Background: The 2009 Arbitration And 2010/2011 Enforcement Proceedings

Perusahaan Gas Negara (Persero) (“PGN“), an Indonesian state-owned company, contracted with CRW, an Indonesian company, to design, procure andpre-commission a pipeline to convey natural gas from South Sumatra to West Java. The contract incorporated the FIDIC 1999 Red Book form of contract (the “Red Book“).

A dispute arose between the parties regarding a number of variation claims under the contract, which CRW referred to the Dispute Adjudication Board (“DAB“) in accordance with the contract. In its decision of 25 November 2008,the DAB held that PGN owed CRW approximately USD 17m. PGN issued a notice of dissatisfaction with the DAB’s decision and refused to pay CRW the awarded sum. 

CRW commenced arbitration proceedings in 2009 seeking an award for the immediate payment of the sums ordered by the DAB. Importantly, CRW did not refer to arbitration the underlying dispute which formed the basis of the DAB’s decision. The tribunal found in favour of CRW and ordered PGN to make immediate payment to CRW of the sums determined by the DAB. PGN again refused to pay and CRW brought enforcement proceedings against PGN in the Singapore Courts.

Previously we considered the somewhat controversial decision of the Singapore High Court in 2010, upheld by the Court of Appeal in 2011, that set aside CRW’s application to enforce the tribunal’s award. The Court of Appeal held that the tribunal, by making a final award in the case, had denied PGN the opportunity to have the DAB’s decision re-opened and considered in a single arbitration proceeding. This was held to be in violation of the principles of natural justice.

The Court of Appeal noted, however, that had the tribunal ordered payment of the sum by means of an interim or partial award, and retained jurisdiction to hear the case on the merits, that would have been permissible.

The 2011 Arbitration

CRW then commenced a second arbitration, apparently taking on board the Court of Appeal’s previous comments. This time, CRW placed both the underlying dispute that had been decided by the DAB (the “primary dispute“) and the dispute as to CRW’s right to immediate payment against the DAB’s 2008 decision (the “secondary dispute“), before the tribunal. 

In response, PGN argued that the arbitration clause in the contract and the Singapore International Arbitration Act (the “IAA“) do not permit the tribunal to order compliance with the DAB’s decision unless in the same award it also determines the primary dispute. The tribunal rejected this argument and issued an “interim or partial” award compelling compliance with the DAB’s 2008 decision. The award was expressed to be made “pending the final resolution of the Parties’ dispute raised in these proceedings“. 

The 2014 Proceedings

PGN brought an application to set aside the interim award on the basis that it was contrary to the IAA. It contended that the IAA prohibited the issue of a provisional award which is only binding until it is varied by a final award. Further, in light of an express provision in the IAA which prohibits a tribunal from varying, amending or revoking an award, PGN argued that the interim award would effectively preclude PGN from seeking any future determination on the underlying merits of the dispute, which would be contrary to the rules of natural justice.

Clauses 20.4 To 20.7 Of The Red Book

The Court first considered the detail of the DAB and arbitration provisions in the contract, which were largely unamended from the Red Book standard. In summary:

• Disputes were to be adjudicated by a DAB which was to give its decision within 84 days after receiving a reference. If either party was dissatisfied with the decision then it could give notice of its dissatisfaction within 28 days. 
• If a notice of dissatisfaction is issued within the deadline then the matter may be finally settled by arbitration (i.e. the notice is a condition precedent to commencing arbitration).
• If no such notice is given, the DAB’s decision becomes final and binding; if a party fails to comply with the decision, the other party may refer the failure itself to arbitration.

The system of immediate payment against a DAB decision is often described as “pay now, argue later” and the Court accepted that this was the philosophy of the contract. The effect is to maintain cash-flow but permit the employer to dispute the decision in subsequent proceedings.

The Court identified certain shortcomings in Clauses 20.4 to 20.7; in particular, that it is not clear what process the contractor has to follow in circumstances such as this where the employer has issued a notice of dissatisfaction and refuses to pay against the DAB’s decision. Do the conditions’ precedent to arbitration apply in the event that the contractor wishes to refer the secondary dispute to arbitration under Clause 20.6? And, if the contractor only wishes to resolve the secondary dispute, what limits (if any) are there on the tribunal to open up the DAB decision and the parties to attack the DAB decision?

In answering these questions the Court considered whether the primary and secondary disputes were in fact one dispute or two. If they were two disputes, the effect would be that the (secondary) dispute as to CRW’s entitlement to be paid under the DAB’s decision and the (primary) underlying dispute would be resolved in separate proceedings. This would mean that it would become necessary for every dispute which was to go to arbitration to be preceded by a DAB decision in respect of that dispute. Therefore, once an employer serves a notice of dissatisfaction the contractor would have to refer the secondary dispute to theDAB before it could proceed to arbitration, resulting in a never-ending loop. Obviously such a result would conflict with the accepted overall “pay now, argue later” intention of the contract.

By contrast, in the “one dispute” approach, the reference to “dispute” in the DAB clause is interpreted to mean only a primary dispute, rather than a dispute about the dispute resolution regime. In other words “dispute” does not mean a dispute about a dispute. Therefore, the failure to pay the amount determined as due by the DAB can be considered to be an aspect of the primary dispute and does not itself need to be referred to the DAB for a decision before it is arbitrated. 

The Court accepted the “one dispute” approach and noted that this was the approach taken by CRW in the 2011 arbitration.

The Effect Of The “Interim Award” 

PGN argued that the IAA requires every award to be final and binding on the parties. As such, a tribunal has no power under the IAA to issue a partial or interim award which takes effect provisionally. PGN argued that the arbitrator’s award, in requiringimmediate payment against the 2008 DAB decision pending final resolution of the primary dispute, was a provisional award. 

The Court took the view that the award, although expressed as “interim”, was final and binding on its subject matter and therefore compliant with the IAA. Its subject matter was the right to be paid immediately against the DAB’s 2008 decision, i.e. the secondary dispute. 

Further, the Court doubted that provisional awards that granted relief which was intended to be effective for a limited period, were prohibited by the Act; even if they were, the award was not provisional in the sense that it would not be “varied”, “amended” or “revoked” at a future stage. If the final decision on the primary dispute was that a different (or indeed no) sum was payable by PGN then the appropriate accounting exercise would be set out in the final award on the primary dispute. 

The Court dismissed PGN’s application to set aside the interim award.

Comment

In response to the first, 2010/2011 enforcement proceedings in this matter, FIDIC issued a “Guidance Memorandum to Users of the 1999 Conditions of Contract” dated 1 April 2013 with revisions to the standard form wording at Clauses 14 and 20 of the 1999 editions. This was intended to enable the failure to pay any decision of the DAB, whether binding or final and binding, to be referred to arbitration for summary or other expedited relief as may be appropriate. The revised wording expressly states that the DAB provisions in Sub-Clause 20.4 do not apply to such a reference, thus avoiding the “never-ending loop” referred to above.

Even where parties have incorporated this revised wording into their contracts, the lesson that we can take from this case is that enforcement of a DAB decision should be undertaken by way of a notice of arbitration raising all issues in dispute between the parties arising out of the decision, followed by an application for an interim award enforcing the decision. Failure to raise all issues at the initial stage may preclude enforcement (in line with the 2011 decision of the Singapore Court of Appeal).

It has taken some 6 years for CRW to obtain payment against a DAB decision. Even then, this may not be the end of the matter as PGN has appealed to the Singapore Court of Appeal against this most recent ruling.

Nonetheless, until any later contrary judgment, this is an important outcome for the efficacy of the FIDIC 1999 DAB and arbitral process. It is a carefully reasoned judgment on the operation of the standard form clauses and will be of considerable persuasive effect in other jurisdictions. The judgment also provides a useful analysis of what constitutes an enforceable “award” for the purposes of Singapore law.

For further information, please contact:

Peter Godwin, Partner, Herbert Smith Freehills
[email protected]

Dominic Roughton, Partner, Herbert Smith Freehills
[email protected]

David Gilmore, Partner, Herbert Smith Freehills
[email protected]

Emma Kratochvilova, Partner, Herbert Smith Freehills
[email protected]