Dispute Adjudication Board s Decision Under FIDIC s 1999 Red Book Not Enforceable By Arbitration

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1 Dispute Adjudication Board s Decision Under FIDIC s 1999 Red Book Not Enforceable By Arbitration Introduction The recent decision of the Singapore High Court in PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation [2010] SGHC 202 illustrates the importance of appreciating that not all arbitration agreements operate in the same manner and that in some, there might be conditions to be satisfied before a dispute becomes referable to arbitration. Parties should also understand that even where the contract envisages decisions being made by an engineer, superintending officer or a disputes board, and that such decisions are given contractually binding effect, there is a difference between referring the disputes underlying such decisions to arbitration and enforcing such decisions. In this case, the High Court affirmed that a decision of the Dispute Adjudication Board ( DAB ) under Clause 20.4 of the 1999 FIDIC Red Book ( 1999 Red Book ), though binding on parties, is nonetheless not enforceable by arbitration. Essentially, there are two broad categories of disputes referable to arbitration under the 1999 Red Book: a. disputes referred to the DAB whose decision has been challenged and hence, not final and binding (such a decision is only binding pending revision in arbitration); and b. disputes relating to the enforcement and compliance of a DAB decision which has become final and binding. There is no third category where a binding but not final DAB decision can be referred to arbitration by way of enforcement. In this case, the respondent ( CRW ) obtained a favourable ruling by the DAB which ordered the applicant ( PGN ) to pay a certain amount of monies to it. PGN challenged the DAB decision. Because of this challenge, the DAB decision does not have a final and binding effect. In the meantime, PGN did not comply with the DAB decision. CRW therefore tried to enforce the DAB decision by way of arbitration. It therefore referred to arbitration - not the underlying dispute Rajah & Tann LLP

2 which formed the decision of the DAB but rather - the question whether PGN was obliged to comply with the DAB decision. The tribunal was of the view that PGN was so obliged and issued an award requiring PGN to make immediate payment to CRW ( Award ). PGN then applied via Originating Summons for the Award to be set aside. The Court set aside the Award and held that the tribunal exceeded its power by rendering a final award pertaining to a dispute that was not referred first to the DAB pursuant to the Conditions of Contract. What the respondent could have done was to challenge the underlying disputes and not to frame the dispute as one pertaining to CRW s obligations to make immediate payment (which was never referred to the DAB). The Court highlighted that the adjudication of the immediate payment issue without confirming the correctness of the DAB Decision would be tantamount to converting the binding but not final DAB decision into a final arbitration award and ignoring the dispute resolution provisions of the Conditions of Contract. Brief Facts (1) PGN and CRW entered into a contract whereby CRW undertook to construct a gas transmission pipeline for PGN ( Contract ). The Contract adopted the standard provisions of the Federation Internationale des Ingenieurs Conseils ( FIDIC ) Conditions of Contract for Construction (1st Edition, 1999) ( 1999 Red Book ), with some modifications made thereto by the parties ( Conditions of Contract ). The Conditions of Contract provided for the mechanism for resolving disputes between the contracting parties. (2) A dispute subsequently arose between the parties, prompting them to refer the dispute to a DAB pursuant to sub-clause 20.4 of the Conditions of Contract. (3) The DAB rendered several decisions, all of which were accepted by PGN except for that ordering it to pay CRW US$17.2 million ( DAB Decision ). PGM then filed a Notice of Dissatisfaction ( NOD ) alleging amongst others that the DAB Decision was excessive in that it was for an amount greater than that claimed by CRW. (4) As PGN did not comply with the DAB decision, CRW filed a request for arbitration with the International Chamber of Commerce International Court of Arbitration ( ICC ) purportedly pursuant to clause 20 of the Conditions of Contract. CRW resorted to arbitration notwithstanding the NOD because in its view, PGN remained obliged to perform its obligation under the DAB Decision to pay CRW the sum of US$17.2 million. According to CRW, PGN s refusal to pay that sum caused a second dispute between the parties and it was this second dispute that it wanted the Arbitral Tribunal to resolve. (5) At the hearing of the arbitration case, the Arbitral Tribunal considered the issue of whether CRW was entitled to immediate payment of the subject amount. 2 Rajah & Tann LLP

3 (6) The Arbitral Tribunal concluded that the DAB Decision was binding on the parties and that PGN had an obligation to make immediate payment to CRW under the Contract ( Award ). (7) CRW went on to register the Award in Singapore as a judgment by way of an order of court ( Registration Order ). (8) PGN, in addition to filing a separate application to set aside the Registration Order, filed a separate application to set aside the Award. The application to set aside the Registration Order was adjourned pending the outcome of the application to set aside the Award. Issue The Singapore High Court had to determine whether the Award ought to be set aside on the following grounds: (i) the Arbitral Tribunal exceeded its jurisdiction or mandate; and (ii) the arbitral procedure was not in accordance with the agreement of the parties. Holding of the Court The Court allowed the application to set aside the Award pursuant to Article 34(2)(a)(iii) of the UNCITRAL Model Law on International Commercial Arbitration ( Model Law ). The crux of the present dispute was the proper interpretation of the dispute resolution clause of the Conditions of Contract. Specifically, the Court pointed out that the bone of contention in the present case concerned the admissibility of a reference to international arbitration of any dispute which had not yet become final and binding. Contractual Framework for Resolving Disputes In order to better understand the dispute in the present case, it would help to know the contractual framework for resolving disputes as stipulated in the Conditions of Contract. Sub-clause 20.4 provides that the DAB, after receiving the referred dispute for adjudication, shall give its stated decision within a stipulated period. The DAB s decision shall be binding on both parties, who shall promptly give effect to it unless and until it shall be revised in an amicable settlement or an arbitral award pursuant to sub-clause The DAB decision becomes final and binding upon both parties if no NOD is given by either party within a stipulated period. Sub-clause 20.5 allows parties to amicably settle their dispute before the commencement of arbitration. However, unless both parties agree otherwise, arbitration may be commenced after the lapse of a certain prescribed period, even if no attempt at amicable settlement has been made. Subclause 20.6 states that unless settled amicably, any dispute in respect of which the DAB s decision (if any) has not become final and binding shall be finally settled by international arbitration. Under 3 Rajah & Tann LLP

4 this sub-clause, the arbitrators are authorised to open up, review and revise any decision of the DAB that is relevant to the dispute. The last relevant sub-clause, sub-clause 20.7, provides that in the event that: (i) neither party has given NOD within the period set out in sub-clause 20.4; (ii) the DAB s decision has become final and binding; and (iii) a party fails to comply with the DAB Decision, then the other party may refer the failure itself to arbitration under sub-clause This sub-clause expressly excludes sub-clause 20.4 and Arbitral Tribunal Acted in Excess of its Powers Article 34(2)(a)(iii) of the Model Law, incorporated into Singapore legislation as the First Schedule to the Act, provides for the ground for setting aside an arbitral award. The Court explained that two situations may fall within the ambit of article 34(2)(a)(iii) of the Model law. The first contemplates the common situation where an award is made by a tribunal which had jurisdiction to deal with the dispute, but exceeded its powers by looking into matters that had not been submitted to it for resolution (citing Nigel Blackaby, Constantine Partasides with Alan Redfern and Martini Hunter, Redfern and Hunter on (Oxford University Press, Fifth Ed at para 10.39). The second situation is where the dispute referred to the arbitrators is one that was not within the parties arbitration agreement or that went beyond the scope of that agreement. The arbitration commenced by CRW was made under sub-clause 20.6 which provides that any dispute in respect of which the DAB s decision (if any) has not become final and binding shall be finally settled by arbitration. What this means is that before a dispute can be subject to arbitration, it must first have been referred to the DAB. It is to be understood by the wording of sub-clause 20.6 that the DAB decision that a party intends the arbitral tribunal to review is that which had been referred to it for resolution. In the present case, the dispute which CRW wanted the Arbitral Tribunal to resolve (ie the second dispute ) was whether it was entitled to immediate repayment by PGN of the sum set out in the DAB Decision. Clearly, this dispute as regards the immediate enforceability of the DAB Decision was not a dispute relating to the DAB Decision. Not only was the second dispute a different dispute from that original one brought before the DAB, it was in fact a dispute that had not yet been referred to the DAB. What CRW could have done was to challenge the DAB Decision on whether CRW was indeed entitled to the sum which the DAB had decided was due. However, CRW tried to limit the dispute to only whether payment of the subject sum should be made immediately and, in doing so, wrongly relied on sub-clause As correctly argued by PGN, the powers of the arbitrators as set out in sub-clause 20.6 did not include the power to direct PGN to make immediate payment of the subject sum without a review on the merits of the case confirming the correctness of the DAB Decision. The Court noted that an adjudication on the second dispute without confirming the correctness of the DAB Decision would be tantamount to converting the binding but not final decision (ie DAB Decision) into a final arbitration award and ignoring the dispute resolution provisions of the Conditions of Contract. 4 Rajah & Tann LLP

5 Based on the foregoing, the Court held that the Arbitral Tribunal exceeded its powers because it rendered a final award pertaining to (i) a dispute (ie the second dispute ) that was not referred first to the DAB, given that before a dispute can be subject to arbitration, it must have been referred to the DAB and a NOD must have been served within the stipulated period; and (ii) a dispute that was not within the scope of the arbitration provision of the Conditions of Contract. Enforcing a Binding but not Final Decision The Court in the present case stressed that based on the Conditions of Contract, only a final and binding DAB Decision may be enforced by reference to arbitration. There are instances, however, where a DAB Decision may be binding (as is evident from the wording in sub-clause 20.4: The decision shall be binding on both parties, who shall promptly give effect to it ) but may not be final as when a valid NOD is filed and served. In such situations, what is the recourse of the winning party against the losing party who fails to give prompt effect to the DAB Decision? The Court observed that there appears to be a lacuna in the Red Book in so far as it does not confer an express right on the winning party to refer the matter to arbitration. To address this gap, the Court suggested that the winning party can ask the arbitral tribunal to review and confirm the DAB Decision. It may then include a claim for an interim award vis-à-vis the DAB Decision to be enforced, stating the amount to be paid as set out in the DAB Decision. The amount paid out is liable to be returned to the payer, depending on the outcome of the review of the DAB Decision by the arbitral tribunal. Concluding Words It was highlighted in this case that parties must pay attention to the arbitration clause of the agreement that they may enter into. This is important because the arbitration clause defines the scope of the dispute that may be referred to arbitration, ie the nature and / or kind of disputes that the arbitration clause covers. The arbitration clause also provides for the requisites or steps that must be undertaken before referring a matter to arbitration. Non-compliance with the agreed arbitral procedure is a ground to set aside an arbitral award. 5 Rajah & Tann LLP

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