, in case of silence, the claim is deemed to have been rejected. Under Sub-Clause a Notice of Dissatisfaction (NOD) may be given within 28 days from the Notice of Determination, otherwise the Determination becomes final and binding. In case either party fails to comply with a Determination, the party may refer the failure to arbitration under Sub-Clause 21.6 and The reference to the latter clause, means that even a Determination which has been objected to and is non-final, should be given immediate effect or may be referred to Arbitration. After giving the NOD, the party may refer a Dispute to the DAAB. Under the Silver Book, the procedure remains the same, but the number of the Clauses change as follows: - 3.5; Agreement or Determination, (instead of Sub-Clause 3.7) ; Consultations to reach agreement, (instead of 3.7.1) ; Employer s Representative Determination, (Instead of Engineer s Determination, under Sub-Clause 3.7.2). If the Engineer does not give a notice of agreement or determination in time, the matter is deemed to have become a Dispute. The main differences with the 1999 Edition are a more articulate task of the Engineer in fostering an agreed solution, and the fixed time for the 8

9 Engineer (84 days, similar to that assigned to the DAAB) to respond to claims, with a contractual remedy for not responding in time. The Disputes are decided by the Dispute Avoidance/Adjudication Board (DAAB) as defined in Sub-Clause , constituted as a standing Board for Red, Yellow and Silver Books under Sub-Clause Under Sub-Clause 21.3 [Avoidance of Disputes], the DAAB may be jointly requested to provide assistance and/or informally discuss and attempt to resolve any issue or disagreement that may have arisen between them. Moreover, the DAAB may invite the parties to request assistance in disputes avoidance. This task cannot be carried out during the period assigned to the Engineer to make an agreement or a determination on any claim, thus separating the similar functions of Engineer and DAAB. The Contract provides that such opinions and advice are not binding on the parties and the DAAB is not bound by any such view when making a DAAB decision on disputes. Apart from a definition under Sub- Clause 1.5 there is only one reference to the duties of informal assistance by the DAAB: in Sub-Clause 5.1 (e) each DAAB Member shall be available to give Informal Assistance when requested jointly by the Parties. It is noted that this process cannot be initiated by one party only but by the joint request of the parties. Unlike the First Edition 1999, the 2017 Edition of Red, Yellow and Silver Books include provisions for informal advice and opinions, since all these forms of contract have standing boards. Sub-Clause 20.4 regulates the procedure under which a DAAB is conducted, providing that a dispute must be referred to the DAAB within 42 days from the NOD (Sub-Clause 3.7.3) or the NOD will expire, confirming the Engineer s determination that would then become binding. This means that there is a continuing set of deadlines from the notice of Claim to the referral to the Board, preventing any of the parties from delaying the process: it is a matter of complying with the time or the claim/dispute will expire. On one hand, this encourages the parties to positively resolve disputes rather than leaving them pending indefinitely, but on the other hand, it inexorably leads the claiming party to escalate its claim rather than losing the right to it. The DAAB is obliged to complete its decision within 84 days or in such time as otherwise decided by the Parties. Sub-Clauses states that the DAAB Decision is binding (not final) and the parties shall promptly comply with it irrespective of NODS. Moreover, the Employer shall be responsible for the Engineer s compliance with the DAAB Decision. Another good point in favour of certainty is that any amount decided by the DAAB shall be payable without further certification or notice. 9

10 Under Sub-Clause either party may give a notice of dissatisfaction (NOD) with a DAAB s Decision, or in respect of DAAB s failure to give a Decision within 28 days, or such Decision becomes final and binding. If any decision is not promptly given effect, the parties may refer the dispute to arbitration under Sub-Clause 20.7 [Failure to Comply with DAAB s Decisions] both if the Decision is bending or final and binding thus closing the gap in Sub-Clause 20.7 of the 1999 Edition. If for any reason there is no DAAB in place, as in the 1999 Edition, Sub-Clause 20.8 shall apply and the dispute may be referred directly to Arbitration. After the NOD on a Decision is given, a 28 days cooling-off period is mandatory before referring the Dispute to Arbitration, during which the parties shall attempt to settle the differences amicably (Sub-Clause 21.5). The wording of Sub-Clause 21.5 is similar to Sub-Clause 20.5 of the 1999 Suite, and does not match the complexity of Sub- Clause regarding the Engineer s consultations to reach an agreement, probably considering that a settlement should be made at an earlier stage and assigning the Engineer a guiding role in avoiding disputes. Under Sub-Clause 21.6 [Arbitration] any Dispute in which the DAAB s decision has not become final and binding shall be settled by arbitration. There is no mandatory time limit for arbitration, once the NOD is given in time. The arbitral tribunal shall have the full power to open up previous Engineer s Determinations and DAAB s Decisions, as long as they are not final and binding. Conclusions The 2017 Suite of FIDIC Contracts provides a procedure that leads to the conclusion of disputes according to a well-defined sequence, linked by set deadlines from the notice of claim to the time of the DAAB s decision. The requirement for the Employer to give notice is certainly welcomed by contractors, also because it does not leave an open ended route to the Employer s claims. As regards to claims, the Engineer is compelled to respond within a set time and is no longer permitted to leave issues unanswered or pending indefinitely. However, as from the first notice, the longest path that leads to referring a dispute to Arbitration would theoretically take up to 420 days, which is definitely more than a reasonable time. Another important point is the strong role of the Engineer in making agreements and determinations which is reasonable since the Engineer is the first recourse in preventing disagreement from becoming disputes and in determining claims. 10

11 The Engineer has an active role in the early stage of the claim proceedings, such as determining whether a notice may be valid or not, and includes the power to extend the time for submission of detailed particulars. It is to be noted that the duty of making a fair determination stated in the 1999 Edition was added with the obligation to act neutrally 14 between the parties in the 2017 edition. The notion of neutrality is not included under the Silver Book, where perhaps this assurance is most needed. The positive role of DAAB in dispute resolution is clear, but that of dispute prevention is mostly due to the benefits of the standing presence of the DAAB, that becomes acquainted with the progress of the Works and obtains the confidence of the parties, before any dispute arise, and may be called in for opinions or meetings according to the joint will of the parties. There is a Sub-Clause 21.3 on the Avoidance of Disputes through the DAAB, however with the exception of the Gold Book, the clause calling for an Amicable Settlement before Arbitration has remained practically unchanged from Sub-Clause 67.2 of FIDIC 1987 to Sub-Clause 21.5 of FIDIC Lastly, the complexity of the claims and dispute resolution procedure is a factor to be tested in the construction practice to see whether this is a real concern or not. The clients and the industry will give the answer in due time. Acknowledgment: The starting point when writing this paper was reading Gordon Jaynes article presented at DRBF Conference in May 2018 in Tokyo, that focuses on dispute prevention ( Worth-a-Pound-of-Cure-Gordon-Jaynes-Tokyo-2018.pdf.) However, the ideas I developed in this article are my own. Eugenio Zoppis, (MCInstCES, MCIArb, MAPM, GMICE,) is a PhD Researcher in construction law at the King s College - London. He has both engineering and legal academic background, and an MSc in Construction Law ad Dispute Resolution. He has 30 years experience as project manager for Salini-Impregilo, working as a contractor on roads, tunnels and hydroelectric projects. He is currently building a dam for hydro-power generation. During his career in construction, he gathered claims and disputes resolution experience, and may be contacted at eugenio.zoppis@kcl.ac.uk ; Zoppis Eugenio 14 This term brings to memory the Latham Report: The adjudicator must be neutral (Latham, Constructing the Team, 1994, HMSO, p 88). Moreover, in Redfern and Hunter on International Arbitration, 6 th Edition, 2015, Oxford, p 254, it is suggested that the requirement of neutrality defines the arbitrators non-partisan attitude despite being party appointed, as directed by the American Arbitration Association / American Bar Association Code of Ethics for Arbitrators in Commercial Disputes. 11