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Singapore – Dispute Boards: Drafting For An Effective Procedure.

26 November 2014

 

Legal News & Analysis – Asia Pacific – Singapore  Dispute Resolution

 

In recent years, we have seen increasing use of “Dispute Boards” to resolve disputes arising on large international construction projects. However,recent court decisions in Singapore and elsewhere have highlighted the importance of careful drafting of the relevant contractual provisions.


What Is A Dispute Board?


Essentially, a Dispute Board is a project-specific dispute resolution process intended to provide an alternative to conventional dispute resolution mechanisms such as arbitration or litigation. Usually the parties will appoint a board (either on a “standing” or an “ad hoc” basis) with jurisdiction to hear and advise the parties on issues and disputes as they arise. Typically, a board will comprise three independent members, who will issue either non-binding recommendations or binding decisions (depending upon the parties’ agreement). Even binding decisions can, however, be referred on to arbitration or litigation.


Benefits Of A Dispute Board


Proponents of Dispute Boards point to a number of benefits, including the following:

 

  • a Dispute Board provides a forum for raising contentious issues at a relatively early stage. This allows the parties to discuss these issues and prevent them from becoming disputes;
  • where a standing board is appointed, board members are regularly updated on the project status and can promote a more consensual and constructive approach during the contract period; and
  • the right board, properly informed, can resolve disputes more quickly and cheaply than arbitration or litigation.

Potential Pitfalls


Where parties elect to provide for a Dispute Board in their contract, it is critical to carefully consider the drafting used. This point has recently been highlighted by Court decisions in Singapore, Switzerland and England, which have considered the relevant wording of the International Federation of Consulting Engineers (FIDIC) Red and Silver Books.


Is The Process Mandatory?


The FIDIC Red Book provides for a standing dispute adjudication board (DAB), whose decisions are binding unless either party serves a Notice of Dissatisfaction (in which case it is intended that the dispute be referred to arbitration – see below).
The Federal Supreme Court of Switzerland, in the case of A___ S.A. -v- B___ S.A.,1 has recently considered the jurisdiction of an arbitral tribunal to hear a dispute that has not gone through the DAB procedure. The Court held that the procedure is mandatory in nature, and therefore parties should not bypass it and refer a dispute to arbitration directly. However, in that case, the parties had failed to appoint a DAB after executing the contracts. The court ruled against forcing the parties to proceed with an ad hoc DAB, which would not serve the “economy of the system”.


This approach can be contrasted with a decision from the English Technology and Construction Court in October 2014. Applying Clause 20 of the FIDIC Silver Book, Edwards-Stuart J in Peterborough City Council – v- Enterprise Managed Services Ltd2 granted a stay of court proceedings, ruling that the Silver Book required the dispute to be determined by the DAB. While acknowledging that the matter was likely to end up before the Court eventually, the Judge ruled that the DAB mechanism agreed by the parties should be upheld.


Enforcement


Even if the adjudication process itself runs smoothly, issues can also arise at the enforcement stage. The recent Singapore High Court decision in PT Perusahaan Gas Negara (Persero) -v- CRW Joint Operation (Indonesia)3 has highlighted these concerns in the context of a long-running dispute arising out of the FIDIC Red Book.

 

Facts And Arguments


PT Perusahaan Gas Negara (Persero) (PGN) and CRW Joint Operation (Indonesia) (CRW) appointed a DAB to resolve disputes arising out of their contract for construction of a gas pipeline and referred various disputes to it. In November 2008, the DAB made a decision in favour of CRW for an amount of USD 17.3m.


PGN issued a Notice of Dissatisfaction to contest the DAB’s decision (meaning that the decision was “binding” but not “final and binding”), but did not refer the matter to arbitration or make payment. Accordingly, CRW initiated an arbitration to seek payment which, it contended, PGN was required under Clause 20.4 to make.


In its defence, PGN argued that Clause 20.6 required the arbitral tribunal to first decide on the merits of the underlying claim presented before the DAB, before making an award in respect of the matter. This was accepted by the High Court and the Court of Appeal in Singapore who refused to enforce the tribunal’s award.


CRW then initiated a second arbitration in 2011. In this arbitration, CRW sought: (i) an order determining the merits of the underlying dispute; and (ii) an interim award for immediate payment of the amounts already awarded by the DAB.


The tribunal issued an interim award as sought by CRW, and the Singapore court allowed its enforcement. PGN challenged the award and the enforcement order before the Singapore High Court on the basis that:

 

  • the tribunal’s interim award could not be enforced as it was in fact a partial award that could change once the decision on merits was made; and
  • CRW could not seek an arbitration award to force payment under Clause 20.4 (4) of the Red Book, since PGN’s failure to pay immediately was a separate dispute that should itself be referred to the DAB.

Decision Of The High Court


The High Court rejected PGN’s arguments and made the following observations:

 

  • Clause 20.4 (4) of the Red Book compelled PGN to make immediate payment, despite its challenge to the DAB decision;
  • CRW did not require a separate adjudication from the DAB on the issue of PGN’s obligation to pay immediately on the DAB’s decision. Both the issues were part of one dispute; and
  • the interim award was not a partial award. It was final on the issue of PGN’s liability to make immediate payment under Clause 20.4 (4) of the Red Book.

The decision of the Singapore High Court has been criticised in some quarters on the basis that a party was compelled to pay on a DAB decision that, while “binding”, was not intended to be “final”. Nevertheless, it can also be argued that the decision represents a sensible and reasoned approach to resolving difficulties in the drafting of the FIDIC Red Book.


Practical Tips


These decisions highlight the importance of careful drafting for reference to a Dispute Board. In particular, parties should:


1. be clear that the Dispute Board process is a mandatory pre-condition to arbitration;


2. provide for a standing Dispute Board, unless there are good reasons to use an ad hoc arrangement. By providing for a standing board, you will reduce the possibility of the process being derailed if the board cannot be constituted after a dispute arises; and


3. be clear as to the process of enforcement of a Dispute Board’s decision. We recommend that, if using the FIDIC Red Book, parties should amend the drafting to provide that a party’s failure to comply with a DAB decision can itself be referred to arbitration without referring the underlying dispute.


End Notes:


1. 4A_124/2014.


2. [2014] EWHC 3193 (TCC).


3. [2014] SGHC 146.

 

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For further information, please contact:

 

Rob Palmer, Partner, Ashurst
rob.palmer@ashurst.com


Akshay Kishore, Ashurst
akshay.kishore@ashurst.com

 

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