FIDIC DAB enforcement - pay now, argue later re-affirmed
This article first appeared in Building magazine on 6th May 2016 and is re-published here with the kind permission of the editors.
A team from Fieldfisher LLP, led by disputes partner Colin Gibson, recently secured an enforcement of a DAB Decision in arbitration by way of a Final Partial Award after the contractor refused to pay.
There remains uncertainty within the industry on projects let on the FIDIC 1999 suite of contracts as to how a Dispute Adjudication Board (DAB) Decision which is binding, but not final and binding, is to be enforced in the event of non-compliance. Having recently enforced such a decision for a European construction and energy contractor wishing to recover losses, there are a few clear lessons for the industry.
The contractor was seeking to recover losses from the employer that it had suffered on an electricity cable laying project involving the extension of two power substations and the stringing of circuit transmission lines between them. The contract was let on an amended FIDIC EPC/Turnkey Contract, 1st Edition (the 'Silver Book'). The dispute resolutions provisions of the contract were not amended and provided for the escalating dispute resolution framework of DAB, amicable settlement then arbitration.
The Contract Sum was €41m. The contractor sought to recover damages for breach of contract to the sum of approximately €12m. The contractor referred the dispute to the DAB, which awarded the contractor the sum of €7m plus VAT. The employer served a Notice of Dissatisfaction (NOD) in accordance with the contract, which meant that, while the DAB Decision was binding, it had not become final and binding. The employer did not comply with the DAB Decision and amicable settlement failed.
DAB Decisions are not enforceable under the New York Convention 1958, so the question arose as to how it should be enforced. Is a party's failure to comply with a DAB Decision a new dispute? Is it necessary to refer such non-compliance to a second DAB before enforcement by way of arbitration? Can a party simply enforce the original DAB Decision by way of arbitration? Should enforcement be by way of an interim award or a partial award? These are precisely the questions which arose in this case.
Arbitration proceedings pursuant to Clause 20.6 of the contract were commenced, first to enforce the DAB Decision and, second, to determine the merits of the underlying claim. The employer disputed the Tribunal's jurisdiction on two bases: first, that the Tribunal was not properly constituted; and second, that the employer's non-payment of the DAB Decision was a new dispute - which the contract required to be referred to a second DAB before it could be enforced by way of arbitration.
In response it was argued that both the Tribunal was properly constituted; and the DAB Decision was binding. The parties were bound to give effect to it pending resolution of the merits of the underlying claim. In the event of non-compliance with the DAB Decision, compliance should be enforced by way of a Final Partial Award. This is an important point: awards labelled as 'interim' are not enforceable in several jurisdictions. It is also the most time and cost-effective manner in which to properly enforce a DAB Decision. In respect of the argument that the DAB Decision was binding, the Persero and Persero 2 judgments in Singapore and the FIDIC Guidance Memorandum to Users of the 1999 Conditions of Contract (1 April 2013) were key.
The Tribunal ordered a hearing on jurisdiction, at which the parties agreed that the Tribunal should also address Phase I of the arbitration, i.e. enforcement of the DAB Decision pending Phase II on the merits. The Tribunal found that it was indeed properly constituted and awarded enforcement of the DAB Decision by way of Final Partial Award. The parties subsequently settled the dispute.
This Award shows that, where a party has a DAB Decision in its favour which is binding, but has not become final and binding, that party should commence arbitration proceedings under Clause 20.6 of the contract and request that the Tribunal enforces the DAB Decision by way of a Final Partial Award, pending a final determination of the merits of the underlying dispute. There is no need for a second DAB and "interim" awards should be avoided for enforcement reasons.
Parties who let projects on the FIDIC 1999 suite of contracts, which do not make it expressly clear that DAB decisions which are binding but have not become final and binding may be enforced in this manner, should take note. The Guidance Memorandum to Users suggests a "patch" for the 1999 suite and parties should consider using it. FIDIC has already made the position clear in the 'Gold Book' (FIDIC Conditions of Contract for Design, Build and Operate Projects (1st Edition, 2008)), and it's understood that this point will also be clarified in the anticipated revised suite of FIDIC contracts.