Enforcing a “binding” but not “final” decision of a dispute adjudication board (DAB) under the FIDIC Conditions of Contract for Construction 1999 (Red Book)

On 27 May 2015, the Singapore Court of Appeal held that a failure by a party to comply promptly with a decision of a Dispute Adjudication Board (DAB) may be directly referred to arbitration. The resulting award is enforceable as an interim or partial award under the Singapore International Arbitration Act, irrespective of the award on the merits.

Background of the case

In 2006, the claimant (PGN) and the respondent (CRW) entered into a contract based upon the 1999 edition of the FIDIC Conditions of Contract for Construction (the “Red Book”) governed by Indonesian law. According to this contract, CRW was to design, procure, install, test and pre-commission a pipeline to convey natural gas from South Sumatra to West Java in Indonesia.

During the performance of the project, a dispute arose between the parties regarding variations.

The dispute was thus referred to a Dispute Adjudication Board (“DAB”) in accordance with Sub-clause 20.4 of the Red Book, according to which the DAB’s decision has an interim binding effect unless and until it is overturned by litigation, arbitration or by agreement between the parties.

In the case at issue, the DAB rendered several decisions on 13 disputed variations. PGN accepted all of the DAB’s decisions, except the third decision (DAB decision No. 3), which ordered PGN to pay CRW the sum of US$ 17,298,834.57.

  • Persero I

In accordance with the contract, PGN submitted a Notice of Dissatisfaction in respect of DAB decision No. 3 and refused to pay the sum ordered by the DAB. As a consequence, in 2009, CRW initiated an ICC arbitration, known as Persero I, seeking a declaration that PGN had an immediate obligation to pay the sum ordered by the DAB and an order for “prompt payment”.

The arbitral tribunal granted the relief sought by CRW in a “final award” and held that Sub-clause 20.4 of the contract made it clear that a DAB decision had to be given prompt effect and could only be varied by a subsequent amicable settlement or arbitral award.

However, in 2011, the Singapore Courts set aside this final award (reported as CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] 4 SLR 305 (“Persero CA”)), holding that the arbitral tribunal was not entitled to enforce such a DAB decision by way of a final award without first addressing the merits of the dispute in the same arbitration procedure.

  • Persero II

As a result, CRW commenced in 2011 a second ICC arbitration against PGN (Persero II), requesting, in accordance with the Singapore Courts’ decision, (i) an interim award to enforce the same DAB decision, and (ii) a final award on the merits of the claims underlying the DAB’s decision.

The arbitral tribunal upheld CRW’s request and ordered PGN, by an interim award, to pay the sum ordered by the DAB pending the final resolution of the parties’ dispute by the same tribunal, but in a final award ruling on the merits.

PGN, once more, applied to the Singapore High Court to have the interim award set aside. The High Court denied the application and ordered the enforcement of the interim award.

PGN then appealed the High Court’s order to enforce the interim award to the Singapore Court of Appeal, on the basis that the interim award was not final and binding and because DAB decision No. 3 ceased to be binding as soon as the arbitral tribunal made an award over the merits of the same dispute.

The key issue on appeal was the effect of an interim award. The Court of Appeal highlighted the need to appreciate that there is a distinct contractual obligation of the parties to comply promptly with a DAB decision once it is issued, regardless of its views on the merits of the DAB’s decision.

While the arbitral tribunal hearing the underlying dispute may open up and revise the DAB’s decision, for instance by concluding that a different sum is due to the receiving party, this does not detract from the obligation of the parties to immediately implement and give effect to the DAB’s decision in the interim.

The arbitral tribunal hearing the merits of the dispute, in determining the final state of accounts between the parties, would be considering a conceptually distinct question from the DAB.

It thus follows that the interim award is final and binding as regards the particular issue it decided, that is PGN’s obligation under Sub-clause 20.4 of the Red Book to make prompt payment of the adjudicated sum to CRW; there is nothing the arbitral tribunal hearing the underlying dispute can do to change that.

The Court of Appeal also held that the fact the DAB No. 3 decision ceases to be binding once any award on its merits is made does not automatically lead to the interim award becoming unenforceable or liable to be set aside.

The Court of Appeal thus construed Sub-clause 20.4 of the contract as imposing a distinct contractual obligation on a party to comply promptly with a DAB decision regardless of whether the decision is final or not.

The Persero II decision is available here.

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