8 FÉDÉRATION INTERNATIONAL DES INGÉNIEURS-CONSEILS (FIDIC) DISPUTE BOARD RULES
Fédération International des Ingénieurs-Conseils (FIDIC) Dispute Board Rules
Procedure and conduct of the adjudication
Procedures after the decision has been issued
Amendments to the FIDIC adjudication procedure
FIDIC and statutory adjudication
Is it possible to arbitrate without a DAB being in place?
“With respect to binding and final decisions, the FIDIC forms of contract should be amended by expressly stating what the arbitrators are expected to do in the case of non-compliance with a DB decision.
Concerning a binding decision, the claim in the arbitration (without the need first to submit the dispute to the DB) should be worded as a prayer to obtain an award, establishing the failure of the dissatisfied party to comply with its contractual obligations and, if it is so established, ordering compliance with the DB decision. Wording pointing to this manner of proceeding could be inserted in the FIDIC forms.
In both cases, FIDIC could incorporate into its models (general, or particular, conditions) as many directions as possible mandating the arbitral tribunal, for instance, to proceed by way of an expedited procedure, or on documents-only.”1
8.1 FIDIC is the International Federation of Consulting Engineers (whose members are national associations of consulting engineers). The organisation (which is based in Geneva) was founded in 1913 and aims to implement the consulting engineering industry’s strategic goals across 97 countries. In support of its aims, it publishes international standard forms of contracts for both works and consulting services, as well as business practice and policy documents.
8.2 For the most part, adjudication is an ad hoc adversarial process, initiated by one party, often without giving any warning to the other. In fact, this is often seen as a benefit, because taking the other party by surprise can give the referring party a distinct advantage. Under a FIDIC contract, however, things may be different. FIDIC contracts2 are the only standard form contracts in the world that promote proactive dispute avoidance as a precursor to a formal process of dispute resolution.3 The inclusion of dispute avoidance provisions changes the way in which the adjudication procedure works because dispute avoidance is something that takes place before a formal dispute has crystallised and before the parties have taken up enhanced positions. In some FIDIC contracts, dispute avoidance is mandatory. In others, there are provisions for a more traditional process of dispute adjudication.4
8.3 Multi-tier dispute resolution procedures, which are not a common feature of adjudication, are something that has been incorporated into FIDIC contracts since the first edition of the Red Book in 1957, in an attempt to reduce the amount of time, money and effort expended in arbitral proceedings. Later editions provided for early arbitration,5 amicable settlement6 and, eventually, a dispute board.7 The advantages of a dispute board had long been recognised in the USA, where an independent panel of one, or three, or any greater odd number of members, monitored the project from the commencement of the construction contract until completion and carried out regular site visits and held meetings with the parties in order to assist in the avoidance of disputes. In international projects, there was a growing concern about the lack of independence of the engineer who, whilst being paid for by the employer, was empowered to give decisions on contractor’s claims. This was recognised by the World Bank, which, in an attempt to help minimise the impact of disputes on the projects which it funded, included provisions for a dispute board in its Standard Bidding Document published in 1995 for all projects with a value over $50 million.
8.4 In the 1996 and 1997 supplements to the fourth edition of the FIDIC Red Book and third edition of the Yellow Book, the engineer’s pre-arbitral decision was replaced by an independent dispute adjudication board (DAB), which was empowered to decide disputes arising out of any dissatisfaction from the determination of claims by the engineer. This was the precursor to the 1999 suite of contracts, which included mandatory provisions for a DAB, either standing, or ad hoc. The principal difference between the two is that a standing board is appointed at the commencement of the contract and has the power and ability to assist the parties in avoiding disputes, whereas an ad hoc board is appointed only at the time a party wishes to refer a dispute for adjudication and therefore the process is not preceded by any form of dispute avoidance.
8.5 A standing dispute board therefore has to switch from its quasi-project management rôle in helping the parties to avoid the crystallisation of disputes into a tribunal, which will decide the disputes. In the case of an ad hoc board, the procedure is much more akin to traditional adjudication, where an adjudicator is appointed only after a dispute has crystallised.
FIDIC adjudication provisions
8.6 Adjudication under a FIDIC contract is a contractual process, although, as we shall see later, it may also have to comply with statutory procedures. All variants of the FIDIC contracts provide, in the first instance, for the interim resolution of disputes by a dispute board. These are generally known as a dispute adjudication board, except in the MDB contract, in which it is simply called a DB (which, despite the difference in name, carries out the same functions).
8.7 From the two main types of dispute board, FIDIC has chosen the dispute adjudication board, rather than the dispute review board from which the DAB evolved. In the latter, the board offers non-binding recommendations, whereas, if a dispute is referred to the DAB, it makes a binding decision. The reason FIDIC chose the DAB over the DRB is because some parties find it easier to implement a decision made by a third party, rather than a recommendation, with which some governments have some difficulty in complying. However, the FIDIC provisions do allow for the parties to request informal assistance, as we shall see below.
8.8 FIDIC contracts provide for a multi-tiered dispute resolution procedure, as a precursor to adjudication, which, in the case of the contractor, starts with a claim being made under sub-clause 20.1. The engineer then proceeds to review the claim under the provisions of sub-clause 3.5 and a determination is given, which either approves, or disapproves, the claim. In the case of the employer, notice of a claim is given under sub-clause 2.5 and, again, the engineer proceeds under sub-clause 3.5 to make a determination. It is possible that matters may not proceed beyond the engineer’s determination and a dispute arises only when one party is unhappy with it and, if they are, then a dispute has arisen.
8.9 In all but the Silver Book, sub-clause 20.2 states that “[d]isputes shall be adjudicated by a DAB.” Sub-clause 20.3 of the Silver Book confirms that “[d]isputes arising during the Design and Build Period shall be adjudicated by a DAB …”. There is some debate about whether these DAB procedures are a mandatory precursor to arbitration, which is discussed further below.
Appointment of the DAB
8.10 Before a dispute can be referred to a DAB, as with all adjudication procedures, the adjudicator(s) (in this case, the board) has to have been appointed and be in place. In the case of a standing DAB, the parties should, in the case of a one-person board, nominate candidates for agreement and appointment and, in the case of a three-person board, have each selected a candidate for approval of the other and those two candidates should then have nominated a chairman.8 If one, or the other, party has not carried out its obligations, or the parties cannot agree on one, or both, members and/or the chairman, sub-clause 20.3 provides the default procedure, by which an appointing official9 may make the appointment(s) in lieu of the parties. Sometimes, even where a standing board is included in the contract, the parties will not put the DAB in place at the outset, in which case the procedure has to be carried out either after commencement of the contract, or when a dispute arises. In the case of the latter, the obvious advantages of the dispute avoidance function of the board are lost. This issue is considered further below.
8.11 In the case of an ad hoc board,10 the parties are to jointly appoint a DAB no later than 28 days after a party gives notice to the other of its intention to refer a dispute to the DAB. For a sole, or three-person board, the procedure is the same as that for a standing board, with similar default provisions, in the event that the parties fail to agree the board, or one party fails to nominate a member, or appoint a chairman.
8.12 Dispute avoidance is not a normal part of the adjudication process outside FIDIC contracts, but under such a contract, the most important function of a standing DAB is indeed dispute avoidance. No other contractual adjudication provisions, in any other standard form contracts, provide for this. Sometimes, the parties will agree to a separate dispute, or conflict avoidance, panel, as a precursor to any form of formal dispute resolution.11 A common feature of such panels is that a third party neutral is put in place to assist the parties in avoiding disputes, but the third party does actually not make any binding decisions.12
8.13 It is beyond the scope of this chapter to set out all the ways in which the DAB can assist the parties to avoid disputes, but it briefly involves becoming familiar with the contract and keeping up to date with the works, making regular visits to the site and having meetings jointly with both parties. At those meetings, the parties may raise any matters of concern. For the most part, dispute avoidance will comprise relatively informal discussions between the parties and the DAB, but under sub-clause 20.2:
“If at any time the Parties so agree, they may jointly refer a matter to the DAB for it to give its opinion.”
8.14 Such an opinion will be non-binding upon the parties and is akin to the informal non-binding opinions of the American dispute resolution boards. Even a non-binding opinion, which provides a good indication of how the dispute might eventually be decided by the DAB, or in arbitration, may make a party have second thoughts about formally referring a dispute. In the alternative, it may prompt the parties to find a resolution for themselves, without recourse to any formal dispute resolution procedure. In other words, it is a good indication of how an independent tribunal might decide the dispute, on how successful a party might, or might not, be and so make the decision whether, or not, to proceed to formal resolution is actually worth it. This encourages the parties to deal themselves with disputes which have little or no merit, or possibly prevents disputes from escalating, with the consequence of high costs involved for both parties.
8.15 This proactive process of dispute avoidance is often mistaken for mediation. Whilst the DAB may adopt mediation techniques in order to assist in the avoidance of disputes, the process is more akin to conciliation, with any meetings being conducted with both parties at the same time. Although some dispute board rules13 do allow for separate meetings (or “caucus” sessions) with the parties, this carries with it the risk that the DAB might face a challenge that it has breached the rules of natural justice.14
8.16 Of course, in the case of the Yellow and Silver Books, where there is an ad hoc and not a standing board, there is no provision for the parties to use the DAB to assist in the avoidance of disputes. In this case, the dispute resolution procedure is similar to that found in the contractual or statutory schemes, which provide only for the ad hoc adjudication of disputes once they have crystallised.
Referral of the dispute
8.17 In the Red, MDB, Yellow and Silver Books, sub-clause 20.4 (and sub-clause 20.6 of the Gold Book) state as follows:
“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, including any dispute as to any certificate, determination, instruction, opinion or valuation of the Engineer, either Party may refer the dispute in writing to the DAB for its decision. …”
8.18 The DAB is deemed to have received the reference when it (or, in the case of a DAB of three, or more, when the chairman) has received the reference. This date is crucially important, because the contract provides for a period of 84 days for the resolution of the dispute and that time starts to run on the date the DAB physically receives the reference.
8.19 The Procedural Rules annexed to the contract, which are concise and comprise only six clauses, with some sub-clauses, provide the DAB with broad powers and with a high degree of flexibility to adapt the procedures to the particular contract, parties and the nature of the dispute. Rule 5(a) makes it clear that the DAB is to establish the procedure to be adopted in deciding the dispute. Rule 2 states:
“The DAB shall proceed in accordance with Sub Clause 20.4 and these Rules. Subject to the time allowed to give notice of a decision and other relevant factors, the DAB shall:
- (a) act fairly and impartially as between the Employer and the Contractor, giving each of them a reasonable opportunity of putting its case and responding to the other’s case, and
- (b) adopt procedures suitable to the dispute, avoiding unnecessary delay or expense.”
8.20 Rule 3(a) essentially obliges the DAB to act within the rules of natural justice and the procedures anticipated under rule 3(b) of the Procedural Rules include the power to adopt an inquisitorial procedure, unless agreed otherwise by the parties.15
Procedure and conduct of the adjudication
8.21 Sub-clause 20.4 makes it clear that the DAB shall not be deemed to be acting in the capacity of arbitrators. Upon receipt of the referral, both parties are obliged promptly to make available all information to the DAB, as well as access to the site, if necessary.
8.22 Unlike in arbitration, certain statutory adjudication régimes do not permit the adjudicator(s) to decide their own jurisdiction; this being a power left to the local courts.16 There are also often limits set upon jurisdiction in relation to the dispute that has been referred, such that an initial notice may set the boundaries of the dispute to be decided. In the Red Book, FIDIC Procedural Rule 8(b)17 allows the DAB to decide its own jurisdiction, as well as the precise scope of the dispute referred to it.
8.23 The DAB, at its discretion, may conduct a hearing on the dispute and it has the power to decide the time and place of the hearing; although, in practice, it will also need to seek agreement of the parties to ensure that the procedure accords with natural justice. Rule 5(c), however, provides for the DAB to conduct the hearing as it sees fit and it is not bound by any rules other than those in the contract and the Procedural Rules. Rule 4 also gives the DAB the power to refuse admission to hearings to any persons other than representatives of the parties and the engineer, which helps to preserve the confidential nature of FIDIC adjudication. During the hearing, the DAB should not express any opinions concerning the merits of the arguments of either party.18
8.24 Jurisdictional challenges are commonplace in statutory adjudication and, no less so, in contractual adjudication. By contrast with statutory adjudication (such as in the United Kingdom), the FIDIC DAB has the power to decide upon its own jurisdiction and not merely to comment thereon. Rule 5 also allows the DAB to ascertain the facts and any matters required for it to make a decision and, in doing so, to make use of its own specialist knowledge, if required. The Rules do not say that, if it relies upon its own specialist knowledge, it should allow the parties to comment first before making a decision on such basis. Like most adjudication processes, the DAB may decide upon provisional relief and it may open up and revise any certificate, decision, determination and instruction given by the engineer under the contract.
8.25 Procedural Rule 6 states that, in the case of a three-person DAB, it will meet after any hearing to have discussions and to prepare the decision. It is suggested that the DAB should endeavour to reach a unanimous decision, but, where that is not possible and a majority decision is reached, the minority member should prepare a separate report for submission to the parties. The FIDIC Rules do not say whether this should be anonymous, but practice suggests that this is the best way in which to proceed, so that the minority member is not compromised in the eyes of the parties. In the event that one member fails to attend either a meeting, or hearing, the other two members may proceed in their absence, unless the parties disagree that they should, or if the absent member is the chairman and they instruct the other member not to make a decision.
8.26 If only two of the three members take part in the hearing and make the decision there is the possibility of a split decision, in which both remaining members differ upon key issues. This could result in an embarrassing stalemate, which could be avoided if the chairman seeks the consent of the parties to have the casting vote.
8.27 The DAB’s decision must be reasoned,19 but, in the event that the fees of the DAB have not been paid, it is not obliged to give its decision, until all its invoices have been paid. Again, this contrasts with practice (such as in the UK), where an adjudicator is not permitted to hold any lien over their fees.
Procedures after the decision has been issued
8.28 The whole procedure, from the time the referral is received by the DAB, or the chairman, to the point where the decision is issued, must be carried out within 84 days. If, at any point, the DAB considers that the task cannot be completed within that period, it must seek the approval of both parties for an extension, which may, or may not, be granted. If the decision is not issued in time, then either party may give a notice of dissatisfaction. If the decision is issued within the prescribed timescale, it becomes contractually binding upon the parties, sub-clause 20.4 stating:
“The decision shall be binding on both Parties who shall promptly give effect to it unless and until it shall be revised in an amicable settlement or arbitral award …”.
8.29 If no notice of dissatisfaction is issued by either party within 28 days of the date of the decision, it becomes final and binding. However, if either party is unhappy with the decision, it may issue a notice of dissatisfaction within the 28-day period. Neither party may commence arbitration, unless a notice of dissatisfaction has been served. Hence, this is an important step, if a party is not happy with the DAB’s decision.
8.30 The notice must set out the matters in dispute and the reasons for dissatisfaction with the decision. Issuing the notice triggers a cooling-down period, during which the parties are expected to attempt a process of amicable settlement.20 Sub-clause 20.5 does not impose, or even suggest, any procedure by which amicable settlement should be implemented and, in addition, sub-clause 20.5 contains a contradiction, where the first sentence reads:
“Where notice of dissatisfaction has been given … both Parties shall attempt to settle the dispute amicably before the commencement of arbitration.”
8.31 Whereas, the second sentence adopts the words:
“However, unless both Parties agree otherwise, arbitration may be commenced on or after the fifty-sixth day after the day on which the notice of dissatisfaction was given, even if no attempt at amicable settlement has been made.”
8.32 The FIDIC Guide21 states that this contradiction is unavoidable, because it is impossible to provide a contractual mechanism that imposes a requirement upon the parties to agree a method of amicable settlement, presumably because it is impossible to force two parties to agree to anything. It has been suggested that, in some countries, the governing laws might make amicable settlement mandatory; perhaps particularly in jurisdictions that uphold the doctrine of good faith.22
8.33 Amicable settlement might take several forms, perhaps starting at least with meetings between managers and senior executives of the parties. This might progress to mediation, or conciliation, or some other consensual form of alternative dispute resolution. A question arises regarding the helpfulness of involving legal advisors and this will be driven by whether the dispute concerns legal, technical, or commercial, issues. Because FIDIC adjudication is a confidential process, it is assumed that amicable settlement will also be carried out in that way, although there is nothing that makes this mandatory and so the parties should agree if this is to be the case. A decision will need to be made about the status of the negotiations and whether they are to be “without prejudice” or “open”. As before, the FIDIC provisions leave the decision to party agreement, where the law recognises this concept.23 Whatever procedure is adopted, however, it must be agreed beforehand, if, of course, agreement between the parties is even possible at this stage.
8.34 If the dispute is not settled amicably and the DAB decision has not become final and binding, then the dispute can be referred to arbitration under sub-clause 20.6. In this case, the arbitrators may open up the dispute and re-hear it from scratch. If, however, the decision has become final and binding, but it has not been complied with, then the failure to comply may be referred to arbitration under sub-clause 20.7.
8.35 All adjudication procedures need rules by which the procedure is governed and so that both parties and the adjudicator(s) are clearly aware of their respective obligations. The FIDIC dispute board procedure sets out to be fair, flexible and informal and, like any good form of dispute resolution, should be economical in time and money and, importantly, should be predictable.
8.36 In statutory adjudication, rules may be published as part of the legislation and they may be incorporated into contracts. Although FIDIC DABs may be subject to local statutory régimes, they are essentially a creature of the contract, deriving their power from both that and from the appended Procedural Rules.
8.37 Sub-clause 20.2 (20.3 in the Gold Book) deals with the appointment of the DAB and refers to the “Dispute Adjudication Agreement”, which is appended to the General Conditions, in which article 4(e) provides:
“The Member shall … comply with the annexed procedural rules and with Sub Clause 20.4 of the Conditions of Contract.”
8.38 The different versions of the FIDIC contracts have different numbers of rules,24 but they all do similar things in essence. A brief review of each of these is provided in the following table:
|Rule 1||(Red, MDB, Gold)|
|Rule 2||(Red, MDB, Gold)|
|Rule 3||(Red, MDB, Gold)|
|Rule 4||(Red, MDB, Gold); Rule 1 (Yellow, Silver)|
|Rule 5||(Red, MDB, Gold); Rule 2 (Yellow, Silver)|
|Rule 6||(Red, MDB, Gold); Rule 3 (Yellow, Silver)|
|Rule 7||(Red, MDB); Rule 9 (Gold)|
|Rule 8||(Red, MDB); Rule 5 (Yellow, Silver);Rule10 (Gold)|
|Rule 9||(Red, MDB); Rule 6 (Yellow, Silver); Rules 11 and 12 (Gold)|