Presentation FIDIC Conference

8/20/2019 Presentation FIDIC Conference

1/53

Copyright © 2012 by K&L Gates LLP. All rights reserved.

Construction as Investment

Kyiv, 20 February 2013

Dispute Avoidance and Resolutionunder FIDIC Rules and Procedure:

Polish Experience


2/53

1

ROADMAP OF OUR PRESENTATION

I.Introductory remarks

II. How to process a claim under the FIDIC Conditions?

1. FIDIC Rules and Procedure2. Employer’s & Contractor’s claims3. Time bars in theory and practice

III. Dispute Avoidance and Early Resolution - Dispute Adjudication Board (DAB)

1. DABs – Concept and background2. Models of DABs in FIDIC (standing and ad hoc DABs)

3. Legal effects and enforcement of DAB’s decisions

IV. Arbitration/Litigation

1. Construction arbitration - a growing industry2. Arbitration under FIDIC Conditions

3. Polish experience - XXV Division in the Warsaw High Court- a specialized construction court?

V. Final remarks


3/53

2

"Better to prevent than to cure"old French proverb (Mieux vaut prévenir que guérir.)


4/53

3

Conflict is a fact of life… and is inevitable


5/53

4

Introductory remarks

Dispute Avoidance preferred

The FIDIC Update Task Group recommends the use ofa standing DAB

”The sooner, the better!”

Multi-tier dispute resolution (escalation mechanism):

Engineer

DAB/Mediation

Arbitration/Litigation


6/53

5

Effective conflict management

1 2 3Dispute

communicated

to the other

party

Negotiation

Engineer’s

Decision

Consensus-

oriented DR

Method

Enhanced-

negotiation/

Mediation/

Conciliation

Dispute Board

Arbitration/

Litigation


7/53

6

Employer’s Claims

The claims ‘available’ to the Employer will depend upon

the specific FIDIC form, since the risk allocation acrossthe FIDIC suite alters considerably; and

the precise contract terms used by the parties, i.a., in theParticular Conditions

The Employer does not have a general right to set-off

Clause 2.5: Notice of Claims

The Employer’s right to make deductions is subject to thegiving of notice “as soon as practicable” after becomingaware of an event or circumstances giving rise to a claim


8/53

7

Contractor’s claims (Sub-Clause 20.1)

The Contractor must:

notify a claim not later than 28 days after the Contractorbecame aware or should have become aware of theevent or circumstance;

submit a ‘fully detailed claim and full supporting

particulars’ within 42 days after it became aware (orshould have become aware); and

keep ‘contemporary records’ to substantiate the claimand allow the Engineer to inspect these records and

obtain copies.


9/53

8

Contractor’s claims (Sub-Clause 20.1)

The Engineer must:

respond within 42 days of receiving a claim or furtherparticulars either approving the claim or disapproving itwith ‘detailed comments’;

In any determination under Sub-Cl. 3.5,

consult with both parties in an endeavour to reachagreement; and

if agreement cannot be achieved, make a fairdetermination in accordance with the contract

‘taking due regard of all relevant circumstances’


10/53

9

Contractor’s claims: Time-Bar Limitation

‘If the Contractor fails to give notice of a claim within such period of 28 days, the Time forCompletion shall not be extended, theContractor shall not be entitled to additional

payment, and the Employer shall be dischargedfrom all liability in connection with the claim ’(Sub-Cl. 20.1)


11/53

10

What types of claims are barred?

‘…any extension of the time for Completion and/orany additional payment, under any Clause of theseConditions or otherwise in connection with theContract’ (Sub-Cl. 20.1)

The provision is broad enough to cover most typesof claims


12/53

11

Are the FIDIC time bar provisions too onerous?

European International Contractors: ‘unduly harsh’

In theory: Time bars facilitate good claims management,

allowing issues to be aired and settled at the

working level while they are fresh in peoples’minds

They also facilitate effective mitigation,allowing the parties to take action to minimise

the costs and delay of a notified claim


13/53

12

Are the FIDIC time bar provisions too onerous?

Multiplex Construction (UK) Ltd v Honeywell

Systems [2007] EWHC 447 (TCC):

“… Contractual terms requiring a contractor to give

prompt notice of delay serve a valuable purpose; suchnotice enables matters to be investigated while they arestill current. Furthermore, such notice sometimes givesthe employer the opportunity to withdraw instructionswhen the financial consequences become apparent”


14/53

13

Enforceability of time bars by DABs

DABs, where appropriate, enforce the time bars

FIDIC Gold Book 2008 – DAB has discretion to overridethe time bar:

Sub-Clause 20.1(a):‘…However, if the Contractor considers there arecircumstances which justify the late submission, hemay submit the details to the DAB for a ruling. If the

DAB considers that, in all the circumstances, it is fairand reasonable that the late submission be accepted,the DAB shall have the authority to overrule therelevant 28 day limit …’


15/53

14

Enforceability of time bars – Arbitral Tribunals

Arbitration clause may be ineffective, if contractual prerequisites

to arbitration have not been fulfilled

Decision on Jurisdiction by an arbitral tribunal under the Rules of the Court of Arbitration at the Polish Confederation of PrivateEmployers Lewiatan, publ. in Arbitration e-Review no. 1(2009)

Award in Hamburg Chamber of Commerce of 14 July 2006 ,2007 SchiedsVZ 55

‘ A referral to arbitration is not valid where the DAB procedure

has not been attempted first ’Glover J., Understanding the New FIDIC Red Book – A

clause-by-clause commentary , London Sweet&Maxwell2006, p. 390


16/53

15

Enforceability of time bars – state courts

Common law jurisdictions

Enforceable on the basis of the parties’ agreement

Skub-clause 20.1 notice is a condition precedent to the rightto recover either time or money

Einstein J in Aiton Pty Ltd v Transfield Pty (1999) SC NSW

236; Mr Justice Ramsey in Holloway v Chancery Mead Ltd [2007] EWHC 2495 (TCC)

The prevention principle?

A party should not benefit from its own breach of contract

Civil law jurisdictions 28-day time-limit leading to a loss of a claim may be

unenforceable due to mandatory statute of limitations rules in civillaws of certain jurisdictions


17/53

16

Enforceability of time bars – Example: Germany

Germany - Section 307 of BGB (German Civil Code)

‘(1) Provisions in standard business terms are ineffective if,contrary to the requirement of good faith, they unreasonablydisadvantage the other party to the contract with the user.

(2) An unreasonable disadvantage is, in case of doubt, to beassumed to exist if a provision is not compatible with essentialprinciples of the statutory provision from which it deviates’

The standard limitation period is three years (Section 195 BGB)

Is then the 28-day time bar ‘compatible with essentialprinciples of the statutory provision ’?


18/53

17

Enforceability of time bars – Example: Poland

Poland - Article 119 of Polish Civil Code

‘Periods of limitation may not be shortened orprolonged by a legal act.’

Subclause 20.1 time bar (result: loss of the claim)goes even further than the statute of limitation(result: claim exists, but is not enforceable via courtorder)

Since the statute of limitation cannot be contractually

modified, the same should apply to a time bar (aminori ad maius )

Result: Subclause 20.1 time bar null and void?


19/53

18

Enforceability of time bars: Poland – Case Law

Appellate Court in Warsaw (30.05.2011, I ACz 700/11)

FIDIC notice requirement is a contractual time bar and not amodification to a statute of limitations rules

FIDIC is commonly used in the industry, and constitutes anintegral part of the parties’ freedom of contract

Notice of claim requirement - as a precondition to arbitration -is not contrary to the Polish public policy

Regional Court in Warsaw (7.03.2012, XXV C 249/11)

Subclause 20.1 given full effect

Claims notified after the agreement has been performed are

time barred a ‘fully detailed claim’ includes a specific calculation of

damage, not a mere assertion of extra costs incurred


20/53

19

Enforceability of time bars: Poland – Case Law


28-day time bar contradicts the Civil Code provisions on thestatute of limitations and is null and void in this respect

A contractor, despite lack of notice, does not lose its claims. It ishowever contractually liable for breach of contract (breach of aSubclause 20.1 condition)

FIDIC Conditions are of a common law origin and must beadjusted to mandatory laws of a given jurisdiction


Similar arguments and conclusion as above

The law is not settled as the Supreme Court has not yet spoken onthis issue


21/53

20

Engineer’s determination under scrutiny -

the Dispute Adjudication Board


22/53

21

DAB Procedure

under the FIDIC Red Book (Clause 20)

Step 1: Referral of a “dispute” to a DAB

Step 2: DAB must decide within 84 days by a “binding”

decision

Step 3: Notice of dissatisfaction within 28 days or else

“final and binding”

Step 4: Maximum of 56 days for amicable settlement

Step 5: If not settled by above steps, international arbitration


23/53

22

Overview of FIDIC dispute resolution provisions

DAB to give

notice of

decision

Notice of

dissatisfaction

Arbitration

can be

commenced

84 days

28 days

If Engineer’s Decision

becomes final and binding

but a Party fails to comply

Arbitration can

be commenced

56 days

Amicable

Settlement

Referral of matters

in dispute to DAB


24/53

23

Dispute Boards

Specifically designed and developed for large construction

contracts; known under different names as: Dispute Review Boards (DRB)

issues recommendations with no binding effect

Dispute Adjudication Boards (DAB) issues decisions which are binding on an interim basis

Combined Dispute Boards (CDB)

Standing (or ad hoc ) panels of impartial experts who support parties in reaching consensus

provide recommendations or

render decisions


25/53

24

Dispute Boards - Historical background

First developed in the 1970s and 1980s in the US

Eisenhower Tunnel (Colorado), the Mount Baker Ridge HighwayTunnel (Seattle, Washington), and the Chambers Creek Tunnel(Tacoma, Washington)

In 1981, the El Cajon Hydroelectric Project in Hondurasthe first large international construction contract where a DisputeBoard was effectively utilized

In 1995, the World Bank made DRBs mandatory for all IBRD-financed

projects over US$50m

In 1997 the Asian Development Bank and EBRDfollowed with similar decisions


26/53

25

FIDIC Dispute Adjudication Boards

In 1995, FIDIC started with the introduction of the use of Dispute

Boards in the Orange Book

In 1996, Dispute Boards were incorporated into the 1992 FourthEdition of the Red Book though its Supplement

In 1999, the suite of FIDICs three major contracts, the 1999 RedBook, the 1999 Yellow Book and the 1999 Silver Book, have alladopted this concept as the first step in the dispute resolutionmechanism, albeit in different forms


27/53

26


28/53

27


29/53

28

Eisenhower Tunnel (Colorado, US)

the Eisenhower Tunnel, completed in 1979, remains

the highest vehicular tunnel in the US first broadly discussed case in which Dispute Board

was effectively used

Source: www.wikipedia.com


30/53

29

Ertan Project (China)


31/53

30

Hong Kong International Airport

A HK$50 billion investment, HKIA has been one of

the largest engineering and architectural projects inthe world

One of the largest hubs: in 2011, 53.9 millionpassengers used HKIA and some 3.9 million tonnesof air cargo passed through HKIA


32/53

31

Channel Tunnel Rail Link Project

a US$5 billion concession project in the UK on which constructionstarted in October 1998

two panels:

a technical panel comprising engineers (construction relateddisputes) and

a finance panel comprising accountants and financiers (disputes

concerning the financial provisions of the concession agreement)


33/53

32

Nature of the DAB in the FIDIC forms

Clause 20 of the Yellow Book:

20.4 Obtaining Dispute Adjudication Board’s Decision

“If a dispute (of any kind whatsoever) arises betweenthe Parties in connection with, or arising out of, theContract or the execution of the Works … then after a

DAB has been appointed pursuant to Sub-Clauses 20.2[Appointment of the Dispute Adjudication Board] and20.3 [Failure to Agree Dispute Adjudication Board],either Party may refer the dispute in writing to the DAB

for its decision, with a copy to the other Party …


34/53

33

Principal features of the DAB in the FIDIC forms

Express duty of independence and impartiality on the DAB members

DAB’s decision obtainable within a relatively short time – 84 daysfrom reference

Decision binding on the Parties “unless and until it shall be revised in

an amicable settlement or arbitral award” (SC 20.4)


35/53

34

Nature of the DAB in the FIDIC forms

Two different models:

‘Standing’ – as provided for in Red & Gold Book GeneralConditions

‘Ad hoc’ – as provided for in Yellow & Silver Book GeneralConditions

Models are alternatives – but both include dispute adjudicationrole

Most appropriate model depends on particular project

Fees split equally between Parties


36/53

35

Standing DAB

DAB appointed by Parties at outset of the Contract, and operatesthroughout its currency

DAB visits the site regularly

Many disputes resolved amicably before they require decision ofDAB

Parties can jointly request opinions

If dispute arises, referral can be made immediatelyWhen making a decision, DAB will have read the Contract, willneed less time to familiarise itself with issues, and can draw onactual knowledge of conditions on the Site

May be paid retainer for ‘doing nothing’ substantive if there are nodisputes


37/53

36

Ad hoc DAB

DAB only appointed after the dispute has arisen

Allows Parties to chose member(s) with expertise most suited toissues involved in the dispute

Only visits the Site after the dispute has arisen

Less familiar with the Project

But only paid when there are disputes

No power to issue an opinion

Deprives DAB of principal benefit of dispute board concept: ongoinginvolvement during course of contract


38/53

37

Appointment of the DAB – Sub-Clauses 20.2 20.3

Default: three members

Exceptions for Large Projects

Hong Kong Airport: DRB of six members plus a convener dealing with themajor contracts awarded by the Airports Authority. When disputes arose, apanel comprising either one or three members was chosen to hear thedispute depending on its size and nature.

Boston Big Dig: a three-member panel for each contract with disciplinary-specific expertise and dispute resolution/DRB experience. This was fixed atten years for a panel member and fifteen years for the Chairman. The paneldealt with 30 submissions with amounts in dispute ranging from US$100,000to US$20m.

Independent, ‘suitably qualified’ professionals

DAB members should not be employees of the Employer, the

Contractor or the Engineer


39/53

38

Appointment of the DAB – Sub-Clauses 20.2 20.3

Members are appointed by agreement of the Employer and

Contractor Tripartite Dispute Adjudication Agreement

DAB may comprise of either one or three members

If the DAB is to comprise three persons, each party shall nominateone member for the approval of the other party

The Chairman is generally chosen by the parties in consultationwith the party-appointed members


40/53

39

Failure to agree on the DAB – Sub-Clause 20.3

If the parties fail to agree on the sole member of the DAB, fail tonominate their members to a three-person DAB, or fail to agreeupon the appointment of the chairman resort to the appointing entity named in the Appendix toTender

Even when there are no further specific rules, appointingauthorities have their own regulations and preferences:

ICC will usually appoint a chairman who is not a national ofthe country of origin of either Party

The Dispute Board Federation usually appoints theChairman first and then select the other two members inconsultation with him/her


41/53

40

Failure to agree on the DAB

Polish experience

Supreme Court (12.01.2012, IV CSK 219/11) Failure to agree on a new Dispute Adjudication

Board is not a valid reason to terminate the

contract under FIDIC Subclauses 16.2 (b) or (d)


42/53

41

Nature of a DAB decision

Clause 20 of the Yellow Book:

20.4 Obtaining Dispute Adjudication Board’s Decision

“… Within 84 days after receiving such reference … or

within such other period as may be proposed by theDAB and approved by both Parties, the DAB shallgive its decision … .

… If either Party is dissatisfied with the DAB’s

decision, then either Party may, within 28 days afterreceiving the decision, give notice to the other Partyof its dissatisfaction.”


43/53

42

Nature of a DAB decision

Decision binding “unless and until it shall be revised

in an amicable settlement or arbitral award”

Parties must “promptly give effect” to decision

Decision becomes final and binding unless one Party givesthe other Party notice of dissatisfaction within28 days

Once final, decision cannot be challenged at arbitration


44/53

43

Enforcement of a DAB’s decision - arbitration

If no notice of dissatisfaction is given, a Party may refer the failure ofthe other Party to comply with the decision directly to arbitration (SC20.7)

No need to refer the failure back to the DAB

No need to attempt amicable settlement or wait for 56 days

If notice of dissatisfaction is given:

Party may include in an arbitration commenced under Sub-Clause 20.6 a claim for an interim award to enforce the decisionof the DAB

Also possible support from the courts


45/53

44

Enforcement of a DAB’s decision

There is a debate about the binding status of DAB’sdecision

local law: ‘final and binding decision’ reserved for arbitralawards

Singapore High Court in PT Perusahaan Gas Negara(Persero) TBK v CRW Joint Operation [2010] SGHC 202

DAB’s decision, though binding on the parties, non-enforceable through arbitration

Many Civil Codes encourage the Parties to resolves thedisputes within the Contract and through ADR procedures -DAB decision as a facilitated settlement?


46/53

45

Effectiveness of Dispute Boards

“the statistics show that if there is an operational Dispute

Board in existence on a project close to 99% of alldisputes referred to it will be successfully resolved withinless than 90 days and at a cost of about 2% of theamount of the dispute”

Dr. Cyril Chern, Dispute Board Federation

C. Chern , The Dispute Board Federation and the Role of Dispute Boards in Construction –

Benefits without Burden, Revista del Club Español del Arbitraje , Volume 2010, Issue 9, p. 5


47/53

46

International Arbitration and FIDIC


48/53

47

Construction Arbitration

Construction disputes represent a large share of arbitrationmarket

ICC: ‘In 2010 (…) Construction and engineering disputesaccounted for almost 17% of the total caseload ’

ICC International Court of Arbitration Bulletin

Vol 22/Number 1-2011

The highest volume of cases of any industry sector

Similarly in 2009 - 15%ICC International Court of Arbitration Bulletin - Vol. 21/1 - 2010


49/53

48

International Arbitration in the FIDIC forms -

model clause

20.6 Arbitration

“

Unless settled amicably, any dispute in respect of which the DAB’s

decision if any) has not become final and binding shall be finally

settled by international arbitration. Unless otherwise agreed by both

Parties:

a) the dispute shall be finally settled under the Rules ofArbitration of the International Chamber of Commerce,

b) the dispute shall be settled by three arbitrators appointed in

accordance with these Rules, and

c) the arbitration shall be conducted in the language for

communications defined in Sub-Clause 1.4 [Law and Language].

…

”

No default option for seat of arbitration and procedural law


50/53

49

International Arbitration in the FIDIC forms

International Arbitration is the final stage in the disputeresolution process

Arbitration may be commenced during or after completion of theWork:

Where notice of dissatisfaction has been given in respectof a DAB’s decision and after the 56-day amicablesettlement period

Immediately if no DAB in place (SC 20.8)

Parties are bound by the obligations in the Contract, eventhough arbitration has commenced

Arbitral Tribunal issues a binding arbitral award which may beenforced internationally


51/53

50

Construction litigation in Poland

High Court in Warsaw, XXV Civil Division - Polish TCC?

The General Directorate of National Roads and Motorways(GDDKiA) has its seat in the court’s district

A natural process of specialisation of the Court’s judges has followed,together with logistic concerns such as…truckloads of files which

sometimes take an hour to be moved to the court room

Amounts in dispute reach over 1 billion PLN in a single case

Judges admit that arbitration is a better mode to hear such disputes.However, GDDKiA consistently deletes arbitration clauses from theFIDIC Clause 20 in favour of domestic litigation


52/53

51

Concluding remarks


53/53

52

K&L Gates Jamka sp.k.

Al. Jana Pawła II 25

00-854 Warsaw

tel: +48 22 653 4200www.klgates.com

[email protected]

[email protected]

Please visit our blog: www.disputeresolutionpoland.com

Documents

Presentation FIDIC Conference