The New FIDIC Yellow Book Dispute Resolution Procedure: Part 2 – Are Dispute Adjudication Boards Worthwhile? Benefits, Problems And Comments On FIDIC's Security Of Payment Regime

Introduction

In Part 1 of this paper we reviewed the dispute resolution procedure included in FIDIC's pre-release version of its second edition of Conditions of Contract for Plant and Design Build ("the Proposed 2017 Yellow Book"),[1] which affirms and expands the infamous Dispute Adjudication/Avoidance Board ("DAB") mechanism.

DABs are used widely in international construction contracts and they can be very effective. However, if either party refuses to comply with its obligations under the DAB provisions it can be difficult and at times impossible to enforce them. Defective drafting of the FIDIC Rainbow Suite, or 1999 Conditions of Contract, has led to a proliferation of disputes as to whether, as a matter of contract, it is possible to summarily enforce binding but not-final DAB decisions, notwithstanding that FIDIC has explicitly stated this was its intention. The problematic wording has been resolved in the Proposed 2017 Yellow Book; however, even where the contractual position is clear a further issue is whether not-final DAB decisions are able to be enforced as a matter of law in a number of jurisdictions. Many contractors have signed up to the FIDIC Conditions on the understanding that the DAB provides a security of payment regime, only to find it act as a barrier to payment instead. The reality is that DABs often do not provide the straightforward relief that FIDIC intended.

This paper considers the practical effect of FIDIC's DAB mechanism as a security of payment regime, and in doing so addresses the benefits, pitfalls, how not-final DAB decisions are treated in different jurisdictions, and potential solutions for a workable DAB mechanism, and by implication the proposed new binding Engineer's determinations, as a contractual precondition to arbitration.

The intended DAB security of payment regime

DABs, under the FIDIC form and as they are commonly understood, consist of a board of one or three people, appointed by parties to a contract to assist in the resolution of issues or disputes arising in relation to that contract, as a first step before any dispute can be referred to arbitration or court proceedings.

While DABs under the 2008 Gold Book and Proposed 2017 Yellow Book also provide a dispute avoidance role during the contract,1 this paper focuses on the security of payment regime of binding decisions. The key features of FIDIC's security of payment regime are as follows:2

when any dispute arises in relation to a contract, either party may refer the dispute to the DAB;3 the DAB must issue a decision within 84 days of the dispute being referred to it; the decision "shall be binding on both Parties, who shall promptly give effect to it;" and obtaining a DAB decision is a condition precedent to referring that dispute to arbitration. Either party may issue a "notice of dissatisfaction" ("NOD") with a DAB decision within 28 days of it being issued, which will preserve the parties' ability to refer the underlying dispute to be finally determined in arbitration. If neither party issues a valid NOD then the decision will become final, and the decision itself will be enforceable in arbitration without the merits of the underlying dispute being looked at any further.

FIDIC has repeatedly affirmed that its intention is that any DAB decision, whether subject to an NOD or not, be able to be enforced summarily in arbitration in the first instance;4 i.e. "pay now, argue later". This was explained by the Singapore courts in the Persero II proceedings5 as creating:6

"a contractual security of payment regime, intended to be available to the parties even if no statutory regime exists under the applicable law ... [and under which w]hen a dispute over a...