Contractual pre-conditions to arbitration in England and the UAE

By Jeremy Glover and Heba Osman, Partners, Fenwick Elliott

Under the FIDIC form, whether it is the 1999 Rainbow suite or the 1987 Fourth Edition, which is still used fairly widely in the Middle East today,  obtaining a decision from either the Engineer (4th Edition) or  a DAB (1999 suite) is generally a precondition to a party being entitled to commence arbitration. This can often result in two conflicting questions:

(i) What can I do if the other party to the contract refuses to assist in the appointment of the DAB? How do I resolve my dispute if there is no Engineer and no Engineer’s decision? Can I go straight to arbitration?
(ii) Do I have to go through the DAB process? The contract is at an end. Obtaining a decision of the DAB is just an unnecessary duplication of costs.

There has been a recent decision in Dubai on this very question, but first a recap of the position in the UK.

England: Peterborough City Council v Enterprise Managed Services Ltd1

Here, following completion of a project, where the contract was based on the FIDIC 1999 Form, Peterborough alleged that the plant had failed to achieve the required power output and claimed the Price Reduction. On 6 January 2014, Peterborough issued a letter of claim under the Pre-action Protocol. EMS responded that in accordance with the Contract terms the dispute ought to be referred to a DAB. Mr Justice Edwards-Stuart was therefore asked to consider whether or not the terms of the Contract required a dispute to be referred to adjudication by a DAB first as a pre-condition to any court proceedings. If that was correct, should the court exercise its discretion and order that the Council’s proceedings be stayed?

On the first issue the Judge decided that upon a proper interpretation of the Contract, sub-clause 20.8 would only apply to give Peterborough a unilateral right to opt out of DAB adjudication if the parties had agreed to appoint a standing DAB at the outset. Accordingly, given that sub-clause 20.2 provided for ad hoc DAB appointments, the Judge accepted EMS’s argument that the Contract required the determination of the dispute through DAB adjudication prior to any litigation. The right to refer a dispute to adjudication arises under sub-clause 20.4 as soon as a DAB has been appointed, whether under sub-clause 20.2 or 20.3.

Peterborough then argued that sub-clause 20.8 provided an opt-out from DAB adjudication but that if reference of a dispute to a DAB was mandatory, the court proceedings should be allowed to continue on the grounds that:

(i) what was a complex dispute was unsuitable for a “rough and ready” DAB adjudication procedure; and

(ii) any DAB adjudication would be an expensive waste of time as it was inevitable that the losing party would go to court.

Peterborough submitted that any decision by the DAB would almost inevitably provoke a notice of dissatisfaction from one or other party. Accordingly, to embark on the fairly lengthy (and therefore expensive) adjudication procedure under the contract would be a wholly or at least largely unproductive exercise. The dispute raised complex questions of construction and application of legislation, mandatory codes and standard industry practice and would require extensive disclosure. Therefore the “rough and ready” process of adjudication was entirely inappropriate to resolve this dispute.

However, the Judge noted that this was nothing new: the complexity of a potential dispute about when the required power output was achieved was foreseeable from the outset, yet nevertheless the parties chose to incorporate the adjudication machinery in the FIDIC form of contract. Both parties therefore agreed to the “rough and ready” adjudication procedure.

That said, in circumstances where the parties had not yet invested time or money in the DAB adjudication, the Judge was sympathetic to Peterborough’s case that the court proceedings should not be supplanted by adjudication. However, the overriding principle, as illustrated by the English legal authorities, clearly showed a presumption in favour of leaving parties to resolve their disputes in the manner they had agreed to in their contract. DAB procedures must be treated as mandatory.

Accordingly, the Judge ordered that the court proceedings were to be stayed.

Dubai: Commercial Case 757 of 2016

The Dubai Court of First Instance in a recent ruling (Commercial Case 757 of 2016 dated 15 August 2016) 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 4th Edition.

Summary of facts

The Claimant in this case is a contractor who entered into a construction contract with the Respondent for the construction of a factory and its associated buildings (the Project). The value of the contract is approximately AED 48 million and the Claimant submitted a performance bond amounting to 10% of the value of the contract. 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 FIDIC 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, legal fees, etc.

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 include the Claimant’s failure to refer the dispute for the Engineer’s decision in accordance with clause 67 and hence the Respondent submitted that the arbitration was filed prematurely. In particular, the Respondent submitted that clause 67 has set a mechanism for the settlement of disputes which requires that:

1. there be a dispute between the parties;
2. the dispute has not been resolved amicably; and
3. the dispute was 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:

1. 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 is 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.
2. The principle that the contract is the law of the parties does not disallow 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.
3. 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 the parties.

On the basis of these principles, the Dubai Court of First Instance was of the view that the parties have agreed that certain disputes arising between them may be referred to arbitration and these are the disputes which were (1) referred to the Engineer for a decision but have not become final and binding (clause 67.1) or (2) 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 has produced no evidence showing that the dispute was ever referred for the Engineer’s decision under clause 67.

Commentary

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 quite important to comply with these provisions even if the other party is uncooperative. The question before a court enforcing the arbitral award (or a tribunal considering whether it has jurisdiction or not) is whether the party did attempt to comply with the requirements of the arbitration agreement or not.

Conclusion

Both these cases confirm that DAB and Engineer determination procedures should be treated as mandatory. And if one of the parties tries to frustrate the appointment process, can you still go to arbitration even if there is no Engineer’s or DAB Determination? Well you may recall that there is a recent Swiss case, Decision 4A_124/2014, where the Supreme Court agreed that the DAB procedure was mandatory, but at the same time took into account the reasons why there had been no DAB upholding the decision of the Respondent Contractor to go to arbitration and concluding that:

“In this respect, considering the circumstances germane to the case at hand … they cannot be criticized for failing to denounce the Respondent’s failure to sign the DAA from the point of view of the rules of good faith. Pursuant to these rules and considering the process of constitution of the DAB, it is indeed impossible to blame the Respondent for losing patience and finally skipping the DAB phase despite its mandatory nature in order to submit the matter to arbitration.”

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• 1. [2014] EWHC 3193 (TCC)