Articles

The author thanks Kornelia Nagy Koppany (KNP LAW Nagy Koppany Varga & Partners), and Bogdan Crîngureanu (BCLAW Cringureanu & Partners) for their valuable comments on DABs in Hungary and Romania.

Introduction

Dispute Adjudication Boards (DABs) is a concept which is supposed to enable the defusing of conflicts that occur during the performance of construction agreements. DABs have proven to be useful especially in large, long-term infrastructure projects, when at the outset it is not possible to envisage all the issues that may occur during the performance of a construction project. Usually a three-person panel should decide on the issues/disagreements/disputes presented by the parties during the performance of a given contract. The concept of DABs originates from Dispute Review Boards. Since the first introduction of the concept in the Boundary Dam Project in Washington in the 1960s (then known as ‘Joint Construction Board’), DABs have spread all over the world and have, since then, evolved. A decision of a Dispute Review Board carries only the value of a recommendation to the parties, but DABs have evolved into bodies issuing binding and, if a notice of dissatisfaction is not issued, a final decision. FIDIC¹ is the unquestionable champion in the introduction of DABs. First introduced as an optional tool available for parties in the Orange Book in 1995 and the Red Book in 1996, DABs became a stable part of the dispute resolution mechanism issuing decisions binding on the parties in the FIDIC’s Rainbow Suite of Contracts introduced in 1999.² FIDIC became a transmitter of the concept to numerous places in the world, including to the CEE countries. Initially, multinational institutions such as IFC,³ EBRD⁴ etc., insisted on using the FIDIC model of contracts⁵ in the projects they financed;⁶ with the FIDIC contracts, the DAB concept was implemented through the back door into the legal and business practice of CEE countries. Later – following the admission of a group of CEE countries to the EU – the EU poured money into the region,⁷ relying on FIDIC and the built-in DAB procedures as a model of proven balanced contract for all major infrastructure contracts. At first, FIDIC was introduced into the CEE countries without major changes. With time, CEE countries’ agencies responsible for infrastructure decided to amend the standard FIDIC model of contracts, creating local models for construction contracts in their countries. Sometimes the amendments resulted in a significant departure from the FIDIC model of agreement.⁸ Although FIDIC is still the prevailing model for large infrastructure projects in the region, each country in the region has its own reaction to the FIDIC forms and its own way of reconciliation with local law, tradition and the business environment. The purpose of this paper is not to present an exhaustive guide on the usage of DAB in the CEE countries, but rather to illustrate some of the challenges in applying the DAB concept to local law and specificities in the CEE region.

1. Forfeiture of contractor’s claims

The legal systems of the CEE countries are based on the civil law system. The civil codes are mainly influenced by German-Austrian law, although some French legal concepts are evident in Romania and, to a lesser extent, in Poland.⁹ Civil laws provide for statutory prescriptions of claims for various types of contracts and other legal relations after which a claim cannot be successfully raised. These provisions are deemed to be ius cogens, i.e. mandatory regulations that parties cannot derogate from by contract. In the case of claims arising out of infrastructure construction contracts, the limitation period is three years under Polish and Romanian law. Against this backdrop, section 20.1 of FIDIC Red Book provides:

If the Contractor considers himself to be entitled to any extension of the Time for Completion and/or any additional payment, under any Clause of the Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance. (Emphasis added)

Some Polish courts have claimed that this FIDIC provision is invalid because of an alleged conflict with the mandatory three-year limitation in the Polish Civil Code. Supporters of this theory claim that if the Polish Civil Code provides for a three-year limitation period, the parties cannot reduce it to 28 days. The Regional Court of Warsaw, in case no. XXV C 1908/15,¹⁰ phrased its conclusion as follows:

In the Court's opinion, sub-clause 20.1 providing for the effect of losing the Contractor’s right to additional payment in the event of the failure to notify a claim within a specified period of time to the Contracting Authority … is invalid under the provisions of Polish law, as Article 353 of the Civil Code does not grant the parties the right to establish contractual (final) dates to file a complaint under pain of expiration of the claim. The notion of limitation and final dates is a domain reserved exclusively for the provisions of the law. (Free translation)

There is, however, an opposite line of jurisprudence according to which the 28-day period in Section 20.1 of the FIDIC Red Book is not a prescription period of claims as contemplated by the Polish Civil Code. It is rather a type of contractual act of diligence of a party to secure certain legal effects. This concept has been presented in the Polish legal literature,¹¹ but not many examples of its application can be found in statutes (codes) and legal practice. There was, however, one example which was pointed out as relatively similar to Section 20.1 of the FIDIC Red Book. The Polish Civil Code provides that a purchaser of goods, in order to enjoy the right under a guarantee, shall notify the seller about defects of the purchased goods within 30 days after the defect was detected. This is considered not to be a prescription period, but a period for diligent action. Supporters of this theory suggested this provision’s legal similarity with the 28-day period of Section 20.1 of the FIDIC Red Book. The Appellate Court in Kraków in case no. I AGa 65/18¹² phrased it in the following manner:

Legal doctrine and sometimes also court decisions formulate views on the inadmissibility of setting or modifying the final dates (prescription periods) by the will of the parties ... While with regard to time limits to pursue claims in court, due to their similarity to limitation periods, it must be admitted that it is not permissible to establish and shape them by the will of the parties. However, there is no obstacle for the contractual parties, under the freedom of contracts laid down in Article 353 of the Civil Code, to establish the necessity to perform certain acts of diligence in the form of notifications to the other party of the circumstances giving rise to or extending the scope of the claim, otherwise the right shall be forfeited. (Free translation)

This differing practice may cease by the recent judgment of the Supreme Court of Poland
(23 March 2017, case no. V CSK 449/16¹³) that provided as follows:

The admissibility of reserving in a contract sensu stricto final dates, the failure to observe of which results in the loss of certain contractual rights, including notification deadlines and acts of diligence, should not be questioned on the basis of the principle of freedom of contract provided for in Article 353 of the Civil Code. (Free translation)

Even though the Polish Supreme Court judgments do not create legal precedent, its authority is nevertheless likely to end the differing practice.¹⁴

Interestingly enough, the same issue resonated in the Romanian application of FIDIC. One author observed the following:

The preliminary procedure which should be followed by a Contractor before the referral of its disputes with the Employer to the Court or the Arbitral Tribunal (as the case may be), and the statutory limitation periods which must be observed on this occasion continue to be two of the most controversial issues generated by the application of the public procurement contracts based on FIDIC Conditions of Contract in Romania.¹⁵

In Romania, the situation seems to be even more complex as, unlike Poland, it employs the French concept of administrative contracts. As a consequence, the following terms are conflicting:

• Article 2.517 of the Civil Code: ‘The limitation term of three years, unless the law provides another term’.
• Law no. 554/2004, article 11, point (1): ‘Application for the annulment of … an administrative contract, the recognition of the claimed right and compensation of the damage caused may be brought within six months’.
• Section 20.1. of FIDIC Red Book: ‘The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance’.¹⁶
• Some say that another time limit may come into play: Article 8 of Law no. 101/2016 (on remedies and appeals concerning the award of public procurement contracts, concession contracts, and on the organization of the National Council for Solving Complaints) provides that before addressing to the Council or the competent court, a bidder aggrieved by an act of a contracting authority is entitled to challenge and notify the contracting authority of its request of remediation within five to ten days, depending on the estimated value of the procurement/concession.

Maneuvering between all those terms certainly requires skill and caution.

2. Mandatory or optional nature of DABs

In the majority of the CEE countries, usage of the FIDIC form of contracts is not a legal obligation, but a decision of various state agencies performing infrastructure investments. Romania used to be an exception because during a certain period usage of FIDIC was mandatory.¹⁷ Even if a given entity has opted for the FIDIC form of contract, it may decide to get rid of either DAB or the entire dispute resolution provision of the FIDIC form. This indeed applies to the majority of cases in Poland and the Czech Republic.¹⁸ In the Czech Republic, there are almost no examples of functioning DABs.¹⁹ The situation is very different in Slovakia despite the fact that the Czech Republic and Slovakia shared one state until quite recently. In Slovakia, there is a functioning system of FIDIC DABs in some Slovakian public procurement construction projects;²⁰ although in a majority of cases DAB provisions are deleted from FIDIC contracts.

In Poland, central government entities like GDDKiA²¹ (roads) and PKP PLK SA²² (railroads) as a rule delete from FIDIC forms of contract the entire dispute resolution clause, and replace it with a simple reference to the common courts. Other entities, such as municipalities, may still use both arbitration and DABs in their contracts as originally provided in the FIDIC forms of contracts. DABs were used in Romania. A statutory body performing a function similar to DAB was introduced in Hungary in 2014.²³ Something resembling the DAB concept a bit less was employed at the beginning of 2018 in Romania.²⁴

Even if DAB provisions are not deleted from the contract, the obligation to use it remains disputable. Even if a contract envisages DAB, for various reasons parties may actually not appoint DAB and head directly to arbitration or the court. The issue whether a preliminary step, i.e. referral to DAB and its decision, is mandatory or just optional arises. That dispute is somehow backed by the unclear legal status of DAB, lack of experience in using these type of legal tools, natural conservatism of the judiciary and finally, the use of the word ‘may’ in subsection 20.4 FIDIC Red Book. As a consequence, the practice has become divergent.

In Poland, some guidance may be offered by the award of the Supreme Court dated 19 March 2015 case no. IV CSK 443/14. The Supreme Court confirmed that if FIDIC wording regarding DAB is included in the agreement, the DAB procedure is mandatory. Consequently, the courts and arbitration panels may reject as premature a claim submitted straight to the court or arbitration. However, the Polish Supreme Court added that if the parties did not agree on the composition of DAB and both failed to request the appointment of DAB to a nomination entity (when a nomination entity is provided for in the contract), they are then free to revert to the court or arbitration, as the case may be.

A similar issue has been subject to review by the Swiss Federal Supreme Court (Decision 4A 124/2014), involving a French contractor and a Romanian employer. Despite the numerous attempts of the contractor, it had not been possible to establish a DAB panel. A subsequent arbitration tribunal confirmed the French contractor’s authority to refer the motion for arbitration without exhausting the DAB procedure, which was followed by a set aside motion of the Romanian employer before the Swiss Federal Supreme Court, as the place of arbitration was Switzerland. Although the Swiss court confirmed the mandatory nature of DAB, it emphasized the principle of good faith when appointing DAB and authorized the party to go straight to arbitration if the other party is not acting in good faith.²⁵ It turned out that almost simultaneously the same issue was the subject of review by the Court of International Commercial Arbitration attached to the Chamber of Commerce and Industry of Romania, which in Decision no. 76/2015 stated:

[I]n accordance with the provisions of the General Conditions of Contract and the Special Conditions of Contract, parties can choose to address their dispute to DAB if they consider that a dispute has arisen. If the contractual provision uses the wording ‘may’, this means that the provision is not mandatory and the party has the ability to choose whether to go or not to DAB.²⁶

The Decision of the Romanian arbitration institution refers to usage of the word ‘may’ in Section 20.4 of the FIDIC Red Book. To the author of the current paper, however, that judgment of the Romanian arbitration institution misinterprets the linguistic function of the word ‘may’ and overlooks function of DAB which could not be simply derailed by one of the parties unwilling to follow the DAB procedure.

3. Is a DAB decision binding?

The consequences of DAB decisions are not an easy topic and not clear cut.²⁷ In the context of CEE countries it may be even more challenging.²⁸ However, a distinction between the binding decision that the DAB decision becomes when issued and binding and final when and if a notice of dissatisfaction is not sent seems to be unquestionable at least in the legal literature. The issues of what it means in practice as well as the consequences of a DAB decision in any of those situations, and specifically the ways to enforce these decisions, have become the subject of disputes.²⁹

In Poland, the issue surfaced only in a limited number of cases as in the majority of cases DABs are crossed-out of FIDIC forms of contract. Consequently, there is a limited number of disputes and the Supreme Court does not have many cases to deal with. In case no. IV CSK 443/14 and judgment of 19 March 2015,³⁰ the Polish Supreme Court stated the following:

Even if a party does not file a notice of dissatisfaction provided for in the contract and does not comply with the decision of the Disputes Committee, the decision of the Dispute Adjudication Board is not subject to mandatory enforcement. Pursuant to clause 20.7, a party may then file a lawsuit with the Arbitration Court referring to non-compliance with the Disputes Commission's decision against which the other party has not protested. The Dispute Adjudication Board’s decision cannot be treated in the same way as an arbitration award, and the proceedings before it are not a part of the arbitration proceedings. (Free translation)

That analysis led the Supreme Court to conclude that a court is not bound by any DAB decision. In another case the court was even more explicit and stated that a DAB decision is just a piece of evidence that is subject to the court’s evaluation.³¹ Unfortunately, this misconception of the DAB’s legal nature is striking. The Supreme Court is missing the clear point that the parties had agreed to an adjudication process with DAB and that a clear agreement of the parties should be binding. The Supreme Court’s opinion would be justified if the DAB was still an advisory and mediation-like entity.

It seems that the Ukrainian courts have ruled in a similar direction as in the case Municipal Enterprise ‘Vodokanal’ v LLC Trust Zaporizohobud, where the court urged that ‘a DAB decision is not binding on the court’.³²

The situation is different in Romania as the Government Decision no. 1405/2010 made FIDIC contracts mandatory for all institutions subordinated to the Ministry of Transportation for all work contracts related to the development of the national transportation, which are financed by public funds and exceed five million euros. Apparently applying FIDIC contracts did not resolve all problems and the Romanian government adopted the Government Ordinance no. 7/2016 (‘EGO’) to accelerate the implementation of trans-European transport infrastructure projects.³³ Among other measures, EGO addresses the conditions for the enforcement of DAB decisions.

• Contractors willing to enforce DAB shall waive their ‘ancillary rights’. Although the term ‘ancillary rights’ is not clear, it probably refers to interest and contractual penalties due as a result of an untimely performance of obligations.
• Contractors should provide a bank guarantee of the disputed amount and ‘ancillary rights’ (mainly interests).³⁴

As noted by two authors, it seems that enforcement of DAB in Romania depends on the ability to convince a judge in a particular case:

Experience shows that contractors have managed to obtain both partial and interim awards recognizing payment of the sum awarded by DAB pending a final award which were considered to be enforceable in Romania, but the case law is not uniform and there are serious legal arguments against such enforcing of a contracted DAB decision.³⁵

At the beginning of 2018, the Romanian government decided to once again change the legal regulations with regard to major infrastructure projects. Decision no. 1/2018 mandates using the model of a construction contract provided by that regulation. It is mandatory for the contracting authorities for procurement of construction works or design and works for projects over five million euros funded from public sources. The model agreement resembles the FIDIC Red Book,³⁶ however without any DAB. The role of a Supervisor was introduced, and is similar to the FIDIC’s Engineer. However, the Supervisor has gained slightly more authority with regard to enforceability of its decision, and certain peculiarities of DAB decisions were transposed to the Supervisor’s decision.³⁷ It is probably too early to comment on the practical experience of this new law.

4. Statutory bodies to resolve construction disputes

Infrastructure projects frequently lead to disputes. They often are very fact-heavy and tend to be technical. Disputes are connected with long pleadings with a significant amount of written evidence and with expert witnesses often playing a key role. It is not the best materia for the common courts and often these courts are not technically prepared to handle those matters and are unable to deal with such infrastructure construction matters, which in the CEE context especially refer to large road and railroad construction matters financed by the EU. These limitations of the common courts were a basis for the development of the DAB concept. However, the DAB system - isolated from the local laws, traditions and institutions - has difficulties to become an effective tool of dispute prevention or resolution. This was probably the reason why Hungary introduced a law, which introduces a body that plays a similar role and may compete to a certain extent with the DAB provisions of FIDIC. On July 2013, the Act XXXIV on the Expert Body for Performance Certification (EBPC) entered into force. EBPC is designed to resolve disputes in the construction sector. Its jurisdiction covers:

• cases in connection with the performance of construction contracts when no performance certificate is issued;
• cases where the issuance of a performance certificate is disputed;
• cases where payment is not made despite being due;
• cases where ancillary obligations to guarantee the contract (bank guarantee, lien, surety) and their enforcement are disputed by the parties.³⁸

The procedure may start at any party’s initiative without any need for contractual stipulation and regardless of whether the Hungarian law is a governing law provided that the construction is performed in Hungary. Any contractual provisions which would attempt to exclude or restrict a party’s right to resort to EBPC are invalid. The EBPC is comprised of independent experts who are expected to issue a decision within 30 days. A party unsatisfied with the EBPC’s decision may within 60 days start litigation or arbitration. It is worth mentioning, however, that EBPC certification enjoys privileges in the court and preferential treatment³⁹ as it is viewed as an expert opinion issued by an expert appointed by the court during the proceedings.

The new Arbitration Act became effective on 1 January 2018 in Hungary. While the previous wording of the Rules of Proceedings of the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry did not contain any language pertaining to the EBPC or its expert opinions, these Rules now specifically name the expert opinion issued by the EBPC among the rules pertaining to evidence, although not granting it any special or binding status. Ultimately, EBPC opinions constitute, both in civil proceedings and in arbitration, one means of evidence which the court (or the arbitral tribunal) can consider and evaluate at its own discretion. Between 2013 and 2018, more than 900 requests for expert opinions were submitted to this expert body and more than 700 expert opinions have been rendered.⁴⁰

Interestingly enough, a similar proposal was presented in the summer of 2018 by the Polish Minister of Justice.⁴¹ It went however a couple of steps further, and probably too far. It was proposed that the role of DAB could be played by an organ of the state’s construction supervision authorities. Consequently, that organ would, upon a motion of a party, issue an administrative decision that would be appealable to the administrative courts. The concept of clearly mixing civil rights (contractual rights) with an administrative procedure unleashed an avalanche of criticism from all directions,⁴² which probably led to the project’s permanent legislative hibernation.

Conclusion

The concept of DAB is a challenging one. Its proper functioning, as in case of many other alternative dispute resolution tools, requires the cooperation of the given parties, a certain dose of trust and the understanding of the fact that the actors of construction projects have more common than divergent interests. Trust, however, is a rare currency. According to the Legatum Institute’s Central and Eastern Europe Prosperity Report 2016, low social capital is a factor which is very characteristic of all countries in the region.⁴³ It has been said that ‘[t]he single best prediction that any of the 149 countries covered in the Global Prosperity Index is in Central and Eastern Europe is the low level of social capital, as measured by the Social Capital Sub-Index’.⁴⁴ The low social capital is probably one of the major hindrances in broader implementation of DABs in the region. Unlike the arbitration procedure and awards, DAB decisions do not have international treaties or even local statutes to support them. There is no New York Convention and no statutory regulations which could be the junction between a DAB decision and the local system of laws and institutions. DABs have to rely on the commonly accepted but very vague concept of freedom of contract.

In CEE countries – as in any civil law jurisdictions – judges consider themselves as ‘the voice of the statute’ and easily get lost when the statute does not provide univocal guidance, e.g. with regard to a DAB decision. Further, DAB is used in the overwhelming majority of cases by government agencies entrusted with the task to develop a country’s infrastructure, like roads and railroads, often using EU funds and relying on FIDIC forms of contracts. Naturally, political delegates at the top of these institutions have less freedom to recognize unity of interest with contractors and are under a constant anti-corruption watch and in the vigilant public eye. It frequently causes a tendency to play things safe and not to do anything that might be recognized as an unforced concession to a private party.

Transplantation of the DAB concept on the CEE soil is challenging and attempts to set up statutory bodies and procedures that imitate the DAB function are more likely to be successful. The success of the CEE countries’ attempts to establish bodies or procedures that may perform the function of DAB, however, largely depends on governments’ ability to structure those bodies in such a manner that will resemble parties’ appointed DABs and not yet another government designated and controlled entity.

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