Presentation on theme: "International Construction Arbitration"— Presentation transcript:
1International Construction Arbitration John SavagePartner and Head of International Arbitration, AsiaDecember 13, 2007
2Outline of the Presentation I. Introduction to International Construction ArbitrationII. Issues that Cause International Construction DisputesIII. Typical International Construction ClaimsIV. Common Mechanisms for Resolving International Construction DisputesV. Introduction to FIDIC and its Dispute Resolution ProvisionsVI. Conduct of a Typical International ArbitrationVII. Investment Treaty Arbitration and Construction DisputesVIII. Advice on Drafting International Construction Dispute Resolution ProvisionsIX. Advice on Preparing for and Conducting International Construction Disputes
3I. Introduction to International Construction Arbitration (1) Typical Features of International Construction Disputes (1)Technically complex, fact intensive: require technical experts as well as lawyersOften more than two parties, even in turnkey projects (involvement of subcontractors, suppliers, lenders, consultants, other contractors etc)Often more than one relevant contract (subcontracts, supply contracts, construction of other facilities on same project, offtake contracts, operation and maintenance etc)Parties of (sometimes many) different nationalities on the same jobSite may be in another country altogether
4I. Introduction to International Construction Arbitration (2) Typical Features of International Construction Disputes (2)Large sums in dispute, at least in absolute termsProject usually of long duration, with disputes emerging throughoutEnglish law often applies, or at least contracts often inspired by English lawUse of standard form contracts (e.g. FIDIC contracts)Not a separate area of law, in English law at least (general contract and tort law apply in most cases), but specialised lawyers, judges and arbitrators in practice
5II. Issues that Cause International Construction Disputes (1) Alleged interference by or deficiencies of Owner, such as:Lack of site possessionLate approvals or instructionsChanges in design/materials/specificationNon paymentAlleged deficiencies of Contractor, such as:Contractor design omissions and deficienciesDefective manufacture and constructionDelayed performance (various causes attributable to contractor)Excessive cost, when contract price not fixed
6II. Issues that Cause International Construction Disputes (2) Third party events, such as:Adverse site conditionsAdverse weatherMaterial escalationHostilities/strikesChanges in law
7III. Typical International Construction Claims (1) Contractor usually claims one or more of the following:Compensation for extra work performedCompensation and/or schedule relief for acceleration, delay and/or disruptionPayment and interestBlocking draw of performance bond
8III. Typical International Construction Claims (2) Owner usually claims one or more of the following:Damages (usually liquidated) for delay, or for poor performance (plant not at specification)Correction or compensation for defective work (under warranties)Draw on performance bond
9IV. Common Mechanisms for Resolving International Construction Disputes (1) Non Binding Dispute Resolution MechanismsMediationEarly Neutral EvaluationTemporarily Binding Dispute Resolution MechanismsStatutory AdjudicationDispute BoardsExpert Determination (but can be final…?)Binding Dispute Resolution FormsArbitrationCourt Litigation
10IV. Common Mechanisms for Resolving International Construction Disputes (2) Mediation (not binding)Process conducted by third party mediatorConfidentialWithout prejudiceObjective is to facilitate settlement of dispute by parties, not an evaluationCan be effective if parties committed to process, attendees have power to settle, and if mediator competent
11IV. Common Mechanisms for Resolving International Construction Disputes (3) Early Neutral Evaluation (not binding)An independent third party will give an evaluation of the dispute, like a one person Dispute Review BoardParties will then have a predetermined period of time for follow-up direct negotiation with the goal of reaching settlement
12IV. Common Mechanisms for Resolving International Construction Disputes (4) Statutory Adjudication (temporarily binding)Most important dispute resolution process in UK construction industry due to 1996 Construction ActThe Act makes adjudication mandatory for an agreement which involves “construction operations” in England, Wales or ScotlandParty can apply for adjudication “at any time”. Rapid procedure before an individual or a board, but must meet statutory conditions. Temporarily binding decisionSpeedy but needs a court system to enforce adjudication decisionsLegislation has been adopted elsewhere, mainly in Commonwealth jurisdictions such as Australia, New Zealand, Singapore, Hong KongParties to international projects need to be aware that legislation may exist
13IV. Common Mechanisms for Resolving International Construction Disputes (5) Dispute Boards (temporarily binding)Procedure where a standing panel of 1 or 3 engineers/lawyers appointed at the outset of project, and visit the site 3 or 4 times a year to monitor progress and deal with potential problemsWhen requested by the parties the Dispute Board conducts an informal hearing of the dispute and issues a recommendation or decision (depending on the contract). Decision temporarily binding, but can be challenged through arbitration or litigationFIDIC and ICC have their own Dispute Board procedures
14IV. Common Mechanisms for Resolving International Construction Disputes (6) Expert Determination (1) (temporarily binding?)A third party with expertise in a particular field is asked to give a determination on a disputed issue in that fieldGenerally used for a single issue or a handful of related issues, not a whole disputeEither technical, financial or contractual issuesFlexible procedures, query if due process requiredParties can choose to use ICC Rules for Expertise in their contractICC International Centre for Expertise can administer the expert determination or act as appointing authority for the expert
15IV. Common Mechanisms for Resolving International Construction Disputes (7) Expert Determination (2) (temporarily binding?)Difficulties with expert determination:Finality/recourse (is it an arbitral award capable of challenge?)Which dispute resolved by expert, which by arbitratorsWhat to do with legal questions brought before expertFlexibility/vagueness of proceduresEnforcement
16IV. Common Mechanisms for Resolving International Construction Disputes (8) Arbitration (1) (binding)Most international construction contracts specify arbitration as final resort if interim dispute resolution measures failArbitration generally preferred over court litigation (see later slides)Larger disputes usually involve 3 member tribunalCommon to have use of tiered dispute resolution clauses, e.g. negotiation then arbitration, dispute board then arbitration etc.
17IV. Common Mechanisms for Resolving International Construction Disputes (9) Arbitration (2) (binding)No institutions specialised in construction cases. Instead, we recommend usual top international arbitration institutions, such as:International Chamber of Commerce (ICC)London Court of International Arbitration (LCIA)Singapore International Arbitration Centre (SIAC)Hong Kong International Arbitration Centre (HKIAC)Beijing Arbitration Commission (BAC) or CIETAC for arbitration in China(Note: leading institutions’ arbitration rules are largely similar)
18IV. Common Mechanisms for Resolving International Construction Disputes (10) Court litigation (binding)usually in the country of one or other party (not neutral)usually subject to one or more levels of appealcost and duration can vary enormously from country to country
19IV. Common Mechanisms for Resolving International Construction Disputes (11) Advantages of international arbitration over court litigation for internationaldisputes?Neutrality: avoid home courts of other partyEnforceability: arbitral awards much more enforceable across borders than court judgments, thanks to New York ConventionFlexibility: parties can design, in their contract, their own dispute resolution mechanismFinality: no court or other review of the merits of an arbitral awardCost and time savings? As compared to which courts?Confidentiality?
20IV. Common Mechanisms for Resolving International Construction Disputes (12) Advantages of court litigation over international arbitration?Joinder or consolidation available before courts without further party consentNo decisions in court. Perhaps, but is that what happens today in arbitration?Lack of finality (review of merits available)?Courts can be less expensive and time-consuming? In Singapore, yes, but not in India, for example
21IV. Common Mechanisms for Resolving International Construction Disputes (13) What if we don’t include an arbitration clause in our contract?No arbitration clause in contract usually = no arbitration.But exceptions include:where parties agree to arbitration when dispute arises (rare)where party has grievance against state or state body, and there is investment treaty coverage (investment treaties usually allow arbitration without prior arbitration clause)Alternative to arbitration is either selection in contract of court(s) or, if no selection, court with jurisdiction by default
22V. Introduction to FIDIC and its Dispute Resolution Provisions (1) What is FIDIC?FIDIC stands for Fédération Internationale des Ingénieurs-Conseils or International Federation of Consulting EngineersFormed in 1913, now a global organisation with members from 70 plus countries and secretariat based in SwitzerlandFIDIC Forms of Contract are widely used forms (i.e. model contracts) for engineering, construction, provision of mechanical and electrical works in international projectsFIDIC introduced the concept of Dispute Board into its Orange Book contract in 1995In November 1996 FIDIC introduced the procedure into Clause 67 of its Red Book
23V. Introduction to FIDIC and its Dispute Resolution Provisions (2) In 1999, FIDIC revised its Forms of ContractThe four FIDIC Forms of Contract are:Conditions of Contract for Construction (New Red Book)Conditions of Contract for Plant and Design-Build (New Yellow Book)Conditions of Contract for EPC Turnkey Projects (Silver Book)Short Form of Contract (Green Book)(Note that FIDIC will be launching its Design, Build and Operate (DBO) Contract (Gold Book) in mid 2008)Note that these are just model contracts. The parties are expected to adapt them to their own projects
24V. Introduction to FIDIC and its Dispute Resolution Provisions (3) FIDIC Dispute Resolution provision is set out in Clause 20 of the New Red, New Yellow and Silver BooksApproach used by FIDIC is the Dispute Adjudication Board (DAB) which issues a decision, as opposed to Dispute Review Board which issues a recommendationThe FIDIC DAB provisions apply whenever a FIDIC contract is used unless parties delete the provisionFIDIC DAB decisions are immediately binding and parties are obliged to comply with the decision pending other stages of the dispute resolution procedure, e.g. revised by amicable settlement or arbitral awardNew Red (Construction Contract) and New Yellow (Plant and Design-Build Contract) Books provide for Engineer to act as adjudicator and DAB. Silver Book (EPC Contract) has no Engineer, so disputes under Silver Book must be handled by DAB.
25V. Introduction to FIDIC and its Dispute Resolution Provisions (4) FIDIC Procedure for Contractor’s ClaimsNew Red/Yellow BooksSilver Book28 day Notice of Claim to Engineer28 day Notice of Claim to EmployerClause 20.1Contractor’s Claims42 day “Fully Detailed Claim”to Engineer42 day “Fully Detailed Claim”to Employer“Final Claim” 28 days after end of effects“Final Claim” 28 days after end of effects42 days after receipt of claimEngineer’s Response42 days after receipt of claimEmployer’s ResponseClause 3.5DeterminationsClause 3.5 Engineer to“Agree or Determine”Clause 3.5 Employer to“Agree or Determine”Agreement/Determinationgiven effect unless revised under Clause 20Given effect unlessContractor’s Notice of Dissatisfaction14 days of receipt
26V. Introduction to FIDIC and its Dispute Resolution Provisions (5) FIDIC Procedure for Contractor’s ClaimsReference to Dispute Adjudication Board (DAB)(1 or 3 people)Clause 20.2DAB Decisionwithin 84 days of referenceNo DAB Decisionwithin 84 days of referenceClause 20.4No Notice of Dissatisfactionwithin 28 days of DecisionNotice of Dissatisfactionwithin 28 days of DecisionNotice of Dissatisfactionwithin 28 days after 84 days of referenceDAB Decisionfinal and binding“Amicable Settlement” stageClause 20.5ICC Arbitrationwithin 56 days after Notice of DissatisfactionClause 20.6
27V. Introduction to FIDIC and its Dispute Resolution Provisions (6) FIDIC Procedure for Employer’s ClaimsNew Red/Yellow BooksSilver BookEmployer or Engineer givesnotice and particulars to ContractorEmployer givesnotice and particulars to ContractorClause 2.5Employer’s ClaimsClause 3.5DeterminationsClause 3.5 Engineer to“Agree or Determine”Clause 3.5 Employer to“Agree or Determine”Agreement/Determination giveneffect unless revisedunder Clause 20Given effect unlessContractor’s Notice of Dissatisfaction14 days of receiptClauses 20.2 and 20.4(See previous diagram forfull Clause 20.4 procedure)Reference to Dispute Adjudication Board (DAB)(1 or 3 people)“Amicable Settlement” stageClause 20.5ICC Arbitrationwithin 56 days after Notice of DissatisfactionClause 20.6
28V. Introduction to FIDIC and its Dispute Resolution Provisions (7) Procedural Rules for DAB are set out in Annex to Dispute Adjudication AgreementDAB shall visit site at intervals of not more than 140 days but not less than 70 days at request of either Employer or ContractorDAB to use site visits to become and remain acquainted with progress of the Works and actual/potential problems or claimsDAB to produce a report after each site visitDAB may conduct hearings and request exchange of statementsDAB can adopt an inquisitorial procedure and refuse admission to hearings or grant audience to any persons other than parties’ representativesDAB can open up, review and revise any certificate, decision, determination, instruction, opinion or valuation of the Engineer
29A Typical ICC Arbitration Procedure VI. Conduct of a Typical International Arbitration (1)A Typical ICC Arbitration ProcedureApplication forInterimReliefRequest forArbitrationAnswer to Requestand Filing ofCounterclaimsHearingsPost-HearingSubmissionsExchange ofWrittenConstitution ofArbitral TribunalTerms of Referenceand ProceduralTimetableLimited Discovery(Exchange ofDocuments)Final Award & CostsTypical duration: months
30VI. Conduct of a Typical International Arbitration (2) Four phases of the typical international arbitrationIntroductory phase: exchange of outline initial submissions and constitution of tribunal.Written phase: exchange of longer written pleadings and evidence.Hearing phase: witness hearings and hearings of argument.Award phase: arbitrators deliberate and draft their award.
31VI. Conduct of a Typical International Arbitration (3) General remarks about international arbitration procedureOften an international hybrid of common and civil law procedures.Examples: IBA guidelines on evidence and conflicts.More informal than courts (no wigs, advocates usually sit)…… but equally adversarial.Often fascinating and difficult cultural clashes (e.g. document production, preparation of witnesses…).
32VI. Conduct of a Typical International Arbitration (4) International arbitration personnelWorldwide arbitration community/mafia. Centred in Europe, especially France, Switzerland and the UK. Paris probably still the headquarters of international arbitration (seat of the ICC). But now a growing pool of international arbitrators from Asia and based in Asia.Increasingly two groups: arbitrators (older, academics, barristers, and in boutique firms) and counsel (younger, in larger firms). The former often graduate from the latter. Some overlap between the two groups.Case for specialisation: arbitration procedures and personnel increasingly distinct from those of local courts. What you know and who you know are both important.
33VII. Investment Treaty Arbitration and Construction Disputes (1) If the owner in an international construction project is a sovereign state instead of a private company, a contractor with a claim may be able to start investment treaty arbitration instead of following contractual dispute resolution proceduresOr if state interferes with a contractor’s project with a private owner, contractor may still have a claim against the state under an investment treatyTypical claims under investment treaties are based on interference by the state in the project, including by action of the legislature, the courts, local government, tax authorities etcInvestment treaty arbitration can be better than “normal” arbitration as it gives access to neutral, offshore proceedings, and international law remedies that may not be available under contract or in the courtsCan be very powerful, especially as China has concluded over 100 BITs, with new (and effective) second generation treaties now replacing first generation (less effective) treaties
34VII. Investment Treaty Arbitration and Construction Disputes (2) An investment treaty is an agreement concluded by two or more states to promote and protect investment by investors of those states in the territory of other states party to the treaty. Example:State XInvestment TreatyChinaChinese InvestorState XInvestmentProtection and PromotionState X InvestorInvestmentProtection and PromotionChina
35VII. Investment Treaty Arbitration and Construction Disputes (3) BITs cover investments by an investor of one country in the territory of the other country“ Investor of a Contracting State” is usually defined to include:Individuals who are nationals of the State; andCompanies organised under the laws of the StateIndirectly controlled investments are often covered“Investment” is usually broadly defined to include any kind of asset, which can include any claim to money or to performance under contractSo definition of covered investment is very wide, far beyond traditional conception
36VII. Investment Treaty Arbitration and Construction Disputes (4) Question – are construction projects considered an “investment” in the context of investment treaty arbitration?See Salini v Morocco (2001) – two Italian contractors filed for ICSID arbitration against Morocco over a dispute arising under a contract for construction of a highway. The contract provided for resolution of disputes in domestic courts. Claimants alleged that Morocco’s failure to pay was a violation of the “fair and equitable treatment and protection against indirect expropriation” in the Morocco-Italy BIT. Morocco raised jurisdictional objection that dispute was not in relation to investment under Art. 25(1) of ICSID Convention and Art 1 of the Morocco-Italy BIT.Held: Contract for construction of a highway was an investment under both treaties. Tribunal upheld jurisdiction over the investors' claims.
37VII. Investment Treaty Arbitration and Construction Disputes (5) See also R.F.C.C. v Morocco, Bayindir v Pakistan (both highway construction projects), Impregilo v Pakistan (construction of a dam) and Saipem v Bangladesh (pipeline construction project)In all cases, the construction projects were held to be investments covered by investment treaty in question and the ICSID Convention. The contractors could therefore all proceed with their claims in neutral, offshore international arbitration regardless of the dispute resolution provision in their contractSo, if you have a dispute with a state or state agency, think about investment treaty arbitration even if you have an arbitration or litigation clause in your contract, or even if you have no contract
38VIII. Advice on Drafting International Construction Dispute Resolution Provisions (1) Consider interim dispute resolution mechanism, as can be advantageous to contractorsFinal mechanism should be arbitration in most casesResist temptation to overdraft, keep dispute resolution provisions simple: use model institutional clauses or standard form contracts (easily available online) as the basisCaution with carve-out clauses, e.g. sending some disputes to court/expert and the rest to arbitration
39VIII. Advice on Drafting International Construction Dispute Resolution Provisions (2) Resist temptation to limit pool of arbitrators, e.g. by requiring arbitrator to have esoteric experienceDon’t forget the governing law clause; and if you are using a standard form contract, choose governing law that is compatible with the contractConsider consolidation/joinder for supplier/subcontractor contractsIf consolidation/joinder impossible, try to get the dispute resolution clauses as similar as possible, e.g. same arbitration rules, governing law provisions
40VIII. Advice on Drafting International Construction Dispute Resolution Provisions (3) Ideally, make sure that dispute resolution clauses in performance bonds are identical with main contract dispute resolution provisionsNo language stating that contractor must wait until after completion before commencing final dispute resolution proceedingsAsk for courts or (more realistically) arbitration in your home jurisdiction as a starting pointAgree to an arbitration friendly place of arbitration if home jurisdiction not available, e.g. Hong Kong, Singapore, London, ParisIf in doubt, seek specialist adviceKeep enforcement considerations in mind, e.g. location of other party’s assets
41VIII. Advice on Drafting International Construction Dispute Resolution Provisions (4) For China-related arbitration, consider:That PRC Arbitration Law is currently interpreted by many as not permitting in China either ad hoc arbitration or arbitration administered by institutions based outside ChinaSpecifying that arbitration administered by selected institution, rather than merely referring to selected arbitration rulesProviding for appointment of arbitrators other than those on the institution’s panelProviding that sole/presiding arbitrator not being the same nationality as the partiesAvoiding two languages (e.g. English and Chinese) as the languages of the arbitration: keep it to only one language
42IX. Advice on Preparing for and Conducting International Construction Disputes (1) Before a dispute arises:Establish sound, dedicated policies and procedures for correspondence, other documentation and claims handlingKeep supporting documents and contemporaneous evidence well, e.g. diaries, photographs, maps, drawings (preferably electronically)Maintain a set of programmes which are regularly updated throughout the course of the project so that the delay experts will be able to prepare their report in the event of a delay claim
43IX. Advice on Preparing for and Conducting International Construction Disputes (2) When a dispute arises:Keep a close eye on notice provisions and other conditions precedent to claims in your contract, and time limitations for bringing claims and defencesGather facts and seek legal and expert advice earlyTake care in what you write and don’t write to the opposing party (do protest, don’t make unintended concessions)Evaluate chances of success early, and act upon that evaluationCarefully explore all settlement options, especially ADR (e.g. mediation)Look at exposure of performance bonds
44IX. Advice on Preparing for and Conducting International Construction Disputes (3) During arbitration or litigation:Set up dedicated internal team to maximise efficiency and minimise disruption to projectWork with specialist external lawyers, arbitrators and experts,Work together with your external team, don’t just let them get on with itPrepare and monitor realistic litigation budgetsGet management commitment to ensure cooperation of project participantsAlways keep settlement and ADR possibilities in mind