Legally Bound

Burke ... way forward is to comply strictly with procedure detailed in Clause 67.

Burke ... way forward is to comply strictly with procedure detailed in Clause 67.

Dispute resolution in focus

June 2017

STEPHEN BURKE* highlights the importance of knowing the dispute resolution procedure, particularly with regard to contractual preconditions to arbitration under the FIDIC Red Book.

The Fidic (Fédération Internationale des Ingénieurs-Conseils, which in French stands for International Federation of Consulting Engineers) Red Book has been used in the Middle East since the 1970s and is by far the most widely used form of construction contract in the Gulf region. The Fidic Red Book 1987 Fourth Edition is still preferred by many employers, whilst the Fidic Red Book 1999 First Edition is only slowly being adopted.

As most construction professionals operating in the Gulf will know, Clause 67 of the Fourth Edition provides a multi-tiered procedure for the settlement of disputes. This requires a request for an engineer’s decision (Clause 67.1), a period of amicable settlement (Clause 67.2) and, finally, arbitration (Clause 67.3). 

Some project participants assume that one or both of the first two stages of the Fourth Edition’s tiered dispute resolution procedure is or are optional, and elect to take their dispute straight to arbitration. This is understandable, particularly where it has become obvious that an engineer is unwilling or unable to issue an impartial decision, or where an opposing party has made it clear that there will be no amicable settlement in any circumstances. 

Even in the most trying of circumstances, however, there is usually little to be gained by missing out the stages of the prescribed dispute resolution procedure. To the contrary, there is a significant risk of undermining the jurisdiction of any arbitral tribunal, potentially leaving the parties with a worthless (and yet very costly) award.

 

A jurisdictional matter?

There has been debate, both in the Gulf region and beyond, as to the precise consequences of a party’s failure to comply with the requirements of the Fourth Edition’s tiered dispute resolution procedure. In the UAE at least, this debate has been materially assisted by last year’s decision of the Dubai courts in Commercial Case 757 of 2016. In that case, a contractor was engaged, on terms that are understood to have been based on the Fidic Red Book Fourth Edition, to build a factory and its associated buildings in Dubai Investment Park. Following hand-over, the employer failed to make various payments and refused to release the contractor’s performance bond.

The contractor filed an arbitration case before the Dubai International Arbitration Centre (Case 2 of 2015) seeking payment of the outstanding sums and the return of its performance bond. The tribunal ultimately issued an award in the contractor’s favour, following which the contractor applied to the Dubai courts for the ratification of the award.

The employer then sought to have the award annulled by the Dubai courts, arguing that the tribunal lacked jurisdiction because the contractor had filed for arbitration prematurely. In particular, the employer asserted that the contractor had filed for arbitration without having first sought an engineer’s decision in respect of its claims as required by Clause 67 of the contract. The Dubai courts agreed with this, finding that the referral of a dispute to the engineer for a decision was a necessary precondition to arbitration under the contract. Consequently, the Dubai courts ordered the annulment of the award. 

This decision offers a salutary lesson to anyone with a dispute under the Fidic Fourth Edition. Whilst only a decision of the Dubai Court of First Instance, and even despite any system of binding precedent in the UAE, the case makes clear the potential risks of missing out one or more of the prescribed steps prior to arbitration. Far from saving time, a decision to proceed straight to arbitration may result in significant cost and delay whilst an inevitable jurisdictional challenge is resolved. Indeed, it may lead ultimately to the annulment of a hard-won arbitral award.

 

What can be done

The most obvious way forward for parties with a dispute is to comply strictly with each stage of the procedure detailed in Clause 67 of the Fidic Fourth Edition (and/or with any other applicable preconditions to arbitration that may separately be agreed). This may be frustrating, particularly if it is already clear that arbitration is inevitable. Regardless, it is by far the safest way of avoiding the substantial risks that are highlighted here. In some cases, it could even avoid the need for arbitration proceedings, for example, where the engineer issues a particularly robust decision, or if the parties have a change of heart on the benefits of settlement. 

It is important to note that the contractual preconditions in Clause 67 of the Fidic Red Book Fourth Edition will apply to each separate claim or issue in dispute. Where there are multiple claims, it is not sufficient merely to have complied with the applicable preconditions for some claims but not for others. 

Perhaps the only safe way of avoiding the need to comply with the Fidic Fourth Edition dispute resolution procedure in its entirety is to agree to waive some or all of the applicable requirements with the opposing party. This is best done in a formal written submission agreement, in which the parties agree to proceed directly to arbitration on specified terms. 

This is a potentially complex area of law, however, likely necessitating specific legal advice on the terms of any waiver or proposed submission agreement. To illustrate the possible pitfalls, for example, the parties to the Dubai court case discussed above had executed a separate “arbitration agreement” at an early stage of the arbitration proceedings. The Dubai courts, nonetheless, ordered the annulment of the award, finding that the arbitration agreement was not sufficient to waive the requirements of Clause 67 of the parties’ contract because of the way in which it had been drafted. 

 

* Stephen Burke is a partner in the Dubai office of Baker Botts. He specialises in construction arbitration work in the Middle East and beyond.




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