This article was featured in our 2023 Construction Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Connect and Jus Mundi.
This issue explores the construction industry and presents a goldmine of information based on data available on Jus Mundi and Jus Connect as of May 2023. Discover updated insights into construction arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on construction projects, disputes, & arbitration from leading lawyers, arbitrators, experts, arbitral institutions, and in-house counsel.
THE AUTHORS:
Şule Uluç, Partner at Herguner
Fahreddin Eren, Associate at Herguner
Zülal San, Trainee Associate at Herguner
In the realm of construction contracts, FIDIC (Fédération Internationale des Ingénieurs-Conseils) models are often hailed as the gold standard and attract an ever-growing interest. Turkey, where one of the most important business sectors is construction, also has its share of this gold standard. Today, FIDIC is the most preferred option, particularly in high volume construction and infrastructure projects in Turkey, as this standard model secures efficient and effective delivery of projects and is very credible around the world. While such contracts typically require the parties to undergo extensive pre-arbitral procedures before commencing arbitration, and the evidence from statistical data indicates that dispute boards function with a remarkable success rate, there may be circumstances where the parties seek to bypass such procedures. In this piece, we will briefly explain the dispute resolution mechanism under FIDIC Model Contracts and we will also address why the parties would want to directly proceed with arbitration and whether they are able to do so.
Dispute Resolution Mechanism under FIDIC Model Contracts
The most prominent of FIDIC Model Contracts, The Red Book and The Yellow Book, set forth a four-stage process for resolving disputes.
The first stage involves the parties applying to the Engineer that oversees the construction process and supervises the Contractor on behalf of the Employer. Initially, either party must refer the matter or dispute it may have with the other party to the Engineer. At this stage, the Engineer will try to facilitate a consensus between the parties, and if the process proves to be fruitless, the Engineer issues its determinations on the matter or claim. If neither party expresses dissatisfaction with these determinations within a specified timeframe, the Engineer’s determination will become binding on both parties. If either party is dissatisfied with the Engineer’s determinations, a “dispute” is deemed to have arisen under the contract.
The second stage involves the Dispute Adjudication/Avoidance Board (“DAAB”). It is worth noting that in the 1999 Yellow Book, the Dispute Adjudication Board (“DAB”) was an ad hoc body that would be appointed only in case of a dispute. However, in the latest 2017 FIDIC Model Contracts, both the Red Book and the Yellow Book require the appointment of the DAAB at the start of the construction and must remain throughout its duration. After the parties submit their dispute to the DAAB, it is the board’s responsibility to make a decision on the matter. If no dissatisfaction with the decision is expressed within a certain timeframe, it becomes binding on both parties.
When a party expresses their discontent with a DAAB decision, they enter the third stage where they try to settle their dispute amicably. This phase is commonly referred to as the “cooling-off” period as it allows the parties to directly negotiate with each other instead of trying to convince a third party to rule in their favor based on legal arguments.
In the event that the parties are unable to reach an amicable resolution or initiate negotiations within the designated timeframe, arbitration shall be the final recourse for settling the dispute.
Why Would the Parties Want to By-Pass the Pre-Arbitral Dispute Resolution Mechanisms?
The parties may be inclined to bypass pre-arbitral procedures for various reasons. Firstly, in cases where the dispute has already reached a point where it cannot be resolved amicably, it may be evident that there is no chance for the parties to settle. This is particularly true in cases where construction has already been completed and the parties are in no rush to complete the project. Completion of the construction also means that the DAAB has dissolved and may lead to hesitation regarding the reappointment thereof. Moreover, parties may also be reluctant to apply the dispute board procedures because they are not well versed with the system and thus would prefer to directly resort to arbitration.
It is also imperative to underscore that the binding nature of the DAAB’s decision or the Engineer’s determinations pertains solely to their contractual effect. Therefore, infringement of a DAAB decision or an Engineer’s determination would only mean an infringement of the contract and enforcement cannot be pursued through State authorities. The parties would have to obtain an arbitral award to determine the breach thereof and order the necessary remedy. Therefore, a proper and formal arbitration award is the sine qua non for initiating the process of State entities to execute a decision resolving the dispute.
Another reason may be that the dispute board process typically takes approximately six months to conclude. This duration implies that the DAAB process may cause significant delays and costs and might be ultimately detrimental to the interests of the parties involved, especially if the dispute board process fails to produce a satisfactory outcome or if it is obvious that the dispute may not be resolved through the DAAB process.
The urge to bypass pre-arbitral procedures may also stem from necessity. One such example is the risk of the statute of limitations elapsing. While Article 21.4.1 of the recent FIDIC Model Contracts explicitly allows an application to the DAAB to interrupt the statute of limitations, this may not be the case for disputes arising under 1999 contracts that lack such a clause. Therefore, the parties may find themselves in a situation where seeking relief from the dispute board is not a viable option and may opt to proceed directly to arbitration instead. An instance of this is how Turkish law treats an appeal to the dispute board, which does not serve as an interruption to the statute of limitations.
Can and under Which Criteria May the Parties By-Pass the Pre-Arbitral Dispute Resolution Mechanisms?
The nature of recourse to dispute boards as a mandatory or voluntary dispute resolution procedure has been a matter of considerable debate. This controversy arises from the fact that the 1999 Yellow Book regulates the DAB as ad hoc, as indicated earlier, along with the provisions of Article 20.8 of the Yellow Book of 1999 and Article 21.8 of the Red and Yellow Books of 2017. In brief, as per the mentioned articles, if a DAB’s term expires or if the DAB is absent for any reason, disputes can be directly submitted to arbitration. However, an ad hoc DAB is naturally absent at the beginning of the dispute, which leads to arguments that an ad hoc DAB is not mandatory. However, the English [See, Peterborough City Council v. Enterprise Managed Services Ltd, 3193, 01.01.2014, High Court Of Justice Queen’s Bench Division Technology And Construction Court, EWHC 3193 (TCC)] and Swiss courts [See, First Civil Law Court of the Swiss Federal Tribunal, 16.03.2016, 4A_628/2015] have held that an ad hoc DAB is also mandatory.
Nevertheless, in 2014, the Swiss Federal Court [See, First Civil Law Court of the Swiss Federal Tribunal, 07.07.2014, 4A_124/2014] ruled that arbitration may be resorted to without recourse to the DAB in certain circumstances and that such instances can arise when it is apparent from the circumstances that the parties intend to refer the dispute board decision to arbitration or when the dispute board cannot be established or operated for an extended duration. The court upheld that the creators of FIDIC Model Contracts intended to establish a permanent conciliation authority for prompt solutions and that the parties entering into ad hoc DAB contracts detracted from this aim as the DAB process, serving as a primary resort before the arbitration procedure, consumes time and generates decisions that are often challenged by parties. The court emphasized that pursuing claims before an arbitral tribunal without DAB proceedings may be more feasible under certain circumstances and should be examined on a case-by-case basis.
With reference to the above-mentioned ruling of the Swiss Federal Court, it can be argued that a court may accept the possibility of resorting directly to arbitration before applying to dispute boards based on a range of factors, such as the construction being completed a long time ago, an inability to appoint the board, the statute of limitations being about to elapse, and good faith.
First, the completion of construction may render the application of the dispute board redundant as the role of the board is to oversee the progress of work and assist in the swift resolution of disputes that arise during construction in order to ensure a smooth construction process.
Second, the parties may fail to appoint a dispute board, leading the parties directly to arbitration. This failure may occur for various reasons, such as lack of suitable candidates, disagreement over the appointment, etc. In such cases, bypassing the DAAB process may be a more efficient and effective means of resolving disputes.
Finally, good faith may be considered when bypassing the pre-arbitral procedures. If the party wishing to by-pass the pre-arbitral procedures acts in good faith while doing so (that is, if it is clear that this request was not made for arbitrary reasons or in bad faith but rather made due to certain legal or factual necessities), then the arbitral tribunal may consider allowing the direct application to arbitration to achieve a fair and timely resolution to the dispute.
As a potential and significant risk of bypassing pre-arbitral mechanisms, the arbitral tribunal may find that it lacks jurisdiction to hear a premature arbitration. As a more feasible alternative solution, the tribunal may choose to suspend the arbitration proceedings until the parties exhaust the pre-arbitral mechanisms first.
In conclusion, although FIDIC model contracts typically require parties to adhere to pre-arbitral procedures, bypassing such procedures in certain circumstances may be a necessity. Nonetheless, it is paramount to meticulously examine the applicable law, contractual provisions, and the specific circumstances of the dispute before initiating arbitration. If it is foreseeable in advance that the dispute board would not be an ideal venue for resolution, it would be advisable to amend the dispute resolution article for special conditions to avoid superfluous delays and expenses during the dispute resolution process as well as to limit jurisdictional risk.
ABOUT THE AUTHORS:
Şule Uluç is a partner in the Dispute Resolution and Arbitration team of Herguner. Ms. Uluç has focused her practice in the areas of international and domestic arbitration and dispute resolution. She advises and represents her foreign and local clients in all areas of the dispute resolution processes including courts, domestic and international arbitration, amicable dispute resolution as well as mandatory mediation processes with unique experience in the areas of commercial, construction and employment disputes.
Fahreddin Eren is an associate of Dispute Resolution and Arbitration team of Herguner. Mr. Eren practices in all aspects of corporate law, advises and represents clients in international and domestic arbitration and litigation as well as concordat and execution proceedings. He also provides legal consultancy to companies on their day-to-day matters.
Zülal San is a Trainee Associate in Herguner’s Dispute Resolution and Corporate Support practices. Ms. San assists with matters concerning international and domestic traditional disputes as well as alternative dispute resolution mechanisms including arbitration. She also assists corporate clients with their day-to-day legal needs.
Find more data-backed insights in our 2023 Construction Arbitration Report
