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The relationship between Arbitration and the Dispute Adjudication Board under the FIDIC Silver Book (EPCT)

The relationship between Arbitration and the Dispute Adjudication Board under the FIDIC Silver Book (EPCT). Dr. Lic . Herfried Wöss, LL.M. (Exeter), MCIArb . ©. Case. Construction of plant in a Mexican city under the FIDIC Conditions of Contract for EPC Turnkey Projects

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The relationship between Arbitration and the Dispute Adjudication Board under the FIDIC Silver Book (EPCT)

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  1. The relationship between Arbitration and the Dispute Adjudication Board under the FIDIC Silver Book (EPCT) Dr. Lic. Herfried Wöss, LL.M. (Exeter), MCIArb. ©

  2. Case • Construction of plant in a Mexican city under the FIDIC Conditions of Contract for EPC Turnkey Projects • Performance of plant of only 20% of the required capacity at testing • The Contractor has not complied with the Instructions of the Employer to extend its Performance Security and the software for the plant, and to deliver the As Built Documents for Testing under Sub-Clause 9.1 EPCT • The Contractor has not complied with a Notice to Correct the lack of capacity of the plant under Sub-Clause 15.1 EPCT

  3. Case • Employer instructed Contractor to choose one of three candidates as sole member of the Dispute Adjudication Board domiciled in the Americas proposed from the FIDIC list • Contractor did not respond to such Instructions • Employer reiterated its Instructions • The appointing authority is a provincial court with no experience in the matter • Arbitration might be significantly delayed in case a Dispute Adjudication Board has to be appointed through the appointing authority

  4. Typical sequence of Dispute Events envisaged in Clause 20 EPCT

  5. Typical sequence of Dispute Events envisaged in Clause 20 EPCT

  6. Typical sequence of Dispute Events envisaged in Clause 20 EPCT

  7. The FIDIC EPCT Dispute Adjudication  Board • The EPCT Dispute Adjudication Board is an “ad-hoc” dispute adjudication board, which comprises one or three members who are only appointed if and when a particular dispute arises and whose appointment typically expires when the DB has issued its decision on that dispute

  8. Obtaining Dispute Board’s Decision (Sub-Clause 20.4 EPCT) • “If a dispute (of any kind whatsoever) arises between the Parties in connection with, or arising out of, the Contract or the execution of the Works, including any dispute as to any certificate, determination, instruction, opinion or valuation of the Employer, • then after a DAB has been appointed pursuant to Sub-Clauses 20.2 [Appointment of the DAB] and 20.3 [Failure to Agree DAB], • either Party may refer the dispute to the DAB for its decision, • with a copy to the other Party. • Such reference shall state that it is given under this Sub-Clause.”

  9. Obtaining Dispute Board’s Decision (Sub-Clause 20.4 EPCT) • Only a “dispute” may be referred to a DAB • A dispute may arise from claims of the Contractor (20.1) or the Employer (2.5), Employer’s Instructions (3.4) and Determinations (3.5) duly contested by the other Party, for example, through a notice of dissatisfaction under Sub-Clause 3.5 • Mere discussions are not considered a dispute • A matter that has not yet matured into a dispute may be considered outside the jurisdiction of the arbitral tribunal (Nael G. Bunni, The FIDIC Forms of Contract, third edition, p. 626)

  10. Obtaining Dispute Board’s Decision (Sub-Clause 20.4 EPCT) • According to the FIDIC Contracts Guide, “a matter may be said to have developed into a dispute: (i) after rejection of a final determination, (ii) when discussions have been discontinued without agreement on the matter, (iii) when a Party declines to participate in discussions or to reach agreement under Sub-Clause 3.5, or (iv) when so little progress is being achieved during protracted discussions that it has become clear that agreement is unlikely to be achieved.”

  11. Appointment of the DAB (Sub-Clause 20.2 EPCT) • The Parties “shall jointly appoint a DAB” by the date 28 days after a Party gives notice to the other Party of its intention to refer a dispute to a DAB (Sub-Clause 20.2 EPCT) • Disputes shall be adjudicated by a DAB in accordance with Sub-Clause 20.4 EPCT [Obtaining Dispute Adjudication Board’s Decision] • If the Parties cannot agree upon the appointment of a person as member of the DAB, Sub-Clause 20.3 EPCT applies

  12. Failure to Agree Dispute Adjudication Board (Sub-Clause 20.3 EPCT) • In case of failure to agree Dispute Adjudication Board, “the appointing entity or official named in the Particular Conditions shall, upon the request of [i] either or [ii] both of the Parties and after due consultation with both Parties, appoint this member of the the DAB. This appointment shall be final and conclusive.” (Sub-Clause 20.3 EPCT)

  13. Expiry of Dispute Adjudication Board’s Appointment (Sub-Clause 20.8 EPCT) • Such Sub-Clause reads: “If a dispute arises between the Parties in connection with, or arising out of, the Contract or the execution of the Works and there is no DAB in place, whether by reason of the expiry of the DAB’s appointment or otherwise: • (a) Sub- Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply, and • (b) the dispute may be referred directly to arbitration under Sub-Clause 20.6 [Arbitration].” (Emphasis added)

  14. Risks • The problem lies in the risk of possible guerrilla tactics that may arise due to difficulties in interpretation of the Contract as regards the right or obligation to have a Dispute Adjudication Board in place that might affect the execution of an arbitral award • The arbitral tribunal might lack jurisdiction in case the dispute has not been submitted to the Dispute Adjudication Board • Even if the arbitral tribunal confirms its, jurisdiction the matter might come up again during the execution of the arbitral award

  15. Legal questions • What is the consequence of a party refusing to appoint the Dispute Adjudication Board? • Is the other party obligated to request the appointing entity to appoint the Dispute Adjudication Board? • Is the Dispute Adjudication Board procedure a right or an obligation of the Parties? Can such right be waived? Can the obligation be suspended by both Parties? • How can arbitration be commenced without such risk?

  16. Interpretation • The FIDIC Contracts Guide establishes that: “Under EPCT, the first paragraph of Sub-Clause 20.2 requires a DAB to be appointed within 28 days after a Party gives notice of intention to refer a dispute to a DAB, and Sub-Clause 20.3 should resolve any failure to agree the membership of the DAB.”

  17. Interpretation • The FIDIC Contracts Guide further establishes that: “there may be no DAB in place” because of a Party’s intransigence (e.g. in respect of the first paragraph of EPCT 20.2). If a dispute arises thereafter, either Party can initiate arbitration immediately (subject to the first paragraph of EPCT 20.2), without having to reconvene a DAB for a decision and without attempting amicable settlement.” • “The Parties should thus comply with Sub-Clauses 20.2 and 20.3 before invoking Sub-Clause 20.8. If one Party prevents a DAB becoming “in place” it would be in breach of contract. Sub-Clause 20.8 then provides a solution for the other Party, which is entitled to submit all disputes (and this breach) directly to arbitration.”

  18. Interpretation • The FIDIC Contracts Guide seems to indicate that the mere refusal of a Party to participate in the joint appointment of a DAB permits the application of Sub-Clause 20.8 • Such refusal to establish a Dispute Adjudication Board by a Party accepted by the other Party could be interpreted as a waiver by both Parties to have a Dispute Adjudication Board in place • Interpretation is subject to the lexcontractus • The local court of the execution of the arbitral award has the last word

  19. Solution • In case the waiver of the right or obligation to appoint a Dispute Adjudication Board cannot be validly or undoubtedly waived, such obligation, if any, may be eliminated by the Employer through the termination of the Contract under Sub-Clause 15.2 EPCT • According to the autonomy of the arbitration agreement under the applicable lexarbitri (Mexican law), the arbitral tribunal is competent to rule on the termination of the Contract • This also applies to any claims resulting thereof such as a claim for loss of income normally not admitted under Sub-Clause 17.6 EPCT (save fraud, deliberate default or reckless misconduct of the defaulting Party)

  20. Contact Torre Esmeralda I Blvd. Manuel Ávila Camacho 40-1606 Col. Lomas de Chapultepec 11000 México, D.F. Tel: +52 (55) 2623-7100 Fax: +52 (55) 2623-7200 Email: hwoess@woessetpartners.com http://www.woessetpartners.com

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