Contractual preconditions to arbitration under FIDIC: Dubai 2016
The Dubai Court of First Instance in a recent ruling (Commercial Case 757 dated 15 August 2016) has confirmed the principle that recourse to the Engineer for a decision under clause 67 FIDIC is a pre-condition to the validity of the arbitration. The judgment does not appear to specify which FIDIC Standard Form; however, from reading it appears to be the modified version of the FIDIC Red Book fourth edition.
Heba Osman explains more.
Summary of facts
The Claimant in this case was a contractor who entered into a construction contract (most likely a FIDIC Red Book fourth edition) with the Respondent for the construction of a factory and its associated buildings (the “Project”). The value of the contract was approximately AED 48 million and the Claimant submitted a performance bond amounting to 10% of the value of the contract. Limited information is currently available from the judgment however it is understood that the Claimant completed the works and handed over the Project to the Respondent.
It is also understood that the Respondent failed to make certain payments to the Claimant and refused to release the performance bond as required under the terms of their contract. However, the judgment does not state the reasons or the grounds on the basis of which the Respondent refused to make the payments to the Claimant and/or release the performance bond.
However, on the basis of the Respondent’s failure, the Claimant filed an arbitration case in accordance with clause 67 of the FIDIC contract before the Dubai International Arbitration Centre (“DIAC”), which appointed the arbitrator. The parties and the arbitrator then signed Terms of Reference. It is understood that the Terms of Reference did not contain any provision indicating that the Respondent waived its right to challenge the arbitral award on the basis that the dispute was not referred to the Engineer; on the contrary, it appears that the Respondent did raise a jurisdictional objection due to the lack of referral to the Engineer.
The arbitral award was issued on 9 March 2016 obliging the Respondent to pay the Claimant an amount of AED 7.3 million along with interest, arbitration costs and legal fees.
The Claimant then filed a case before the Dubai Court of the First Instance seeking, inter alia, the enforcement of the arbitral award. The Respondent filed a counterclaim seeking the annulment of
the arbitral award.
The Respondent’s grounds for the annulment of the arbitral award included the Claimant’s failure to refer the dispute for the Engineer’s decision in accordance with clause 67. As a consequence of this, the Respondent submitted that the arbitration had been filed prematurely.
In particular, the Respondent submitted that clause 67 had set a mechanism, (which the Claimant had failed to follow) for the settlement of disputes prior to an arbitration which required that:
(i) there be a dispute between the parties;
(ii) the dispute had not been resolved amicably; and
(iii) the dispute had been referred to the Engineer for a decision to be issued within 84 days from its referral.
The court decision
Before making its decision, the Dubai court recited the following principles:
(i) In accordance with the general principles of contract, arbitration is a contract between the parties and therefore it is permissible for the parties to this contract to include pre-conditions that must be fulfilled prior to arbitration being commenced.
As such, if any of these conditions are not satisfied or fulfilled then it is not possible to resort to arbitration. This is in line with the established legal principle that the contract is the law of the parties.
(ii) The principle that the contract is the law of the parties does not prevent these same parties, either after entering into the agreement or at any time, from expressly or impliedly amending the terms of their arbitration agreement as these agreements are not part of the public order.
(iii) It is an established principle that the parties to a contract are entitled to decide on the types of disputes in respect of which recourse to arbitration can be made.
The parties are not obliged to utilise arbitration for all disputes that may arise between them. Moreover, since arbitration is an exception to the original jurisdiction of the courts, arbitration agreements must be narrowly construed in a manner that does not exceed the intent of
Applying these principles, the Dubai Court of First Instance was of the view that the parties had agreed that certain disputes arising between them may be referred to arbitration.
These disputes were the disputes which had been (i) referred to the Engineer for a decision but had not become final and binding (clause 67.1) or (ii) referred to the Engineer for a decision and have become final and binding but one of the parties failed to comply with the Engineer’s decision (clause 67.4).
The Court, therefore, concluded that the parties’ agreement was that it was essential that a dispute be first referred to the Engineer before the parties can proceed to arbitration.
The Court then ordered the annulment of the arbitral award on the basis that the Claimant had produced no evidence showing that the dispute was ever referred for the Engineer’s decision under clause 67.
This is a decision from the Dubai Court of First Instance and is therefore still subject to appeal. However, this decision shows a consistency in the Dubai Court’s position that clear pre-conditions contained in multi-tier dispute resolution clauses must be respected by the parties.
This position, nonetheless, is to be contrasted with a decision from the Dubai Court of Cassation last year in which that Court did not accept a provision requiring amicable settlement to be attempted prior to resorting to arbitration as a pre-condition.
In particular, the Dubai Court of Cassation found that if the agreement does not offer guidance as to how this amicable settlement should be approached or set out any specific steps for this amicable settlement, and a party proceeds to arbitration, then it is deemed that the amicable settlement attempts have failed.
The importance of considering the specific requirements of an arbitration clause cannot be overemphasised. It is not in any claimant’s interest to commence arbitration proceedings and expend time and money to end up with an annulled arbitration award due to the failure to follow a procedural step, especially when this could have been avoided from the start.
Parties contemplating arbitration should, before commencing any arbitration proceedings, carefully review the wording of the full dispute settlement or arbitration provision contained in their agreement.
In particular, a simple check-list would include:
- Ensure that the arbitration agreement itself is binding (i.e. signed by the authorised persons);
- Check if the arbitration agreement can in fact be applied (for example: it actually refers to arbitration rather than to the court);
- Consider carefully the pre-conditions contained in the provision. Is there a requirement to submit the dispute to an Engineer or a Dispute Adjudication Board (“DAB”)?
- Is there a time limit for submitting the dispute? When can arbitration be commenced?
- Is there a requirement for amicable settlement or referral to senior management following the Engineer’s or DAB’s decision?
- Is the other party a governmental entity or some other entity subject to a special law that sets specific requirements prior to commencing arbitration?
Whatever the requirements of the arbitration clause, it is important to comply with these provisions even if the other party is uncooperative. The central question before a court enforcing the arbitral award (or a tribunal considering whether it has jurisdiction or not) will be whether or not the party has attempted to comply with the requirements of the arbitration agreement.
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