The 1999 FIDIC forms of contract contain a number of obligations and/or conditions precedent that require: a party to give notice of a claim (Sub-Clauses 20.1 and 2.5); refer the claim to the Engineer (Sub-Clauses 20.1 and 3.5); and submit

The 1999 FIDIC forms of contract contain a number of obligations and/or conditions precedent that require:

• a party to give notice of a claim (Sub-Clauses 20.1 and 2.5);
• refer the claim to the Engineer (Sub-Clauses 20.1 and 3.5); and
• submit the dispute to a Dispute Adjudication Board (“DAB”) (Sub-Clause 20.4).

If either party gives a notice of dissatisfaction relating to the DAB’s Decision, Sub-Clause 20.5 provides that:[1]

“Where a notice of dissatisfaction has been given under Sub-Clause 20.4 above, both Parties shall attempt to settle the dispute amicably before the commencement of arbitration. However, unless both Parties agree otherwise, arbitration may be commenced on or after the fifty-sixth day after the day on which notice of dissatisfaction was given, even if no attempt at amicable settlement has been made.”

There has been some question whether the above clause creates two distinct obligations or whether it creates a single obligation. The two distinct obligations may be stated as:

1. an obligation to attempt to settle the dispute amicably; and
2. an obligation to wait 56 days before commencing arbitration.

Those who consider Sub-Clause 20.5 as creating two obligations acknowledge that the obligation to negotiate is not a condition precedent to arbitration, but assert that the obligation to wait 56 days is. Those who take the view that there is a single obligation consider that the 56-day period is simply part of the obligation to negotiate amicably and that, as negotiation clauses are generally unenforceable, so is the obligation to wait 56 days before commencing arbitration. This was shown in the recent case of Emirates Trading Agency Llc v Sociedade de Fomento Industrial Private Ltd,[2] where the arbitral tribunal held that a time-related amicable settlement clause did not create a condition precedent to arbitration and that the arbitral tribunal had jurisdiction, even though one of the parties had commenced the arbitration prematurely.

A Condition Precedent

Sub-Clause 20.5 of the FIDIC forms is not drafted as a condition precedent:

“It is not essential that the very words ‘condition precedent’ be used … Other words can be used, if they are clear”.[3]

In Bremer Handelsgesellschaft MBH v Vanden Avenne Izegem PVBA,[4] the House of Lords held that a notice provision was unlikely to be a condition precedent, unless it prescribed a specific time for delivery of the notice and made plain the consequences of the failure to serve the notice. The principles set out in Bremer v Vanden should equally apply to amicable settlement clauses; however, there is little case law on this issue.

Sub-Clause 20.5 of the FIDIC 1999 contracts does not state the consequences of a failure to negotiate for a period of 56 days; i.e. it does not state that any arbitration commenced before the 56-day period shall be void or invalid. It may therefore be argued that the presumption should be that Sub-Clause 20.5 does not create a condition precedent. The obligation to negotiate for a limited period of time is better described as a procedural obligation, the breach of which sounds in damages (if appropriate) or can be sanctioned by an adverse costs order – see Hillas v Arcos.[5] If the FIDIC drafters had intended that Sub-Clause 20.5 should have the consequences of preventing a party from commencing arbitration, then this could have easily been spelt out by them in the same way as they spelt out the consequences of not issuing a Sub- Clause 20.1 notice.

The alternative view, however, is that the intention is clear enough. As Edward Corbett explains[6], a failure by a party to attempt to settle the dispute amicably would appear not to be a breach of contract. However, the right to commence arbitration “…must be subject to clause 67.2 and the 56-day amicable settlement period provided for there.” Like many other commentators, Edward Corbett considers the 56-day time period a distinct obligation and one which is intended to be binding on the parties. These commentators consider this type of clause to be no different from a clause which prevents arbitration from being commenced until after practical completion of the works or delivery of goods.

Good Faith Negotiation Clauses – the Historical Position

In the 1970s the position under English law was well established and amicable settlement or good faith negotiation clauses were considered to be non-binding on the parties. This was still the position in the early 1990s when in Walford v Miles,[7] Lord Ackner concluded that good faith negotiation clauses were not binding under English law and held:[8]

“The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty…A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a ‘proper reason’ to withdraw. Accordingly, a bare agreement to negotiate has no legal content.”

The position was no different in arbitration proceedings. Contractual clauses which sought to impose on parties an obligation to negotiate prior to arbitration were regularly disregarded.

Historically, amicable settlement clauses and mediation clauses have been held to be different from clauses which require a party to take certain specified steps as a condition precedent to commencing arbitration. While the courts upheld clauses that required a formal procedure as a condition precedent to arbitration, they did not uphold clauses which merely required the parties to attempt to settle their disputes. Therefore, contracts which required a dispute to be first submitted to an Engineer for an assessment,[9] or to an adjudicator[10] or an expert[11] have been upheld as conditions precedent to the commencement of the arbitration.

A Change in Attitude

The English courts in the late 1990s began to question the orthodoxy that mediations clause had “no legal content”. In 1997, in Bernhard’s Rugby Landscapes v Stockley Park[12], HHJ Lloyd QC recognised a change in attitude to ADR and stated that: “There is now a tide running in favour of alternative forms of dispute resolution prior to recourse to litigation.” In 2002, Colman J (as he then was) approached the question of whether a mediation clause was enforceable by reference to three criteria. His lordship found that:

• there must be an intention to be bound by the clause;
• that there was sufficient certainty in the procedure that the parties had agreed upon; and
• that there were public policy considerations.[13]

Similarly, in Holloway & Anor v Chancery Mead Ltd,[14] Ramsey J re-affirmed that a mediation clause would be enforceable if certain criteria were met. This reasoning of Ramsey J has subsequently been approved by the Court of Appeal and is now considered the orthodox view.

In the recent case of Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd,[15] the English High Court re-considered the question of whether an amicable settlement clause was a condition precedent. Clause 11.1 of the contract stated:

“11.1 In case of any dispute or claim arising out of or in connection with or under this LTC including on account of a breaches/defaults mentioned in 9.2, 9.3, Clauses 10.1(d) and/or 10.1(e) above, the Parties shall first seek to resolve the dispute or claim by friendly discussion. Any party may notify the other Party of its desire to enter into consultation to resolve a dispute or claim. If no solution can be arrived at between the Parties for a continuous period of 4 (four) weeks, then the non- defaulting party can invoke the arbitration clause and refer the disputes to arbitration.” [emphasis added]

Teare J examined in depth the decision of Alsopp P in United Group Rail Services v Rail Corporation New South Wales.[16] This Australian case considered a contract for the design and build of rolling stock which contained a dispute resolution clause that provided that the parties should “meet and undertake genuine and good faith negotiation with a view to resolving the dispute“. Alsopp P. stated:[17]

“a promise to negotiate (that is to treat and discuss) genuinely and in good faith with a view to resolving claims to entitlement by reference to a known body of rights and obligations, in a manner that respects the respective contractual rights of the parties, giving due allowance for honest and genuinely held views about those pre-existing rights is not vague, illusory or uncertain.”

Alsopp P further held that such an approach met with public policy requirements, which promoted efficient dispute resolution and encouraged approaches by, and attitudes of, parties conducive to the resolution of disputes without expensive litigation or arbitration.[18] Teare J, in Emirates Trading, applied the reasoning of Alsopp P. His lordship proceeded to state that in conducting negotiations there must be imported an obligation to seek to do so in good faith.[19]

One of the main issues addressed in Emirates Trading[20] related to the 4-week period in which the negotiations were to take place. The claimant’s counsel argued that the 4-week period created a condition precedent to be satisfied before the arbitrators would have jurisdiction to hear and determine the claim. The condition precedent was “a requirement to engage in time limited negotiations“. That requirement was not fulfilled, because there had not been “a continuous period of 4 weeks of consultations to resolve the claims” which were the subject of the notice of termination.[21] Teare J considered this provision important because the reference to a period of 4 continuous weeks ensures that a defaulting party cannot postpone the commencement of arbitration indefinitely. In conclusion, Teare J. held:[22]

“There is, it seems to me, much to be said for the view that a time limited obligation to seek to resolve a dispute in good faith should be enforceable. Such an agreement is not incomplete.”

Having reviewed the good faith negotiation clause in detail, and in particular the use of the word “shall”, Teare J held:[23]

“I accept that the first part of clause 11.1 provides that before a party can refer a claim to arbitration there must be friendly discussions to resolve the claim. Such friendly discussions are a condition precedent to the right to refer a claim to arbitration.”

Conclusion

It now seems to be settled that an English court would find an amicable settlement clause, such as Sub-Clause 20.5 of the FIDIC forms, to be a condition precedent to the commencement of arbitration. The High Court in Emirates Trading was clear that a good faith negotiation clause, coupled with a time limited obligation, was a condition precedent which needed to be complied with prior to the commencement of arbitration. The English courts are now in line with the courts in Australia, Singapore, the United States, and many civil law countries. Similarly, there appear to be more arbitrations where arbitral tribunals are finding that they lack jurisdiction where the parties have not gone through an amicable settlement process, such as Sub-Clause 20.5 of FIDIC.

Please get in touch at victoria.tyson@howardkennedy.com with your thoughts or to discuss any concerns.

[1] This provision is found in the Red, Yellow and Silver Books.

[2] [2015] EWHC 1452.

[3] Eagle Star Insurance Company Ltd. v Cresswell & Ors [2004] EWCA Civ 602.

[4] [1978] 2 Lloyd’s Rep 109.

[5] [1932] Lloyd’s List LR 359, 369.

[6] Corbett E., FIDIC 4th A Practical Legal Guide, Sweet and Maxwell (1991) at page 449.

[7] [1992] 1 All ER 453.

[8] Ibid at 460.

[9] J T Mackley & Company Ltd v Gosport Marina Ltd [2002] EWHC 1315 (TCC) (03 July 2002). In Al-Waddan Hotel Ltd v Man Enterprise SAL (Offshore) [2015] EWHC 4796 at [29-30] HHJ Raeside QC referred to it being trite law that the referral to an Engineer under clause 67.1 of FIDIC 4th contract was a condition precedent to arbitration.

[10] Cape Durasteel Ltd v. Rosser and Russell Building Services Ltd [1995] 46 Con LR 75, and [2007] EWHC 1584 (TCC).

[11] Cott UK DGT Steel and Cladding Ltd v Cubitt Building and Interiors Ltd. v. FE Barber Ltd. [1997] 3 All ER 540.

[12] 82 BLR 39 at 57.

[13] Colman J stated, “For the courts now to decline to enforce contractual references to ADR on the grounds of intrinsic uncertainty would be to fly in the face of public policy as expressed in the CPR and as reflected in the judgment of the Court of Appeal in Dunnett v. Railtrack.”

[14] [2007] EWHC 2495 (TCC) at para 84.

[15] [2014] EWHC 2104.

[16] [2009] 127 Con LR 202.

[17] [2009] 127 Con LR 202 at [74].

[18] Ibid at [80].

[19] Ibid at [51].

[20] [2014] EWHC 2104.

[21] Ibid at [4].

[22] Ibid at [52].

[23] Ibid at [26].

If the parties to a FIDIC contract cannot agree on a suitable DAB member and they have selected FIDIC as their appointing entity, they may request FIDIC to appoint that DAB member. However, FIDIC’s present procedures seem less than ideal.

If the parties to a FIDIC contract cannot agree on a suitable DAB member and they have selected FIDIC as their appointing entity, they may request FIDIC to appoint that DAB member. However, FIDIC’s present procedures seem less than ideal. They increase the prospect of rejection of the candidate nominated by FIDIC in the first instance and correspondingly the need to repeat the exercise. They could also result in an appointment unacceptable to one or both parties. This article posits that they should be revised.

Obligation Under the Contract to Consult

Recent court decisions from England and Switzerland have highlighted the difficulties caused when the parties to a FIDIC contract are unable to agree on the appointment of a DAB.[1] Lack of agreement may be genuine. However, we have seen cases where it is part of one party’s attempt to stymie the DAB, or even the entire dispute resolution process. Whatever the cause, when the parties do need to turn to the appointing entity under the Contract for assistance, it is vital that the appointment procedures are reasonable and fit for purpose.

FIDIC’s 1999 edition of the Red, Yellow and Silver Book contracts provides at Sub-Clause 20.3 for the appointment of a DAB member, namely if any of the following conditions apply:

• the Parties fail to agree the appointment of the sole member of the DAB by the date stated in the first paragraph of Sub-Clause 20.2;
• either Party fails to nominate a member (for approval by the other Party) of a DAB of three persons by such date;
• the Parties fail to agree upon the appointment of the third member (to act as chairman) of the DAB by such date; or
• the Parties fail to agree upon the appointment of a replacement person within 42 days after the date on which the sole member or one of the three members declines to act or is unable to act as a result of death, disability, resignation or termination of appointment,

then,

“the appointing entity or official named … shall, upon the request of either or both of the Parties and after due consultation with both Parties, appoint this member of the DAB. This appointment shall be final and conclusive”

Note that the appointing entity’s prior “due consultation” with both parties is obligatory under the FIDIC contract. Anything less could rightly be regarded as contravening the principles of natural justice which include the duty to act with procedural fairness. But as to the form that this “due consultation” should take, the contract is silent.

The meaning of “due consultation”

The Oxford Dictionary of English defines the word “consult” as to “seek information or advice from (someone) …” and to “have discussions with (someone), typically before undertaking a course of action.”

The phrase “due consultation” (without definition) is found in many clauses in the earlier FIDIC 4th edition of the Red Book, obliging the Engineer to consult with both Contractor and Employer prior to making an assessment or determination. In his work The FIDIC Forms of Contract, Dr. Nael Bunni refers to commentators having expressed the view that those words should be interpreted there as a consultation appropriate to the circumstances. Similarly, in relation to the appointment of a DAB member by an appointing entity or official under the 1999 editions of the Red, Yellow and Silver Books, Dr. Bunni opines that it means “consultation with both parties to the extent required by the nature of the difficulty encountered.”[2]

So, as one might expect, the detail of the procedures for due consultation with both parties is a matter for the appointing entity or official to determine in accordance with the complexity or difficulty of the particular circumstances. As long as its procedures are fair and balanced and sensitive to circumstance, they should withstand objection.

FIDIC’s Procedures for Consultation, Nomination and Appointment

Turning to the procedures currently in use by FIDIC, its website[3] provides an information checklist for those submitting a request for appointment of a DAB member. Surprisingly, a request for information or the applicant’s views (or even joint applicants’ views) regarding the preferred attributes of the candidate member does not feature.

FIDIC’s website[4] sets out the procedure it will then follow, once it has received a request, as follows:

“FIDIC shall discharge this obligation by notifying both parties to the contract that “the President/official named is considering appointing Mr/Ms A.N. Other to the DAB…” and that Mr/Ms Other’s CV is attached.

Should either party have reasons why Mr/Ms Other is unsuitable for appointment to the DAB such reasons should be communicated to the FIDIC secretariat within 48 hours of the receipt of this notification and, in the event that FIDIC, in its sole discretion, considers that such reasons justify a reselection, this will be undertaken, and the parties notified accordingly.

Objections to Mr/Ms Other that are of a general nature rather than specifically related to his or her suitability for this particular appointment are unlikely to result in reselection.

If no objections are received or if those that are received are not considered to disqualify Mr/Ms Other from undertaking the appointment …, FIDIC formally notifies the parties and Mr/Ms Other of the appointment.

In the event that objections are considered to warrant reselection, FIDIC notifies Mr/Ms Other that he will not be nominated (without giving reasons) and proceed to progress the next highest Candidate on the shortlist.

This procedure is repeated until an appointment is made.

Potential Problems with FIDIC’s Procedures

Several points emerge from a review of FIDIC’s procedures above:

• By its initial submission checklist, FIDIC misses an early opportunity to obtain information on the preferred attributes of the appointee as regards basic matters, such as nationality, language, capability, profession, qualifications, experience, and the like.
• Following receipt of the request, FIDIC will then proceed to identify and notify the parties of a candidate DAB member that FIDIC thinks might be suitable – without first having canvassed the views of the parties. It is of course the parties’ own dispute. They are closest to it and are likely already to have formed their own views on the future appointee’s preferred attributes such as those referred to above. A perception that the parties’ views have little importance to FIDIC could easily arise.
• The suggested meaning of “due consultation” referred to above, whereby the extent of the consultation is sensitive to the difficulties involved, does not sit easily alongside a provisional decision on a disputed matter which is made without having first heard from the parties and subject only to limited right of objection later.
• FIDIC leaves the parties just 48 hours in which to make their first submission on the desirable characteristics of the DAB member – by way of objection. It is conceivable that a party will feel that there is no realistic prospect of overturning FIDIC’s provisional decision within such a short timescale and before it becomes “final” under Sub-Clause 20.3. This could arise simply because the circumstances in which a party finds itself at that time do not permit a rapid response in the timescale demanded by FIDIC.
• So here also there is scope for the parties to feel that there has been procedural unfairness in the appointment. If there were already a perception that the parties’ views were of little importance, it could easily be compounded by the sense of having been afforded no reasonable opportunity to research FIDIC’s proposed appointee and then make a considered response to FIDIC on the question of suitability. All of this does nothing to engender confidence in the DAB whose appointment may then follow. Furthermore, it could generate a challenge to the validity of that appointment, and potentially to the validity of a DAB decision that results.
• If a reasonable objection to the suitability of FIDIC’s candidate follows from one or both of the parties, for example one relating to the profession or experience of FIDIC’s proposed appointee, and this results in FIDIC’s withdrawal and reselection of the candidate, then FIDIC’s original research and administrative effort will all have been wasted for want of prior consultation; so also will the time and costs of the parties have been wasted.

Suggested Solution

In any review of its DAB appointment procedures, FIDIC might consider the following scheme:

• After receipt of an application to appoint, which should set out the applicant’s views on the desirable attributes of the DAB member, FIDIC should first copy the application to the other party and invite further submissions on the desirable attributes of the DAB member from each party within a suitable period of, for example, seven days.
• FIDIC might take the opportunity here to remind the parties that it proposes DAB members only from its own finite President’s List of well-qualified and approved persons. There will inevitably be restrictions on the availability of some of those persons and their particular skill sets at any one time. Thus, it may not be possible for FIDIC to comply in every respect with the wishes of the parties.
• After having considered any such submissions, FIDIC should inform both parties of its proposed appointee, whose appointment will automatically come into effect after a short further period of, for example, five days, unless FIDIC has received from either or both parties’ objections with reasons on why the proposed member is unsuitable.
• FIDIC informs the parties that objections to a proposed DAB member, which are of a general nature, rather than specifically related to his or her suitability for this particular appointment, are unlikely to result in reselection.
• In the event that FIDIC, at its sole discretion, considers that such reasons do justify a reselection, that reselection will be undertaken and the parties notified of the new proposed member. The reselected proposed member’s appointment will be subject to the same right of objection with reasons.
• However, if FIDIC considers that the reasons given for a proposed member’s unsuitability do not justify a reselection, the appointment will be expressly confirmed by FIDIC.

Conclusion

Even minor changes to the content and timing of FIDIC’s published procedures would be sufficient to ensure that they do not offend the principles of natural justice. A DAB appointment under such improved procedures would serve to increase the level of confidence that the parties to a dispute have in their DAB and in its eventual decision. Those improved procedures should also avoid the prospect of wasted costs.

Please get in touch at victoria.tyson@howardkennedy.com with your thoughts or to discuss any concerns.

[1] Peterborough City Council v Enterprise Managed Services Ltd [2014] EWHC 3193 (TCC) (10 October 2014) (bailii.org)

[2] Third edition, 2005, Blackwell Publishing, pp 616-7.

[3] http://fidic.org/node/2552.

[4] http://fidic.org/node/816.