Introduction
The International Federation of Consulting Engineers (FIDIC) publishes standard contracts that are widely used in the construction industry for international projects. These contracts include multi-tiered dispute resolution provisions, which typically involve adjudication by a Dispute Adjudication Board (DAB) or a Dispute Avoidance and Adjudication Board (DAAB). This paper focuses on the DAB/DAAB process in the Red, Yellow and Silver Books of FIDIC forms of contract by examining whether the DAB process can be skipped and exploring the jurisdictional and/or procedural implications of doing so.
When faced with a dispute and having irreconcilable views, parties may want to skip the DAB process and proceed directly with arbitration. The non-imperative language used in certain DAB provisions has led to divergent interpretations regarding their application and caused uncertainty as to whether the DAB process can be skipped. Courts in Switzerland, England, and Italy have adopted varying and flexible approaches to decide whether the DAB process is mandatory, but have generally ruled that bypassing the DAB process does not necessarily prove fatal to the arbitration process. In practice, when parties skip the DAB process, arbitral tribunals often view this as an admissibility issue and choose to stay the proceedings to allow the parties to complete the DAB process. While this is the general observation for the FIDIC forms of contract, variations may occur depending on the specific language and the governing law of the contract in question.
The Dispute Adjudication Board Process and Its Shortcomings
The DAB process is envisaged in Sub-Clauses 20.2 to 20.8 of FIDIC forms of contract dated 1999 (FIDIC 1999) and Clause 21 of FIDIC forms of contract dated 2017[1] (FIDIC 2017). A DAB can be described as a body consisting of independent and impartial member(s), typically engineers, architects and/or lawyers, who are appointed by the parties and are charged with the task of issuing a decision on the dispute in 84 days.[2]
The parties may make provision for a standing or an ad hoc DAB. Standing DABs are constituted right after the commencement of the project, whereas ad hoc DABs are constituted after a dispute arises.[3] Shortcomings relating to the DAB’s constitution usually arise from ad hoc DABs, so the discussions in this article will focus on these.
Sub-Clause 20.2 of FIDIC 1999 and Sub-Clause 21.1 of FIDIC 2017 use the word ‘shall’ when stipulating the requirement to refer the dispute to the DAB.[4] This wording imposes a mandatory nature on the DAB process. However, Sub-Clause 20.8 of FIDIC 1999 and Sub-Clause 21.8 of FIDIC 2017 provide that, if a DAB is not ‘in place whether by expiry […] or otherwise’, the parties can proceed with arbitration.[5]
Some parties have relied on the literal reading of Sub-Clause 20.8 of FIDIC 1999 to skip the DAB process altogether at the beginning of a dispute.[6] This is because a literal interpretation of Sub-Clause 20.8 in isolation allows a party to bypass the DAB in favour of arbitration because necessarily no DAB will be ‘in place’ at the very beginning of a dispute.[7] In this case, FIDIC Guide suggests complying with Sub-Clauses 20.2 and 20.3 before invoking arbitration in Sub-Clause 20.8.[8] FIDIC also includes the DAB process ‘as a condition precedent to arbitration’ in one of its ‘Golden Principles’ and invites parties not to deviate from these principles in preparing their particular conditions of contract.[9] However, whether the exhaustion of the DAB process is mandatory is still open to interpretation, with Sub-Clause 21.8 of FIDIC 2017 keeping the same wording as Sub-Clause 20.8 of FIDIC 1999. Consequently, it remains imperative to stay abreast of the case law in relevant jurisdictions and prioritize clear contract drafting to ensure legal foreseeability.
Recent Case Law on Non-Exhaustion of the DAB Process
The courts of England, Switzerland, and Italy have had to consider the issue of non-exhaustion of the DAB process prior to arbitration.[10] The English and Swiss courts acknowledged the tension between: (i) the opening wording of Sub-Clause 20.2 of FIDIC 1999, which uses mandatory language for the parties to refer their dispute to the DAB, and (ii) the wording in Sub-Clause 20.8 of FIDIC 1999, which provides that, if a DAB is not ‘in place whether by expiry […] or otherwise’, the parties can bypass the DAB. The Italian court, however, overlooked the wording of Sub-Clause 20.2 and focused on Sub-Clauses 20.6 and 20.8, which stipulate that the dispute shall be settled by arbitration where there is no final DAB decision in relation to that dispute.[11]
These decisions demonstrate that a uniform interpretation of the nature of the DAB is still not achieved internationally, and the facts of the case, as well as the governing law, are crucial.
Swiss Federal Supreme Court Decision
The Swiss Federal Supreme Court examined Clause 20 of FIDIC 1999 in 2014,[12] in the context of a challenge of a partial award, in which an arbitral tribunal found it had jurisdiction, despite the DAB process not having been completed.[13]
In the case before the Swiss Federal Supreme Court, the appointment of the DAB lasted several months and a DAB agreement was never signed.[14] Consequently, the contractor initiated arbitration and the owner/employer challenged the arbitral tribunal’s jurisdiction. The tribunal found that the mandatory language of Sub-Clause 20.2 should be interpreted in the context of Sub-Clause 20.4, which states that ‘either Party may refer the dispute in writing to the DAB’, and of Sub-Clause 20.8.[15] It stated that Sub-Clause 20.8 also applies where a DAB has never been put in place and concluded that the DAB process was optional.
The Swiss Federal Supreme Court did not agree with the tribunal on the interpretation of Clause 20. The Court interpreted the clause according to Swiss law, as the law of the seat of arbitration, which required looking beyond the literal meaning of the contract to establish the real and common intention of the parties in each case.[16] Accordingly, the Court concluded that the pre-arbitration steps contained in Sub-Clause 20, especially the mandatory language of Sub-Clause 20.2, were clear and mandatory in nature.[17] It considered that any other approach would render the entire dispute resolution mechanism redundant.[18] On the other hand, the Court concluded that there are exceptions to the DAB requirement, arising under Sub-Clause 20.8 and the general principle of good faith under Swiss law.[19] The Court stated that such exceptional circumstances were present in that case, namely (i) the parties’ positions were already irreconcilable after the completion of works, and (ii) the DAB agreement was not signed in 15 months owing to the owner’s reluctance.[20]
Thus, the Swiss Court stated that this was an exceptional situation under Sub-Clause 20.8 of FIDIC 1999 and concluded that that non-exhaustion of the DAB was not fatal to the tribunal’s jurisdiction.
English Court Decision
The English High Court, also in 2014, ruled on the nature of the DAB in Peterborough City Council v Enterprise Managed Services Ltd (hereinafter the Peterborough Case).[21] The contract in this case provided for an ad hoc DAB and final adjudication by litigation.[22] A few weeks after the contractor initiated the DAB process, the employer commenced litigation before the English court.[23] The contractor applied for a stay of this court action.
The employer’s argument in proceeding straight to litigation was that Sub-Clause 20.8 of FIDIC 1999 provided an opt out for a party to refer the dispute to court if it did not want to have the dispute resolved by the DAB.[24] The employer also argued that the DAB provisions in Sub-Clauses 20.4 to 20.7 should be unenforceable for lack of certainty.[25]
The English court disagreed with the employer, stating that Sub-Clause 20.8 probably applied only in cases where there is a standing DAB, rather than to appointing an ad hoc DAB after a dispute has arisen.[26] The court has ordered a stay on the basis that this would uphold the parties’ contractual agreement as to how disputes would be determined.[27]
Italian Court Decision
The Court of Lecce issued a recent decision regarding the nature of the DAB process under the FIDIC 1999 Red Book.[28] In this case, the contractor commenced litigation right after the dispute arose. The employer argued, among other things, that the claim was inadmissible because the contract provided for adjudication by DAB first.[29]
The Court of Lecce held that DAB was not a condition precedent to arbitration by focusing on the wording of Sub-Clause 20.6, which provides that, in disputes in respect of which the DAB’s decision, if any, has not become final, the parties shall refer the matter directly to arbitration.[30] Thus, the Court of Lecce did not consider Sub-Clause 20.6 in its full context, ie together with Sub-Clauses 20.2 and 20.4, and chose to ignore the mandatory wording in Sub-Clause 20.2. The Court of Lecce also relied on a literal and broad interpretation of Sub-Clause 20.8, which is in contrast with the Swiss and English courts.[31]
Implications for Arbitral Jurisdiction
If a party skips the DAB process entirely or partly and initiates arbitration, the arbitral tribunal will determine whether it can deal with the dispute without a prior DAB decision. If the tribunal decides that recourse to the DAB is mandatory, then it must answer an equally important question: whether this determination will be an issue of jurisdiction or admissibility. Unfortunately, this question does not have a straight answer either.
If the lack of a DAB decision is treated as an issue of jurisdiction, the tribunal will dismiss the case. On the other hand, if the lack of a DAB decision is treated as an issue of admissibility, the tribunal may suspend the arbitration proceedings until the DAB has been constituted and/or the DAB has issued a decision on the dispute, depending on which part of the DAB process was skipped in the first place.
In the above-mentioned Swiss case and the Peterborough Case, the admissibility approach has been preferred. Although not directly related to the DAB, French and German courts also considered non-compliance with multi-tiered dispute resolution clauses as a matter of admissibility.[32] Similarly, in a case regarding a mandatory pre-tier to arbitration that is not DAB, the Swiss Federal Supreme Court referenced its above-mentioned decision dated 7 July 2014 and stated its preference for staying the case until the pre-arbitral step is finished instead of finding a lack of jurisdiction.[33] Thus, there is a trend to perceive DAB and other pre-arbitral alternative dispute resolution clauses as an issue of admissibility rather than jurisdiction.
Choosing admissibility over jurisdiction gives more flexibility to the arbitral tribunal to deal with the issues in the most effective and just way. This is because, when the lack of a DAB decision is considered as an admissibility issue, it cannot be entirely separated from the principle of good faith. Although the principle of good faith comes in different forms depending on the governing law, this principle may be used by tribunals to prevent a party from benefiting from its own delay or failure to engage in the DAB process and then resorting to jurisdictional or procedural objections.[34]
In addition to considerations of good faith, there may be other reasons to uphold the arbitral tribunal’s jurisdiction despite the non-exhaustion of the DAB. As seen from the case law, the contractual intention of the parties should be respected. While doing so, the purpose of ensuring efficiency and flexibility in dispute resolution should be kept in mind. For instance, if the parties are unable to appoint the members of the DAB for months, there may be no justifiable reason to suspend arbitral proceedings to finish the DAB process, given that it has not yet even started. This is not a new method, as English and French courts have referenced futility of the alternative dispute resolution when evaluating the enforceability of mediation clauses in multi-tiered dispute resolution provisions.[35] Thus, futility of the DAB process may also be taken into consideration when deciding on whether to uphold the tribunal’s jurisdiction.
Conclusion
Case law is not established on the nature of the DAB and its jurisdictional implications, although there is a tendency to be flexible and not perceive it as a matter of jurisdiction. To be on the safe side, a tailor-made dispute resolution clause could be inserted into the contract. In any event, the governing law of the contract as well as the seat of arbitration should be chosen wisely. The issue of whether multi-tiered dispute resolution provisions are treated as issues of jurisdiction or admissibility under a particular law should be considered before choosing that law as the governing law of the contract or seat of arbitration. In this regard, the importance of drafting contracts clearly to prevent disputes and staying well-informed about case law developments before deciding whether to bypass the DAB phase cannot be overstated.
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[1] Please note that the FIDIC 2017 was reprinted with minor amendments to be effective as of 1 January 2023; however, these amendments do not concern Sub-Clause 21. The amendments can be accessed free of charge from FIDIC’s website.
[2] FIDIC 1999, Sub-Clause 20.4; FIDIC 2017, Sub-Clause 21.4.
[3] Taner Dedezade, ‘Can a party ignore FIDIC’s DAB process and refer its dispute directly to arbitration?’ <https://www.howardkennedy.com/Latest/Article/Can-a-party-ignore-FIDICs-DAB-process-and-refer-its-dispute-directly-to-arbitration> accessed 15 August 2023.
[4] FIDIC 1999, Sub-Clause 20.2; FIDIC 2017, Sub-Clause 21.1.
[5] FIDIC 1999, Sub-Clause 20.8 (emphasis added); FIDIC 2017, Sub-Clause 21.8 (emphasis added).
[6] Peterborough City Council v Enterprise Managed Services Limited [2014] EWHC 3193 (TCC), para 20.
[7] Dedezade, ‘Can a party ignore FIDIC’s DAB process and refer its dispute directly to arbitration?’.
[8] FIDIC Contracts (1999 editions) Guide 1st Ed (2000), at 317.
[9] FIDIC Golden Principles (2019), at 8, Golden Principle 5.
[10] These decisions were chosen in this article for being the few publicly available decisions on this issue.
[11] FIDIC 1999, Sub-Clause 20.4 (emphasis added).
[12] Swiss Federal Supreme Court, No. 4A_124/2014, 7 July 2014.
[13] Matthias Scherer, ‘Supreme Court – DAB proceedings precondition for arbitration under FIDIC Conditions’ (Lexology, 13 October 2014) <https://www.lexology.com/commentary/projects-construction-infrastructure/switzerland/lalive/supreme-court-dab-proceedings-precondition-for-arbitration-under-fidic-conditions> accessed 15 August 2023.
[14] ibid
[15] Swiss Federal Supreme Court, No. 4A_124/2014, 7 July 2014, para 3.1.1.
[16] ibid
[17] ibid, paras 3.4.3.1-3.4.3.2.
[18] ibid, para 3.4.3.3.
[19] ibid, para 3.4.4.
[20] ibid, para 3.5.
[21] Peterborough City Council v Enterprise Managed Services Limited [2014] EWHC 3193 (TCC). See also Herbert Smith Freehills, ‘FIDIC dispute adjudication boards: mandatory or optional?’ <https://www.lexology.com/library/detail.aspx?g=ee018fa3-0cb9-4f83-8431-722688c797fb> accessed 15 August 2023.
[22] ibid, para 14.
[23] ibid, paras 7-8.
[24] ibid, para 20.
[25] ibid, para 24.
[26] ibid, para 33.
[27] ibid, para 44.
[28] Court of Lecce, No. 1003, 16 April 2020.
[29] Giuseppe Franco, ‘To adjudicate, or not to adjudicate – that is the question (before Italian courts)’ (DLA Piper, 29 June 2022) <https://www.dlapiper.com/en-bh/insights/publications/2022/06/to-adjudicate-or-not-to-adjudicate-italian-courts> accessed 15 August 2023.
[30] Court of Lecce, No. 1003, 16 April 2020, at 6.
[31] ibid
[32] Breach of an alternative dispute resolution clause is considered as giving rise to a plea of inadmissibility (fin de non-recevoir) under the French Civil Procedure Code: Cour de Cassation, Chambre Mixte, 14 February 2003, no. 00-19.423; Cour de Cassation, 1ère Chambre Civile, 30 October 2007; Cour de Cassation, 1ère Chambre Civile, 9 November 2006; Cour d’Appel de Paris, 28 June 2016, no. 15/03504. See also the decisions of the German Federal Court of Justice dated 2016: I ZB 50/15, BGHZ [14.01.2016]; I ZB 1/15, BGHZ [09.08.2016].
[33] Swiss Federal Supreme Court, No. 4A_628/2015, 16 March 2016, para 1.2.
[34] See eg Swiss Federal Supreme Court, No. 4A_124/2014, 7 July 2014. See also Lindy Patterson KC and Nicholas Higgs, ‘Dispute Boards’ in The Guide to Construction Arbitration – Fifth Edition (2023) <https://globalarbitrationreview.com/guide/the-guide-construction-arbitration/fifth-edition/article/dispute-boards> accessed 15 November 2023.
[35] Colman J explained in Cable & Wireless that, where mediation would be ‘a completely hopeless exercise’, the court can refuse to penalize the breach of a mediation clause: Cable & Wireless Plc v IBM United Kingdom Ltd [2002] All ER (D) 277. Similarly, the Court of Cassation in France treated the likelihood of mediation’s being successful or futile as a relevant factor for the enforceability of mediation clauses: Cour de Cassation, 1ère Chambre Civile, 4 January 1961.
