Construction as Investment

Dispute Avoidance and Resolution

under FIDIC Rules and Procedure:
Polish Experience
Kyiv, 20 February 2013

Copyright 2012 by K&L Gates LLP. All rights reserved.

ROADMAP OF OUR PRESENTATION

I.Introductory remarks
II. How to process a claim under the FIDIC Conditions?
1. FIDIC Rules and Procedure
2. Employers & Contractors claims
3. Time bars in theory and practice
III. Dispute Avoidance and Early Resolution - Dispute Adjudication Board (DAB)
1. DABs Concept and background
2. Models of DABs in FIDIC (standing and ad hoc DABs)
3. Legal effects and enforcement of DABs decisions
IV. Arbitration/Litigation
1. Construction arbitration - a growing industry
2. Arbitration under FIDIC Conditions
3. Polish experience - XXV Division in the Warsaw High Court
- a specialized construction court?
V. Final remarks

"Better to prevent than to cure"

old French proverb (Mieux vaut prvenir que gurir.)

Conflict is a fact of life and is inevitable

Introductory remarks
Dispute Avoidance preferred
The FIDIC Update Task Group recommends the use of

a standing DAB
The sooner, the better!

Multi-tier dispute resolution (escalation mechanism):

Engineer
DAB/Mediation
Arbitration/Litigation

Effective conflict management

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Dispute
communicated
to the other
party
Negotiation
Engineers
Decision

Consensusoriented DR
Method

Arbitration/
Litigation

Enhancednegotiation/
Mediation/
Conciliation
Dispute Board

Employers Claims
The claims available to the Employer will depend upon
the specific FIDIC form, since the risk allocation across
the FIDIC suite alters considerably; and
the precise contract terms used by the parties, i.a., in the
Particular Conditions
The Employer does not have a general right to set-off
Clause 2.5: Notice of Claims
The Employers right to make deductions is subject to the
giving of notice as soon as practicable after becoming
aware of an event or circumstances giving rise to a claim

Contractors claims (Sub-Clause 20.1)

The Contractor must:
notify a claim not later than 28 days after the Contractor
became aware or should have become aware of the
event or circumstance;
submit a fully detailed claim and full supporting
particulars within 42 days after it became aware (or
should have become aware); and
keep contemporary records to substantiate the claim
and allow the Engineer to inspect these records and
obtain copies.

Contractors claims (Sub-Clause 20.1)

The Engineer must:
respond within 42 days of receiving a claim or further
particulars either approving the claim or disapproving it
with detailed comments;
In any determination under Sub-Cl. 3.5,
consult with both parties in an endeavour to reach
agreement; and
if agreement cannot be achieved, make a fair
determination in accordance with the contract
taking due regard of all relevant circumstances

Contractors claims: Time-Bar Limitation

If the Contractor fails to give notice of a claim

within such period of 28 days, the Time for

Completion shall not be extended, the
Contractor shall not be entitled to additional
payment, and the Employer shall be discharged
from all liability in connection with the claim
(Sub-Cl. 20.1)

What types of claims are barred?

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 (Sub-Cl. 20.1)
The provision is broad enough to cover most types
of claims

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Are the FIDIC time bar provisions too onerous?

European International Contractors: unduly harsh
In theory:
Time bars facilitate good claims management,
allowing issues to be aired and settled at the
working level while they are fresh in peoples
minds
They also facilitate effective mitigation,
allowing the parties to take action to minimise
the costs and delay of a notified claim

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Are the FIDIC time bar provisions too onerous?

Multiplex Construction (UK) Ltd v Honeywell
Systems [2007] EWHC 447 (TCC):

Contractual terms requiring a contractor to give

prompt notice of delay serve a valuable purpose; such
notice enables matters to be investigated while they are
still current. Furthermore, such notice sometimes gives
the employer the opportunity to withdraw instructions
when the financial consequences become apparent

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Enforceability of time bars by DABs

DABs, where appropriate, enforce the time bars
FIDIC Gold Book 2008 DAB has discretion to override
the time bar:
Sub-Clause 20.1(a):

However, if the Contractor considers there are

circumstances which justify the late submission, he
may submit the details to the DAB for a ruling. If the
DAB considers that, in all the circumstances, it is fair
and reasonable that the late submission be accepted,
the DAB shall have the authority to overrule the
relevant 28 day limit
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Enforceability of time bars Arbitral Tribunals

Arbitration clause may be ineffective, if contractual prerequisites
to arbitration have not been fulfilled
Decision on Jurisdiction by an arbitral tribunal under the Rules

of the Court of Arbitration at the Polish Confederation of Private

Employers Lewiatan, publ. in Arbitration e-Review no. 1(2009)
Award in Hamburg Chamber of Commerce of 14 July 2006,
2007 SchiedsVZ 55

A referral to arbitration is not valid where the DAB procedure

has not been attempted first
Glover J., Understanding the New FIDIC Red Book A
clause-by-clause commentary, London Sweet&Maxwell
2006, p. 390

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Enforceability of time bars state courts

Common law jurisdictions
Enforceable on the basis of the parties agreement
Skub-clause 20.1 notice is a condition precedent to the right
to recover either time or money
Einstein J in Aiton Pty Ltd v Transfield Pty (1999) SC NSW
236; Mr Justice Ramsey in Holloway v Chancery Mead Ltd
[2007] EWHC 2495 (TCC)
The prevention principle?
A party should not benefit from its own breach of contract
Civil law jurisdictions
28-day time-limit leading to a loss of a claim may be
unenforceable due to mandatory statute of limitations rules in civil
laws of certain jurisdictions
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Enforceability of time bars Example: Germany

Germany - Section 307 of BGB (German Civil Code)

(1) Provisions in standard business terms are ineffective if,

contrary to the requirement of good faith, they unreasonably
disadvantage the other party to the contract with the user.
(2) An unreasonable disadvantage is, in case of doubt, to be
assumed to exist if a provision is not compatible with essential
principles of the statutory provision from which it deviates

The standard limitation period is three years (Section 195 BGB)

Is then the 28-day time bar compatible with essential

principles of the statutory provision?

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Enforceability of time bars Example: Poland

Poland - Article 119 of Polish Civil Code
Periods of limitation may not be shortened or
prolonged by a legal act.

Subclause 20.1 time bar (result: loss of the claim)

goes even further than the statute of limitation
(result: claim exists, but is not enforceable via court
order)
Since the statute of limitation cannot be contractually
modified, the same should apply to a time bar (a
minori ad maius)
Result: Subclause 20.1 time bar null and void?

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Enforceability of time bars: Poland Case Law

Appellate Court in Warsaw (30.05.2011, I ACz 700/11)
FIDIC notice requirement is a contractual time bar and not a
modification to a statute of limitations rules
FIDIC is commonly used in the industry, and constitutes an
integral part of the parties freedom of contract
Notice of claim requirement - as a precondition to arbitration is not contrary to the Polish public policy
Regional Court in Warsaw (7.03.2012, XXV C 249/11)
Subclause 20.1 given full effect
Claims notified after the agreement has been performed are
time barred
a fully detailed claim includes a specific calculation of
damage, not a mere assertion of extra costs incurred

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Enforceability of time bars: Poland Case Law

Regional Court in Warsaw (13.07.2011, XXV C 701/10)
28-day time bar contradicts the Civil Code provisions on the
statute of limitations and is null and void in this respect
A contractor, despite lack of notice, does not lose its claims. It is
however contractually liable for breach of contract (breach of a
Subclause 20.1 condition)
FIDIC Conditions are of a common law origin and must be
adjusted to mandatory laws of a given jurisdiction
Regional Court in Warsaw (11.06.2012, XXV C 567/11)
Similar arguments and conclusion as above
The law is not settled as the Supreme Court has not yet spoken on
this issue

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Engineers determination under scrutiny the Dispute Adjudication Board

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DAB Procedure
under the FIDIC Red Book (Clause 20)
Step 1: Referral of a dispute to a DAB
Step 2: DAB must decide within 84 days by a binding
decision
Step 3: Notice of dissatisfaction within 28 days or else
final and binding
Step 4: Maximum of 56 days for amicable settlement
Step 5: If not settled by above steps, international arbitration

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Overview of FIDIC dispute resolution provisions

Referral of matters
in dispute to DAB
84 days
DAB to give
notice of
decision
28 days
Notice of
dissatisfaction
Arbitration
can be
commenced

56 days
Amicable
Settlement

If Engineers Decision
becomes final and binding
but a Party fails to comply
Arbitration can
be commenced

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Dispute Boards
Specifically designed and developed for large construction
contracts; known under different names as:
Dispute Review Boards (DRB)
issues recommendations with no binding effect

Dispute Adjudication Boards (DAB)

issues decisions which are binding on an interim basis

Combined Dispute Boards (CDB)

Standing (or ad hoc) panels of impartial experts who

support parties in reaching consensus
provide recommendations or
render decisions

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Dispute Boards - Historical background

First developed in the 1970s and 1980s in the US
Eisenhower Tunnel (Colorado), the Mount Baker Ridge Highway
Tunnel (Seattle, Washington), and the Chambers Creek Tunnel
(Tacoma, Washington)
In 1981, the El Cajon Hydroelectric Project in Honduras
the first large international construction contract where a Dispute
Board was effectively utilized
In 1995, the World Bank made DRBs mandatory for all IBRD-financed
projects over US$50m
In 1997 the Asian Development Bank and EBRD
followed with similar decisions
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FIDIC Dispute Adjudication Boards

In 1995, FIDIC started with the introduction of the use of Dispute
Boards in the Orange Book
In 1996, Dispute Boards were incorporated into the 1992 Fourth
Edition of the Red Book though its Supplement
In 1999, the suite of FIDICs three major contracts, the 1999 Red
Book, the 1999 Yellow Book and the 1999 Silver Book, have all
adopted this concept as the first step in the dispute resolution
mechanism, albeit in different forms

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Eisenhower Tunnel (Colorado, US)

the Eisenhower Tunnel, completed in 1979, remains
the highest vehicular tunnel in the US
first broadly discussed case in which Dispute Board
was effectively used

Source: www.wikipedia.com

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Ertan Project (China)

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Hong Kong International Airport

A HK$50 billion investment, HKIA has been one of
the largest engineering and architectural projects in
the world
One of the largest hubs: in 2011, 53.9 million
passengers used HKIA and some 3.9 million tonnes
of air cargo passed through HKIA

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Channel Tunnel Rail Link Project

a US$5 billion concession project in the UK on which construction
started in October 1998
two panels:
a technical panel comprising engineers (construction related
disputes) and
a finance panel comprising accountants and financiers (disputes
concerning the financial provisions of the concession agreement)

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Nature of the DAB in the FIDIC forms

Clause 20 of the Yellow Book:
20.4 Obtaining Dispute Adjudication Boards Decision
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 then after a
DAB has been appointed pursuant to Sub-Clauses 20.2
[Appointment of the Dispute Adjudication Board] and
20.3 [Failure to Agree Dispute Adjudication Board],
either Party may refer the dispute in writing to the DAB
for its decision, with a copy to the other Party

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Principal features of the DAB in the FIDIC forms

Express duty of independence and impartiality on the DAB members
DABs decision obtainable within a relatively short time 84 days
from reference
Decision binding on the Parties unless and until it shall be revised in
an amicable settlement or arbitral award (SC 20.4)

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Nature of the DAB in the FIDIC forms

Two different models:
Standing as provided for in Red & Gold Book General
Conditions
Ad hoc as provided for in Yellow & Silver Book General
Conditions
Models are alternatives but both include dispute adjudication
role
Most appropriate model depends on particular project
Fees split equally between Parties

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Standing DAB
DAB appointed by Parties at outset of the Contract, and operates
throughout its currency
DAB visits the site regularly
Many disputes resolved amicably before they require decision of
DAB
Parties can jointly request opinions
If dispute arises, referral can be made immediately
When making a decision, DAB will have read the Contract, will
need less time to familiarise itself with issues, and can draw on
actual knowledge of conditions on the Site
May be paid retainer for doing nothing substantive if there are no
disputes

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Ad hoc DAB
DAB only appointed after the dispute has arisen
Allows Parties to chose member(s) with expertise most suited to
issues involved in the dispute
Only visits the Site after the dispute has arisen
Less familiar with the Project
But only paid when there are disputes
No power to issue an opinion
Deprives DAB of principal benefit of dispute board concept: ongoing
involvement during course of contract

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Appointment of the DAB Sub-Clauses 20.2 & 20.3

Default: three members

Exceptions for Large Projects

Hong Kong Airport: DRB of six members plus a convener dealing with the
major contracts awarded by the Airports Authority. When disputes arose, a
panel comprising either one or three members was chosen to hear the
dispute depending on its size and nature.

Boston Big Dig: a three-member panel for each contract with disciplinaryspecific expertise and dispute resolution/DRB experience. This was fixed at
ten years for a panel member and fifteen years for the Chairman. The panel
dealt with 30 submissions with amounts in dispute ranging from US$100,000
to US$20m.

Independent, suitably qualified professionals

DAB members should not be employees of the Employer, the

Contractor or the Engineer
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Appointment of the DAB Sub-Clauses 20.2 & 20.3

Members are appointed by agreement of the Employer and
Contractor
Tripartite Dispute Adjudication Agreement
DAB may comprise of either one or three members
If the DAB is to comprise three persons, each party shall nominate
one member for the approval of the other party
The Chairman is generally chosen by the parties in consultation
with the party-appointed members

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Failure to agree on the DAB Sub-Clause 20.3

If the parties fail to agree on the sole member of the DAB, fail to
nominate their members to a three-person DAB, or fail to agree
upon the appointment of the chairman
resort to the appointing entity named in the Appendix to
Tender
Even when there are no further specific rules, appointing
authorities have their own regulations and preferences:
ICC will usually appoint a chairman who is not a national of
the country of origin of either Party
The Dispute Board Federation usually appoints the
Chairman first and then select the other two members in
consultation with him/her
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Failure to agree on the DAB

Polish experience
Supreme Court (12.01.2012, IV CSK 219/11)
Failure to agree on a new Dispute Adjudication
Board is not a valid reason to terminate the
contract under FIDIC Subclauses 16.2 (b) or (d)

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Nature of a DAB decision

Clause 20 of the Yellow Book:
20.4 Obtaining Dispute Adjudication Boards Decision

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 .
If either Party is dissatisfied with the DABs
decision, then either Party may, within 28 days after
receiving the decision, give notice to the other Party
of its dissatisfaction.
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Nature of a DAB decision

Decision binding unless and until it shall be revised
in an amicable settlement or arbitral award
Parties must promptly give effect to decision
Decision becomes final and binding unless one Party gives
the other Party notice of dissatisfaction within
28 days
Once final, decision cannot be challenged at arbitration

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Enforcement of a DABs decision - arbitration

If no notice of dissatisfaction is given, a Party may refer the failure of
the other Party to comply with the decision directly to arbitration (SC
20.7)
No need to refer the failure back to the DAB
No need to attempt amicable settlement or wait for 56 days
If notice of dissatisfaction is given:
Party may include in an arbitration commenced under SubClause 20.6 a claim for an interim award to enforce the decision
of the DAB
Also possible support from the courts

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Enforcement of a DABs decision

There is a debate about the binding status of DABs
decision
local law: final and binding decision reserved for arbitral
awards
Singapore High Court in PT Perusahaan Gas Negara
(Persero) TBK v CRW Joint Operation [2010] SGHC 202
DABs decision, though binding on the parties, nonenforceable through arbitration

Many Civil Codes encourage the Parties to resolves the

disputes within the Contract and through ADR procedures DAB decision as a facilitated settlement?

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Effectiveness of Dispute Boards

the statistics show that if there is an operational Dispute

Board in existence on a project close to 99% of all

disputes referred to it will be successfully resolved within
less than 90 days and at a cost of about 2% of the
amount of the dispute

Dr. Cyril Chern, Dispute Board Federation

C. Chern, The Dispute Board Federation and the Role of Dispute Boards in Construction
Benefits without Burden, Revista del Club Espaol del Arbitraje, Volume 2010, Issue 9, p. 5

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International Arbitration and FIDIC

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Construction Arbitration
Construction disputes represent a large share of arbitration
market
ICC: In 2010 () Construction and engineering disputes
accounted for almost 17% of the total caseload
ICC International Court of Arbitration Bulletin
Vol 22/Number 1-2011

The highest volume of cases of any industry sector

Similarly in 2009 - 15%
ICC International Court of Arbitration Bulletin - Vol. 21/1 - 2010

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International Arbitration in the FIDIC forms model clause

20.6 Arbitration
Unless settled amicably, any dispute in respect of which the DABs

decision (if any) has not become final and 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].

No default option for seat of arbitration and procedural law

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International Arbitration in the FIDIC forms

International Arbitration is the final stage in the dispute
resolution process
Arbitration may be commenced during or after completion of the
Work:
Where notice of dissatisfaction has been given in respect
of a DABs decision and after the 56-day amicable
settlement period
Immediately if no DAB in place (SC 20.8)
Parties are bound by the obligations in the Contract, even
though arbitration has commenced
Arbitral Tribunal issues a binding arbitral award which may be
enforced internationally

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Construction litigation in Poland

High Court in Warsaw, XXV Civil Division - Polish TCC?

The General Directorate of National Roads and Motorways

(GDDKiA) has its seat in the courts district

A natural process of specialisation of the Courts judges has followed,

together with logistic concerns such astruckloads of files which
sometimes take an hour to be moved to the court room
Amounts in dispute reach over 1 billion PLN in a single case
Judges admit that arbitration is a better mode to hear such disputes.
However, GDDKiA consistently deletes arbitration clauses from the
FIDIC Clause 20 in favour of domestic litigation

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Concluding remarks

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K&L Gates Jamka sp.k.

Al. Jana Pawa II 25
00-854 Warsaw
tel: +48 22 653 4200
www.klgates.com
maciej.jamka@klgates.com
rafal.morek@klgates.com
Please visit our blog: www.disputeresolutionpoland.com

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