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Singapore – Building And Construction: Perusahaan Gas Negara (Persero) TBK V CRW Joint Operation (Indonesia) [2014] SGHC 146.

30 September, 2014

 

Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution

 

Parties had entered into a design-and-build contract which incorporated the standard-form terms and conditions of the Red Book. When disputes arose as to variation claims, the disputes were first determined by a Dispute Adjudication Board. The secondary dispute as to the enforcement of the decision of the Dispute Adjudication Board was then placed, together with the primary dispute as to the merits of the claim, before an arbitral tribunal which made an award on the secondary dispute. Held that the decision of the arbitral tribunal as to the secondary dispute was not a provisional award and was therefore not contrary to section 19B of the International Arbitration Act:

PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation (Indonesia) [2014] SGHC 146 (Singapore, High Court, 16 July 2014)

 
Facts

 
This case concerned an arbitration between PT Perusahaan Gas Negara (Persero) TBK (“PGN”) and CRW Joint Operation (Indonesia) (“CRW”). PGN and CRW had entered into a contract (“Contract”) under which PGN had engaged CRW to design, procure, install, test, and pre-commission a pipeline to convey natural gas from South Sumatra to West Java.

 
The Contract incorporated a set of standard-form terms and conditions commonly known as “the Red Book”. The Red Book is the first edition of the “Conditions of Contract for Construction” published in 1999 by the International Federation of Consulting Engineers (“FIDIC”). The heart of the Red Book’s dispute resolution regime was at clauses 20.4 to 20.7, and established arbitration as the sole method for the parties to resolve their disputes, as well as providing a contractual security of payment regime, intended to be available to the parties even if no statutory regime existed under the applicable law. As with the statutory regime provided under the Building and Construction Industry Security of Payment Act, the contractual security of payment regime envisages a preliminary adjudication of claims, followed by a final determination of the dispute on the merits.

 
Proceedings Before The DAB

 
In early 2008, CRW and PGN found themselves in dispute on a number of variation claims made by CRW under their Contract. Accordingly, pursuant to the contractual security of payment regime provided in the Red Book the parties referred their disputes for decision by a Dispute Adjudication Board (“DAB”). This referral was for a preliminary determination of payment claims for the purposes of making an initial payment, with the final amounts to be regularised between the parties upon the final determination of the respective merits of the claim.

 
The DAB rendered a series of decisions, which were all accepted by PGN except for the DAB decision delivered on 25 November 2008. In that decision, the DAB held that as at 25 November 2008, CRW had “become entitled to” the total sum of some USD 17m. PGN failed to pay CRW pursuant to that DAB decision. PGN did not dispute that it had a contractual obligation to pay CRW pursuant to the DAB decision, but submitted that the Contract and Singapore’s arbitration legislation did not permit CRW to do anything to enforce that obligation.

 
The First Attempt To Enforce The DAB Award

 
CRW made two attempts through arbitration to compel PGN to pay the sum awarded by the DAB, in 2009 and 2011.

 
In the 2009 arbitration, CRW placed only the secondary dispute before the tribunal i.e., PGN’s failure to pay CRW pursuant to the DAB decision. However, PGN argued that the parties’ arbitration agreement did not permit an arbitral tribunal to compel PGN to comply with the DAB decision unless the same arbitral tribunal in the same arbitration went on to hear and determine the primary dispute on the merits and with finality. This argument was rejected by the tribunal who went on to make a final award in CRW’s favour. Pursuant to PGN’s setting aside application, the High Court agreed with PGN that the final award should be set aside. CRW’s appeal was subsequently dismissed by the Court of Appeal.

 
The Second Attempt To Enforce The DAB Award

 
In the 2011 arbitration, CRW placed both the primary and secondary disputes before the tribunal. The tribunal issued an interim or partial award compelling PGN to comply with the DAB decision. PGN applied to set aside the award. It argued as follows:

 

  • The interim or partial award made by the tribunal was in truth a provisional award because it was intended to only have finality up until the time the tribunal heard and determined the primary dispute on the merits.
  • Section 19B(1) of the International Arbitration Act (“IAA”) deemed every award issued by a tribunal to be final and binding and the legislative history of section 19B showed an intent not to permit provisional awards. Accordingly, the tribunal had determined with finality the existence and extent of PGN’s obligation to pay CRW without considering the primary dispute between the parties on the merits.

 

Decision

 
The central issue to be decided was whether CRW was entitled to enforce the DAB decision by way of an arbitral award without the arbitral tribunal first determining the underlying merits of the DAB decision.

 
The Singapore High Court considered the relevant clauses of the Red Book setting out the dispute resolution regime (i.e., clauses 20.4 to 20.7). It noted that the clauses were not clear, particularly as to how the arbitration process applied when dealing with a non-final DAB decision. Given the ambiguities of the drafting, the Court opined that it should adopt the approach that would best support security of payment. It therefore held that the dispute resolution regime should be construed as embodying a “one-dispute approach”. Under this approach, the secondary dispute as to compliance with a DAB decision would go straight to arbitration because it was an integral part of the primary dispute as to merits. Accordingly, CRW had correctly placed both the secondary dispute as to enforcement of the DAB award and the primary dispute as to the merits of the claim before the tribunal in the 2011 arbitration.

 
The Court then had to deal with PGN’s argument that an award by an arbitral tribunal as to the secondary dispute was a provisional award and hence contrary to section 19B(1) of the IAA. This section provides:

 

“An award made by the arbitral tribunal pursuant to an arbitration agreement is final and binding on the parties and on any persons claiming through or under them and may be relied upon by any of the parties by way of defence, set-off or otherwise in any proceedings in any court of competent jurisdiction.”


The Court held that the purpose of section 19B of the IAA was to deem it that every award issued by a Singapore-seated tribunal precluded the parties, and indeed the tribunal, from revisiting the subject-matter of that award. It was the Court’s view that, as long as that stricture was complied with, nothing in section 19B prohibited a tribunal from issuing a provisional award, i.e., an award granting relief intended to be effective for a limited period. Accordingly, section 19B did not prohibit a tribunal from issuing a provisional award, particularly in a case such as the present where the parties’ contract gave them a substantive, contractual right to provisional relief; its sole objective was to confirm that every award must be final and binding on its subject matter.

 
In the present case, the Court held that the interim award was final and binding on its subject-matter and therefore complied with section 19B. The subject-matter of the interim award was CRW’s undisputed substantive provisional right to be paid now and PGN’s substantive obligation to argue only later. In other words, the subject-matter of the interim award was the secondary dispute. The interim award had thus determined with finality CRW’s substantive but provisional right to be paid promptly, without having to wait for all remaining aspects of the parties’ dispute to be resolved with finality. Section 19B of the IAA prevented the parties and the tribunal from revisiting the secondary dispute.

 
Our Comments/Analysis

 
The significance of this decision lies in how it stands for the clear proposition that it is entirely possible to enforce a DAB decision, which is merely binding and not yet made final through arbitration, by way of an interim award. A party seeking to block the enforcement of an interim award will not be allowed to do so by simply characterising such awards as provisional awards under section 19B.

 
Furthermore, the Court also drew parallels between the local security of payment regime under the Building and Construction Industry Security of Payment Act and the contractual security of payment regime under the FIDIC form of contract. The policies underlying a security of payment regime include:

 

  • Facilitating the cashflow of contractors;
  • Recognising that contractors are almost invariably the party in the weaker bargaining position; and
  • The key principle underpinning the security of payment regime is “pay now, argue later”, i.e., the employer is required to pay now to facilitate the contractor’s cash flow, but this does not disturb the employer / contractor’s entitlement to argue later about the underlying payment obligation.

 
The essential features of a security of payment regime include:

 

  • Establishing a quick and relatively inexpensive procedure by which a contractor can secure from a neutral body a binding interim adjudication of its right to receive a disputed payment;
  • Giving the successful contractor a quick and relatively inexpensive way of compelling a recalcitrant employer to comply with the interim adjudication; and
  • Ensuring that the interim adjudication does not in any way preclude the parties from, in the fullness of time, arriving at a resolution of their payment dispute on its merits and with finality.

 
In choosing between a one-dispute or two-dispute approach and to ensure that the security of payment regime is workable, the Court had to ignore the implications of clause 20.7. Clause 20.7 was essentially drafted on the basis that the secondary dispute is a separate dispute which can be referred to arbitration separately (core of the two-dispute approach). However, a fundamental difficulty with this approach is that in order for the security of payment regime to work, there must be no possibility of inquiry into the primary dispute when a tribunal considers the secondary dispute alone. However, where the tribunal is determining a dispute with finality, it is illogical/impractical for the tribunal to shut out any consideration of the merits of the primary dispute.

 
In contrast, the one-dispute approach is preferable as it reconciles the drafting of the Red Book’s dispute resolution regime with its contractual intent to create a security of payment regime. This approach interprets “dispute” as meaning only a primary dispute about the parties’ primary obligations under their contract and does not include a subsidiary dispute which arises within or about the dispute-resolution regime once it is invoked.

 

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For further information, please contact:

 

Christopher Chuah, Partner, WongPartnership
christopher.chuah@wongpartnership.com

 
Peng Cheng Tay, Partner, WongPartnership
pengcheng.tay@wongpartnership.com

 

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