Three separate court decisions in different jurisdictions in recent months have given support to dispute adjudication boards (DABs) as a form of dispute resolution and, more generally, the enforcability of contractual dispute resolution clauses.
DABs, which often comprise a panel of three members, provide a decision on a dispute which is binding pending any subsequent determination by a court or arbitral tribunal should one of the parties pursue litigation or arbitration. In this sense they are similar to adjudicators’ decisions. Commonly seen in international standard form contracts in the construction and infrastructure industries, clauses requiring disputes to be referred to a DAB before court or arbitration are intended to keep a long term project on track by providing quick resolution to disputes and avoiding disruption to cashflow – applying a ‘pay now, argue later’ approach.
Two decisions in England and Switzerland last year both considered the provisions in the FIDIC suite of contracts (used extensively in the construction industry) that require referral of disputes to a DAB. In both cases, the courts held that the referral to a DAB was mandatory, with only limited exceptions – rejecting arguments that the parties could opt out of the process once the dispute had arisen and refer the dispute direct to arbitration or court proceedings (although, on the facts in the Swiss case, the court considered that an exception based on principles of good faith applied). Michael Mendelblat of our Construction team comments on the Swiss and English decisions below.
Shortly after those judgments, in an important decision in an arbitration context, the Singapore Court of Appeal upheld an interim award made by an arbitral tribunal giving effect to an obligation to promptly comply with a DAB decision. Our arbitration team comments on this Singapore decision on our Arbitration Notes blog here.
Underlying all three decisions is the view that parties should be held to their bargain where they have clearly expressed their intention to resort first to a particular form of dispute resolution (in this case DABs) before escalating the dispute to court or arbitration.
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Peterborough City Council v Enterprise  EWHC 3193 TCC
Rather unusually this case concerns a contract entered into on the FIDIC Silver Book terms for works in the UK. It concerned a solar energy plant and the claimant employer alleged that it had failed to achieve the required output for which a price reduction was available. The employer sought recovery of the sum as a debt and issued court proceedings. Meanwhile, the defendant contractor applied for the appointment of an adjudicator. He was appointed by the RICS. The contractor applied for the employer’s proceedings to be stayed.
Under the Silver Book, the Disputes Adjudication Board (“DAB”) is appointed on an Ad Hoc basis following the issue by one of the parties of a notice of intention to refer a dispute to adjudication. Thereafter, the parties jointly appoint the DAB or the nominating body makes an appointment. The contract went on to provide at clause 20.8 that where a dispute arises between the parties and there is no DAB in place, whether by reason of the expiry of the DAB’s appointment or otherwise, then the dispute may be referred directly to the court.
The Employer submitted that clause 20.8 was an “opt out” that enabled a party who did not wish to have a dispute resolved by an adjudication, to refer it directly to the court. It said that the requirement to refer disputes to adjudication was directive rather than mandatory and that the DAB would only be “in place” once a Dispute Adjudication Agreement had been entered in to. Further, the DAB’s decision might not be enforceable on the basis that if a Notice of Dissatisfaction was given by either party, then the DAB’s decision became binding but not final. Any failure to comply with that decision would itself be a dispute which must be referred to adjudication and so on ad infinitum.
The court said that this issue might be arguable where the contract provided for arbitration but there would be no problem with the court ordering specific performance of the obligation to comply with a decision of the DAB. Further, it did not matter that no Dispute Adjudication Agreement had been concluded, since all relevant terms were in place once the Appendix to the Contract Conditions was completed. There would be an implied term of that agreement that the adjudicator was entitled to his reasonable fees. In any event, if either party refused to sign the Dispute Adjudication Agreement, the court could compel it to do so by an order for Specific Performance.
The court decided that clause 20.8 only applied where the contract provided for a standing DAB and that DAB had ceased to be in place for whatever reason by the time a dispute arises. In relation to an Ad Hoc DAB, the right to refer a dispute to it arises as soon as it has been appointed since a dispute cannot be referred to a DAB that is not in place.
The court exercised its discretion in favour of ordering a stay. It saw some force in the argument that it would be better for there to be one dispute resolution mechanism than two, since it was inevitable that whoever lost the adjudication would serve a notice of dissatisfaction. However, there is a presumption in favour of leaving the parties to resolve their dispute in the manner provided for by their contract – DGT case (2007), and the employer had not made out a compelling case to displace the presumption. The stay was therefore ordered.
It seems likely that the employer planned to use the CPR Part 24 Summary Procedure to recover what it saw as a debt and was concerned that it might find a less robust approach to its claims in adjudication. Further, it is a matter of debate as to whether there is an effective method of enforcing a DAB’s decisions. The only court decisions on the “Ad Infinitum” point are in Singapore and are of only persuasive influence elsewhere. Nevertheless, the court held the parties to their bargain as it was clearly intended that the DAB should be the first port of call for dispute resolution under the terms of the contract.
A v B Civil Law Court Switzerland 7 July 2014 (4A_124/2014)
The contract in this case was on the terms of the FIDIC Red Book and under Romanian Law. A standing DAB was required to be convened. However, this was not done and the parties had sought to agree the candidates for the DAB when a dispute arose. The Employer (“A”) had been uncooperative in the appointment of the members of the DAB and after more than a year of correspondence between the parties no agreement had been reached. The Contractor (“B”) filed a request for arbitration with the ICC and this appears to have provoked the Employer into confirming the appointment of the members of the DAB and to seek to finalise the Dispute Adjudication Agreement. FIDIC refused to appoint a DAB on the basis that the arbitration procedure had been initiated.
The Arbitral Tribunal then produced a majority partial award which accepted jurisdiction over the Contractor’s claim. The Employer appealed this decision with a view to obtaining its annulment. The Court referred to the provisions of Swiss Law which enabled it to find the jurisdiction or lack of it of an Arbitral Tribunal.
It referred to FIDIC’s long standing system of alternative resolution of pre-arbitration disputes which in previous editions of its suite required the engineer to reach a decision. However, the latest edition introduced a DAB as a pre-condition to arbitration. The wording of Clause 20.2 is that disputes “shall” be adjudicated by a DAB which indicates this is an obligation rather than an option. Clause 20.6 establishes that a decision by a DAB is a pre-condition to the initiation of arbitral proceedings.
As in the Peterborough case, the Court considered Clause 20.8 of the Contract and decided in the same way that it refers to a situation where the “mission” of a standing DAB expires at the end of a given time limit before a dispute arises between the parties. The inclusion of the words “or otherwise” allows the taking into consideration of other causes for the expiry of the DAB’s “mission”, such as the intransigence of the parties.
Clause 20.8 refers in general to special circumstances where resorting to the pre-arbitration DAB should not be imposed on the party wishing to submit a dispute to arbitration. The Court described the Employer’s will to obtain a DAB’s decision as “questionable at the very least”.
The Contractor was not to blame for the delay in appointing the DAB but the result was that there was no constituted DAB and the only remedy that a party had when faced with the other’s refusal to sign the DAA is to go to arbitration. Therefore, the arbitrators were right to find that the DAB was not in place when the arbitration request was filed and the appeal was dismissed.
The decision as to the mandatory nature of the DAB provision is similar to that reached in Peterborough but the outcome is the reverse. The crucial difference appears to be that the failure to constitute the DAB arose from the fault of one of the parties in not cooperating in agreeing its constitution and signing the DAA. By contrast in Peterborough, the DAB had already been appointed at or shortly after the date the court proceedings were issued and there was no evidence of a lack of cooperation.
The Swiss Court’s decision is of course only of persuasive interest in other jurisdictions but it may serve to indicate the circumstances which would cause a DAB’s decision to no longer be a pre-condition to arbitration in FDIC Contracts.