Pre-conditions to arbitration and the FIDIC 2nd Edition

Amendments to the FIDIC 2^nd Edition contracts published in November 2022 have narrowed the definition of “Dispute” to more closely align it with the pre-conditions to DAAB and arbitration proceedings specified by the form. The narrower definition raises the potential for new jurisdictional objections to be made in DAAB or arbitration proceedings commenced without compliance with those pre-conditions. In this Law-Now, we consider recent developments in the approach taken to arbitral pre-conditions in a number of international jurisdictions, before considering the specific issues thrown up by the amended definitions published by FIDIC.

Introduction

Multi-tiered dispute resolution clauses are a common feature of international construction contracts. At a very basic level, clauses may require parties to notify the existence of a dispute and to engage in good faith negotiations over it for a specified period prior to commencing a formal dispute resolution process such as adjudication or arbitration. More complex provisions can be observed in the FIDIC 2^nd Edition dispute resolution procedure which requires:

• An initial Notice of Claim followed by a fully detailed Claim. 
• A period of consultation and negotiation mediated by the Engineer under clause 3.7.1.
• Failing agreement, a determination by the Engineer under clause 3.7.2.
• If the Engineer’s determination is disputed, a reference to the Dispute Avoidance and Adjudication Board (the “DAAB”) under clause 21.4.
• If the DAAB’s decision is disputed, a further period of negotiation under clause 21.5.
• If a negotiated settlement is not achieved, arbitration under clause 21.6.

Structured dispute resolution procedures like this serve an important purpose in providing a framework for the early resolution of disputes prior to full-blown arbitration proceedings, which are both expensive and time-consuming, and generally considered a last resort for the resolution of disputes. One disadvantage of such procedures is that the more detailed and complex they are, the more they tend to encourage arguments over whether their requirements have been complied with and the effects of any non-compliance.

As the last stage of such procedures is usually a formal reference to arbitration, non-compliance with preceding steps in the process often give rise to arguments as to whether a reference to arbitration is valid and/or whether arbitrators have jurisdiction over the dispute as a result of the non-compliance. Such arguments will usually seek to characterise the preceding steps in the process as conditions precedent to the applicability of the arbitration clause. In the absence of compliance with the preceding steps, so the argument goes, the arbitration agreement does not apply.

The relevance of these arguments has been brought into sharp focus by the recent amendments to the FIDIC form which narrow the definition of “Dispute” and thereby the scope of the arbitration clause. This Law-Now considers the prospect for jurisdictional arguments to be made as a result of these amendments, but first considers some recent developments in the approach to arbitral pre-conditions from courts across the globe.

The condition precedent approach

The approach originally taken by the English courts to preparatory steps required by an arbitration clause was to ask whether such provisions were properly interpreted as conditions precedent to the arbitration agreement. If they were, any arbitration commenced in breach of them was said to lack jurisdiction. This was the approach taken in Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd, decided in 2014, where a clause requiring the parties to seek to resolve disputes by friendly discussions for a continuous period of 4 weeks before commencing arbitration was held to be an enforceable condition precedent the breach of which would have deprived the arbitrators of jurisdiction.

This approach is also exemplified on the FIDIC form by Partial Award in Case 16262, decided by a London seated tribunal in 2010, which found that: “a reference to the DAB was a condition precedent to arbitration and that, since that condition precedent has not been satisfied, the Arbitral Tribunal has no jurisdiction.”

The decision late last year of a three-person bench of the Singaporean International Commercial Court in CZQ v CZS also adopts this approach.  The case concerned a 1^st Edition FIDIC Yellow Book contract and a bespoke version of the requirement for amicable discussions under clause 20.5 of that form. Non-compliance was said to deprive an arbitration tribunal of jurisdiction, but the Court ruled that the clause was not a condition precedent to the arbitration agreement. The Court’s approach to the issue along condition precedent lines follows an earlier decision of the Singapore Court of Appeal in International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd where a jurisdictional objection was upheld because a clause requiring mediation prior to arbitration had not been complied with and was a condition precedent to the arbitration agreement.

Admissibility vs jurisdiction

The approach under English law changed in 2021 with the decision in Republic of Sierra Leone v SL Mining Ltd (Rev 1). After a review of international cases and academic writings, the English Commercial Court decided that a broader test based on a distinction between admissibility and jurisdiction was to be preferred:

“The international authorities are plainly overwhelmingly in support of a case that a challenge such as the present does not go to jurisdiction … if the issue relates to whether a claim could not be brought to arbitration, the issue is ordinarily one of jurisdiction …, whereas if it relates to whether a claim should not be heard by the arbitrators at all, or at least not yet, the issue is ordinarily one of admissibility … The issue here is not whether the claim is arbitrable, or whether there is another forum rather than arbitration in which it should be decided, but whether it has been presented too early. That is best decided by the arbitrators.”

This approach was developed by a second English Commercial Court decision in NWA v NVF, also in 2021, with the Court in that case expressing disagreement with the Singapore Court of Appeal in International Research.

The distinction between admissibility and jurisdiction has also recently been adopted in Hong Kong following a final appeal decision last year in C v D. The case concerned a requirement for negotiation and an executive meeting prior to arbitration. Jurisdiction was challenged on the basis that this requirement was a condition precedent which remained unsatisfied. The Hong Kong Court of Appeal adopted the “jurisdiction vs admissibility” approach and found that the existence of a condition precedent and its fulfilment were matters for the arbitral tribunal:

“In our view, it is an over-simplification to say that where a reference to arbitration is subject to some condition precedent, an arbitral tribunal’s decision on whether the condition precedent has been fulfilled must necessarily be a jurisdictional decision … The true and proper question to ask is whether it is the parties’ intention (or agreement) that the question of fulfilment of the condition precedent is to be determined by the arbitral tribunal …”

On further appeal to the Court of Final Appeal, the relevance of the jurisdiction / admissibility dichotomy was confirmed. Pre-arbitral conditions were to be regarded as “presumptively non-jurisdictional”. As explained by Ribero PJ:

“Such a presumption is consistent with the consensual basis of the tribunal’s jurisdiction: in the absence of unequivocal language to the contrary, an objection to how the tribunal has resolved an issue concerning a pre-arbitration condition does not challenge the tribunal’s authority to arbitrate conferred by the parties’ consent.”

Support for this presumption was drawn from Lord Hoffmann’s remarks in the Fiona Trust case decided by the House of Lords in the UK, where a similar presumption was established for the interpretation of the scope of an arbitration clause, moving away from the traditionally more literal approach focusing on the use of prepositions such as “under” or “in connection with”. This conclusion followed from the inherent unlikelihood that parties would wish to arbitrate only some of their disputes arising from a given contract, leaving others to be litigated:

“If, as appears to be generally accepted, there is no rational basis upon which businessmen would be likely to wish to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another, one would need to find very clear language before deciding that they must have had such an intention.”

The Hong Kong Court of Final Appeal also endorsed Jan Paulsson’s rule of thumb for determining the jurisdictional nature of arguments over pre-arbitral conditions as whether “the objecting party [is] taking aim at the tribunal or at the claim”. Paulsson, in his article, concludes as follows:

“To understand whether a challenge pertains to jurisdiction or admissibility, one should imagine that it succeeds:

• If the reason for such an outcome would be that the claim could not be brought to the particular forum seized, the issue is ordinarily one of jurisdiction and subject to further recourse.
• If the reason would be that the claim should not be heard at all (or at least not yet) the issue is ordinarily one of admissibility and the tribunal's decision is final.”

These passages were also approved by the English Commercial Court in SL Mining and NWA v NVF.

FIDIC 2nd Edition Amendments

The 1^st Edition contracts within the FIDIC rainbow suite contain no definition of the terms “claim” and “dispute”. New definitions were included in the 2017 2^nd Edition contracts and are shown below alongside their current form as amended by Amendments Issue No. 3 published in November 2022.

It can be seen that the definition of Dispute has been narrowed considerably in the 2022 amendments:

• Previously the definition was drafted broadly to encompass any claim which had been rejected where that rejection had not been accepted or acquiesced in by the claiming party. It had also made clear that a failure to respond to a claim could constitute a rejection.
• The new definition requires the Engineer’s determination process under clause 3.7 to be carried out, including the service of a Notice of Dissatisfaction or “NOD” before a Dispute can arise.
• It is no longer sufficient, therefore, that there is a disagreement between the parties over a given claim; that claim must have been taken through the Engineer’s determination process and an NOD issued before the requirements for a “Dispute” will be satisfied.
• Previously a Dispute was defined by reference to the undefined term “claims”, which was said to include the defined term “Claims”, matters to be agreed or determined under clause 3.7, or “otherwise”. This has now changed so that only the defined term “Claims” and clause 3.7 matters are included within the definition of “Dispute”.

The strictness of the definition is reinforced by additional amendments which provide a small list of exceptions where a “Dispute shall be deemed to have arisen” outside the definition. This includes where a Notice of Termination has been given under the contractual provisions (but not under local law).

The result of this narrowing is that there are a number of situations in which the new definition of “Dispute” would not appear to apply, but where recourse to arbitration would ordinarily be expected. These include:

1. Urgent disputes. The clause 3.7 procedure takes between 3 to 4 months and there is no power for the Engineer to make interim or provisional decisions in urgent cases.
2. Legacy claims. Claims for defective work in particular may arise many years after the Final Payment Certificate. By that time, the Engineer will have ceased its role.
3. Local law termination or recission. Would the functions of the Engineer and the clause 3.7 process survive a termination under local law?
4. Procedural disputes. Points may arise as to the validity of the clause 3.7 process if the Engineer does not comply with clause 3.7 or exceeds his or her jurisdiction.

There is, therefore, ample scope for arguments to be made that certain types of disputes fall outside the definition of “Dispute”. As the width of the DAAB and arbitration clauses depend on the definition of “Dispute”, these arguments lead directly to a potential for jurisdictional objections where DAAB or arbitration proceedings are commenced without the definition of “Dispute” having been satisfied.

Conclusions and implications

It is inevitable that FIDIC’s narrowing of the definition of “Dispute” will result in a greater number of jurisdictional arguments being raised in arbitrations commenced under amended 2^nd Edition contracts. Whether these jurisdictional arguments find any greater acceptance by tribunals than was previously the case remains to be seen. On one hand, the definition forms the very subject matter of the agreement to arbitrate under the 2^nd Edition contracts and its deliberate narrowing can be said to signal jurisdictional intent. On the other hand, Lord Hoffman’s reasoning in Fiona Trust remains apposite and it is difficult to identify sensible commercial reasons why parties would wish to submit only some of their disputes to a DAAB and, if necessary, arbitration, while leaving other disputes to be dealt with by national courts. For the meantime, both contractors and owners would be well advised to consider omitting the 2022 amendments to the definitions of “Claim” and “Dispute”.

References:

Paulsson, “Jurisdiction and Admissibility” in Global Reflections on International Law, Commerce and Dispute Resolution, ICC Publishing, 2005

Fiona Trust & Holding Corp v Privalov [2007] UKHL 40

Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm)

International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd [2014] 1 SLR 130 

Partial Award in Case 16262, ICC Dispute Resolution Bulletin 2015 No. 1, page 75

Republic of Sierra Leone v SL Mining Ltd (Rev 1) [2021] EWHC 286

NWA v NVF [2021] EWHC 2666 

C v D [2022] HKCA 729 

C v D [2023] HKCFA

CZQ v CZS [2023] SGHC(I) 16