Conditions FIDIC, 2e édition / Litige entre l'entrepreneur principal et le sous-traitant / clause d'arbitrage valablement incorporée au sous-contrat par référence au contrat principal / La demande d'arbitrage et la réponse à cette demande par le défendeur constituent, ensemble, une nouvelle convention d'arbitrage / Obligation de saisine de l'ingénieur préalablement à l'introduction de la procédure arbitrale non applicable.

'I. FACTS AND SUMMARY OF PARTIES RESPECTIVE CLAIMS

1. In April 1977, the Defendant (a European contractor) and the Employer (not a party to this arbitration) entered into an agreement (the "Main Contract") for the extension of a steam power plant in an Arab country.

The Defendant chose the Claimant (a contractor from another Arab country) as subcontractor and, on May 17, 1977, the Claimant and the Defendant entered into a contract under which the Claimant was to carry out the construction, completion and maintenance of a part of the civil works (the "Subcontract"). On the same date the Defendant also subcontracted with a European company (not a party to this arbitration), for undertaking other civil works.

The Employer appointed a European firm as consulting engineer.

2. The relevant provisions of the Subcontract are the following:

"Article 3

In consideration of the payments to be made by the Contractor to the Subcontractor as hereinafter mentioned the Subcontractor hereby covenants with the Contractor to construct complete and maintain the works in conformity in all respects with the provisions of the Subcontractor's construction programme.

The payments shall be made to the Subcontractor according to the following methods:

a) 15% of the civil works Contract value as down payment, i.e., 5 957 343,30. This payment has to be made within 40 days after signing of Contract with the Employer and presentation of Subcontractor's down payment guarantee in favour of the Contractor. This down payment guarantee will be valid for 19 months.

b) 75% of the civil works Contract value, i.e., 29 786 716,50, will be paid monthly against approved progress invoices submitted by the Contractor for the value of measured civil works including deliveries of material to site. A bill of quantity to assist with the preparation of monthly invoices will be prepared by the Subcontractor.

c) 5% of the civil works Contract value, i.e., 1 985 781,10, will be paid on substantial completion certificate issued by the Engineer for the civil works.

d) 5% of the civil works Contract value, i.e., 1 985 781,10, will be paid on completion of the twelve months maintenance period.

e) All payments due under clauses 3(b) to 3(d) inclusive shall be made by the Contractor to the Subcontractor not later than 7 days after the Contractor has received payment from the Employer.

In case of any delay in payment caused by the Employer beyond the Contractor's control, payments to the Subcontractor will be made upon receipt of delayed payments made by the Employer and the applicable interest received from the Employer will be paid to the Subcontractor.

Article 4

The Contractor hereby covenants to pay the Subcontractor in consideration of the construction, completion and maintenance of the works the Subcontract price at the times and in the manner prescribed in the Contract to be concluded between the Employer and the Defendant.

Article 9

In the internal relationship the Subcontractor will take upon himself and bear all obligations and risks arising from the Contract to be concluded between the Employer and the Defendant in such a way as if the Subcontractor has concluded a direct Contract with the Employer for his scope of supply and services.

Article 11: This Subcontract agreement will become effective only after the Contract between the Employer and the Defendant comes into force in clause 8 of the 'Conditions of Contract'."

3. Shortly after the conclusion of the Subcontract, the Defendant paid to the Claimant the 15% contractual down payment (in accordance with article 3(a) of the Subcontract), after having received from the Employer the initial 15% payment provided for in the Main Contract.

The Claimant started to work on the Site in the spring of 1978.

It is not disputed that the Claimant submitted monthly invoices ("Valuations") to the Defendant covering work and equipment provided. On the basis of these Valuations, the Defendant forwarded "Progress Invoices" to the Employer which were examined by the Engineer who issued a payment certificate to the Defendant. The Defendant thereafter issued a corresponding payment certificate to the Claimant stating the following:

"We hereby certify that the sum of ___ is in accordance with invoice No. ___ the Claimant to be paid 75% of the above mentioned work."

The Defendant issued 28 such payment certificates between May 3, 1978 and July 6, 1980 for a total certified amount of 26 416 539, for work carried out by the Claimant. The amounts correspond to the total amount invoiced by the Claimant. In addition, the Defendant approved payment of a variation order for extra work performed by the Claimant in the amount of 121 178.

However, the Employer was experiencing financial difficulties and various negotiations, with a view to revising the payment terms of the Main Contract, took place, without success. The Employer has never paid any money to the Defendant, except the down payment and, in early 1980, the project was eventually abandoned. In June, the Defendant ordered the Claimant to stop all work, before the completion of the Subcontract. (Meanwhile, the Engineer had ceased to operate.)

The Claimant never received payment of the amounts listed in the payment certificates and for the extra order. (The only payment made to the Claimant was the down payment as said before.)

4. The Claimant claims payment by the Defendant of the contractual value of unpaid works performed by the Claimant according to the Subcontract, plus interest and additional damages.

In support of its claims the Claimant argues that:

- The Defendant's failure to pay constitutes a breach of the Subcontract. The Defendant had indeed an unconditional obligation to pay the Claimant: the Claimant had to be paid even when the Defendant has not received full payment from the Employer.

- In any case, the Defendant received payment from the Employer for the civil work performed by the Claimant: the down payment that was paid to it by the Employer is indeed not only an advance paid prior to the beginning of the work but also a payment on account for work to be performed and the amount of this down payment exceeds the total value of all work actually performed under the Contract, including the civil work performed by the Claimant. Moreover, the Defendant received other payments on account of the work from sources other than the Employer.

- Independently of the arguments hereabove, the delays in the Employer's payments to the Defendant were not beyond the Defendant's control and, for this reason, the Defendant has to pay the Claimant immediately according to article 3 in fine of the Subcontract.

The Defendant contests the claims and argues that:

- Article 3 (e) of the Subcontract clearly provides that the Defendant must pay the Claimant only upon receipt by the Defendant from the Employer of the corresponding amounts provided for under the Main Contract. Except for the 15% down payment, the Defendant did never receive any monies from the Employer.

- The Defendant claimed compensation against the Employer for all losses incurred as a result of the Employer's default under the Main Contract (including compensation for work performed by the Claimant [and the other subcontractor (not a party to this arbitration)], but was not paid.

- The down payment that the Defendant received from the Employer was allocated among the Claimant and the other Subcontractors (and members of the consortium, that were, under the leading of the Defendant, joint ventures for the project). For this reason. it cannot be regarded as payment on account of the Claimant's work only.

- Additionally, article 9 of the Subcontract undoubtedly provides that payment risks are on the Claimant.

- Furthermore, the Claimant is not entitled to argue that the payment certificates issued by the Defendant were independent payment obligations. Their only purpose was to establish that both the Defendant and the Engineer had examined the Claimant's invoices and that these invoices were "to be paid" by the Employer.

- The Defendant did everything it could to obtain payment from the Employer and, therefore, did not breach any (implied) fiduciary duty it allegedly owed to the Claimant.

- Alternatively ("eventualities"), part of the amounts claimed by the Claimant are barred because the applicable statute of limitation has expired.

Consequently, the Defendant refuses to allocate any payment to the Claimant.

II. THE ARBITRATION CLAUSE AND APPLICABLE PROCEDURAL RULES

5. As explained above, article 2 of the Subcontract contains an arbitration clause, by reference. This provision mentions some specific listed documents that are deemed to be part of the Subcontract and, among these, are the Conditions of Contract, Parts I and II (the "Conditions of Contract…") of the Main Contract.

Article 39 of Part II of the Conditions of Contract provides for the settlement of disputes by arbitration according to article 67 of the FIDIC (Fédération Internationale des Ingénieurs conseils) "Conditions of Contract (International) for Works of Civil Engineering Construction," second edition, published 1969 and reprinted 1973 (the "FIDIC article 67") and states that the arbitration shall be held in Zurich.

6. FIDIC 2nd edition article 67 reads as follows: [...]

7. This article provides that any dispute between the "Employer" (i.e., the Employer and, by reference, the Defendant) and the "Contractor" (i.e., the Defendant and, by reference, the Claimant) should be firstly referred to the Engineer following which either party may start arbitration.

However, according to the Claimant, no Engineer was appointed under the Subcontract and, furthermore, the Engineer named under the Main Contract was discharged in November 1979, so that the Claimant could proceed directly to arbitration.

8. The Arbitral Tribunal has to apply the Rules of Conciliation and Arbitration of the International Chamber of Commerce in force as from January 1, 1988, as supplemented or amended by the mandatory provisions of the Swiss Law.

[…]

[Suite à des développements sur la question de la convention d'arbitrage par référence, le tribunal conclut :]

26. It is undeniable, in the present case, that the Defendant knew and accepted the arbitration provision. A survey of some relevant facts undoubtedly leads to such a conclusion.

a) It was the Defendant itself that drafted the Subcontract.

b) The conditions of Contract of the Main Contract (in which article 39 refers to FIDIC article 67) were attached to the Main Contract that the Defendant signed (and possibly drafted). These conditions of Contract were imported by the Defendant from the Main Contract for inclusion in the Subcontract.

c) The Defendant made some deletions in said Conditions of Contract before inserting them in the Subcontract (for example, on pages 2 to 7, some information was wiped out). But the Defendant did not delete the reference to FIDIC article 67.

d) Part II of the Conditions of Contract are not standardized but instead have been tailored to respond to the specific demands of the project. This is particularly sensible for article 39, which is contained in a separate item entitled "Settlement of Disputes - Arbitration. Article 39 is not merely a reference to FIDIC Article 67: the parties have individualised this clause by including some specific provisions as to the place of arbitration. The term "Arbitration" is repeated two more times in the text.

e) The reference to FIDIC conditions in the Conditions of Contract is also meaningful. An experienced international contractor as the Defendant should know that the standard FIDIC conditions (whether civil or electromechanical) contain an arbitration provision.

f) The Defendant concedes that it knew about the arbitration clause in the Main Contract. It explains that "there existed a real commercial need to have an arbitration clause with the Employer" (para. 30, p. 15 of the Defendant's submission of August 23, 1991). Thus the Defendant was perfectly aware of the existence of the arbitration provision in the Conditions of Contract, which it supplied as part of the Subcontract.

g) As said above, the Defendant entered into a virtually identical subcontract with an other subcontractor, KIER. This subcontract contains the same Conditions of contract with the same arbitration clause in article 39.

h) By answering "Agreement to arbitrate: un-disputed" in its reply to the Claimant's request for arbitration, the Defendant clearly acknowledged that it knew that it had consented to arbitration in the Subcontract. It was only one year after that the Defendant contested the arbitral tribunal's jurisdiction.

[…]

[Suite à des développements touchant la validité et la portée de la convention d'arbitrage, le tribunal poursuit :]

28. The incorporation by reference in the Subcontract of clause 39 of the Conditions of Contract of the Main Contract consequently constitutes a valid arbitration agreement under the Swiss Statute and the New York Convention. It was made in writing and was signed and unequivocably accepted by both parties.

Did the Defendant's reply of November 30, 1989 to the request for arbitration create a new agreement to arbitrate?

29. In its reply of November 30, 1989 to the request for arbitration, the Defendant not only failed to contest the jurisdiction of an Arbitral Tribunal constituted in accordance with the Rules of Arbitration of the International Court of Arbitration, but unequivocably accepted it. Thus, at that time the Defendant and the Claimant entered into another agreement to arbitrate an agreement which was completely distinct from the arbitration provision contained in the Subcontract. This separate agreement consists of the Claimant request for arbitration and the Defendant's reply. It fulfills, with respect of the written form and the signature of parties, the requirement of both the Swiss Statute on International Private Law and the New York Convention.

"In the event the defendant answers on the merits and does not object to the proceedings, the Court will allow the arbitration to proceed irrespective of a flawed or even nonexistent agreement to arbitrate. A new agreement to arbitrate is deemed to have arisen, the Request constituting the offer and the nonobjecting Answer, the acceptance." (W.L. CRAIG, W.W. Park and J. PAULSSON, International Chamber of Commerce Arbitration, 1990 (2nd ed.), p. 30.)

The Claimant's request for arbitration and the Defendant's reply clearly jointly constitute in themselves an arbitration agreement, which the Defendant cannot unilaterally alter or rescind at a later time. This agreement alone is therefore a sufficient basis of jurisdiction for the Arbitral Tribunal to settle this dispute.

30. The Defendant's then counsel who signed the submission of November 30, 1989 - and so expressly accepted the jurisdiction of the Arbitral Tribunal constituted under the Rules of Arbitration of the Court of Arbitration - clearly had the powers to bind the Defendant and to conclude in the Defendant's name an arbitration agreement. This undoubtedly Proceeds from the power of attorney of the Defendant's then counsel, dated August 17, 1989, which was transmitted to the Secretariat of the International Court of Arbitration with the Defendant's reply.

[…]

Furthermore, the Defendant cannot reasonably claim in good faith not to have known and approved what was submitted in its name in its counsel's reply to the request for arbitration.

Does the Claimant have the right to start arbitration proceedings, considering the provisions of FIDIC article 67 dealing with the prior reference of the dispute to the Engineer?

31. As explained before, the Defendant's reply to the request for arbitration of November 30, 1989, created a new arbitration agreement, submitted to the Rules of Arbitration of the International Court of Arbitration, that is entirely independent from the arbitration agreement contained in article 39 of the Subcontract referring to FIDIC article 67.

In this second arbitration agreement, the parties submitted to the jurisdiction of the Arbitral Tribunal without reservation. No engineer has whatsoever anything to do with this and the question whether the Claimant had the obligation to refer to an engineer is simply irrelevant.

32. However, even with respect to the arbitration agreement contained in the Subcontract and to FIDIC article 67, the Claimant had no obligation, under the circumstances, to refer to any engineer before initiating arbitral proceedings.

33. The first reason is that there was no engineer appointed by the Defendant under the Subcontract, in accordance with article 2 of the Conditions of Contract. The Engineer was named - and eventually dismissed - as Engineer by the Employer under the Main Contract but never acted as Engineer visàvis the Claimant. The Engineer functioned only for the Employer under the Main Contract and never performed the normal functions of the Engineer under the Subcontract. Substantive contacts during the project were only between the Claimant and the Defendant, not the Engineer.

It may not be acknowledged, despite the Defendant's contentions, that the Engineer tacitly fulfilled the functions of an Engineer between the Defendant and the Claimant. This fact is not proved by the Defendant. Furthermore it is inconceivable, for this would have created a conflict of interest for the Engineer in its relationship with the Employer that appointed it.

So it was impossible for the Claimant to refer the dispute to any engineer.

34. Moreover supposing that the Engineer named under the Main Contract was deemed to act also as Engineer under the Subcontract, and assuming that, under FIDIC article 67, the Engineer is empowered to decide on disputes not involving technical matters but legal rights of the parties, it is undisputed that the Engineer had ceased its office ten years before the present proceedings.

In a telex of November 1979, the Defendant informed the Claimant that, according to the Employer's decision, "the Engineer duties have been stopped for the present". The Defendant did not contest that the Engineer never resumed its charge on the project.

Subsequently it would not have been possible for the Claimant to refer the dispute prior to commencing the arbitration proceedings in 1989 to an Engineer which was no longer employed.

FOR THESE REASONS,

The Arbitral Tribunal decides that it has jurisdiction on the dispute.'