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

Construction as Investment

Kyiv, 20 February 2013

Dispute Avoidance and Resolution under FIDIC Rules and Procedure:

Polish Experience

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ROADMAP OF OUR PRESENTATIONI.Introductory remarksII. How to process a claim under the FIDIC Conditions?

1. FIDIC Rules and Procedure 2. 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/Litigation1. Construction arbitration - a growing industry2. Arbitration under FIDIC Conditions3. Polish experience - XXV Division in the Warsaw High Court

- a specialized construction court?V. Final remarks

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

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Conflict is a fact of life… and is inevitable

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Introductory remarksDispute Avoidance preferred The FIDIC Update Task Group recommends the use of

a standing DAB ”The sooner, the better!”

Multi-tier dispute resolution (escalation mechanism): Engineer

DAB/Mediation Arbitration/Litigation

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Effective conflict management

1 2 3Dispute communicated to the other partyNegotiationEngineer’s Decision

Consensus-oriented DR MethodEnhanced-negotiation/Mediation/ConciliationDispute Board

Arbitration/Litigation

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Employer’s Claims The claims ‘available’ to the Employer will depend upon

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

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

giving of notice “as soon as practicable” after becoming aware of an event or circumstances giving rise to a claim

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Contractor’s claims (Sub-Clause 20.1) The Contractor must:

notify a claim not later than 28 days after the Contractor became aware or should have become aware of the event or circumstance;

submit a ‘fully detailed claim and full supporting particulars’ within 42 days after it became aware (or should have become aware); and

keep ‘contemporary records’ to substantiate the claim and allow the Engineer to inspect these records and obtain copies.

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Contractor’s claims (Sub-Clause 20.1) The Engineer must:

respond within 42 days of receiving a claim or further particulars either approving the claim or disapproving it with ‘detailed comments’;

In any determination under Sub-Cl. 3.5, consult with both parties in an endeavour to reach

agreement; and if agreement cannot be achieved, make a fair

determination in accordance with the contract ‘taking due regard of all relevant circumstances’

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Contractor’s claims: Time-Bar Limitation

‘If the Contractor fails to give notice of a claimwithin such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim’(Sub-Cl. 20.1)

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What types of claims are barred?

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

The provision is broad enough to cover most types of claims

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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

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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; such notice enables matters to be investigated while they are still current. Furthermore, such notice sometimes gives the employer the opportunity to withdraw instructions when the financial consequences become apparent”

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Enforceability of time bars by DABs

DABs, where appropriate, enforce the time bars

FIDIC Gold Book 2008 – DAB has discretion to override the time bar:Sub-Clause 20.1(a):

‘…However, if the Contractor considers there are circumstances which justify the late submission, he may submit the details to the DAB for a ruling. If the DAB considers that, in all the circumstances, it is fair and reasonable that the late submission be accepted, the DAB shall have the authority to overrule the relevant 28 day limit …’

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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 Rulesof the Court of Arbitration at the Polish Confederation of Private Employers 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&Maxwell 2006, p. 390

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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 right

to 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 civil laws of certain jurisdictions

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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 unreasonably disadvantage the other party to the contract with the user.

(2) An unreasonable disadvantage is, in case of doubt, to be assumed to exist if a provision is not compatible with essential principles 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 essential principles of the statutory provision’?

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Enforceability of time bars – Example: Poland

Poland - Article 119 of Polish Civil Code ‘Periods of limitation may not be shortened or

prolonged 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 court order)

Since the statute of limitation cannot be contractually modified, the same should apply to a time bar (a minori ad maius)

Result: Subclause 20.1 time bar null and void?

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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 a modification to a statute of limitations rules

FIDIC is commonly used in the industry, and constitutes an integral 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

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Enforceability of time bars: Poland – Case Law Regional Court in Warsaw (13.07.2011, XXV C 701/10)

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

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

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

Regional Court in Warsaw (11.06.2012, XXV C 567/11) Similar arguments and conclusion as above

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

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Engineer’s determination under scrutiny -the Dispute Adjudication Board

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DAB Procedure under the FIDIC Red Book (Clause 20)

Step 1: Referral of a “dispute” to a DABStep 2: DAB must decide within 84 days by a “binding”

decisionStep 3: Notice of dissatisfaction within 28 days or else

“final and binding”Step 4: Maximum of 56 days for amicable settlementStep 5: If not settled by above steps, international arbitration

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Overview of FIDIC dispute resolution provisions

DAB to givenotice ofdecision

Notice ofdissatisfaction

Arbitrationcan be

commenced

84 days

28 daysIf Engineer’s Decision

becomes final and bindingbut a Party fails to comply

Arbitration canbe commenced

56 daysAmicable

Settlement

Referral of mattersin dispute to DAB

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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

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Dispute Boards - Historical background

First developed in the 1970s and 1980s in the US Eisenhower Tunnel (Colorado), the Mount Baker Ridge Highway

Tunnel (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 Dispute Board 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 EBRD followed with similar decisions

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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 Fourth Edition 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 all adopted this concept as the first step in the dispute resolutionmechanism, albeit in different forms

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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

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Ertan Project (China)

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Hong Kong International Airport

A HK$50 billion investment, HKIA has been one of the largest engineering and architectural projects in the world One of the largest hubs: in 2011, 53.9 million

passengers used HKIA and some 3.9 million tonnes of air cargo passed through HKIA

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Channel Tunnel Rail Link Project a US$5 billion concession project in the UK on which construction

started in October 1998 two panels:

a technical panel comprising engineers (construction related disputes) and

a finance panel comprising accountants and financiers (disputes concerning the financial provisions of the concession agreement)

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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 between the Parties in connection with, or arising out of, the Contract 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] and 20.3 [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 …

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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 days from reference

Decision binding on the Parties “unless and until it shall be revised in an amicable settlement or arbitral award” (SC 20.4)

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Nature of the DAB in the FIDIC forms Two different models: ‘Standing’ – as provided for in Red & Gold Book General

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

Conditions

Models are alternatives – but both include dispute adjudication role

Most appropriate model depends on particular project

Fees split equally between Parties

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Standing DABDAB appointed by Parties at outset of the Contract, and operatesthroughout its currencyDAB visits the site regularlyMany disputes resolved amicably before they require decision of DABParties can jointly request opinionsIf dispute arises, referral can be made immediatelyWhen making a decision, DAB will have read the Contract, will need less time to familiarise itself with issues, and can draw on actual knowledge of conditions on the SiteMay be paid retainer for ‘doing nothing’ substantive if there are no disputes

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Ad hoc DAB DAB only appointed after the dispute has arisen Allows Parties to chose member(s) with expertise most suited to

issues 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: ongoing

involvement during course of contract

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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 the major contracts awarded by the Airports Authority. When disputes arose, a panel comprising either one or three members was chosen to hear the dispute 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 at ten years for a panel member and fifteen years for the Chairman. The panel dealt with 30 submissions with amounts in dispute ranging from US$100,000 to US$20m.

Independent, ‘suitably qualified’ professionals DAB members should not be employees of the Employer, the

Contractor or the Engineer

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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 nominate one member for the approval of the other party

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

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Failure to agree on the DAB – Sub-Clause 20.3 If the parties fail to agree on the sole member of the DAB, fail to

nominate their members to a three-person DAB, or fail to agree upon the appointment of the chairman resort to the appointing entity named in the Appendix to Tender

Even when there are no further specific rules, appointing authorities have their own regulations and preferences: ICC will usually appoint a chairman who is not a national of

the country of origin of either Party The Dispute Board Federation usually appoints the

Chairman first and then select the other two members in consultation with him/her

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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)

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Nature of a DAB decisionClause 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 the DAB and approved by both Parties, the DAB shall give its decision … . … If either Party is dissatisfied with the DAB’s decision, then either Party may, within 28 days after receiving the decision, give notice to the other Party of its dissatisfaction.”

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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 gives the other Party notice of dissatisfaction within 28 days Once final, decision cannot be challenged at arbitration

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Enforcement of a DAB’s decision - arbitration If no notice of dissatisfaction is given, a Party may refer the failure of

the other Party to comply with the decision directly to arbitration (SC 20.7) 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

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Enforcement of a DAB’s decision There is a debate about the binding status of DAB’s

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

awards 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 the disputes within the Contract and through ADR procedures -DAB decision as a facilitated settlement?

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Effectiveness of Dispute Boards

“the statistics show that if there is an operational Dispute Board in existence on a project close to 99% of all disputes referred to it will be successfully resolved within less than 90 days and at a cost of about 2% of the amount 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

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International Arbitration and FIDIC

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Construction ArbitrationConstruction disputes represent a large share of arbitration

market

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

ICC International Court of Arbitration BulletinVol 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

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International Arbitration in the FIDIC forms -model clause20.6 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 of

Arbitration 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

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International Arbitration in the FIDIC forms International Arbitration is the final stage in the dispute

resolution process Arbitration may be commenced during or after completion of the

Work: Where notice of dissatisfaction has been given in respect

of a DAB’s decision and after the 56-day amicable settlement period

Immediately if no DAB in place (SC 20.8) Parties are bound by the obligations in the Contract, even

though arbitration has commenced Arbitral Tribunal issues a binding arbitral award which may be

enforced internationally

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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 the FIDIC Clause 20 in favour of domestic litigation

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Concluding remarks

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K&L Gates Jamka sp.k.Al. Jana Pawła II 2500-854 Warsawtel: +48 22 653 4200www.klgates.com

maciej.jamka@klgates.com rafal.morek@klgates.com

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