FIDIC Contracts Arbitration

user Youssry Saleh & Partners calender 28 Feb 2024 views 372 Views
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FIDIC is an international professional organization which stands for International Federation of Consulting Engineers. FIDIC develops and publishes standard forms of contracts for use in   the construction industry, which are commonly used in international construction projects and are known for their practicality.

There are several FIDIC contract types such as the Red, Yellow, Silver and Green books.  They are considered balanced and fair books as they regulate the relations between the contractor and the employer. They show risks and responsibilities of each party in a constructions project.  FIDIC books are well respected and are authoritative in the construction industry. They are known to both employers and contractors, hence, they are considered a popular choice in construction projects.  The four most commonly used FIDIC books are the following:

  1. The Red Book which is usually used where the employer is responsible for deigning the project, and the contractor is responsible for working on the project after the design.
  2. The Yellow Book which is widely used where the contractor is in charge of designing and carrying out the project. The employer can help with the design process, however, the authority is held with the contractor to make sure the design and work is carried out.
  3. The Silver Book is commonly used in projects where there is a turnkey plant. Turnkey plant is when the contractor is fully responsible for the design, construction, testing and handing over the project fully functioning and in a ready to use state to the owner.
  4. The Green Book is used in smaller scale projects as it is less complex, hence, suitable for projects with lower values. It will relatively be used in projects where the value does not exceed 500,000 USD, where the time frame of the project does not surpass 6 months, and the design is not complex and where the parties involved previously know each other and have a strong working relationship.

One of the benefits of FIDIC books is that they greatly reduce risk of disputes, are clear and provide regulation in case of disputes in a competent manner. They improve communication and cooperation between the contractor and employer as it gives a common dialect for both parties to depend on and identify future problems and risks as to avoid them.  They ensure that projects are done within time and without going over budget, as FIDIC books aid projects in not having any delays from the employers or contractors behalf.

For parties to use arbitration as a dispute resolution mechanism they must pass by two tiers of mandatory resolutions firstly, the engineer’s decision as per FIDIC Yellow Book/Red Book 2017 Sub -Clause 3.5 which states that if no agreement has been found between the parties, the Engineer shall make a decision in accordance with the contract. The Engineer must be fair and neutral as per FIDIC Yellow Book/Red Book 2017 Sub -Clause 3.7, and his decision is conclusive and enforceable in arbitration as conveyed in FIDIC Yellow Book/Red Book 2017 Sub -Clause 3.7.5.  If either of the parties fails to conform to the agreement with the Engineer, then it may refer itself to arbitration as per Sub Clause 21.6 of FIDIC Contracts 2017.

A main feature of FIDIC contracts is their dispute resolution mechanism and the determination of not using arbitration as an initial dispute tool, as arbitration is considered lengthy and expensive. This mechanism is aimed to encourage early and good faith settlement of disputes. The mechanism includes a mandatory Dispute Avoidance Adjudication Board (DAAB) as per Clause 21.1 of FIDIC Contracts 2017. Prior to 2017 the resolution was called Dispute Adjudication Board(DAB), however, after the 2017 amendments there has been a heavy emphasis on dispute avoidance and the mechanism is currently called DAAB.  It is a neutral body which is chosen in FIDIC contracts to resolve disputes that occur during the execution of the project. Any decision taken by DAAB in the process is binding on both parties unless overturned by an arbitral tribunal. DAAB is a positive way to resolve disputes as it is less time consuming and cheaper than litigation, however a compulsory mechanism which must be resorted to prior to arbitration.  Clause 21.4.1 regulates the conditions on how to refer to the DAAB, firstly it must be in writing with copies sent to the opposing party, engineer and employer, and secondly, it must give the reasoning of the dispute.

Should one of the parties show dissatisfaction of the DAABs decision then according to Clause 21.4.4 FIDIC Contracts 2017 the party must submit a Notice of Dissatisfaction (NOD) to the other party with a copy attached to the DAAB within 28 days of receiving the DAAB decision. The aforementioned clause expressly states that neither party would be allowed to arbitrate a dispute unless an NOD is submitted as this is a prior condition to arbitration. Yet Clause 21.5 FIDIC Contracts 2017 determines that the parties must attempt to settle before the “commencement of arbitration”.

Clause 21.6 FIDIC Contracts 2017 expresses another type of dispute resolution which is arbitration, it is a private and unbiased method of dispute resolution which is commonly used in international construction projects. Arbitration is enforceable in any country that has ratified the New York Convection on Recognition and Enforcement of Foreign Arbitral Awards which Egypt is a part of.  FIDIC contracts usually include a clause that provides the preferred way of dispute resolution such as arbitration. The contract would include clauses that identify the rules and procedures that will be followed if arbitration is chosen as the dispute resolution, and how the arbitral proceedings would commence. The most commonly used arbitration rules for FIDIC contracts are ICC Rules of Arbitration, they are regularly the default position used in FIDIC contracts unless parties decide otherwise. ICC Rules of Arbitration are regulated by the International Court of Arbitration which is part of the International Chamber of Commerce. The ICC Rules of Arbitration are considered flexible as they allow the parties of the dispute to work out the arbitral proceedings as per their needs. For example, the disputers can choose the language of the proceedings and the number of arbitrators. 

The regulations are meant to be neutral as they do not favor a particular jurisdiction and most importantly they are considered time efficient and practical.  A main common aspect about ICC arbitral rules is that the arbitration awards can be enforced in any country that has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. 

ICC court has a more dominant role in administering ICC arbitrations. ICC courts can assign arbitrators and make decisions on procedural issues.  ICC Rules permit the parties to choose the law that will govern the proceedings. The parties of the dispute can choose either ICC Rules or UNCITRAL Rules depending on several aspects such as the arbitrator chosen, as Clause 21.6 FIDIC Contracts 2017 dictates that there must be either 1 or 3 arbitrators appointed in ICC Rules. Secondly, the complexity of the dispute, should the dispute be too complex then it would be recommended for the parties to choose ICC Rules.

Within the Arab Republic of Egypt FIDIC contracts are used heavily in big construction and industrial projects carried out in public work contracts. Most regulations under FIDIC contracts are compatible with Egyptian law, however, some FIDIC clauses are based on common law concepts which are incompatible with Egyptian law as it is based on civil law principles. Due to the fact that FIDIC is based on English common law this is significantly different from the applied civil law within the nation. Egyptian laws take their origin in French law which distinguishes between different types of work contracts. Firstly, private work contracts that include private parties and secondly, public works contracts that include the state as a sovereign entity. Each type of a contract is governed by a particular set of rules. FIDIC contracts can be applied to private or public contracts, Egyptian Law is applied to both FIDIC contracts involved in public and private contracts which are performed in Egypt. This can be identified in Article 19 of Egyptian Civil Code No. 131 Year 1948 which conveys that any contract relating to an immovable property shall be governed by the law of the place where the property is located stipulating any FIDIC contract regarding an immovable located in Egypt shall be governed by Egyptian law.

When a FIDIC contract is in a private law contract then it is regulated by the Egyptian Civil Code Law No. 131 of Year 1948. There is a set of governing rules that govern contracts whether FIDIC related or not. Initially conveyed in Article 89 of Egyptian Civil Code Law No. 131 of Year 1948 which states that a contract is concluded as soon as “two parties exchange identical wills, taking into account the specific conditions stipulated by the law for concluding the contract”. Moreover seen in Article 90 of the aforementioned law which states that the expression of will can occur verbally or in writing and could be explicit or implicit. Article 109 articulates that anyone is competent to contract unless his capacity is limited by the law proving that the Egyptian Civil Code governs who can enter into a contract. Article 142 conveys that in case of nullification of the contract the contracting parties shall return to their original state prior to performing the contract, should this be impossible then a compensation is awarded.  According to Article 146  should the contract create personal obligations and rights these can be transferred to a successor.

A main similarity between the Egyptian Civil Code and FIDIC regulations is in how good faith is executed as Article 148 of ECC and Sub clauses 3.1 /3.5/20.1 of FIDIC regulations that good faith must exist between all contracting parties whether the engineer or contractor, both need to imply good faith in communications and when problem solving.  As the FIDIC contract is performed in Egypt, then Egyptian laws regulate the contract, Article 157 conveys that should one of the parties not fulfill his obligation, then the opposing party, after notification, can demand the implementation of the contract or termination. Moreover, an Egyptian judge has the power to set a deadline, if needed.  The second set of regulations governing FIDIC is primarily conveyed in Article 646 Law No. 131 of Year 1948 which discusses contracting and public utility commitment, the article defines a contract and establishes that a valid contract must have 3 main elements which are remuneration, two parties and specific work or task.

Article 647 and 648 identify the following: that the work must be lawful, the contractor is responsible for providing the material and manpower and that the employer has the right to inspect the work at any point. Whereas Article 648 identifies a contractors obligations and that he must work with due care and diligence, deliver the work on time and according to the specifications agreed upon and guarantee the quality of work. Lastly, Article 649 outlines the employer’s obligations as follows: they must provide the contractor with the necessary plans and instructions and pay the agreed remuneration. Articles 652-676 deals with several aspects such as:

  • The contractors obligations, that he must complete the work on time and according to the agreed specifications
  • The employers rights, if the work is incomplete or faulty the employer has the right to terminate the contract or demand compensation.
  • Types of work contracts and different payment methods
  • Special situations such as implied warranty or loss and damage to materials.
  • Employer/subcontractor relationship where the employer could be directly liable for certain actions of subcontractors
  • Specific work contracts such as regulations for specific types of work contracts such as construction projects.

A public works contract is a contract signed with a public entity were the contractor takes the responsibility of construction, repair or maintenance or a public service project relevant to an immovable. The New Procurement Law 182 of Year 2018 governs contracts concluded by public authorities in Egypt, it regulates agreements and contracts. It replaces the Tenders and Auctions Law No.89 of Year 1998, the new law was released by the government to improve the economy and social standards that must meet the need of public authorities and the Egyptian Society. Article 180 Tenders and Auctions Law No.89 of Year 1998 concludes that should there be a dispute between the parties of a contract and no settlement can be reached then the dispute is handled by litigation or arbitration as per the contract. Whereas, Egyptian Arbitration Law No.27 of Year 1994 outlines in Articles 1-2 that any dispute regarding administrative contracts must have the approval of the competent minister to use arbitration. Similarly, Article 91 of Law 182 Year 2018 concludes that the approval of the competent minister is needed should the parties decide to use arbitration as a dispute resolution. 

Law No.27 of Year 1994 plays a critical role in resolving disputes from FIDIC contracts within Egypt. FIDIC contracts have arbitration clauses, however, the aforementioned law explains arbitration and their interaction with the contract within Egypt. Article 3 recognizes the validity and enforceability of international arbitration agreements which is a secure legal framework for dispute resolutions which arise from FIDIC contracts. Articles 4-7 give the requirements to have a valid arbitration agreement such as they must be “agreed upon by the two parties to the dispute according to their free will”. This is in compliance with FIDIC regulations as these are considered their standard clauses.  Article 10 reiterates that to have a valid arbitration agreement the “two parties agree to submit to arbitration in order to resolve all or certain disputes which have arisen or may arise between them”.  Articles 12-15 summarize that the arbitration agreement “must be in writing” and that the number of arbitrators should there be not a specific number in the contract to be “three” and it “must consist of an odd number”. The past articles are considered a way of providing a fair arbitration case of both parties even if FIDIC clauses mention no such thing. Articles 16-18 defines the powers and duties of arbitrators as “they cannot be minors” and that they do not have to be “of a given gender or nationality unless agreed by the parties”. FIDIC contracts include such clauses, however, the Egyptian Arbitration Law is executed as an extra precaution.  Articles 21-25 conveys the rules of the arbitral proceedings such as the hearing process and confidentiality. These provisions are also included in FIDIC contracts to ensure fairness.

Conclusively, there is an extensive use of FIDIC contracts in Egypt, the operation of some FIDIC clauses could be challenging due to their compliance with Egyptian law.  Arbitration is a firm and respected method of dispute resolution for construction projects. Egyptian laws and FIDIC arbitration clauses provide a comprehensive framework for the conduction of arbitration which resolves disputes between parties without the need of litigation.