2 July 2015
A recent decision of the Singapore Court of Appeal confirms that interim awards made under Singapore's International Arbitration Act (IAA) are final and enforceable. The decision is also significant as it confirms that a dispute adjudication or avoidance board (DAB) decision made under the 1999 FIDIC Red Book Conditions of Contract for Construction (the "Red Book") must be complied with, and promptly, thereby reinforcing the "pay now, argue later" principle central to the DAB procedure.
Brief Background
The subject matter of the Singapore Court of Appeal's decision in PT Perusahaan Gas Negara (Persero) v CRW Joint Operation (Indonesia) [2015] SGCA 30 ("Perusahaan") related to a dispute that had arisen between PT Perusahaan Gas Negara ("Persero") and CRW Joint Operation (Indonesia) ("CRW"). The dispute had arisen from variation claims made by CRW under a 1999 FIDIC Red Book contract ("Contract") for the design, procurement, installation, testing and pre-commissioning of a pipeline to convey natural gas from South Sumatra to West Java, Indonesia. CRW referred the matter to the DAB constituted under the Contract, which decided that PGN was to pay approximately USD 17.3 million to CRW ("DAB Decision").
Despite the fact that the Contract contained a provision requiring PGN to comply with the DAB Decision, it refused to do so. A plethora of arbitral and court appeal proceedings followed. Essentially, CRW pursued enforcement of the DAB Decision through arbitration, and thereafter attempted to enforce the subsequent arbitral awards in the Singapore Courts as PGN continually refused to comply with the DAB Decision.
In 2011, after the High Court and Court of Appeal had set aside a previous arbitral decision, which required PGN to comply with the DAB Decision, CRW returned to arbitration, seeking two awards:
- first, an interim or partial award permitting it to enforce the DAB Decision against PGN; and
- secondly, a final award for the sums determined in the DAB Decision (i.e. dealing with the Primary Dispute).
CRW successfully argued the first ground, and the tribunal issued an interim award compelling PGN to comply with the DAB Decision (the "Interim Award"). CRW obtained leave from the High Court to enforce the Interim Award against PGN, and in response, PGN applied to the High Court to set aside the award (PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation (Indonesia) [2014] SGHC 146).
In the High Court, the positions of the parties were as follows:
- PGN argued that the Interim Award was a "provisional" award intended to have finality only until the arbitral tribunal had rendered an award on the merits of the DAB Decision, and that section 19B of Singapore's International Arbitration Act (the "IAA") did not permit such provisional awards. PGN, therefore, asserted that the arbitral tribunal did not have the power to award such provisional relief.
- In response, CRW asserted that the Interim Award was not "provisional", but final and binding pursuant to section 19B(1) of the IAA. CRW argued that this was particularly so when read in conjunction with the terms of the Interim Award, which stated that it was final and binding“pending the final resolution of the [merits dispute] raised in these proceedings”. CRW went on to argue that the arbitral tribunal's eventual final award (in respect of its decision on the substances and merits of the DAB Decision) would not vary or otherwise affect the final and binding nature of the Interim Award because it would determine (and would be final and binding in respect of) adifferent dispute, being the merits dispute.
The High Court agreed with CRW, deciding that the Interim Award was final and binding under section 19B of the IAA, that being, CRW’s undisputed substantive right to be “paid now” and PGN’s substantive obligation to “argue later”. Consequently, the Interim Award acknowledged that CRW’s substantive right to be paid promptly, was final. It did not require that other aspects of the dispute be resolved with finality. PGN appealed the High Court's decision.
The Court of Appeal decision
Essentially, PGN's case followed a similar vein as in the High Court, essentially consisting of two arguments.
- First, PGN argued that the Interim Award was inconsistent with s 19B of the IAA on the basis that both CRW and the arbitral tribunal in 2011 envisaged that it would be "subject to future variation"(see paragraph 26). PGN asserted that CRW essentially sought only one relief in those arbitral proceedings, being to enforce the DAB Decision, and that it never intended for the Interim Award to finally resolve the merits dispute arising under the DAB Decision; indeed, PGN considered that CRW was aware that any interim award made could subsequently be varied by the final award on the merits; and
- Secondly, PGN argued that the effect of Clause 20.4 of the Contract was so that the DAB Decision ceased to be binding as soon at the tribunal made any award on the merits of the DAB Decision. As the tribunal had made certain findings on the merits of the DAB Decision in a subsequent partial award, PGN considered the DAB Decision no longer binding.
The Court of Appeal rejected PGN's first argument, finding that Clause 20.4 of the Red Book imposed"a distinct contractual obligation on the parties to comply promptly with a DAB decision once it is issued". It found that CRW had a separate substantive right to enforce the DAB Decision whether the DAB decision was final and binding or merely binding but non-final. The fact that the Tribunal subsequently still needed to review the DAB Decision and determine whether it ought to be opened up and revised did not have the effect of varying the Interim Award. Under section 19B of the IAA, the Interim Award would be final and binding and PGN had to comply with the DAB Decision.
The Court of Appeal also rejected PGN's second line of argument. It found that it was not commercially sensible to read Clause 20.4 to have the effect of a DAB Decision ceasing to be binding once the tribunal made any determination on any aspects of the merits of the parties underlying dispute. The key point was that the Interim Award was a final decision and could be enforced against PGN on its terms save only where there were grounds to set it aside or resist enforcement. The Interim Award required PGN to make prompt payment of the DAB Decision. This obligation remained valid and binding regardless of any subsequent award on the merits of the underlying dispute.
If the merits of the underlying dispute had been finally resolved (which in this case, they had not), and the outcome was an amount different from the DAB Decision, it was the parties' obligation then to resolve the state of the final accounts. The fact that this accounting exercise subsequently needed to be carried out did not by itself render the Interim Award invalid or unenforceable.
Comments
The Court of Appeal's decision in Perusahaan will no doubt be welcomed for those involved in international projects in Singapore or under Singaporean law. For one, it confirms the final and binding nature of an interim arbitral award issued under Singapore's international arbitration legislation, echoing Singapore's continued support for arbitration, whether domestic or international. For those carrying out operations under a FIDIC contract, the decision in Perusahaan is significant because it clarifies the obligation to pay DAB decisions promptly, thereby encouraging the security of payments under FIDIC contract.
The Court of Appeal's explanations of the operation of Clause 20 of the 1999 Red Book sheds light on the doubts arising under that provision. Namely, it confirms that a party required to pay an amount in accordance with a DAB decision under those Conditions of Contract must do so promptly. The DAB procedure is intended to resolve disputes in the first instance, the resolution of which may be subjected to arbitral review at some later stage, and that any decision made by the DAB must be complied with. Therefore, DAB decisions under FIDIC are binding, but not final, where a notice of dissatisfaction is given within the contractually stipulated timeframe.
If a party fails to comply with a DAB decision, the counter-party may apply for a final award to enforce the DAB decision, or request an interim award from an arbitral panel requesting that the decision be enforced, separately from its request for a final award on the merits of that DAB decision. Under section 19B of the IAA, that interim award (such as the Interim Award in Perusahaan) would be final and binding in respect of its declaration that the recalcitrant party comply with the DAB decision. Although a party may challenge the merits of the DAB decision in the same arbitration, the interim award stands as a final and binding arbitral award.
The decision therefore reinforces the "pay now, argue later" principle that is crucial to the success of DABs under the FIDIC suite of contracts in resolving disputes and ensuring the security of payment on large international projects.
For further information, please contact:
Eugene Tam, Partner, Clyde & Co
eugene.tan@clydeco.com
