I INTRODUCTION

1. Construction plays a significant part in the global economy. Infrastructure projects are becoming increasingly technically complex. In addition, many new project delivery methods have been added to the portfolio of possibilities in the past 20 years, all with their own intricacy and challenge.

2. Each project may be faced with technical and contractual problems during project execution that must be addressed by the project participants in a real-time fashion and without pausing project progress.

3. The available dispute resolution tools range from unassisted party negotiation to litigation and arbitration. Cost and risk for each party can increase exponentially when dispute management crosses the line from a situation where the parties resolve the dispute themselves, and the third-party neutral facilitates, to a situation where the decision making is left to a judge or arbitrators.

4. Thus, any approach to dispute settlement should ideally provide for early identification of issues, near real-time dispute resolution and the possibility of the avoidance of disputes, while aiding in moving the project forward.

5. The International Federation of Consulting Engineers (FIDIC) adopts a multi-tiered approach to the settlement of disputes, employing a variety of alternative dispute resolution (ADR) tools, intending to promote early identification and resolution of issues and providing the parties a means of recourse, if disputes cannot be resolved, or avoided, at the first instance.

6. In this paper, FIDIC, its contracts and the spectrum of ADR tools available, will first be introduced, before the focus is shifted to settlement of disputes.

II FIDIC: THE ORGANIZATION 2

7. FIDIC represents the global consulting engineering industry and is charged with promoting and implementing the consulting engineering industry’s strategic goals on behalf of its Member Associations and disseminating information and providing resources of interest to its members.

8. FIDIC was founded in 1913, with three founding members. Today its membership covers 97 countries. FIDIC’s expressed mission, as articulated on its website, is to work closely with its stakeholders to improve the business climate in which it operates and to enable its members to contribute to making the world a better place to live in, now and in the future.

9. Among its stated objectives is to continue to be the leading authority on construction contracts globally, and to promote and enhance the leading position of FIDIC’s Forms of Contract. In pursuit of its objective, FIDIC publishes international standard forms of contracts3, the topic of the next section of this paper.

III THE FIDIC CONTRACTS FOR MAJOR WORKS

10. FIDIC has a long history in the publication of standard forms of contract for works, with its first Conditions of Contract for Works of Civil Engineering Construction, the Red Book, having been published in 1957. The 1957 FIDIC Red Book was heavily modeled on the standard contract published by the Institute of Civil Engineers (ICE), as it then was.

11. In 1963, FIDIC published the first edition of the Conditions of Contract for Electrical and Mechanical Works including Erection on Site (the "Yellow Book") and continued to update and publish the Red and Yellow Books, until 1999, when it expanded the range of its contracts in an effort to offer to the market standard conditions suitable for a variety of project delivery methods.

12. The FIDIC suite of contracts for major works, which was published in its first edition in 1999 and is commonly referred to as the Rainbow Suite, consists of:

A) Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (the "1999 Red Book");

B) The Construction Contract Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor (the "1999 Yellow Book"); and

C) The Plant Contract Conditions of Contract for EPC/Turnkey Projects, The EPC Contract (the "Silver Book").

13. Each of the FIDIC forms includes both general conditions and particular conditions. As noted by FIDIC in the foreword to their documents, the general conditions are intended to be used in unmodified form on each project, and modifications that are considered necessary in order to deal with a particular project or jurisdiction are to be made through the particular conditions.

14. Each of the standard forms included in the 1999 Suite of contracts is suitable for a specific project delivery method, with the following key factors differentiating between the project delivery methods, and in turn deciding the choice of contract:

A) Who will carry the project risks - the employer or the contractor?

B) Who will carry out the design - the employer or the contractor?

C) Who will carry out the administration of the contract - the engineer or the employer?

15. In the case that these questions are best answered by the employer retaining much of the project risk and undertaking the detailed design before engaging the contractor for the construction activities, the choice would be the Red Book. This is often referred to as the "traditional" or "design-bid-build" method of project delivery.

16. When the questions are best answered by the contract being administered by the Engineer, but having the design accomplished by the contractor, i.e. adopting a "design-build’ project delivery method, the best choice would be the Yellow Book.

17. If the questions are best answered with a design-build approach, but with greater risk and control of project implementation passing to the contractor, the choice would be the Silver Book. The choice of the Silver Book would also include the contract being administered by the employer, rather than the Engineer.

18. All three books adopt a tiered approach to dispute resolution that includes entrusting a Dispute Adjudication Board (DAB) with the adjudication of disputes arising during project execution.

19. There are two types of DAB: 1) The standing board, the type provided for in the 1999 Red Book, is appointed at the outset of the contract and remains in place until the end of contract performance. 2) The ad hoc DAB, in which the board is constituted only after a dispute has arisen. Although FIDIC currently employs an ad hoc DAB in the 1999 Yellow and Silver books, a standing DAB will be included in forthcoming updates4, thus this paper will limit is focus to standing DABs and to the provisions in the FIDIC 1999 Red Book.

20. Before an elaboration of the dispute settlement provisions contained in the FIDIC 1999 Red Book is provided in Section V, a general discussion of available dispute resolution tools is warranted. The following section offers a short discussion of the spectrum of alternative dispute resolution (ADR) tools.

IV DISPUTE RESOLUTION TOOLS

21. The spectrum of tools available to parties to aid in the resolution of their disputes includes such tools as:

• Negotiation

• Partnering

• Dispute Boards

• Expert determination

• Mediation

• Conciliation Arbitration.

22. Each of these dispute resolution tools has unique features, which provide both advantages and disadvantages, but the primary features that distinguish them from each other are:

A) If assistance of a third-party neutral is required, and

B) The role the third-party neutral is required to play in the dispute resolution process.

23. The tools that do not require the assistance of a third-party neutral include partnering and unassisted negotiations.

24. The tools that require the assistance of third party neutral include conciliation, mediation, expert determination, dispute boards and arbitration, although the neutral is not required to play the same role in each case.

25. ADR tools requiring the assistance of a neutral can be further differentiated by the role the neutral will be required to play.

26. The neutral can play a variety of roles including facilitation, making recommendations, deciding disputes, or some combination of these. This is illustrated by the following table.

27. ADR tools may be used individually or together. When a dispute resolution provision provides for the use of more than one tool in a sequential series, it is commonly referred to as a multi-tier dispute resolution clause.

28. Multi-tier clauses may be enforced so that each of the sequential steps may only be taken after engaging in the prior steps.

29. The FIDIC dispute settlement provisions, which will be discussed in the next section, are an example of mandatory multi-tier dispute resolution provisions.

V FIDIC AND DISPUTE SETTLEMENT UNDER ITS STANDARD FORMS

30. Employing a multi-tier dispute resolution approach has been a long-standing tradition in FIDIC contracts.

31. Traditionally, the role of taking the initial decision on disputes belonged to the Engineer, with a dissatisfied party being provided the opportunity to challenge the Engineer’s decisions in arbitration, after completion of the works. Under the FIDIC contracts, the Engineer was also, amongst other things, tasked with making determinations in regard to the contractor’s claims for time and money.

32. The Engineer’s traditional dual role - as the adjudicator of disputes between the employer and the contractor and the determiner of the contractor’s entitlements - was met with a perception of a conflict of interest in the international context, given that the Engineer was directly engaged and paid by the Employer, notwithstanding that this was a well-established approach in the UK construction industry.

33. To deal with this perceived conflict of interest, in 1995, FIDIC introduced the concept of the DAB into their works contracts5 and in 1999, FIDIC introduced the DAB as a permanent feature of its multi-tier dispute resolution machinery, requiring that all disputes arising between the parties during contract performance first be submitted to the DAB for a decision.

34. The philosophy underpinning FIDIC’s approach to dispute settlement is that the machinery must provide for early identification of issues, the possibility of the avoidance of disputes and of prompt resolution of any formal disputes. As such, in addition to the inclusion of a DAB in its multi-tier dispute resolution provisions, the 1999 Red Book employs various dispute resolution tools, including conciliation, early neutral evaluation and the possibility of amicable settlement, before the final step of arbitration.

35. The disputes resolution provisions are set out in Clause 20 and although this clause is entitled "Claims, Disputes and Arbitration," in an effort to shed light on this philosophy it is suggested that the reader first focus their mind on the separation of claims and disputes. Simply, as stated by FIDIC in the Contracts Guide6, the philosophy underpinning FIDIC’s approach is that the "claims" procedure is a contract administration tool aimed at implementing the FIDIC approach to balanced risk allocation and aimed at avoiding disputes.

… Major projects give rise to major risks, which have to be dealt with if they occur … In these events, the claims procedures are specified so as to provide the degree of formality considered necessary for the proper administration of a … project.

Complying with these procedures and maintaining a co-operative approach to the determination of all adjustments should enhance the likelihood of achieving a successful project.

36. So, notwithstanding that the Engineer no longer plays a role in deciding a dispute, the Engineer still plays a key role in the avoidance of disputes.

37. To better appreciate the role of the Engineer in the avoidance of disputes, it is recommended that the reader keep in mind the following points: 1) The claims procedures provide a degree of formality and certainty and are intended to foster and maintain a co-operative approach to the determination of all additional time and money adjustments; 2) A claim is not a dispute, nor does it have to be seen as a seed of dispute; and 3) The Engineer is required to don the hat of a conciliator pursuant to Sub-Clause 3.5, which specifically provides:

Whenever these conditions provide that the Engineer shall proceed in accordance with this Sub-Clause 3.5 to agree or determine any matter, the Engineer shall consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.

The Engineer shall give notice to both Parties of each agreement or determination, with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 [Claims, Disputes and Arbitration]

38. As can be seen above, the provisions of Sub-Clause 3.5 require the Engineer to facilitate on-site negotiations between the parties, in an effort to help them reach agreement and, only in the case that the parties fail to reach an agreement, to make a fair determination in accordance with the Contract, giving due regard to all relevant circumstances - in short, to adopt the role of a conciliator.

39. It follows that even if there is initial disagreement between the parties, this need not constitute a dispute, and the parties may still resolve their difference using facilitated negotiations, before their difference becomes a dispute, and without the need for formal referral to the DAB.

40. A further opportunity to prevent any disagreement from becoming a dispute is provided to the parties pursuant to Sub-Clause 20.2 of the Red Book, paragraph 7, which reads:

If at any time the Parties so agree, they may jointly refer a matter to the DAB for it to give its opinion. Neither Party shall consult the DAB on any matter without the agreement of the other Party.

41. The dispute avoidance function of the DAB was more clearly articulated by FIDIC in its Conditions of Contract for Design, Build and Operate Projects, published in 2008 (the "Gold Book"). Sub-Clause 20.5 of the Gold Book, which is entitled Dispute Avoidance, states:

If at any time the Parties so agree, they may jointly refer a matter to the DAB in writing with a request to provide assistance and/or informally discuss and attempt to resolve any disagreement that may have arisen between the Parties during the performance of the Contract. Such informal assistance may take place during any meeting, Site visit or otherwise.

However, unless the Parties agree otherwise, both Parties must be present at such discussions. The Parties are not bound to act upon any advice given during such informal meetings, and the DAB shall not be bound in any future Dispute resolution process and decision by any views given during the informal assistance process, whether provided orally or in writing.

If a Dispute of any kind whatsoever arises between the Parties, whether or not any informal discussions have been held under this Sub-Clause, either Party may refer the Dispute in writing to the DAB according to the provisions of Sub-Clause 20.6 [Obtaining Dispute Adjudication Board’s Decision]. "

42. A similar provision is included in the draft update of the second edition of the Yellow Book, which was distributed by FIDIC to the participants at their annual users’ conference held in London in December 2016. Specifically, Sub-Clause 21.3 in the draft second edition of the Yellow Book provides:

If the Parties so agree, they may jointly refer a matter to the DAB in writing (with a copy to the Engineer) with a request to provide assistance and/or informally discuss and attempt to resolve any issue or disagreement that may have arisen between them during the performance of the Contract.

If the DAB becomes aware of an issue or disagreement, it may invite the Parties to make such a joint referral. Such joint referral may be made at any time, except during the period that the Engineer is carrying out his duties under Sub-Clause 3.7 [Agreement or Determination] unless the Parties agree otherwise.

Such informal assistance may take place during any meeting, Site visit or otherwise. However, unless the Parties agree otherwise, both Parties shall be present at such discussions. The Parties are not bound to act on any advice given during such informal meetings, and the DAB shall not be bound in any future Dispute resolution process or decision by any views given during the informal assistance process, whether provided orally or in writing.

43. FIDIC’s focus on the avoidance of disputes, and prompt resolution only in the case that disputes cannot be avoided, is also complemented by the provisions of Dispute Adjudication Agreement (DAA), the conditions of engagement of DAB members. The provisions of the DAA stipulate that the members of the DAB must be available to "give advice and opinions, on any matter relevant to the Contract when requested by both the Employer and the Contractor … "

44. While both the Engineer and the DAB play a role in dispute avoidance, it is when the parties are unable to resolve a disagreement amicably, with or without assistance, that the disagreement becomes a dispute and the Engineer’s role as a neutral party ends, and the formal role of the DAB in deciding disputes begins.

45. Before turning to a discussion of the procedure associated with formal referrals of dispute to the DAB, a few words about the composition, character and constitution of the DAB are warranted.

46. A dispute board is composed of three independent and impartial construction professionals, specialized in similar construction projects and its function is to provide job-site dispute resolution.7

47. The constitution of the DAB is prescribed in Sub-Clause 20.2 [Appointment of the Dispute Adjudication Board], which reads in the relevant parts:

If the DAB is to comprise three persons, each Party shall nominate one member for the approval of the other Party. The Parties shall consult both these members and shall agree on the third member, who shall be appointed to act as chairman. (Paragraph 3)

[…]

The agreement between the Parties and either the sole member (adjudicator) or each of the three members shall incorporate by reference the General Conditions of Dispute Adjudication Agreement contained in the Appendix to these General Conditions, with such amendments as are agreed between them. (Paragraph 5)

[…]

The terms of the remuneration of either the sole member or each of the three members, including the remuneration of any expert whom the DAB consults, shall be mutually agreed upon by the Parties when agreeing the terms of appointment. Each Party shall be responsible for paying one-half of this remuneration." (Paragraph 6) (emphasis added)

48. It follows that the composition of the DAB is designed to ensure that the board is an impartial and independent panel of one or three people and that they are perceived as such by the parties.

49. The procedure associated with formal referrals of disputes to the DAB will be the topic of the next section.

VI THE ADJUDICATION OF DISPUTES UNDER THE FIDIC CONDITIONS

1. The dispute resolution procedure under the 1999 FIDIC Conditions of Contract provides for a dispute to be first referred to a DAB [Sub-Clause 20.4], with arbitration being resorted to only if there is dissatisfaction with the DAB’s decision [Sub-Clause 20.6] and the parties are subsequently unable to reach resolution amicably [Sub-Clause 20.5].

2. Under the provisions of SC 20.4 [Obtain the Dispute Adjudication Board’s Decision], a dispute may be submitted to the DAB for a provisionally binding determination. Sub-Clause 20.4 reads, in the relevant parts:

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. (Paragraph 1) (emphasis added)

[…]

Within 84 days after receiving such reference, or within such other period as may be proposed by the DAB and approved by both Parties, the DAB shall give its decision…. 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. (paragraph 4)

[…]

If either Party is dissatisfied with the DAB’s decision, then either Party may, within 28 days after receiving the decision, give notice to the other Party of its dissatisfaction. If the DAB fails to give its decision within the period of 84 days (or as otherwise approved) after receiving such reference, then either Party may, within 28 days after this period has expired, give notice to the other Party of its dissatisfaction (paragraph 5)

[…]

If the DAB has given its decision as to a matter in dispute to both Parties, and no notice of dissatisfaction has been given by either Party within 28 days after it received the DAB’s decision, then the decision shall be come final and binding on both parties. (paragraph 7)

Except as stated in Sub-Clause 20.7 [Failure to Comply with Dispute Adjudication Board’s Decision] … 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." (paragraph 8)

3. Pursuant to Sub-Clause 20.4, above, a temporarily binding DAB decision must be issued within 84 days and is binding on the Parties when issued. The Parties are required to give it immediate effect, whether a party is dissatisfied or not. If either party is dissatisfied with a DAB decision, it may issue a notice of dissatisfaction within 28 days after receiving a DAB decision, but must give immediate effect to the DAB decision in any case.

4. In other words, pursuant to Sub-Clause 20.4, the Parties empower the DAB to make a decision with which they undertake to immediately comply, irrespective of dissatisfaction. And, in the case that a party decides to oppose the DAB decision, it may give a notice of dissatisfaction within the 28-day period, which establishes the notifying party’s right of recourse to amicable settlement under Sub-Clause 20.5 and, subsequently, to arbitration pursuant to Sub-Clause 20.6. In the interim, both parties must continue with contract performance.

5. The pre-arbitration phase, set forth in Sub-Clauses 20.4 and 20.5, is mandatory. This means that recourse to arbitration, pursuant to Sub-Clause 20.6, may only take place when a party has issued a notice of dissatisfaction in time (i.e., within 28 days from receipt of a DAB decision, or at the end of the 84-day period during which the DAB should have issued its decision) and, in accordance with Sub-Clause 20.5, the 56-day period from the date of issue of the notice of dissatisfaction has elapsed, whether amicable settlement was attempted or not.

6. The agreement to arbitrate, set out in Clause 20.6, provides that any DAB decision that has not become final and binding (i.e., is the subject of an in-time notice of dissatisfaction) is subject to final settlement by international arbitration under the Rules of Arbitration of the International Chamber of Commerce. Sub-Clause 20.6 [Arbitration] reads, in part:

Unless settled amicably, any dispute in respect of which the DAB’s decision (if any) has not become binding shall be finally settled by international arbitration. Unless otherwise agreed by both Parties:

a) the dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce,

b) the dispute shall be settled by three arbitrators appointed in accordance with these Rules, and

c) the arbitration shall be conducted in the language for communications defined in Sub-Clause 1.4 [Law and Language]

7. As set out below, the second paragraph of Sub-Clause 20.6 makes clear that the arbitration shall include a full hearing on the merits of the dispute, with prior DAB decisions or Engineer’s determinations posing no binding constraints.

The arbitrator(s) shall have full power to open up, review and revise any certificate, determination, instruction, opinion or valuation of the Engineer, and any decision of the DAB, relevant to the dispute. Nothing shall disqualify the Engineer from being called as a witness and giving evidence before the arbitrator(s) on any matter whatsoever relevant to the dispute.

Neither Party shall be limited in the proceeding before the arbitrator(s) to the evidence or arguments previously put before the DAB to obtain its decision, or to the reasons for dissatisfaction given in its notice of dissatisfaction. Any decision of the DAB shall be admissible in evidence in the arbitration.

8. The Contract provisions relating to the enforcement of DAB decisions that have become final and binding (are not the subject of an in-time notice of dissatisfaction) are contained in Sub-Clause 20.7 [Failure to Comply with Dispute Adjudication Board’s Decision], which states:

In the event that:

a) neither Party has given notice of dissatisfaction within the period stated in Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision],

b) the DAB’s related decision (if any) has become final and binding, and

c) a Party fails to comply with this decision,

then the other Party may, without prejudice to any other rights it may have, refer the failure itself to arbitration under Sub-Clause 20.6 [Arbitration]. Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply to this reference.

9. As set out above, an arbitral tribunal may enforce, but cannot revise, any DAB decision that has become final and binding.

VII CONCLUSION

10. The DAB procedure was introduced as a primary feature of the FIDIC dispute resolution machinery in 1999 and the DAB is entrusted with both dispute avoidance and dispute adjudication.

11. The dispute settlement procedure set out in the FIDIC Red Book is multi-tier and mandatory. For a dispute to be heard in arbitration, it must first have been referred to the Engineer for a determination, have been referred to the DAB for a decision and the resultant DAB decision must have been the subject of an in-time notice of dissatisfaction, and the period set aside for amicable settlement under Sub-Clause 20.5 must have elapsed. Alternatively, the dispute must relate to the enforcement of DAB decision under Sub- Clause 20.7.

12. Although certain commentators point to the possibility that the FIDIC multi-tier clause may give rise to procedural problems as the parties operate the dispute resolution machinery, the benefits gained in terms of early identification of issues, the avoidance of disputes and cost effective real-time, job-site resolution of unavoidable disputes, are seen to outweigh these possible problems.

13. Cost and risk for each party can increase exponentially when dispute resolution crosses the line from a situation where the parties’ disputes are resolved on-site and in real-time, to being addressed many years later in by arbitrators that do not have the benefit of first-hand knowledge of the project.

NOTES

1
36th Annual Meeting of The ICC Institute Of World Business Law, Paris, France. 1 December 2016.

2
Further information pertaining to FIDIC may be found on the FIDIC website, www.fidic.org.

3
Although the FIDIC family of standard forms of contract includes standard forms for client consultant agreements, sub-consultant agreements, joint venture agreements, amongst others, this paper will only focus on FIDIC standard forms of contract for use between employers and contractors on international construction projects.

4
The reason is that standing DAB has the ability to participate in the dispute avoidance function and the members of the standing DAB are able to maintain a fluency of the technical contours of the project and to be immediately available to deal with formal referrals. The author has been involved in the FIDIC updates task group responsible for updating the FIDIC 1999 Suite.

5
Conditions of Contract for Design-Build and Turnkey, 1st Edition, 1995, (the "Orange Book")

6
FIDIC Contracts Guide to the Construction, Plant and Design-Build and EPC/Turnkey Contracts, 1st Edition, 2000, p. 88-89.

7
Cyril Chern, Chern on Dispute Boards: Practice and Procedure, Blackwell Publishing, 2008, p. 2.