FIDIC Contracts And The Enforcability Of Interim Arbitral Awards.

 

PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation [2015] SGCA 30

 

Introduction

 

There has been uncertainty over the enforceability of decisions issued by the dispute resolution board (“DAB”) in FIDIC contracts. The difficulties in the dispute resolution process provided for in FIDIC contracts are clearly illustrated by the long-running litigation proceedings in Singapore which were first commenced in 2010 and resulted in a decision issued by the Singapore Court of Appeal (“CA”) in 2011 (CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation [2010] 4 SLR 672) (“2011 CA decision”).

 

Following from the 2011 CA decision, there was a further arbitration in 2011 and subsequently, enforcement proceedings in the Singapore High Court.

 

The appellant, PT Perusahaan Gas Negara (Persero) (TBK) (“PGN”) was dissatisfied with the decision of the Singapore High Court (in PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation (Indonesia) and another matter [2014] SGHC 146) and brought the present appeal in the CA against the respondent, CRW Joint Operation (“CRW”).

 

In the present appeal, the following questions were raised:

 

(1) whether an interim arbitral award ordering PGN to pay CRW a sum of over USD 17.3m (“Interim Award”), which was an amount that the DAB found PGN liable to CRW for, should be set aside; and

 

(2) whether the order of court granting CRW leave to enforce the Interim Award against PGN in the same manner as a court judgment should be set aside.

 

In coming to its decision, the CA also considered the interpretation of section 19B of the International Arbitration Act (Cap 143A) (“IAA”). Section 19B of the IAA provides that an arbitral award made by an arbitral tribunal pursuant to an arbitration agreement is final and binding on the parties to the arbitration agreement, and that an arbitral tribunal shall not vary, amend, correct, review, add to or revoke the award.

 

An interesting question that arose was whether the Interim Award was an “award” as defined in section 2 of the IAA (i.e. a final and binding decision of the arbitral tribunal on the substance of the dispute), or whether the Interim Award was in substance a provisional award that could subsequently be revoked or amended by the arbitral tribunal. If the Interim Award did not fall within the definition of an “award” in section 2 of the IAA, the Interim Award would not be enforceable under section 19 of the IAA in the same manner as a judgment of the Singapore High Court.

 

Background

 

In 2006, PGN and CRW entered into a contract to design, procure, install, test and pre-commission a pipeline to convey natural gas from South Sumatra to West Java. The contract between PGN and CRW was based on the 1999 edition of the Red Book published by FIDIC and governed by Indonesian law (“Contract”).

 

The Contract between the parties included a dispute resolution framework based on Clause 20 of the 1999 edition of the FIDIC Red Book (the “1999 FIDIC Red Book”). The Contract inter alia provided that:

 

(a) a decision of the DAB (a “DAB Decision”) “shall be binding on both Parties, who shall promptly give effect to it unless and until it shall be revised in an amicable settlement or an arbitral award…”;

 

(b) if either party is dissatisfied with a DAB Decision, either party may file a notice of dissatisfaction (“NOD”) within 28 days of receiving the DAB Decision. If no NOD is filed within that time, the DAB Decision shall become final and binding;

 

(c) if an NOD is issued, both parties shall attempt to settle the dispute amicably before commencing arbitration. Unless both parties agree otherwise, arbitration may be commenced 56 days after the NOD, even if no attempt at amicable settlement has been made;

 

(d) unless amicably settled, any dispute in respect of which the DAB Decision has not become final and binding shall be finally settled by international arbitration.

 

Disputes arose in respect of variation claims submitted by CRW under the Contract. The disputes were referred to the DAB in accordance with the 1999 FIDIC Red Book dispute resolution mechanism as set out in Clause 20. The DAB issued a number of decisions against PGN, one of which determined that PGN ought to immediately pay CRW the sum of over USD 17.3m (“DAB Decision 3”). PGN filed an NOD in respect of DAB Decision 3.

 

CRW made several requests to PGN for payment of the sum of over US$17.3 million pursuant to the DAB Decision 3. No payment was made to CRW.

 

The 2009 Arbitration

 

In 2009, CRW commenced arbitration proceedings in respect of the DAB Decision 3 (the “2009 Arbitration”). CRW limited the scope of the 2009 Arbitration to giving prompt effect to DAB Decision 3, and sought (1) a declaration that PGN had a prompt obligation to pay CRW the sum of over US$17.3 million pursuant to DAB Decision 3, and (2) an order for PGN to make prompt payment.

 

PGN did not file a counterclaim in the 2009 Arbitration. PGN simply denied that it was contractually obliged to pay CRW the sum of over US$17.3 million, requested that the arbitral tribunal exercised its powers pursuant to Clause 20.6 of the Contract to open up, review and revise the DAB’s decision in DAB Decision 3, and sought a declaration from the tribunal that:

 

(a) the DAB Decision 3 was not final and binding;

 

(b) PGN was not obliged to pay CRW the sum of over USD 17.3m; and

 

(c) PGN had not breached any obligations under the Contract in refusing to pay the sum of over USD 17.3m to CRW. The arbitral tribunal in the 2009 Arbitration (the “2009 Arbitral Tribunal”) held that PGN was contractually obliged to immediately pay CRW the sum of over US$17.3 million pursuant to DAB Decision 3, and issued a final arbitral award requiring PGN to do so (the “2009 Award”). In the 2009 Award, the 2009 Arbitral Tribunal further held that PGN remained entitled to commence a new arbitration to review and revise the DAB Decision 3.

 

Proceedings To Set Aside The 2009 Award

 

PGN successfully appealed to the High Court to set aside the 2009 Award. The CA subsequently upheld the High Court’s decision to set aside the 2009 Award.

 

In the 2011 CA decision, the CA found that the 2009 Arbitral Tribunal had exceeded its jurisdiction in failing to hear and consider the merits of the disputes determined in DAB Decision 3, prior to concluding the 2009 Arbitration and issuing a final arbitral award by way of the 2009 Award.

 

The CA held that all issues in dispute between parties had to be decided in a single arbitration, i.e. the 2009 Arbitration. As the 2009 Arbitration did not give PGN a real opportunity to defend itself against the merits of the claim for the sum of over USD 17.3m that it was ordered to pay to CRW pursuant to the DAB Decision 3, the CA found that there had been a breach of natural justice. The CA was of the view that what CRW should have done was to commence arbitration to open up and review the merits of DAB Decision 3, and pending the arbitral tribunal’s final determination of that dispute, obtain an interim arbitral award for the immediate enforcement of PGN’s contractual obligation to pay to CRW the sum of over USD 17.3, pursuant to DAB Decision 3.

 

The 2011 Arbitration

 

CRW commenced a second arbitration in 2011 (the “2011 Arbitration”) and sought:

 

(a) a final determination that PGN was liable to pay CRW the sum of over USD 17.3m, or such other sum as determined by the arbitral tribunal, for the disputes determined in DAB Decision 3; and

 

(b) pending that final determination, a partial or interim award for the sum of over USD 17.3m stated in DAB Decision 3.

 

The arbitral tribunal in the 2011 Arbitration (the “2011 Arbitral Tribunal”) issued the Interim Award that compelled PGN to comply with DAB Decision 3. A majority of the 2011 Arbitral Tribunal were satisfied that the Interim Award would not contravene section 19B of the IAA.

 

PGN continued to refuse to pay CRW the sum awarded under the DAB Decision 3. CRW applied to and obtained the leave of the High Court to enforce the Interim Award in the same manner as a court judgment. PGN applied to the High Court to set aside the Interim Award.

 

The Decision Of The High Court

 

PGN argued that the Interim Award was a provisional award which falls foul of the IAA, on the basis that the Interim Award was intended by the 2011 Arbitral Tribunal to be final only until it finally determined the merits of DAB Decision 3. On that basis, PGN asserted that the Interim Award was issued by the 2011 Arbitral Tribunal acting in excess of their jurisdiction, in breach of natural justice and/or in breach of the parties’ agreed arbitral procedure.

 

The High Court held that section 19B of the IAA does not prohibit awards which grant relief that is intended to be “provisional” in the sense that such relief is effective for a limited period only. Rather, the legislative history of section 19B of the IAA provides evidence that the purpose of section 19B of the IAA was to clarify that all arbitral awards, whether interim or final, were final and conclusive as to the issues determined therein.

 

The High Court further held that the Interim Award did not breach section 19B of the IAA, as it was final and binding on the issues determined in the Interim Award. PGN had a contractual obligation to “promptly pay” CRW the sum of over USD 17.3m awarded under the DAB Decision 3. A future determination of the merits of DAB Decision 3 would not vary the Interim Award in a manner disallowed under the IAA, as the final award could be worded to stand alongside the Interim Award.

 

PGN appealed to the CA against the decision of the High Court.

 

The Decision Of The Court Of Appeal

 

The CA was split 2:1 in its decision. The majority of the CA dismissed PGN’s appeal and held that the Interim Award was a valid award under the IAA, while the dissenting judge allowed PGN’s appeals.

 

The majority of the CA confirmed that the Interim Award was a final and binding determination as to whether PGN is contractually obliged to pay CRW the sum of over US$17.3 million determined in DAB Decision 3, pending the 2011 Arbitral Tribunal’s determination of the merits of DAB Decision 3. The majority of the CA further held that, contrary to the findings of the 2011 CA decision, a failure to comply with a binding but non-final DAB decision (i.e. where an NOD has been issued) can be referred directly to arbitration.

 

The Difference Between Partial, Interim, Provisional And Final Awards

 

The majority of the CA observed that the terms partial award and interim award are often used interchangeably to refer to an award made in the course of arbitral proceedings that finally dispose of certain preliminary issues or claims for relief prior to the disposition of all of the issues in the arbitration. Partial awards and interim awards set out an arbitral tribunal’s final and binding determination on certain issues, albeit preliminary issues or claims. Thus, these awards qualify as an “award” as defined under Section 2 of the IAA, andare enforceable as a judgment of the Singapore High Court.

 

Similarly, a final award sets out an arbitral tribunal’s final and binding determination of the issues set out therein, and can refer to:

 

(a) an award which resolves a claim or matter in an arbitration with preclusive effect;

 

(b) awards that have achieved a sufficient degree of finality in the arbitral seat;

 

(c) the last award made in an arbitration which disposes of all remaining claims.

 

In contrast, provisional awards do not finally dispose of any substantive rights of parties, whether preliminary issues or otherwise. Provisional awards are issued merely to protect a party from damage during the course of the arbitral process, and are inherently capable of being varied or revoked by the arbitral tribunal in due course. Thus, they do not qualify as an “award” as defined under Section 2 of the IAA, and cannot be enforced as a judgment of the Singapore High Court.

 

Interpretation Of Clause 20.4 Of The Conditions Of Contract

 

A majority of the CA held that clause 20.4 of the conditions of contract (which is similar to clause 20.4 of the 1999 FIDIC Red Book) imposes a distinct contractual obligation on a paying party to promptly comply with a DAB Decision. Such a contractual obligation may be directly enforced by arbitration without any necessity for a party to first attempt amicable settlement, or to allow 56 days to pass following the issuance of an NOD, before commencing arbitration.

 

Significantly, contrary to the 2011 CA decision, the CA further held that an arbitral tribunal faced with an arbitration consisting of the sole question as to whether a party is contractually obliged to promptly make payment as ordered in a DAB Decision, may make a final determination in respect of that question, regardless of whether the DAB Decision in issue is a final and binding decision, or a binding but non-final decision. Where an arbitral tribunal is faced with both the dispute over a paying party’s non-compliance with a binding but non-final DAB Decision, as well as the dispute over the merits of the DAB Decision, the arbitral tribunal may:

 

(a) make an interim or partial award which finally disposes of the issue as to whether the paying party is contractually obliged to promptly comply with the DAB Decision; then

 

(b) proceed to consider the merits of the DAB Decision; and finally

 

(c) make a final determination as to the merits of the DAB Decision.

 

Section 19B Of The IAA

 

The majority of the CA also held that section 19B of the IAA renders the Interim Award final and binding in respect of the particular issue that was determined by the Interim Award (i.e. that, pending the final determination of the merits of the DAB Decision 3, PGN is contractually obliged to immediately pay CRW the sum of over USD 17.3m stated in the DAB Decision 3). The Interim Award does not prohibit the 2011 Arbitral Tribunal from making subsequent awards in respect of other issues to be determined in the arbitration, provided that the issues determined in the subsequent awards do not revoke, amend or vary its decision in respect of the issues determined in the Interim Award.

 

The Dissenting Judgment

 

The Senior Judge Justice Chan Sek Keong (“Justice Chan”) disagreed with the majority of the CA. Justice Chan was of the opinion that the Interim Award was issued in respect of a dispute that was not referable to arbitration under Clause 20.6 of the 1999 FIDIC Red Book, as Clause 20.4 of the FIDIC Red Book obliges parties to either attempt at an amicable settlement of the dispute, or to allow 56 days to pass following the issuance of an NOD, before commencing arbitration. In this regard, Justice Chan was of the opinion that the concept of an amicable settlement under Clause 20.4 of the FIDIC Red Book is meant to resolve factual disputes, and not legal disputes. In Justice Chan’s opinion, the issue as to whether PGN is contractually obliged to immediately pay CRW the sum of over SGD 17.3 million is a legal dispute which is incapable of being amicably settled pursuant to Clause 20.4.

 

Justice Chan also held that the majority of the 2011 Arbitral Tribunal had no mandate under clause 20.6 of the conditions of contract to issue the Interim Award enforcing the DAB Decision 3, pending the 2011 Arbitral Tribunal’s final adjudication of the parties’ primary dispute over the merits of the DAB Decision 3; the DAB Decision 3 was already enforceable pursuant to clause 20.4 of the conditions of contract until it was revised by an amicable settlement or an arbitral award.

 

Justice Chan further held that, even if the majority of the 2011 Arbitral Tribunal had the mandate to issue the Interim Award pending the 2011 Arbitral Tribunal’s decision on the merits of DAB Decision 3, the Interim Award was in substance a provisional award. Thus, the Interim Award was not an “award” under section 2 of the IAA, and was therefore not enforceable as a judgment under the IAA.

 

In his dissent, Justice Chan also considered the definition of a provisional award in the context of arbitration proceedings, and opined that a provisional award is subject to revision or even nullification following a full hearing on the merits of the dispute which is the subject matter of the arbitration, which is consistent with the meaning of a provisional award under section 39 of the Arbitration Act 1996 (UK).

 

Conclusion/Observations

 

The majority decision of the CA in PT Perusahaan marks a departure from the 2011 CA decision and provides a degree of clarity on the status of interim arbitral awards – that interim arbitral awards can be final and binding on the parties to an arbitration, notwithstanding that a final decision has not been rendered in respect of the underlying issues in dispute between the parties. The majority of the CA also held that, once an interim award is issued, an arbitral tribunal cannot decide any further on matters determined by that interim arbitral award.

 

The decision of the majority of the CA in PT Perusahaan is in line with section 19B of the IAA, which provides that “[a]n award made by the arbitral tribunal pursuant to an arbitration agreement is final and binding”. This decision reminds parties of the need to carefully frame the issues sought to be determined by an arbitral tribunal, so as to ensure that the determination of the issues in a final arbitral award do not amend, vary or revoke the arbitral tribunal’s decision in respect of issues put to it in an application for a partial or an interim award.

 

Significantly, the majority of the CA expressed the view that the 1999 FIDIC Red Book dispute resolution mechanism allows a failure to comply with a binding but non-final DAB decision to be referred directly to arbitration, without parties having to go through the preliminary steps of first attempting amicable settlement and/or allowing 56 days to pass following the issuance of an NOD. This mirrors the views of FIDIC itself, as set out in the FIDIC Guidance Memorandum issued in April 2013.

 

The decision of the majority of the CA in PT Perusahaan gives full practical effect to the dispute resolution mechanism envisaged in Clause 20 of the 1999 FIDIC Red Book. Contracting parties who have incorporated the terms of the 1999 FIDIC Red Book no longer face the uncertainty as to whether they may immediately enforce an arbitral award ordering prompt compliance with a DAB Decision. It has now been clarified that such an arbitral award is immediately enforceable as an award of the Singapore High Court under the IAA, even if the merits of the DAB Decision is yet to be determined.

 

References

 

Please click on the following link to access the case of:

 

PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation [2015] SGCA 30