1 IS THE DAB EMPOWERED TO DECIDE IN LAW?

Sub-Clause 20.1 of the standard FIDIC contract provides as follows:

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 these Conditions or otherwise in connection with the Contract.

The "or otherwise in connection" proviso is generally deemed to include claims made in law. Sub-Clauses 20.2 and 20.4 specify that the disputes to be adjudicated by DAB are those defined in Sub-Clause 20.1. Thus, they include "legal" disputes

This is no surprise: no contract stands alone. Its life depends on a given law. Its performance must conform to the rules of law agreed by the parties. Indeed, under Sub-Clause 1.4 the parties agree that:

The Contract shall be governed by the law of the country (or other jurisdiction) stated in the Particular Conditions.

The words "governed by" imply that the contract incorporates the legal provisions which are relevant to its interpretation and performance. In civil law jurisdictions, the same incorporation is expressly foreseen in a general rule set forth in Civil Codes, pursuant to which, a contract always attracts and must be deemed to be integrated by the provisions of law which are applicable to the specific contract at issue.

In conclusion, the DABs cannot avoid dealing with law, to the extent it is relevant to the outcome of the dispute brought before the DAB.

2 DO THE PARTIES REQUEST THE DAB TO ALSO APPLY THE LAW?

Claims expressly made in law are not the most frequent among those filed before a DAB. Generally, claims to DAB are simply made under the contract and usually involve factual, technical (engineering) and financial matters.

The DAB first looks at the facts (delay events, variations, additional works) for then applying the contract provisions to the facts which are established in the particular case.

Claims before a DAB which are made in law, or also in law, are less frequent, but not less important.

3 IN WHICH CASES MAY THE LAW BECOME RELEVANT?

Events may happen for which the contract does not provide an answer: whenever silent, the contract must be deemed to refer to the law, at least by implication. Moreover, contract provisions may need to be interpreted and the rules of interpretation may only be found in the governing law.

The validity or enforceability of certain clauses (e.g., clauses limiting liability, limiting rights such as time-bar clauses, subjecting rights to certain conditions) may give rise to dispute. Whether they are valid and enforceable, or not, is exclusively established in the governing law.

Certain other matters are exclusively addressed in the law, e.g.:

• degrees of fault and culpability;

• excusable or inexcusable circumstances in evaluating the parties’ conduct;

• categories of compensable damages;

• criteria for quantum determination; and

• admission and administration of evidence.

In civil law jurisdictions, contracts must be construed and performed in good faith and the relevant implications are exclusively governed by the law. The same applies to interest on late payments. Mandatory law provisions may be applicable, which either supplement or even prevail over the contractual clauses (e.g., running date, interest rate, simple or compound interest).

Another good example are the rules concerning statutory limitation, a matter exclusively governed by the law.

One should also note that FIDIC models are drafted with a common-law background and may crash against civil law jurisdictions, in which:

• nominated subcontractors are unknown;

• liquidated damages clauses do not deprive the judge of the power to reduce their amount if the employer suffered lower damages or no damage at all;

• time-bar clauses may become non-enforceable when the employer knew of the facts earlier than the contractor’s notice of claim;

• maximum liability clauses cannot be enforced when disproportionate to the actual damages of the other party; and

• entire agreement clauses cannot be enforced when they are intended to bar a claim based on the employer’s actions or omissions during the tender phase.

Whenever the above matters are disputed and the dispute is brought before the DAB, the DAB is certainly empowered and has even the duty to address them.

4 HOW DO DABS REACT? ARE DABS RELUCTANT TO DEAL WITH LAW?

The DAB may react in different ways. If neither party makes claims in law, most likely no autonomous law analysis will be made by the DAB. This is understandable and also correct, unless mandatory law provisions were to be applied on DAB’s own motion. However, the practice shows that this is extremely rare.

In the cases in which a claim in law is put before the DAB, the DAB may have the tendency to ignore the request and decide on different grounds. Sometimes, the DAB expressly refuses to apply the law without giving reasons, or provides reasons for not applying the law, or applies the law correctly, or applies the law incorrectly.

The cases examined below indicate a variety of solutions, depending on the composition of the DAB and the cultural background of its members.

A question typically raised in all seminars in which this matter is discussed, is whether the DABs are reluctant to deal with law. Based on my experience, I would say that in several cases this may be true, although I note a recent tendency towards a higher degree of diligence in dealing with legal matters.

The reasons for the DAB’s hesitation and uncertainty when it comes across legal matters are sometimes explained by the DABs themselves: "We are not a court of law," "We are not an arbitral tribunal," "If legal matters are relevant to the resolution of the dispute, the parties have the right to refer them to arbitrators."

Statements similar to those quoted above may also be found in some of the DAB decisions that I will analyse below.

5 EXAMPLES FROM THE PRACTICE

The analysis that follows has no ambition to be exhaustive. It does not portray the whole DABs’ "case law," which is unpublished and unknown. Each of us only knows the cases in which he/she was personally involved. The following analysis does not even represent the whole of my experience: I only intended to focus on cases showing certain difficulties when the law comes into play.

5.1 Case A — Contradictory reasoning when facing law matters

The contractor contended that the employer had misguided the tenderers by misrepresenting information on the underground physical conditions or by not disclosing the real conditions. Under the governing law, this amounted to gross negligence and, in some instances, to willful misconduct. Thus, the employer could not rely on the exculpatory clauses by which it had shifted to the contractor the risks for unforeseeable physical conditions: this would be impermissible under the governing law when the employer commits gross negligence or willful misconduct. The DAB was requested to establish that under the applicable domestic law the disputed clauses were not enforceable and to award the resulting damages.

Surprisingly, the DAB reasoning was as follows:

"[…] the DAB has reached its decision on the merits of this referral without having to decide on the contested interpretation and operation of [domestic] law. […] the interpretation of [domestic] law […] will, if necessary, be left to other tribunals to finally decide the strongly contested legal issues. […] the DAB has found that it is not required to give a decision on the application and operation of [domestic] law in order to reach its Decision on this referral and this matter is not further discussed in this Decision document" (emphasis added).

It is unclear why the DAB declined to apply the law notwithstanding it had been lengthily debated by both parties in all pleadings before the DAB. Considering that application of the law is part of the DAB’s mission, the above-quoted reasoning does not constitute a satisfactory precedent.

However, and this is also unsatisfactory, in subsequent paragraphs of the same decision the DAB changed its mind. By contradicting the above introductory reasoning and making express reference to the law of State X, the DAB endorsed the contractor’s allegations of negligence and misrepresentation for then refusing to enforce the contractual limitations of the employer’s liability. The DAB acknowledged that the law did not allow the employer to invoke this clause when acting negligently or through willful misconduct:

"[…] the DAB finds that both Parties at the time of tendering anticipated using the [materials in question] as the primary source [for the works]. This intent was fundamental to the viability of the project and as such should have been better investigated by the Employer before the [material in question] was indicated as being suitable […]. This was not done […]. The only organization that could have done this was the Employer and by electing not to perform such investigations whilst encouraging and inducing the tenderers to prepare tenders on the basis of using [the materials in question] the Employer was negligent. The Employer argues that […] all the risks relating to the materials found on site were those of the Contractor and that the various caveats in the contract rendered the Employer harmless from any responsibility. In the present case, the DAB cannot accept this position. […] the DAB cannot subscribe to the view that the Employer can indicate pre-tender that the intent is for [the materials in question] to be used and that it would therefore be suitable for [the works] and then, later, when the material proved to be unsatisfactory in several ways, seek refuge behind the exclusionary clauses in the Contract and argue that it had no responsibility for misleading the Contractor into a lower price bid in reliance of the Employers intent. […] The DAB considers it is unjust in any system of law to allow a party to benefit by exclusory clauses in a situation which, by its own negligence, it created. Consequently, the DAB accepts as correct the assertion that where a party has conducted its business under a contract in a negligent manner, a fortiori when the innocent party has significantly suffered to its detriment as a result of that negligence, the negligent party is responsible to the innocent party for damages. This assertion is captured in [State X] Civil Code at Article [XY]" (emphasis added).

Comparing the preamble to the conclusions, the decision appears contradictory. This is probably due to an instinctive DAB’s reluctance to resolve the matter by strict application of the law.

In particular, one fails to understand on what grounds the DAB has considered that it belongs to "other tribunals to finally decide the strongly contested legal issues." The dispute had to be first referred to and adjudicated by the DAB. Given that the contractor claimed that the law prevailed over the contract, a meticulous analysis of the law was required and the DAB’s disinclination to discharge this duty finds no justification.

5.2 Case B — A res judicata objection decided purely on the contract

The employer contended that the DAB lacked jurisdiction over a dispute because the matter had been already decided in a previous decision which, under the governing law, amounted to res judicata. Therefore, the same matter could not be litigated twice.

The contractor objected that the breaches referred to the DAB were distinct in nature from those considered under the previous DAB decision and therefore the "identity of object," the most important requirement for achieving a res judicata effect, was not satisfied.

The DAB upheld jurisdiction on the following reasoning:

"[The employer’s] argument which relies upon [Article XY] of the [State X] Civil Code fails. [The employer] informs me that the Code of [State X] provides that the Res judicata provisions in [State X] are subject to three elements namely, object, cause and parties. Clearly in this case, as I have outlined above, the primary identity of object test has failed and as such the provisions of [State X] Code at Article [XY] do not apply. However, notwithstanding this failure, I am persuaded that the Contractual provisions are sufficient for me to arrive at a conclusion with regard to my jurisdiction." (emphasis added)

In other words, the DAB retained jurisdiction based exclusively on the contract, notwithstanding the matter should have been (easily) resolved under the governing law. Moreover, the DAB did not explain what "Contractual provisions" it applied to decide on jurisdiction. No contract clause exists which addresses an issue of res judicata and the parties had indeed manifestly pleaded this matter exclusively in law.

This is a further example of the bizarre reaction a DAB may have whenever requested to decide in law. This probably depended on the fact that the sole member of the DAB in the above referenced case was an engineer, much acquainted with the contract than with the law.

5.3 Case C — Application of law in relation to interest

The contractor claimed that it was entitled to recover interest on sums wrongfully deducted by the employer. For quantification of interest, the contractor relied on the applicable domestic law.

The employer contended that reliance on domestic law was misconceived as such provisions only refer "to the method to be used in the Courts of Law when […] the problem of due interest in a commercial matter is left at the judge’s decision." It requested the DAB to determine interest in accordance with the method "that the DAB thinks fit for this particular instance."

By applying the local legislation, the DAB decided in favor of the contractor:

"[…] I consider that the application of Articles [XY of the Civil code of State X] are correct and that furthermore the interest rates and mechanism provided for under Article [Z] of Governing Ordinance [Z] is applicable and correct. […] By considering the above I decide that [the contractor’s] claim is well made and succeeds in the sum claimed" (emphasis added).

The DAB correctly decided the matter according to the governing law. The decision is not surprising, given that the contractual clause did not cover the issue in dispute

5.4 Case D — Claim for reduction of liquidated damages rejected although admissible under the governing law

The contractor requested the DAB to reduce the amount of delay damages arguing that the DAB’s power was based on the domestic law provision according to which "a penalty may be reduced by the judge."

The DAB decided as follows:

"[The contractor] requests that I make an adjustment to the level of DDs based upon the powers which I may have under Article [X] of the Civil Code of [State X]. Under that Article, … ‘a penalty maybe reduced by the judge.’ At the hearing, some considerable discussion was undertaken related to this issue which revolved around my capacity to have the Article considered to be applicable to DAB proceedings and as to whether a ‘penalty’ may be considered to be equivalent of Delay Damages. I have considered the arguments put forward to me and find that my jurisdiction is limited […] to those matters which may arise out or in connection with the Contract. […] Accordingly, whether the terms of Article [X] are applicable to me or not, or indeed whether I need to consider whether DDs are to be regarded as ‘penalty,’ I consider that I would not need at this time to change the Agreement of the Parties which specified the quantum of DDs. As such I will decline to either consider or apply any purported powers which I may have under Article [X] of the Civil Code of State [X]" (emphasis added).

The DAB’s reasoning is inconsistent. It declines jurisdiction and refrains from reducing the delay damages for two reasons: The DAB’s powers would be confined to enforce the contract; and the DAB "would not need at this time to change the agreement of the parties which specified the quantum of DDs."

The reasoning is flawed. First, the reconsideration of the amount of delay damages did certainly arise out of or from the contract, as a matter of interpretation and enforcement of the relevant clause pursuant to the governing law. The DAB’s decision to decline jurisdiction on this ground appears superficial and inadequately motivated. Second, when the DAB declares that it "would not need at this time to change the agreement of the parties," it reveals that, in reality, it assessed the merits of the claim and probably concluded that the level of delay damages set forth in the contract was appropriate. It thus mixed jurisdiction with merits, addressing them jointly and confusedly.

Once again, the inconsistency in the DAB’s reasoning shows a reluctance to apply domestic law provisions fully and correctly, a signal of the DABs traditional reluctance to depart from the contract, which is generally considered the "exclusive" source from which their decision-making power derives.

5.5 Case E — Termination of an "administrative contract" by contractor’s unilateral notice

The contractor terminated a FIDIC contract due to lack of payment. Based purely on the contract, the termination notice appeared to be correct. Applying the termination clause literally, the DAB endorsed the legitimacy of the termination and awarded damages to the contractor.

However, the employer had objected that, pursuant to the law of its country, which was the governing law, the contract at stake was an administrative contract which could not be terminated merely on contractor’s unilateral notice, but upon a previous court or arbitral tribunal decision validating the grounds for termination.

The DAB ignored the objection and failed to analyze the legal regime of administrative contracts under the governing law. The DAB (wrong) decision was first reversed by a local court and then reversed again by an arbitral tribunal.

Eventually, the contractor was bound to first obtain an arbitral decision recognizing its right to terminate for then finally notifying a valid termination notice. Had the DAB directed the contractor to first seek arbitral enforcement of its right to terminate, long proceedings would have been avoided.

5.6 Case F — Inconsistency between different DAB decisions addressing similar law issues arising from the same contract

A DAB appointed by the same parties in relation to the same contract made two subsequent decisions:

• first decision — the DAB determined that certain contract clauses could not be enforced when clashing against mandatory provisions of the governing law: the clauses were agreed, but prevalence was to be given to the law.

• second decision — the underlying factual circumstances and legal arguments were similar or even identical, but the DAB determined that whenever the matter is exhaustively addressed in the contract, no space is left to the application of the law, which is complementary to the contract and should come into play only when a matter is not addressed in the contract.

The contradiction is striking, especially because the DAB had been clearly alerted by the claimant that, given the identity of facts and law issues, it was bound by its previous rulings.

This is a further example of inconsistency.

5.7 Case G — Balancing governing law and common sense

In a contract for a highway concession, the parties were unable to agree on an extension of time based on certain delay events. Under the contract, the matter was firstly determined by an "Independent Engineer" (IE).

The parties had defined the employer’s activities having an impact on the critical path in a so called "Criticality Agreement." Notwithstanding the Criticality Agreement was clear and self-executable, the IE determined as follows:

"Since the Parties have not agreed on the duration of the extension and the compensation, the Independent Engineer who is requested to determine these matters, in its Determination has to take into account the Concession Agreement and the defined therein Critical Activity and Critical Path, beyond and irrespective of the agreement of the Parties to define the abovementioned Activities as Critical according to the note of Appendix II at Project Reset. The Independent Engineer proceeds to this Determination, taking into account the definitions of the Critical Activity and the Critical Path as these are provided in the Concession Agreement | and articles 173 & 200 of the Civil Code on the manner of interpretation of the agreements, and common sense. None of the mentioned in the list as Critical Activities concerning the relocation of PUO networks, supplementary expropriations and archaeological excavations, under an engineer’s judgment, with common sense and according to the provisions of the Concession Agreement, can determine the shortest total length of the Time Schedule and thus, none can be considered as capable of extending the total time schedule for the whole of the Unit they belong to by supporting that no work can be executed in these Geographical Units." (emphasis added).

The IE provided no reasons for departing from strict application of the Criticality Agreement. The concessionaire notified its dissatisfaction with the IE determination and referred the matter to the DAB to decision.

By a majority of two members (lawyers; the other member was an engineer) the DAB refused to endorse the IE’s disregard of the Criticality Agreement and re-determined the extension of time by applying the parties’ understandings as recorded in the Criticality Agreement.

A good example: the legal approach won over the engineer’s disregard of the parties’ agreement to the benefit of an alleged "common sense" approach.

6 CONCLUSIONS

Is the DAB inapt to decide in law? I would not subscribe to such an excessive proposition. A similar conclusion would also be in contrast with the clear DAB’s mission defined in the contract, which expressly includes the duty to make decisions in law, as needed.

A possible explanation is given by the DAB composition: when law is relevant, at least the chairman should be a lawyer. Another possible explanation lies on the fact that the DAB has become so popular because it is perceived as the "guardian of the contract" and this may illustrate why a lower weight is given to the law.

Contracts try sometimes to make a distinction between "technical" and "legal" disputes for referring the first to expert determination and the second to an arbitral tribunal. However, this method has proved unworkable: the disputes are inextricably intertwined and a dividing line is impossible to draw.

The FIDIC DAB model is probably the best we may have. Its functioning may be improved to avoid using both DAB and arbitration at all times, but it should be maintained. In my experience — except for too large and complex projects — the DAB puts an end to the dispute and makes arbitration superfluous in approximately 30/40% of the cases.

Lastly, would it be permissible to recommend DABs to limit the "common sense" approach to factual or technical matters exclusively and give prevalence to the law when it brings to a different outcome