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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
This article discusses the various and complex jurisdictional issues encountered in the construction sector, a major area in international and ICC arbitration. Authors provide contextual examples of multi-party and multi-contract scenarios which include non-signatory states entities, guarantors and sub-contractors, the issue of extension of the arbitration agreement within a group of companies or a consortium, and the procedural uncertainties triggered by multi-tier dispute resolution clauses in FIDIC disputes.
Introduction
Construction arbitrations often arise out of complex projects involving multiple contracts and multiple parties. Often, in this type of cases, there are doubts as to who the parties to these contracts are. Additionally, more often than in many other sectors, a state or state entity is directly or indirectly involved in the project. Moreover, many contracts are based on a FIDIC form of contract,1 thus containing a multi-tier dispute resolution clause providing that disputes must first be submitted to an engineer or a dispute adjudication board (‘DAB’) and to amicable settlement prior to arbitration.
All of this sometimes raises complicated jurisdictional issues; parties often raise objections to the arbitral tribunal’s jurisdiction, argue that all claims cannot be decided together in a single arbitration, or contend that the parties did not comply with the mandatory preliminary steps of a multi-tiered dispute resolution clause.2 The complexity of the underlying transactions in the construction sector often results in ‘multi-party’ scenarios where a respondent may not only raise jurisdictional objections but also join one or more additional parties.
When such objections are raised in an ICC Arbitration, before the arbitral tribunal has been constituted and the file transmitted to it, the ICC Rules for Arbitration (‘ICC Rules’) envisage a preliminary screening process in accordance with Articles 6(3)3 and/or 6(4)4 of the ICC Rules, consisting of a prima facie analysis carried out by the ICC International Court of Arbitration (‘ICC Court’), if the Secretary General of the ICC Court (‘Secretary General’) so decides. If the matter proceeds, the arbitral tribunal, once constituted, must then decide on its own jurisdiction pursuant to Articles 6(3) or 6(5) of the ICC Rules.5
We gathered a selection of prima facie decisions by the ICC Court and jurisdictional decisions by ICC arbitral tribunals on the applicability of arbitration agreements to non-signatory parties (I) as well as various jurisdictional decisions in the FIDIC context (II). We endeavour to provide a description of the nature and sources of the jurisdictional issues that may arise in construction arbitrations as well as the solutions provided by the ICC Court and arbitral tribunals acting under the ICC Rules to such situations. We also endeavour to illustrate the difference in nature and scope of the analysis performed by, on the one hand, the ICC Court in taking decisions pursuant to Article 6(4) of the ICC Rules and, on the other hand, the arbitral tribunal in deciding on its jurisdiction later in the proceedings.
I. Multiparty arbitration and non-signatories
A. The prima facie assessment by the ICC Court
Article 6(3) of the ICC Rules deals with cases in which arbitral jurisdiction is, or may be, at issue. It reflects policies in favour of arbitral tribunals deciding issues of jurisdiction following the competence-competence principle.
Under the 1998 version of the ICC Rules, Article 6(2) empowered the ICC Court to make a prima facie decision as to the existence of an ICC arbitration agreement in all cases where there was a jurisdictional objection or respondent had not filed an answer to the request for arbitration.
The provisions of Articles 6(3) and 6(4) of the 2012 and 2017 versions of the ICC Rules now provide for the need of the ICC Court’s assessment only if the Secretary General, after an initial screening, refers the matter to the ICC Court for a decision under Article 6(4). All other cases are referred directly to the arbitral tribunal. This screening streamlines the process, given that the number of negative or partially negative decisions by the ICC Court under Article 6(4) is very small. Concurrently, it can eliminate situations where a party is forced to participate in the constitution of the arbitral tribunal and the procedure leading up to an award (partial or final) on jurisdiction in the absence of any indications that an arbitration agreement that may bind such a party exists, thereby saving time and costs.
When a party in a multiparty arbitration raises an objection that it is not bound by the arbitration agreement on the basis of which the request for arbitration was filed, the above mechanism is triggered. In this context, if so decided by the Secretary General, the ICC Court, acting pursuant to Article 6(4) of the ICC Rules, will have to decide whether it is prima facie satisfied that an ICC arbitration agreement binding such party may exist.
When the jurisdictional objections concern a party that has not signed one or more contracts, the factors that the ICC Court examines depend on the nature and circumstances of each case, but may include inter alia evidence that the non-signatory:
As mentioned above, the ICC Court will usually require documentary evidence reflecting the above elements, a party’s allegations alone will not suffice. Depending on the evidence produced, the Secretary General, pursuant to Article 6(3), may or may not refer the matter to the ICC Court. When the matter is referred to the ICC Court, the parties will be granted a time limit to provide comments on the jurisdiction of an ICC arbitral tribunal; these comments will often be accompanied by evidence already available or additional evidence, which may allow the ICC Court to reach a positive prima facie decision under Article 6(4).
In taking decisions under Article 6(4) of the ICC Rules, the ICC Court acts with great caution and reservation, stemming from the ICC Court’s nature as an administrative body that does not settle disputes and the prima facie nature of this type of decisions.6 For instance, the ICC Court does not hear witnesses or experts - a full assessment of the evidence submitted by the parties can only be performed by a fully briefed arbitral tribunal. The ICC Court notably also does not make legal determinations (e.g. whether the non-signatory is bound by the arbitration agreement by virtue of the application of theories of agency, estoppel or another legal theory invoked under the purported applicable law, or whether the contract containing the arbitration agreement entered into force, or ceased to exists).
Below, we set out a selection of the ICC Court’s Article 6(4) decisions in a variety of construction disputes.
a) Non-signatory as subcontractor
In a case relating to road construction, claimant brought the arbitration pursuant to an arbitration agreement in the main contract, between respondent (as principal) and a third party (as contractor), for the construction of a highway. In addition, claimant and the contractor concluded a separate sub-contract where the works of the project were to be carried out by a mixed company formed by such contractor and claimant.
Claimant alleged that it was pursuant to the main contract that it undertook to provide different services to respondent in relation to the project and that respondent undertook to pay claimant for these services. Specifically, claimant alleged that the subcontract stipulated that both claimant and the contractor would perform works for respondent, but that the contractor should act as main contractor and claimant would act as subcontractor. Claimant alleged that a direct business relationship existed between it and the respondent, given that the main contract referred to it as the ‘nominated subcontractor’ of the contractor. Claimant further argued that without its resources, the contractor would have been unable to succeed in the tender process. Moreover, claimant relied on the fact that respondent had acknowledged and accepted its work as an ‘essential part of the works’ provided by the contractor. Respondent argued pursuant to Article 6(3) of the ICC Rules that it had neither signed an arbitration agreement nor had any direct business relationship with claimant. Further to the Secretary General’s decision, the matter was referred to the ICC Court for its decision pursuant to Article 6(4).
The ICC Court applied the usual test and examined whether there was evidence on file that the non-signatory party was involved in the negotiation, performance or termination of the contract which contains the arbitration agreement, or that it represented/acted on behalf of the party who signed that contract. The ICC Court considered that, whereas claimant was involved in the project by virtue of performing works as subcontractor under the subcontract, there was no other evidence of its participation in the negotiation or performance of the main contract. As such, and given that the arbitration was filed pursuant to the main contract, the ICC Court did not allow the matter to proceed.
In a case relating to the construction of a power plant, the main contract for that project was concluded between claimant (as contractor) and a third party (as principal). Claimant filed the request for arbitration on the basis of a subcontract signed with the first respondent, pursuant to which the latter was to complete civil works for the installation and operation of the plant. Claimant alleged that the first respondent subsequently entered into a sub-subcontract with the second respondent, which was to carry out certain obligations undertaken by the first respondent under the subcontract. The second respondent objected that it was not a signatory to the subcontract and was not otherwise bound by the arbitration agreement contained therein.
The ICC Court applied the same test as above, namely whether the second respondent was involved in the negotiation, performance or termination of the subcontract and concluded that the evidence on file established sufficient involvement in the performance of the subcontract for a prima facie finding that the arbitration agreement contained in the subcontract may bind the non-signatory second respondent. The ICC Court reached this conclusion after being provided with the second respondent’s correspondence where it directly communicated with claimant regarding the performance of the works under the subcontract. Moreover, the ICC Court noted that respondents had initiated parallel proceedings before their domestic courts where they argued that the matter concerned civil engineering works performed by respondents pursuant to an agreement that was the subject of a pending ICC arbitration concerning the fact that claimant owed respondents significant amounts of money.
b) Non-signatory as guarantor
In the above mentioned case relating to the construction of a power plant, respondents joined claimant’s parent company as an additional party and provided a guarantee signed by the latter pursuant to which it guaranteed all of claimant’s obligations arising under the subcontract. The guarantee contained an arbitration agreement which expressly referred to the arbitration agreement in the subcontract and provided that, should a matter arise in relation to the subcontract and the guarantee, the arbitration agreement contained in the subcontract should be used and the guarantor and claimant would be treated as one party for the purpose of nominating an arbitrator. The guarantee further provided that claimant’s parent company was bound by any decision made under the arbitration agreement in the subcontract provided that it was given due notice of such arbitration.
In spite of the additional party’s jurisdictional objections, the ICC Court decided to allow the matter to proceed against it pursuant to Article 6(4) considering that the evidence submitted by the respondents seemed to suggest that the additional party may have been involved in the performance of the subcontract and may as well have been linked to the termination of the same. In this regard, the ICC Court also considered that, given that the additional party only signed the guarantee relating to the subcontract, its involvement could regard the guarantee or the subcontract, but such determination was not for the ICC Court to make.
In a case relating to an airport construction project, a subcontractor acting as claimant filed a request for arbitration under a subcontract pursuant to which it was to build steel pallets for the first respondent. Claimant submitted that the second respondent guaranteed all of the first respondent’s obligations under a guarantee contained in a separate document and that this made the second respondent directly liable for the first respondent’s commitments originating from the subcontract. Claimant further alleged that the second respondent was integrally involved in the conclusion and handling of the subcontract as well as in the initial negotiations relating to the dispute between claimant and the first respondent. However, claimant did not provide further information or evidence of such involvement.
In deciding whether to allow the arbitration to proceed with respect to the second respondent, the ICC Court, following its established practice in cases involving guarantors, considered whether:
The ICC Court found that these situations did not apply to the case at hand, as (i) the claimant had not made any allegations that the applicable law binds guarantors to the arbitration agreement, (ii) the Secretariat had not been provided with any evidence that the second respondent was significantly involved in the conclusion and handling of the subcontract or in any initial negotiations relating to the contract and (iii) the guarantee contained its own dispute resolution agreement, which provided for amicable resolution alone and did not mention arbitration. Accordingly, the ICC Court concluded that it was not prima facie satisfied that the arbitration agreement contained in the subcontract could bind the second respondent acting as guarantor.
c) Non-signatory as parent company
In a case relating to the construction of a cement plant, the contract was signed by claimant and the first respondent. The three other respondents, all affiliates of the first respondent and allegedly liable for faulty works and delays in the project, raised jurisdictional objections that they had neither signed, nor otherwise agreed to, the arbitration agreement in the contract.
Following its established practice, the ICC Court considered that the fact that non-signatories belonged to the same group of companies as the signatory respondent was not enough for a prima facie finding that they may have agreed to the arbitration agreement, which required additional evidence of the non-signatories’ participation in the negotiation, performance or termination of the contract.
The ICC Court found that several documents prima facie evidenced the participation of the second, third and fourth respondents in the performance of the contract, among others:
In a case relating to engineering works on an oil platform, claimant filed a request against three respondents on the basis of a contract signed with the first respondent pursuant to which claimant would carry out engineering works for the first respondent. Claimant alleged that the second and third respondents, respectively a subsidiary and parent company of the first respondent, were jointly responsible for the signatory respondent’s payment obligations as they both had participated in the performance of the contract.
The ICC Court considered that elements on file suggested that the second and third respondents may have taken actions for the performance of the contract, including:
On the basis of the above elements, the ICC Court considered that it was prima facie satisfied that an arbitration agreement binding all respondents may exist and allowed the matter to proceed against all parties.
d) State entities as non-signatories
In a case relating to the design and construction of a road, a government, acting as the employer, was represented by the first, second and third respondents (respectively road ministry and infrastructure ministry and a governmental roads agency). The respondents alleged that a different entity, which had since ceased to exist, was actually the original employer. Further, respondents argued that the first, second and fourth respondent (the ministry of transport) should be removed as first and fourth respondents were entities created only after the conclusion of the contract as a result of the restructuring of the second respondent and the second respondent no longer existed.
With respect to the first respondent, the ICC Court considered that the contract, including the signature pages, appeared to refer prima facie to an entity bearing the same name as the first respondent. Having made this determination, the ICC Court considered that the establishment of the true identity of the original contract signatories was not a task for the ICC Court but for the arbitral tribunal, having been fully briefed.
With respect to the second respondent, the ICC Court considered that respondents actually agreed with claimant that the assets and liabilities of the employer under the contract were transferred from the first to the second and ultimately to the third respondent, but disagreed as to whether the second respondent still legally existed. Moreover, claimant provided documentary evidence regarding the second respondent’s participation in the performance and termination of the Contract. The ICC Court considered that the above points appeared to necessitate factual and legal determinations falling within the powers of the arbitral tribunal and not those of the ICC Court.
With respect to the fourth respondent, the ICC Court considered that the parties agreed that it had been created as a result of the restructuring of the second respondent which was divided into a number of smaller governmental entities. Furthermore, claimant alleged that the transfer of responsibilities from the second to the fourth respondent may have included obligations under the contract and that the fourth respondent may be the legal successor in title to the employer.
Consequently, the ICC Court found itself prima facie satisfied that the arbitration agreement in the contract may bind the first, second and fourth respondents and accordingly allowed the arbitration to proceed as against all respondents.
B. Arbitral tribunals’ approach to jurisdiction over non-signatories
A detailed review of various arbitral awards suggests that when a party that has not signed the arbitration agreement on the basis of which the request for arbitration was filed raises jurisdictional objections and alleges that is not bound by such arbitration agreement, the arbitral tribunals’ approach in deciding on its jurisdiction will usually depend on: (i) the law that the arbitral tribunal finds applicable to this question, and (ii) the theories espoused by the party arguing that the arbitral tribunal should find jurisdiction over the non-signatory. As in the previous section, we will divide the cases studied into different categories.
a) Group of companies doctrine and piercing of the corporate veil
In the above mentioned case relating to engineering works on an oil platform (Section A. c), the ICC Court decided that it was prima facie satisfied that an arbitration agreement may bind all respondents and allowed the matter to proceed against the second and third respondents (respectively a subsidiary and the parent company), on the basis that they appeared to have participated in the performance of the contract. Accordingly, the arbitral tribunal had to later decide on its jurisdiction pursuant to Article 6(5) of the Rules.
As regards the law governing the rationae personae scope of the arbitration agreement, the arbitral tribunal noted that the law of the place of arbitration provided that an arbitration clause is governed by the law chosen by the parties to govern the contract and applied such law. As claimant relied on the so called ‘group of companies’ doctrine, the arbitral tribunal first noted that the applicable law did not recognise or follow such doctrine. That said, the arbitral tribunal stated that, even if the applicable law would allow for the application of such doctrine, respondents’ participation in the performance of the contract would have to be of a nature that would show their implicit consent to be bound by the arbitration agreement therein.
On the facts, the arbitral tribunal found that no such implicit consent was given in light of the following determinations.
In a case relating to infrastructure works, the arbitral tribunal faced the issue of whether an arbitration clause bound an indirect parent company of one of the signatories by applying both the ‘group of companies’ doctrine and the concept of ‘piercing of the corporate veil’. In this case, ‘Company A’ (the contractor) had entered into a contract with ‘Company B’ (the employer). At the time of the conclusion of the contract, ‘Company B’ was the wholly owned subsidiary of a third company which was acquired by ‘Company C’ three years later, making ‘Company C’ the indirect corporate parent of ‘Company B’. Following a dispute over allegedly unpaid due invoices, ‘Company A’ terminated the contract and commenced arbitration against ‘Company B’. It later joined ‘Company C’, arguing that ‘Company C’ was jointly and severally liable with ‘Company B’ under the contract.
At the outset, the tribunal determined the law applicable to the question of whether the arbitration agreement bound the non-signatory ‘Company C’. While usually the lex arbitri plays an important role in this type of situations, the legal experts on both sides advocated for transnational principles with respect to the question of whether ‘Company C’ implicitly consented to the arbitration agreement, on the basis that this decision is largely based on facts and common sense. The arbitral tribunal also considered that the criteria under the law at the place of incorporation, the law at the place of arbitration and the transnational norms were essentially the same on the issues at stake and decided to determine the application of the arbitration agreement to ‘Company C’ by application of transnational principles.
The arbitral tribunal reasoned that the ‘group of companies’ doctrine is essentially based on the underlying principle of consent: given the absence of an explicit consent to arbitrate (i.e. signature of the contract containing the arbitration agreement) the question was whether the non-signatory party implicitly consented to being bound by the arbitration clause by being involved in the negotiations, execution, performance or termination of the contract. The arbitral tribunal noted that, following the acquisition of ‘Company B’, ‘Company C’ transferred all of the assets of ‘Company B’ to its subsidiary. Moreover, management of ‘Company B’ was totally subordinated to ‘Company C’, and there was confusion between ‘Company B’ and ‘Company C’ among employees, suppliers and within the group itself. Based on these facts, the arbitral tribunal found that there was evidence that ‘Company C’ was involved in the performance of the contract. However, according to the tribunal this evidence was not sufficient to demonstrate that the non-signatory intended to be a party to the contract and its arbitration agreement, especially since it was not involved during either the negotiation or termination of the contract. Thus, the argument of implied consent failed.
Regarding the ‘piercing the corporate veil’ doctrine, the arbitral tribunal set out the following as transnational principles governing its application:
The arbitral tribunal found that ‘Company C’ controlled and dominated ‘Company B’, in particular with respect to its contract with ‘Company A’. Given that there was no evidence of fraud, the tribunal examined whether ‘Company C’ had abused the corporate structure. The tribunal answered this question in the affirmative, based on the following fact and surrounding circumstances:
b) Implied consent, estoppel and guarantees in consortiums and joint ventures
A case relating to the engineering, erecting and commissioning of a steel mill involved a consortium, composed of four companies incorporated in Brazil, as first claimant (the contractor). The consortium, on its own, filed the case on the basis of the arbitration agreement contained in the contract signed between its members and the respondent. Respondent in turn requested the joinder of the consortium members who accepted to become second, third, fourth and fifth claimants. Respondent also filed jurisdictional objections contesting the first claimant’s standing to file for arbitration on behalf of the consortium.
The arbitral tribunal first found that, under Brazilian corporate law, a consortium was not an entity with legal personality. Rather, the consortium members preserve their legal personality and individual responsibility and are merely submitted to centralised administration in order to attend to the purpose of the consortium, i.e. the completion of the project for which it was established. The arbitral tribunal also found that, whereas the contract referred to the consortium as a party, given that the consortium was actually formed only after the execution of the contract, such reference could only be understood as proof of an intention of the consortium members to constitute a consortium. The arbitral tribunal further found that (i) the contract did not contain any provisions on the future applicability of the contract to the consortium itself, (ii) the contract was not amended after the consortium was established, (iii) the separate contract creating the consortium contained an arbitration agreement which did not refer to the arbitration agreement in the contract on which the request for arbitration was based; and (iv) respondent’s conduct towards the consortium and vice versa did not show an understanding from respondent or an implied consent from the consortium that the consortium acted on behalf of its members in performing the contract or was otherwise bound by the arbitration agreement contained in the contract. As such, the arbitral tribunal found that it did not have jurisdiction over the consortium.
In a case relating to a major industrial project, two members of a consortium (claimants) initiated claims against their guarantors (respondents), with respect to alleged delays, deficiencies and other problems encountered in the completion of the project.
Claimant alleged that an oil production company – not a party to the arbitration – entered into seven individual construction agreements, including with each of the claimants and two of the respondents, to construct a petroleum processing facility. Subsequently, the oil production company and the parties to the construction agreements allegedly consolidated the construction agreements into a single bridge agreement. This was followed by a consortium agreement between claimants, the two respondents, parties to the above agreements, and third parties, for the purposes of jointly performing the work defined in the bridge agreement. Claimants brought the arbitration under the arbitration agreement in the consortium agreement. One of their claims was addressed against a third respondent which allegedly agreed to guarantee the obligations of the first claimant under the construction and bridge agreements.
Claimant argued that this third respondent, although not a signatory to the consortium agreement, was bound by the arbitration agreement contained therein by virtue of the doctrine of estoppel and incorporation by reference into the guarantee. In this regard, the arbitral tribunal first decided that it was unnecessary to determine whether the applicable law was English or a U.S state law, as respectively argued by the parties, given that the test for estoppel, as applied to the facts at hand, leads to the same result under the different potential laws: the doctrine would allow a non-signatory being estopped from trying to escape from the obligations under the arbitration agreement contained in a contract when it has consistently maintained that other provisions of the same contract should be enforced to benefit it. However, on the facts of the particular case, the arbitral tribunal found that the doctrine of estoppel did not apply as the third respondent had never ‘embraced’ the consortium agreement as if it were a contracting party or claimed direct benefits under it.
As to the argument of incorporation by reference, the arbitral tribunal found that the language of the guarantee and the fact that the guarantee was specifically negotiated as a separate agreement, did not justify a finding of an intention on the part of the parties to make the consortium agreement part of the guarantee, as required under the applicable law.
c) States and state entities as non-signatories
Contracts for the realisation of large infrastructure projects often involve one or more state entities. For instance, the employer may be a state agency or a state-owned and/or controlled company. While there is a generally accepted presumption of legal separation between the state and its agencies and that the state’s control or ownership is not per se sufficient to extend the arbitration agreement to the state, there may be circumstances where such an extension is warranted.
In a case relating to the construction of a hydroelectric plant, members of a joint venture (as contractor) terminated the contract on the basis that the authority failed to comply with its payment obligations and caused unforeseen changes to the contract.
The members of the joint venture, acting as claimants, filed the request for arbitration against the public entity but also against the state alleging that the latter was the primary party to the contract and that the public entity only acted as an agent of the state.
By resorting to a factual analysis, the arbitral tribunal concluded that there was no evidence that the public entity represented to the members of the joint venture that it was an agent of the state. In that respect, the arbitral tribunal found that the project acceptance letter made it clear that the public entity was acting on its own behalf, that the joint venture never sought to clarify this fact during the tender process and that it would have been difficult to believe that the joint venture understood, based on such facts, that it was contracting directly with the state.
Moreover, the arbitral tribunal found that the public entity did not carry out a core function of the state and that the claimants did not put forth any evidence to support their alter ego theory. The arbitral tribunal, therefore, declined its jurisdiction over the state.
II. Selected issues in FIDIC arbitrations
The FIDIC General Conditions of Contract provide for a dispute resolution procedure that must be followed before a party can commence arbitration. Thus, depending on which version of the FIDIC standard contract is chosen in a particular case, the parties should submit their disputes to an ‘Engineer’ or a dispute adjudication board (‘DAB’), which will study the parties’ positions and may hold a hearing, deliberate and ultimately render a decision in writing to the parties. If a party is not satisfied with such decision, or the Engineer or DAB fail to give notice of their decision within the prescribed time limit, a party may issue a notice of its dissatisfaction. The parties are then to engage in amicable settlement negotiations, and if these fail, or the set time limit passes without such negotiations having resulted in a settlement, a party can then issue its notice of intent to commence arbitration. The purpose of these procedures is to have a body (i.e. the Engineer or the DAB) which can follow the project closely and may deal with any disputes arising out of the contract in a quick fashion as they arise while the works continue.
The model FIDIC arbitration clauses refer to the ICC Rules for Arbitration and thus a vast corpus of jurisdictional decisions resulting from FIDIC contracts has developed over the years in ICC arbitration. Below is a selection of decisions dealing with some of the most interesting issues that arise in this context.
As mentioned above, the ICC Court is not a court of law and its prima facie analysis is not a legal analysis, but rather focuses on the facts that indicate the possible existence of an arbitration agreement that may bind the parties to the arbitration. Accordingly, as long as the contract containing the arbitration agreement is signed by the party contesting jurisdiction, its objections that any mandatory preliminary steps of the FIDIC multi-tiered procedure were not completed prior to the filing of the request for arbitration will generally be referred to the arbitral tribunal by the Secretary General pursuant to Article 6(3) of the ICC Rules.
In a case relating to the construction of a highway, the claimant (as contractor) entered in two contracts with a state owned company which incorporated the 1999 FIDIC Red Book Conditions.7 The state owned company raised the jurisdictional plea that, under Sub-clause 20.6 of the conditions, referral to arbitration could only be made once a decision was issued by a dispute adjudication board (DAB). Respondent contended that the DAB had not yet issued a decision and, as such, the dispute could not be submitted to arbitration.
Having confirmed that both contracts containing the arbitration agreements were signed by both parties and that there were no objections as to the possibility of deciding all claims arising out of both contracts in one single arbitration proceeding, the Secretary General decided not to refer the matter to a prima facie decision of the ICC Court pursuant to Article 6(3) of the Rules and refer the case directly to the arbitral tribunal. Many cases following the same pattern would normally be decided in a similar fashion.
B. Selected FIDIC arbitral awards on jurisdiction
a) Does failure to submit the dispute to the Engineer or the DAB bar a party from resorting to arbitration?
Arbitral tribunals have taken two different approaches when faced with this type of plea. Some tribunals have treated it as an issue of jurisdiction and others as an issue of admissibility. The choice of one of these two approaches will depend on (i) the way the parties characterise this issue, (ii) the applicable law at the place of arbitration, as well as (iii) the arbitral tribunal’s own analysis on the legal nature of this plea.8
In the above mentioned case relating to the construction of a highway where the Secretary General decided not to refer the matter to the ICC Court, the arbitral tribunal had to decide on respondent’s jurisdictional objections. In particular, respondent argued that the claims were inadmissible and that the arbitral tribunal lacked jurisdiction because the contractual preconditions for a referral to arbitration had not been met.
The timeline of the main events was as follows:
Respondent argued in the arbitration that, since a DAB was in place, claimant should not be allowed to initiate arbitration proceedings before the conclusion of the DAB procedure. The arbitral tribunal first noted that there are two types of DABs:
The arbitral tribunal noted that the parties in the case at hand agreed to an ad-hoc DAB to be appointed upon the occurrence of the first dispute. It then proceeded to determine the legal nature of the agreed dispute resolution regime and found that such regime was not mandatory as that a DAB decision was not a precondition to initiate arbitration.
The arbitral tribunal came to this conclusion after a thorough examination of the wording of the clause. It held that the word ‘shall’ used at paragraph 1 of Sub-Clause 20.2 of the General Conditions10 could not be read in isolation but rather in the broader context of the dispute resolution mechanism instituted by Sub-Clause 20 of the General Conditions. In this regard, paragraph 1 of Sub-Clause 20.4, to which paragraph 1 of Sub-Clause 20.2 refers and which is lex specialis to Sub-Clause 20.2, suggests that, as a consequence of the use of the verb ‘may’, the DAB procedure is simply an option available to each party to submit the case to the DAB.11 The arbitral tribunal found that this interpretation was supported by the second sentence of paragraph 6 of Sub-Clause 20.4 of the General Conditions, which mentions two exceptions to the principle that no party can file for arbitration without tendering a notice of dissatisfaction to the other after receiving the DAB decision.12 The arbitral tribunal focused on one of these two exceptions, found in Sub-Clause 20.8 of the General Conditions and invoked by respondent, namely: ‘no DAB in place, whether by reason of the expiry of the DAB’s appointment or otherwise’.13
The arbitral tribunal then found that, if duly interpreted, Sub-Clause 20.8 allowed direct recourse to arbitration in this case without resorting to the DAB procedure, for four reasons.
The arbitral tribunal finally rejected respondent’s argument that claimant was under a duty to sign a DAA based on the grounds that (i) the contract imposed no duty on claimant to sign the DAA and (ii) respondent could not realistically have any good faith expectations as to the results of the DAB procedure, given the time that had lapsed before the DAB was constituted (i.e. 15 months) and the subsequent claimant’s three month silence with respect to the establishment of the DAA.
b) Impact of amendments to the FIDIC conditions on the scope of the exception contained in Sub-Clause 20.8 where ‘there is no DAB in place’
In a case relating to works for a city’s water supply and sewerage network, respondent argued that the parties replaced the provisions of the Sub-Clause 20.2 of the FIDIC Yellow Book,14 with those of the same clause from the FIDIC Red Book, thereby replacing a standing DAB with an ad hoc one. Respondent argued that, as the DAB was constituted and the DAA established, the DAB was in place pursuant to such amendment. Claimant denied that the parties agreed to such an amendment and argued that no DAB was in place and therefore its request for arbitration was admissible.
The arbitral tribunal first noted that it was undisputed that (i) the parties agreed to the appointment of a one-member DAB, (ii) the DAB submitted a draft DAA purporting to substitute the relevant Yellow Book provisions by the corresponding ones of the Red Book, and (iii) the parties informed him that they had no comments in this respect.
The arbitral tribunal further noted that whereas both parties signed the DAA, no evidence had been submitted as to the DAB sole member’s signature of the same. The arbitral tribunal further found that the DAB member made it clear that he would not sign the DAA, at least ‘until such time as [he] receive[s] the proper Notice to Refer from one or other of the parties’; The arbitral tribunal concluded that the DAA is a tripartite agreement, which requires not only the parties’ signatures, but also the adjudicator’s signature. Failing the DAB’s signature, the DAA had not come into force and therefore the contract had not been amended. Given that respondent conceded that a DAB was not appointed pursuant to the original conditions (i.e. the provisions of the Yellow Book), the matter was capable of being referred to arbitration and the request received was admissible as there could not be a DAB ‘in place’ under the Sub-Clause 20.8.15
In a case relating to the construction of a wastewater treatment plant, a contract was based on the standard FIDIC Yellow Book and parties replaced Sub-Clause 20.2 of the General Conditions (first paragraph), which provides:
The Parties shall jointly appoint a DAB by the date 28 days after a Party gives notice to the other Party of its intention to refer a dispute to a DAB in accordance with Sub-Clause 20.4.
with the following provisions:
The Parties will enter into DAA (in the form included in the Schedules) with the member set, following the procedure at 42 days from the Commencement Date.
In addition, the parties modified Sub-Clause 20.3 as follows:
The nomination is made (if not otherwise agreed on), by the FIDIC President or another person empowered by the President. This nomination must be accepted both by the Employer and the Contractor.
The arbitral tribunal found that the fact that the amendment took place at an early stage of the performance of the contract, rather than at the time when the dispute arose, was evidence of the parties’ intention to have a standing DAB ‘in place’ as of the beginning of the project and thereby exclude any obligation to set up an ad hoc DAB when a dispute arises.
The arbitral tribunal then considered the consequences of the fact that no DAB was established in accordance with amended Sub-Clauses 20.2 and 20.3. The arbitral tribunal first identified the crucial provision for this question, i.e. Sub-Clause 20.8, which provides for direct recourse to arbitration where ‘there is no DAB in place, whether by reason of the expiry of the DAB’s appointment or otherwise’.
The arbitral tribunal agreed with respondent’s view that Sub-Clause 20.8 must not be interpreted in such a way so as to render the preliminary dispute adjudication process optional. It held that Sub-Clause 20 in the FIDIC forms of contracts is built as a multi-step dispute resolution mechanism imposing, in principle, that the dispute first be referred to a DAB. As such, the arbitral tribunal held that Sub-Clause 20.8, which authorizes direct access to arbitration, is to be construed as an exception to the multi-tiered process applicable in principle under the FIDIC conditions. However, the arbitral tribunal also pointed out that the scope of the exception contained in Sub-Clause 20.8 in the event ‘there is no DAB in place’ could not be determined independently from the concrete obligations imposed on the parties in each specific case, by the previous sub-clauses, in particular Sub-Clause 20.2, as they may have been amended.
In the arbitral tribunal’s view, the exception provided in Sub-Clause 20.8 could not be relied upon by a party who still had to comply with its obligation to put the DAB ‘in place’. For instance, in a case where the parties have adopted the standard Yellow Book Sub-Clause 20.2, a party may not rely on Sub-Clause 20.8 unless it had previously (i) given notice to the other party of its intention to refer a dispute to a DAB, (ii) tried to jointly appoint the DAB in accordance with Sub-Clause 20.2, and (iii) if necessary, requested the appointing authority to appoint the DAB in accordance with Sub-Clause 20.3. As such, Sub-Clause 20.8 only authorizes a party to directly access arbitration if the party complied with its obligations and there is nevertheless ‘no DAB in place’ for any other reason.
The tribunal concluded that Sub-Clause 20.8 allowed claimant to resort directly to arbitration and, that claimant’s claims were admissible on the basis of the following:
c) Is a DAB decision which has not become ‘final and binding’ enforceable pending the arbitration?
The most representative matter concerns a saga comprising two ICC Arbitration proceedings seated in Singapore and related state court proceedings arising out of a contract for the construction of a gas pipeline by a contractor (the claimant in both arbitrations). In the context of the project, the parties appointed a DAB to resolve their disputes on the quantification of sums payable by the employer (the respondent).
The first arbitration was initiated in 2009 further to respondent’s notice of dissatisfaction with the DAB decision. Claimant alleged that respondent had breached its obligations under the contract by refusing to make payments in accordance with the DAB decision.
The parties disagreed about the proper interpretation of the second sentence of Sub-Clause 20.4 paragraph 4 of the 1999 Red Book Conditions:
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 an arbitral award as described below.
Claimant relied on the terminology ‘binding’ in support of its claim that a DAB decision had to be given effect promptly. According to claimant, the ‘binding’ nature of the decision was not altered by a notice of dissatisfaction, but rather only by an arbitral award reversing the DAB decision. By contrast, and relying on the language in Sub-Clause 20.4, respondent alleged that a DAB decision does not become ‘final and binding’ until the arbitral tribunal has ruled on the case. The arbitral tribunal first noted that, under the law applicable to the contract, if the wording of a provision is clear, it is not possible to deviate from it by way of interpretation. Indeed, the arbitral tribunal did not find any ambiguity in paragraph 4 of Sub-Clause 20.4 that would require interpretation. It held that the term ‘binding’ means ‘obligatory’, and ‘bound’ means ‘compelled or obliged by a covenant or promise or be subject to a legal obligation to perform an act’, and noted that paragraph 4 does not mention the term ‘final’, which means ‘unalterable’. The arbitral tribunal then noted that this was in contrast with the last paragraph of Sub-Clause 20.4, which places ‘final’ and ‘binding’ alongside in a situation where no notice of dissatisfaction had been served. The arbitral tribunal then went on to consider respondent’s allegations and whether the wording in paragraph 4 affected the ‘binding’ nature of a DAB decision. The arbitral tribunal found that, if the respondent’s arguments were followed, it would render the DAB decision without any effect and found that this conflicted with the wording of paragraph 4 of Sub-Clause 20.4. The arbitral tribunal, therefore, found that the notice of dissatisfaction does not alter the ‘binding’ nature of the DAB decision. Rather, it is only a condition precedent to the commencement of arbitration. Accordingly, the arbitral tribunal ordered respondent to make immediate payments to claimants of the amounts awarded in the DAB decision.
The award was successfully challenged before the High Court of Singapore and set aside on the basis that failure to pay as ordered by the DAB created a dispute per se, and such dispute was not submitted to a DAB prior to arbitration as required by Sub-Clause 20. Other obiter comments were also made by one of the judges as to whether the arbitral tribunal could actually enforce the DAB decision without a consideration of the merits of the case.16
The Singapore Court of Appeal upheld the High Court's decision, albeit on different grounds. The Singapore Court of Appeal held that a final award dealing only with enforcement of the DAB decision without the merits being brought before the arbitral tribunal was ‘unprecedented’ and ‘unwarranted’. The Singapore Court of Appeal went on to state that as long as the merits are placed before the arbitral tribunal, in principle, an interim award ordering a party to comply with the ‘binding’ DAB decision should be possible.17
In the second arbitration initiated in 2011, claimant followed the reasoning of the Singapore Court of Appeals and sought an interim award for the sums found due to it per the DAB decision and for respondent’s failure to comply with the DAB Decision. The arbitral tribunal issued an interim award by majority finding that the DAB decision was ‘binding’ on the parties, pending final resolution of the issues raised by respondent in the notice of dissatisfaction, and further ordered respondent to pay claimant the amounts as set out in the DAB decision.
The interim award was again challenged before Singapore courts. The High Court rejected the challenge and considered that the regime established by Sub-Clauses 20.4 and 20.7 facilitates the contractor’s cash flow by requiring the employer to pay now but without disturbing the employer’s entitlement to argue later about the underlying merits of the payment obligation.18 Accordingly, the High Court, in a change of approach with respect to its decision on the award arising out of the first arbitration, rejected the respondent’s argument that the failure to pay pursuant to the DAB decision gave rise to a second dispute that needed to be submitted to a DAB before it could be referred to arbitration.19
The Singapore Court of Appeals, in turn, rejected the respondent’s appeal to the High Court’s decision. The Court of Appeals, however, in a further change of approach with respect to its previous decision on the challenge against the award arising out of the first arbitration, stated that a non-final DAB decision can be enforced, not only through an interim award, but also through a final award in an arbitration commenced only for such purposes.20
d) Substance and form of referral to the Engineer or DAB
In a case relating to the construction of a hotel and incorporating the 1987 FIDIC Conditions,21 the employer (claimant) issued a succession of variation orders which increased the total cost of the project and hired an auditor to assess the actual value of the hotel. Claimant alleged that, pursuant to the auditors’ report, it paid more than the actual value of the works performed by respondent (the contractor). Respondent rejected this allegation of overcharging and counterclaimed for payments due but not received for the works performed. As a result of this audit, in which respondent participated reserving all of its rights, the Engineer recommended by way of a first letter that claimant cancel the last interim payment certificate it had previously approved.
Claimant alleged that this first letter constituted the Engineer’s decision pursuant to the Sub-Clause 67.1 of the Conditions and that respondent’s notice of intention to commence arbitration given 72 days later was untimely.22 Claimant therefore contested the arbitral tribunal’s jurisdiction to determine respondent’s counterclaims on the basis that the Engineer’s decision on these claims became ‘final and binding’ before respondent’s notice. By contrast, respondent argued that it had not received the Engineer’s decision on the cancellation of the interim payment certificate on the date when the letter was issued but rather 15 days later and therefore the Engineer’s decision on these claims did not become ‘final and binding’ before respondent gave the relevant notice. To decide on claimant’s first jurisdictional objection, the arbitral tribunal examined whether and when respondent received a copy of the Engineer’s letter. After a thorough examination of all written and oral evidence on this point, the arbitral tribunal found that respondent did not receive such a copy on the date the letter was issued, apparently due to an error on the Engineer’s part.
Moreover, claimant alleged that the arbitral tribunal lacked jurisdiction over specific counterclaims (i.e. delays and disruption of works that had not been certified by the Engineer) on the basis that the Engineer’s second letter which allegedly addressed these claims did not constitute a decision for the purposes of Sub-Clause 67.1 due to its failure to expressly refer to this provision as required therein.23 On this second jurisdictional objection with respect to specific counterclaims, the tribunal held that neither of the two Engineer’s letters made reference to Sub-Clause 67.1, but that claimant, by not objecting to the first letter on these grounds, was deemed to have implicitly waived this requirement and was estopped from raising it with respect to the second letter. Accordingly, the Engineer’s second letter was a decision for the purposes of Article 67.1 of the Contract and thus the counterclaims were admissible.
In a case relating to the modernisation and extension of a public research institute, claimant had notified the Engineer of the dispute pursuant to the terms of the contract. The Engineer sent a letter requesting more information 83 days after receiving claimant’s notice of the dispute. Claimant supplemented the notification as requested by the Engineer within seven days of such request. Two months later, the Engineer concluded that he still did not have sufficient information. Shortly thereafter, claimant sent a notification of its intent to commence arbitration. Claimant argued that it gave notice of the intent to commence arbitration by registered mail on the last day of the 70-day time limit prescribed in the Sub-Clause 67.1 and therefore its notice was timely.24 Alternatively, claimant maintained that the Engineer, in requesting more information, extended the time limit.
The arbitral tribunal noted that, according to Sub-Clause 67.1 of the FIDIC 1987 Red Book, the Engineer has 84 days to give notice of his decision to the parties.25 Additionally, if either party is dissatisfied with the decision, or if the Engineer fails to give notice of his decision on or before the eighty-fourth day, either party may give notice of its intention to commence arbitration on or before the seventieth day after the day it received the notice of such decision or after the expiry of the 84 days period in the absence of a decision.
In the case at hand, the arbitral tribunal found that the claimant had 70 days from the date when the Engineer first requested additional information to give notice of the intent to commence arbitration. The arbitral tribunal rejected both of claimant’s arguments and refused the idea that the Engineer could modify the contract and change the terms of the FIDIC General Conditions.
Conclusion
Construction projects are transactions that involve several players with distinct roles, rights and obligations, which are set forth in various documents and agreements. Due to the intrinsic complexities of construction projects, arbitration has become the natural dispute resolution method used in the context of such projects.
Parties should devote the necessary time to draw up their arbitration agreements with a clearly defined scope as to who should be bound by them, what matters can be brought under them and which rules of law should govern them. Construction projects are time sensitive and it may be useful devoting the appropriate amount of time to design the dispute resolution mechanism applicable prior to the start of the project, rather than spending time on jurisdictional disputes while the construction project is on-going.
Furthermore, if arbitration is to be combined with other dispute resolution methods, the interplay between the different methods needs to be carefully examined and considered when drafting the documents. Using model clauses and documents, and relying on the provisions already contained in institutional rules is always recommended, at least as a point of departure. However, as the cases described above reflect, there may be circumstances in light of which the parties may consider that more precise provisions are required and necessary to tailor the dispute resolution mechanism to specific needs.
This said, the possibility of jurisdictional issues arising in complex transactions will always exist and it is of the essence to be able to rely on institutions such as ICC. In addition to being the institution of choice in FIDIC standard forms of contract, ICC offers extensive experience in the construction sector, features modern rules to solve complex procedural issues, and provides the necessary safeguards to tackle jurisdictional submissions as efficiently as possible.
1 International Federation of Consulting Engineers (commonly known as FIDIC, acronym for its French name Fédération Internationale Des Ingénieurs-Conseils).
2 For convenience, the term ‘jurisdiction’ will be used generally for all these pleas, although they may legally not be the same.
3 Article 6(3) of the ICC Rules: ‘If any party against which a claim has been made does not submit an Answer, or raises one or more pleas concerning the existence, validity or scope of the arbitration agreement or concerning whether all of the claims made in the arbitration may be determined together in a single arbitration, the arbitration shall proceed and any question of jurisdiction or of whether the claims may be determined together in that arbitration shall be decided directly by the arbitral tribunal, unless the Secretary General refers the matter to the Court for its decision pursuant to Article 6(4).’
4 Article 6(4) of the ICC Rules: ‘In all cases referred to the Court under Article 6(3), the Court shall decide whether and to what extent the arbitration shall proceed. The arbitration shall proceed if and to the extent that the Court is prima facie satisfied that an arbitration agreement under the Rules may exist.’
5 Article 6(5) of the ICC Rules: ‘In all matters decided by the Court under Article 6(4), any decision as to the jurisdiction of the arbitral tribunal, except as to parties or claims with respect to which the Court decides that the arbitration cannot proceed, shall then be taken by the arbitral tribunal itself.’
6 Article 1(2) of Rules: ‘The Court does not itself settle disputes. It administers the resolution of disputes by arbitral tribunals, in accordance with the Rules of Arbitration of the ICC’.
7 Conditions of Contract for Construction for Building and Engineering Works designed by the Employer (1999 Red Book).
8 Extracts of awards in ICC FIDIC cases and an accompanying commentary have previously been published in the ICC Dispute Resolution Bulletin. On the issue of jurisdiction concerning DABs, see Christopher R. Seppälä, ‘Commentary on Recent ICC Arbitral Awards dealing with Dispute Adjudication Boards under FIDIC Contracts’, ICC Dispute Resolution Bulletin, 2015-1.
9 The dispute adjudication agreement is an agreement between the parties and the DAB members. The FIDIC Red Book and Yellow Book incorporate ‘General Conditions of Dispute Adjudication Agreement’.
10 Sub-Clause 20.2 para. 1 of the 1999 FIDIC Red Book Conditions:’Disputes shall be adjudicated by a DAB in accordance with Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision]. The Parties shall jointly appoint a DAB by the date stated in the Appendix to Tender’.
11 Sub-Clause 20.4 para. 1 of the 1999 FIDIC Red Book Conditions: ‘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, with copies to the other Party and the Engineer. Such reference shall state that it is given under this Sub-Clause.’
12 Sub-Clause 20.4 para. 6 of the 1999 FIDIC Red Book Conditions: ‘In either event, this notice of dissatisfaction shall state that it is given under this Sub-Clause, and shall set out the matter in dispute and the reason(s) for dissatisfaction. Except as stated in Sub-Clause 20.7 [Failure to Comply with Dispute Adjudication Board’s Decision] and Sub-Clause 20.8 [Expiry of Dispute Adjudication Board’s Appointment], neither Party shall be entitled to commence arbitration of a dispute unless a notice of dissatisfaction has been given in accordance with this Sub-Clause.’
13 See Sub-Clause 20.8 of the FIDIC 1999 Red Book Conditions and 1999 Yellow Book Conditions: ‘If a dispute arises between the Parties in connection with, or arising out of, the Contract or the execution of the Works and there is no DAB in place, whether by reason of the expiry of the DAB’s appointment or otherwise: (a) Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply, and (b) the dispute may be referred directly to arbitration under Sub-Clause 20.6 [Arbitration]’.
14 Conditions of Contract for Plant & Design-Build for Electrical & Mechanical Plant & For Building & Engineering Works Designed by the Contractor (1999 Yellow Book).
15 See supra note 13.
16 PT Perusahaan Gas Negara (Persero)TBK v CRW Joint Operation [2010] 4 SLR 672.
17 CRW Joint Operation v PT Perusahaan Gas Negara (Persero)TBK [2011] 4 SLR 305; Taner Dedezade, ‘Mind the GAP: Analysis of Cases and Principles Concerning the Ability of ICC Arbitral Tribunals to Enforce Binding DAB Decisions under the 1999 FIDIC Conditions of Contract’, International Arbitration Law Review, 2012, 145.
18 PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation (Indonesia) [2014] SGHC 146; Christopher R. Seppälä, ‘Singapore contributes to a better understanding of the FIDIC Disputes Clause: the second Persero case’, 2014, International Construction Law Review, p. 4.
19 Article 5(4) of the 2015 ICC Dispute Board Rules settles this issue by establishing that: ‘If any Party fails to comply with a Decision rendered pursuant this Article 5, whether it may be binding or both final and binding, the other Party may refer the failure itself, without having to refer it to the DAB first, either to arbitration, if the Parties have so agreed, or, if not, to any court of competent jurisdiction. A Party that has failed to comply with a Decision, when required to do so, shall not raise any issue as to the merits of the Decision as a defense to its failure to comply without delay with the Decision.’
20 PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation [2015] SGCA 30.
21 FIDIC Conditions of Contract for Works of Civil Engineering Construction (1987 Red Book).
22 Sub-Clause 67.1, para. 4 requires that a notice of dissatisfaction be made within 70 days of the Engineer’s letter : ‘If the Engineer has given notice of his decision as to a matter in dispute to the Employer and the Contractor and no notification of intention to commence arbitration as to such dispute has been given by either the Employer or the Contractor on or before the seventieth day after the day on which the parties received notice as to such decision from the Engineer, the said decision shall become final and binding upon the Employer and the Contractor’.
23 Sub-Clause 67.1 paragraph 1 provides that ‘the matter in dispute shall, in the first place, be referred in writing to the Engineer, with a copy to the other party’ and that ‘[s]uch reference shall state that it is made pursuant to this Clause’.
24 See Sub-Clause 67.1, para. 4 supra note 22.
25 Sub-Clause 67.1, para. 3: ‘If either the Employer or the Contractor be dissatisfied with any decision of the Engineer, or if the Engineer fails to give notice of his decision on or before the eighty-fourth day after the day on which he received the reference; then either the Employer or the Contractor may, on or before the seventieth day after the day on which he received notice of such decision, or on or before the seventieth day after the day on which the said period of 84 days expired, as the case may be, give notice to the other party, with a copy for information to the Engineer, of his intention to commence arbitration, as hereinafter provided as to the matter in dispute. Such notice shall establish the entitlement of the party giving the same to commence arbitration, as hereinafter provided, as to such dispute and, subject to Sub-Clause 67 .4, no arbitration in respect thereof may be commenced unless such notice is given’.