Enforcement of DAB decisions

A number of arbitral awards have recently come to light confirming the enforceability of non-final DAB decisions by ordering the losing party to pay immediately to the winning party the amounts ordered by the DAB even though a notice of dissatisfaction had been given in respect of those DAB decisions. As Fred Gillion discusses,1 recent decisions from the High Court and the Court of Appeal of Singapore seem to go against the tide and are sending a confusing message to contractors and construction practitioners dealing with the FIDIC form of contract.

Introduction

In PT Perusahaan Gas Negara (Persero) TBK (“PGN”) v CRW Joint Operation (“CRW”)2, the High Court of Singapore set aside an ICC arbitral award on the basis that the tribunal had exceeded its powers in making a final award ordering PGN to make immediate payment to CRW of the sum which the DAB had decided was due to CRW. Following an appeal by CRW, the Court of Appeal confirmed the lower court’s decision to set aside that arbitral award in a judgment dated 13 July 2011.3 Further, the Court of Appeal concluded that the Arbitral Tribunal had, by summarily enforcing a binding but non-final decision by way of a final award without a hearing on the merits, acted in a way which was “unprecedented and more crucially, entirely unwarranted under the 1999 FIDIC Conditions of Contract”.

Although some of the findings of the Singapore court are questionable, they serve as a valuable reminder to those involved with FIDIC contracts that the enforcement of DAB decisions is not a simple matter. A number of jurisdictional pitfalls exist which may prevent a winning party from obtaining in arbitration the amounts awarded by the DAB.

The facts of the Singapore case

In 2006, PGN, an Indonesian state-owned company, entered into a contract with CRW for the construction by CRW of a pipeline and optical fibre cable from Grissik to Pagardewa in Indonesia. The contract incorporated the General Conditions of the FIDIC Conditions of Contract of the 1999 Red Book. The law governing the contract was that of Indonesia.

A dispute arose between the parties regarding certain variations in respect of which CRW sought additional payment. Following a referral of that dispute to the DAB, the DAB issued several decisions, all of which were accepted by PGN except for one dated 25 November 2008 ordering PGN to pay CRW a sum in excess of US$ 17 million (“the DAB Decision”). The following day, on 26 November 2008, PGN gave notice of its dissatisfaction with the DAB Decision in accordance with Sub-Clause 20.4 of the Contract. PGN subsequently refused to comply with the DAB Decision. This led CRW to file a request for arbitration with the ICC International Court of Arbitration (ICC Case No. 16122) in respect of PGN’s failure to comply with the DAB Decision. The dispute was referred to arbitration, and the key point of this case was whether CRW was entitled to immediate payment by PGN of the sum awarded by the DAB in its Decision of 25 November 2008 (“the Dispute”).

CRW’s position was that, notwithstanding PGN’s notice of dissatisfaction, PGN still remained bound by the DAB Decision and was required to “promptly give effect” to that decision in accordance with Sub-Clause 20.4 of the Contract. In its defence, PGN argued that the DAB Decision was not “final and binding” as it had served a notice of dissatisfaction and that a binding but not final decision could not be converted into a final arbitral award without first determining whether the DAB Decision was correct (or ought to be revised) on the merits by opening up and reviewing the DAB Decision. PGN in particular sought to argue that the powers of the Arbitral Tribunal set out in Sub-Clause 20.63 did not include the power to direct a party to make immediate payment of the sum awarded by the DAB without a review confirming the correctness of the DAB Decision.

On 24 November 2009, a Final Award was rendered holding that the DAB Decision was binding and that PGN had an obligation to make immediate payment to CRW of the sum set out in the DAB Decision, namely US$ 17,298,834.57. The Arbitral Tribunal also dismissed in its award PGN’s interpretation of Sub-Clause 20.6 and its argument that the Arbitral Tribunal should open up and review the DAB Decision, and noted that PGN had however still the right to commence a separate arbitration to open up, review and revise the DAB Decision. CRW then proceeded to register the Final Award as a judgment in Singapore. In response, PGN applied to set aside the registration order and also sought an order from the High Court of Singapore to set aside the Final Award, on the basis inter alia that the Arbitral Tribunal had exceeded its jurisdiction by converting the DAB Decision into a Final Award without determining first whether the DAB was correct on the merits.

By its decision dated 20 July 2010 (“the High Court Decision”), the High Court of Singapore found in PGN’s favour and set aside the Final Award for lack of jurisdiction of the Arbitral Tribunal. Dissatisfied with the High Court Decision, CRW filed an appeal, which was dismissed by the Court of Appeal of Singapore in its judgment dated 13 July 2011 (“the Court of Appeal Decision”).

The High Court Decision

In reaching its decision to set aside the Final Award, the High Court of Singapore examined the contractual framework set out in Clause 20 for the resolution of disputes between the parties and in particular the requirement for a dispute to have gone through various steps, including a referral of the dispute to the DAB, before it may be referred to arbitration. It also considered the distinction between the proceedings envisaged by Sub-Clauses 20.6 and 20.7 of the Condition of Contract.

The High Court held that the Arbitral Tribunal had acted outside its jurisdiction in two respects:

(i) The Dispute that CRW referred to arbitration in ICC Case No. 16122 (namely PGN’s non-payment of the sum set out in the DAB Decision as opposed to the underlying dispute) had not first been referred to the DAB and was therefore “plainly outside the scope of sub-cl 20.6 of the Conditions of Contract”.4

(ii) The arbitration proceedings commenced by CRW were made pursuant to Sub-Clause 20.6 of the Conditions of Contract, which, according to the Singapore Court, requires “a review of the correctness of the DAB Decision”5 and must be distinguished from proceedings brought under Sub-Clause 20.7 which do not require the Arbitral Tribunal to consider the merits of the DAB Decision. That distinction meant that the Arbitral Tribunal had acted outside its jurisdiction by making final a binding DAB Decision without first hearing the merits of that DAB Decision.

What should CRW have done, according to the Singapore Court, to enforce it’s binding but not final DAB Decision? The Singapore Court dismissed the simple option of a referral to arbitration of the losing party’s failure to comply with the DAB Decision. It held obiter that a winning party should do the following: (1) refer the underlying dispute covered by the DAB Decision to arbitration and ask the Arbitral Tribunal to review and confirm the DAB Decision; and (2) include a claim for an interim award in respect of the amount that the DAB ordered the losing party to pay.

The Court of Appeal Decision

Although the Court of Appeal ultimately confirmed the High Court Decision to set aside the Final Award, the basis on which it reached its decision is quite different. The basis of that Decision dated 13 July 2011 essentially lies with the matters which the Arbitral Tribunal was appointed to decide as set out in the Terms of Reference signed by the parties. The Court of Appeal explains the following:

“The TOR stated clearly that the Arbitration was commenced pursuant to sub-cl 20.6 of the 1999 FIDIC Conditions of Contract. Further, it is plain that under the TOR, the Arbitral Tribunal was, by the parties’ consent, conferred an unfettered discretion to reopen and review each and every finding by the Adjudicator. In other words, the Arbitral Tribunal was appointed to decide not only whether CRW was entitled to immediate payment of the sum of US$17,298,834.57… but also “any additional issues of fact or law which the Arbitral Tribunal, in its own discretion, [might] deem necessary to decide for the purpose of rendering its arbitral award”.”6

With what the Court of Appeal describes as “this crucial backdrop in mind”, it went on to consider whether the Final Award was issued in accordance with Sub-Clause 20.6. It was not by refusing to open up, review and revise the DAB Decision and proceeding instead to make a final award without reviewing the merits of that decision, the Arbitral Tribunal had ignored the clear language of Sub-Clause 20.6 to “finally [settle]” the dispute between the parties. The Court of Appeal considered that “What the Majority Members ought to have done, in accordance with the TOR [Terms of Reference] (and, in particular, sub-cl 20.6 of the 1999 FIDIC Conditions of Contract), was to make an interim award in favour of CRW for the amount assessed by the Adjudicator (or such other appropriate amount) and then proceed to hear the parties’ substantive dispute afresh before making a final award.”7

The Court of Appeal considered that the Final Award was therefore not issued in accordance with Sub-Clause 20.6, which in turn raised the question of whether the Arbitral Tribunal exceeded its jurisdiction in making the Final Award (Article 34(2)(a)(iii) of Model Law) and whether it breached the rules of natural justice (section 24(b) of the Singapore International Arbitration Act). These were the two grounds relied upon by PGN for setting aside the Final Award and accepted by the Court of Appeal in this appeal.8

Implications of the Singapore case

The implications of these decisions are difficult to predict. One thing is certain, the conclusion of the High Court is already being relied upon in other arbitration proceedings in support of defences to claims for immediate payment of amounts awarded by DABs as well as in enforcement proceedings. For this reason, the decisions of the High Court and the Court of Appeal of Singapore merit careful examination.

A thorough analysis of the High Court Decision shows that the Singapore Court seems to have been misguided in its interpretation of Sub-Clauses 20.6 and 20.7. There is nothing in the FIDIC Conditions that would prevent a winning party from referring to arbitration simply the issue of the other party’s failure to comply with a DAB decision, as a second dispute, without having to refer also the underlying dispute. It should therefore be possible for a winning party to commence a relatively straightforward arbitration simply based on the other party’s breach of Sub-Clause 20.4. Only one condition should not be overlooked by the winning party before doing so: that second dispute must have been first referred to the DAB and an adequate and timely notice of dissatisfaction must have been served in respect of that second DAB decision.

In that respect, the High Court of Singapore was correct when it concluded that since the Dispute which CRW referred to arbitration (namely non-payment of the DAB Decision) had not first been referred to the DAB, it was plainly outside the jurisdiction of the Arbitral Tribunal. Sub-Clause 20.7 makes it clear that the only situation where a party may refer directly to arbitration the other party’s failure to give effect to a DAB decision without having to comply first with the requirements of Sub-Clause 20.4 and Sub-Clause 20.5 is in the event that no party has expressed dissatisfaction with the DAB decision and that DAB decision becomes as a result final and binding. In ICC Case No. 16122, a notice of dissatisfaction had been given by PGN, making the DAB Decision binding but not final. Sub-Clause 20.7 was therefore not applicable.

It will be interesting to see how the problem of the enforcement of DAB decisions will be addressed in the second edition of the 1999 FIDIC Books which is expected to be published next year. One approach which the FIDIC Contracts Committee might adopt will be to amend Clause 20 along the lines of the FIDIC Gold Book 2008 by adding in Sub-Clause 20.6 that the DAB decision is binding and that the parties have to comply with it “notwithstanding that a Party gives a Notice of Dissatisfaction with such a decision” and by providing in Sub-Clause 20.7 that in the event that a party fails to comply with a decision of the DAB, whether binding or final and binding, then the other party may refer that failure to arbitration without having to refer first that matter to the DAB and then to wait for the amicable settlement period to expire. These amendments would bring more certainty to what is currently an ambiguous section of the 1999 suite of FIDIC contracts and would no doubt give parties more faith in the DAB process and its outcome.

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• 1. A full version of this article was published in the October 2011 issue of the International Construction Law Review.
• 2. PT Perusahaan Gas Negara (Persero) TBK v. CRW Joint Operation [2010] SGHC 202.
• 3. CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33.
• 4. Sub-Clause 20.6 of the Conditions of Contract: “The arbitrator(s) shall have full power to open up, review and revise any certificate, determination, instruction, opinion or valuation of the Engineer, and any decision of the DAB, relevant to the dispute.”
• 5. Judgment, paragraph 37.
• 6. Court of Appeal Decision, paragraph 43.
• 7. Court of Appeal Decision, paragraph 79.
• 8. PGN did not dispute the decision of the High Court to reject its submissions on Article 34(2)(a)(iv) of the Model Law, namely that “the arbitral procedure was not in accordance with the agreement of the parties, which required the merits of the underlying dispute and/or the question of whether the DAB Decision was made in accordance with the Contract to be determined prior to making that decision a final award” (High Court Decision, paragraph 9).