A Comparative Analysis of the Claim & Dispute Resolution Provisions of FIDICs 1999 Major Forms of Contract Against its

Earlier Forms 1
by

Nael G. Bunni, BSc, MSc, PhD, CEng, FICE, FIEI, FIStructE, FCIArb, FIAE, MConsEI.
Chartered Engineer, Conciliator & Registered Chartered Arbitrator Visiting Professor in Construction Law & Contract Administration at Trinity College Dublin.

1.

Introduction

1.1 The construction contract is unique in that it seeks to provide for a specific remedy in the event of any breach of the terms and conditions within its framework and/or for a contractual entitlement in respect of specified events or perceived risks. 2 Comparatively viewed against other types of contract, the wording of a construction contract is therefore more extensive having to provide for and deal with detailed conditions in respect of the risks that might arise during the construction period and beyond. 1.2 Thus, as in other standard forms of construction contracts, the genesis and development of the various FIDIC Forms of Contract were, and remain to be, based on the need to redefine and reapportion the risk ascribed to the respective parties by the applicable law. By including a mechanism to give one party a certain remedy if a specified event arises, the risk of that event, which would otherwise remain with that party, is transferred to the other party. This process is in conformity with the established principle that the purpose of a contract is to identify and allocate the risks between the parties. It is also in accord with the legal concept that the purpose of a contract is to
1

FIDIC is the acronym for the International Federation of Consulting Engineers, established in 1913 in Ghent, Belgium, by three associations of consulting engineers from France, Switzerland and Belgium. At the present time, FIDIC represents 73 national member associations of independent consulting engineers from different countries around the World. 2 The FIDIC Forms of Contract, by Nael G. Bunni, Blackwell Publishing, Oxford, 3rd Edition, 2005, see Chapter 7 for the inherent characteristics of the construction contract and Chapter 13 for some of the unique obligations contained in it.

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identify and apportion the rights and obligations of the parties; since these rights and obligations stem from the allocation of the risks to which the contract is exposed, a principle which is particularly true in construction contracts. However, whether the remedy sought is in respect of a breach of the contract terms and conditions or for the occurrence of a specified event, the FIDIC Forms of Contract, as indeed in most construction contracts, place an obligation on the party who wishes to avail of that remedy to follow a set procedure, which is referred to as the claims procedure.

2.

Claims & Counterclaims

2.1 The first step of the claims procedure of any construction contract is the launch of a claim. Whilst this might be considered a straightforward exercise, the following

matters need to be fully understood by those involved in such a process: (a) (b) (c) The meaning and definition of a claim; The legal basis of claims, and for that matter counterclaims; The process by which claims & counterclaims should be formulated and managed; (d) (e) The parties rights and obligations under the Contract or in relation thereto; and The manner in which these rights and obligations might be protected or exercised under the Contract or in relation thereto. 3

2.2 Although no express definition of a claim appears in any of the FIDIC Forms of Contract, a claim in practice is generally taken to be an assertion for (additional) payment due to a party or for extension of the Time for Completion. This

interpretation of a claim is borne out by the wording of the contractual provisions relating to claims, as adopted in the earlier FIDIC Forms of Contract, either explicitly or implicitly. For example, Clause 44 of the Fourth Edition of the 1987 Red Book 4 provides for an entitlement to an extension of the Time for Completion of the Works or any Section or part thereof (emphasis added), albeit that the word claim appears
3

As for footnote no.2, but see Chapter 16 for more detailed description of the claims & counterclaims that are expected in such contracts. 4 Conditions of Contract for Works of Civil Engineering Construction (1987), better known as the Red Book.

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nowhere in this clause. Similarly, Sub-Clause 53.1 includes the words if the Contractor intends to claim any additional payment (emphasis added), but here the word claim appears as a verb and as a noun. However, nowhere in these Forms is there a reference to an assertion for a declaration, although such a claim is frequently made. So, for example, a party might assert that a clause in the specification gives a different meaning to that contended by the other party, or that a provision of the contract is not valid under certain circumstances. Such an assertion forms a type of a claim within the legal basis set out in paragraph 3.1(b) below. The 1999 FIDIC Forms of Contract for major works5 follow the same pattern by not defining a claim, but the word claim does appear in Sub-Clauses 2.5 and 20.1 of these Forms, see the quoted text in paragraphs 4.2 and 4.3 below, respectively. However, it should be noted that these sub-clauses do not preclude the parties from exercising their rights under the general concepts of the law by making claims based on the applicable law of the contract, as explained in paragraph 3.1(c) below, by the inclusion of the word otherwise in the first paragraph of each sub-clause. Accordingly, in the end analysis, a claim may therefore be defined as an assertion of a right or a remedy. 2.3 The term counterclaim is also not defined in, and indeed does not appear in the text of, any of the FIDIC Forms of Contract. Nevertheless, the generally accepted meaning given to a counterclaim is an assertion made by a party, which can conveniently be examined and disposed of in an action originally initiated by the other party. It is not necessarily a defence, but a substantive claim against the claimant which could have
5

In September 1999, FIDIC published a new set of standard forms of contract alongside those that have been in use at that time. The new set is made up of the following four contract forms: x The Green Book: The Short Form of Contract - Agreement, General Conditions, Rules for Adjudication and Notes for Guidance; x The New Red Book: The Construction Contract, (Conditions of Contract for Building and Engineering Works, Designed by the Employer) - General Conditions, Guidance for the Preparation of the Particular Conditions, Forms of Tender, Contract Agreement, and Dispute Adjudication Agreement; x The New Yellow Book: The Plant and Design-Build Contract, (Conditions of Contract for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed by the Contractor) - General Conditions, Guidance for the Preparation of the Particular Conditions, Forms of Tender, Contract Agreement and Dispute Adjudication Agreement; and

x The Silver Book: The EPC & Turnkey Contract, (Conditions of Contract for EPC Turnkey Projects) - General Conditions, Guidance for the Preparation of the Particular Conditions, Forms of Tender, Contract Agreement and Dispute Adjudication Agreement.

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grounded an independent action.

The reference to convenience in this definition

signifies that the background of the counterclaim must be similar to that of the claim and resulting from the same set of facts and events. For instance, a good example of a counterclaim is where a delay event causes the contractor to claim that he has been wrongfully denied an extension of time by the engineer and the same delay event gives rise to the employers counterclaim for liquidated damages, referred to as delay damages in the 1999 FIDIC Contracts. 6 The important point to note is that in respect of a counterclaim falling within the above definition, the procedural steps that apply to a claim do not have to be followed by the counter claimant.

3.

Types of Claim
be based on any one of four legal and one non-legal concepts, as set out below, subject to the effect of the applicable law: (a) A claim under the contract: This category is based on the grounds that should a certain event occur, then a claimant would be entitled to a remedy that is specified under a particular provision of the contract. It is explicitly referred to in SubClauses 2.5 and 20.1 of the 1999 three Major Forms of Contract by the words under any Clause of these Conditions in their first paragraph with particular reference to the word under. The event described above may be one of two types. x Firstly, it may be a specified event under the contract, which might or might not occur, where in certain defined circumstances a party is entitled to claim a designated remedy. For example, the contractor may be entitled to claim an additional payment and an extension of time if testing is delayed by, or on behalf of, the employer, under Sub-Clause 7.4 Testing of the 1999 Red Book. 7

3.1 Essentially, other than claims under statutory law, claims in construction contracts may

The example is taken from a paper by Mr. Christopher R. Seppl, The Arbitration Clause in FIDIC Contracts for Major Works, ICLR Vol. 22, Part 1, January 2005. 7 The 1999 Red and Yellow Forms of Contract contain some thirty provisions specifying events that, when and if they occur, would entitle the contractor to make a claim; and thirteen that would entitle the employer to make a claim. The 1999 Silver Form of Contract contains a lesser number of twenty provisions for the contractor and

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Secondly, the specified event may be a breach of a particular provision in the contract entitling a claimant to a designated remedy if the terms of such provision are not, or only partially, complied with. If the claim is successful, the particular provision in the contract would apply and the remedy could be in the form of a payment of a sum of money, or an extension of time, or some other benefit, or a combination of all three. For example, it is stipulated in the 1999 Red Book that failure by the contractor to complete the works on a specified date would entitle the employer to seek delay damages at a specified rate per day or week, as provided in Sub-Clause 8.7 Delay Damages. In this connection, the provisions of the applicable law must be taken into consideration, for instance whether such damages are in effect a penalty, and if so, whether or not such a claim can be treated as a valid claim.

(b)

A claim arising out of or in connection with the contract: The second category relates to a claim arising, not under but, out of or in connection with the contract, where the remedy is not designated in the contract and the claimant needs to invoke a provision of the applicable law to obtain a remedy. Therefore, if the claim is valid, the remedy lies under the provisions of the applicable law of the contract, an example of this type of a claim is where one of the parties has misrepresented certain important facts. In such a case, the other party may use this as a basis for cancelling the contract or for claiming damages. Where the 1999 Major Forms of Contract are concerned, this category of claims is explicitly referred to in Sub-Clauses 2.5 and 20.1 by the words under any Clause of these Conditions or otherwise in connection with the Contract, appearing in the first paragraph, with particular reference to the word otherwise therein.

(c)

A claim under the principles of the applicable law: The third category relates to a claim arising under the application of the principles of the applicable law, either by the parties to the contract or against third parties. This could lead to a claim under the law of tort, or delict, as it is referred to in some jurisdictions. Once again the important explicit word reference in this connection, or indeed in

fourteen for the employer. A list of claims is contained in The FIDIC Contracts Guide, which was published separately by FIDIC during 2001, but was copyrighted in 2000, see pages 90 to 93.

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this connection with claim category (d) below, is otherwise, as referred to in category (b) above. (d) A claim arising out of the principle of quantum meruit: The fourth category comprises claims where no contract exists between the parties; where a contract existed, but is deemed to be void; or where a contract is in existence but the price is not stipulated, instead the amount to be paid is to be based on a reasonable sum or the price is to be agreed from time to time. The principle is that an individual has the right to be paid a reasonable remuneration for work done, which is referred to in some legal systems as quantum meruit or as much as one has earned. (e) A claim for ex gratia payment: Finally there is the claim for an ex gratia payment (meaning out of kindness). Although claims for ex gratia payments are not claims which arise by virtue of a contractual or legal entitlement, they are sometimes tolerated on the basis that there may be some commercial sense or benefit in reaching a settlement between the parties without the acceptance of liability.

4.

Claim Procedures

4.1 Under In the earlier FIDIC Forms of Contract, the claim procedures were tolerant of lack of notice provisions in an attempt to ensure that payment is made where contemporary records are kept and a discipline evolved in a procedure set out Clause 53 of the 1987 Red Book, which required the contractor when submitting a claim to follow the procedural steps outlined below: x give a notice of intention to claim within 28 days of the event giving rise to the claim (note it is not after the consequences of the event). The notice is required whether the claim is pursuant to a clause of the Red Book or otherwise. It does not have to include any details of the claim itself;

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x x x

keep contemporary records (by the contractor); 8 inspect the records (by the engineer); provide authority to instruct the contractor to keep further contemporary records (by the engineer);

within 28 days of the notice or an agreed period, submit particulars of the claim in respect of amount and grounds upon which it is based (by the contractor);

interim and accumulated accounts to be submitted for continuing effects (by the contractor);

x x

final accounts to be submitted at end (by the contractor); a copy of accounts to be sent to the employer, by the contractor, if so required by the engineer .

4.2 Under the 1999 FIDIC contracts for major works, the procedure for initiating a claim under the contract by an employer differs from that for initiating a contractors claim. The two procedures are explained in two different Sub-Clauses: Sub-Clause 2.5, Employers Claims; and Sub-Clause 20.1, Contractors Claims, respectively.

4.3 Sub-Clauses 2.5 and 20.1 of the 1999 FIDIC contracts for major works provide as follows:

Employers Claims
2.5 If the Employer considers himself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract, and/or to any extension of the Defects Notification Period, the Employer or the Engineer shall give notice and particulars to the Contractor. However, notice is not required for payments due under Sub-Clause 4.19 [Electricity, Water and Gas], under Sub-Clause 4.20 [Employer's Equipment and Free-Issue Material], or for other services requested by the Contractor. The notice shall be given as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim. A notice relating to any extension of the Defects Notification Period shall be given before the expiry of such period.
8

A list of the Records expected to be provided is given in Section 16.5.2 of the Authors book quoted in Footnote 2 above.

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The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount and/or extension to which the Employer considers himself to be entitled in connection with the Contract. The Engineer shall then proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine (i) the amount (if any) which the Employer is entitled to be paid by the Contractor, and/or (ii) the extension (if any) of the Defects Notification Period in accordance with Sub-Clause 11.3 [Extension of Defects Notification Period]. This amount may be included as a deduction in the Contract Price and Payment Certificates. The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this Sub-Clause.

Contractors Claims
20.1 If the Contractor considers himself to be entitled to any extension of the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer describing the event or circumstance giving rise to the claim. This notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance. If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the employer shall be discharged from all liability in connection with the claim. Otherwise, the following provisions of this Sub-Clause shall apply. The Contractor shall also submit any other notices which are required by the Contract, and supporting particulars for the claim, all as relevant to such event or circumstance. The Contractor shall keep such contemporary records as may be necessary to substantiate any claim, either on the Site or at another location acceptable to the Engineer. Without admitting the Employer's liability, the Engineer may, after receiving any notice under this Sub-Clause, monitor the record-keeping and/or instruct the Contractor to keep further contemporary records. The Contractor shall permit the Engineer to inspect all these records, and shall (if instructed) submit copies to the Engineer. Within 42 days after the Contractor became aware (or should have become aware) of the event or circumstance giving rise to the claim, or within such other period as may be proposed by the Contractor and approved by the Engineer, the Contractor shall send to the Engineer a fully detailed claim which

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includes full supporting particulars of the basis of the claim and of the extension of time and/or additional payment claimed. If the event or circumstance giving rise to the claim has a continuing effect: (a) (b) this fully detailed claim shall be considered as interim; the Contractor shall send further interim claims at monthly intervals, giving the accumulated delay and/or amount claimed, and such further particulars as the Engineer may reasonably require; and the Contractor shall send a final claim within 28 days after the end of the effects resulting from the event or circumstance, or within such other period as may be proposed by the Contractor and approved by the Engineer.

(c)

Within 42 days after receiving a claim or any further particulars supporting a previous claim, or within such other period as may be proposed by the Engineer and approved by the Contractor, the Engineer shall respond with approval or disapproval and detailed comments. He may also request any necessary further particulars, but shall nevertheless give his response on the principles of the claim within such time. Each Payment Certificate shall include such amounts for any claim as have been reasonably substantiated as due under the relevant provision of the Contract. Unless and until the particulars supplied are sufficient to substantiate the whole of the claim, the Contractor shall only be entitled to payment for such part of the claim as he has been able to substantiate. The Engineer shall proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine (i) the extension (if any) of the Time for Completion (before or after its expiry) in accordance with Sub-Clause 8.4 [Extension of Time for Completion], and/or (ii) the additional payment (if any) to which the Contractor is entitled under the Contract. The requirements of this Sub-Clause are in addition to those of any other SubClause which may apply to a claim. If the Contractor fails to comply with this or another Sub-Clause in relation to any claim, any extension of time and/or additional payment shall take account of the extent (if any) to which the failure has prevented or prejudiced proper investigation of the claim, unless the claim is excluded under the second paragraph of this Sub-Clause. 4.4 As can be seen from the above provisions, although both claim procedures start with an event or circumstance entitling the party to make a claim under one of the sub-clauses of the contract and end with the provisions of Sub-Clause 3.5, quoted below, the intermediate steps are different. Sub-Clauses 2.5, 3.5 and 20.1 are essentially the same

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for the 1999 Red and Yellow Forms, but they differ slightly in the Silver Form in that the Engineer is replaced by the Employer. 9

Determinations
3.5 Whenever these Conditions provide that the Engineer shall proceed in accordance with this Sub-Clause 3.5 to agree or determine any matter, the Engineer shall consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances. The Engineer shall give notice to both Parties of each agreement or determination, with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 [Claims, Disputes and Arbitration]. 10 4.5 The provisions of Sub-Clauses 2.5 and 20.1 can be arranged in the following sequential steps, simplifying the complex wording in these two sub-clauses. For Sub-Clause 2.5: 1. Step 1: An event or circumstance occurs with the potential of a claim by the Employer against the Contractor under any clause of the Contract Conditions or otherwise in connection with the Contract. 2. Step 2: The Employer or the Engineer should give notice and particulars of the claim to the Contractor. This notice should be given with the following in mind: 2.1 It should be given as soon as practicable after the Employer became aware of the event or circumstance. 2.2 A notice relating to an extension of the Defects Notification Period should be given before the expiry of such period.
Although the wording of the three Forms of Contract is very similar and each contains 20 Clauses, there are very important differences between them. The reader is advised to establish whenever relevant these precise differences in wording. Chapter 27 of the Authors book referred to in footnote 2 above provides a comparative analysis between the texts of three Major Forms: Red, Yellow and Silver. 10 Sub-Clause 3.5 of the three Major Forms of FIDIC is a very important clause from the point of view of Claims and Dispute Resolution. It is referred to throughout the Conditions in 27 Sub-Clause: 1.9, Delayed Drawings or Instructions; 2.1, Right to Access to the Site; 2.5, Employers Claims; 3.2, Delegation by the Engineer; 4.7, Setting Out; 4.12, Unforeseeable Physical Conditions; 4.19, Electricity, Water and Gas ; 4.20, Employers Equipment and Free-Issue Material; 4.24, Fossils; 7.4, Testing; 8.9, Consequences of Suspension; 9.4, Failure to Pass Tests on Completion; 10.2, Taking Over of Parts of the Works; 10.3, Interference with Tests on Completion; 11.4, Failure to Remedy Defects; 11.8, Contractor to Search; 12.3, Evaluation; 12.4, Omissions; 13.2, Value Engineering; 13.7, Adjustments for Changes in Legislation; 14.4, Schedule of Payments; 15.3, Valuation at Date of Termination; 16.1, Contractors Entitlement to Suspend Work; 17.4, Consequences of Employers Risks; 19.4, Consequences of Force Majeure; 20.1, Contractors Claims.
9

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2.3

Notice is not required for payments due under Sub-Clauses 4.19, 4.20, or for other services requested by the Contractor.

2.4

Supporting substantiating particulars should also be submitted with the notice specifying the basis of the claim.

3. Step 3: The Engineer should then proceed in accordance with Sub-Clause 3.5 to agree or determine (i) the amount (if any) which the Employer is entitled to be paid by the Contractor, and/or (ii) the extension (if any) of the DNP in accordance with Sub-Clause 11.3. 4. Step 4: The Engineer should consult with each Party in an endeavour to reach agreement, failing which he is required to make a fair determination in accordance with the Contract. 5. Step 5: If agreement between the parties is achieved, the Engineer is required to give a notice with supporting particulars. Otherwise, he is required to give a notice of his determination with supporting particulars. 6. Step 6: The amount determined may be included as a deduction in the Contract Price and Payment Certificates. The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor. 7. Step 7: If the Engineers determination is not acceptable to any of the Parties, the dispute arising should be resolved in accordance with Sub-Clauses 20.2 to 20.8. 4.6 For Sub-Clause 20.1, the procedural steps may be presented as follows: 1. Step 1: An event or circumstance occurs with the potential of a claim under any clause of the Contract Conditions or otherwise in connection with the Contract. 2. Step 2: The Contractor should give notice of the claim to the Engineer describing the event or circumstance giving rise to the claim. This notice should be given with the following in mind: 2.1 It should be given as soon as practicable; and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance. Failure to do so is fatal to the claim.

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2.2

All supporting particulars for the claim, as relevant to such event or circumstance, should also be submitted.

2.3

Any other notices required by the Contract should also be submitted.

3. Step 3: The Contractor should keep substantiating contemporary records, which the Engineer may monitor and/or instruct the Contractor to keep further contemporary records. 4. Step 4: Within 42 days of the event, the Contractor should submit a fully detailed claim which includes full supporting particulars of the claim. The period may be varied if approved by the Engineer. If the event or circumstance giving rise to the claim has a continuing effect: (a) (b) this fully detailed claim shall be considered as interim; the Contractor should submit further interim claims and any further particulars at monthly intervals, giving the accumulated effect; and (c) the Contractor should submit a final claim within 28 days after the end of the effects resulting from the event, or within such other period approved by the Engineer. 5. Step 5: Within 42 days after receiving a claim or any further particulars supporting a previous claim, the Engineer should respond with approval or disapproval and detailed comments. He may also request any necessary further particulars, but shall nevertheless give his response on the principles of the claim within such time. This period may be varied if approved by the Contractor. 6. Step 6: Substantiated amounts for any claim should be included in each Payment Certificate. It is to be noted that the requirements of Sub-Clause 20.1 are in addition to those of any other Sub-Clause which may apply to the claim and failure to comply preventing or prejudicing proper investigation should be taken into account by the Engineer. 7. Step 7: The Engineer should then proceed in accordance with Sub-Clause 3.5 to agree or determine (i) the extension of time (if any) and/or (ii) the additional payment (if any) to which the Contractor is entitled under the Contract.

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8. Step 8: The Engineer should consult with each Party in an endeavour to reach agreement, failing which he is required to make a fair determination in accordance with the Contract. 9. Step 9: If agreement between the parties is achieved, the Engineer is required to give a notice with supporting particulars. Otherwise, he is required to give a notice of his determination with supporting particulars. 10. Step 10: Each Payment Certificate shall include such amounts for any claim as have been reasonably substantiated as due under the relevant provision of the Contract. 11. Step 11: If the Engineers determination is not acceptable to any of the Parties, the dispute arising should be resolved in accordance with Sub-Clauses 20.2 to 20.8. 4.7 Due to the numerous steps in these procedures and the different consequences that might follow, it is perhaps easier to explain and better to understand them by using flow charts, as illustrated below. Figures No. 1(a) and 1(b) show the procedure for the Employers claims and Figures No. 2(a), 2(b) and 2(c) show the procedure for the Contractors claims, each with its own steps from the time that the event or circumstance occurs until the claim is properly dealt with or a dispute arises. If a dispute does arise, then irrespective of whether it is the result of an Employers claim or a Contractors claim, it falls to be resolved under Sub-Clauses 20.2 to 20.8 of the 1999 FIDIC contracts for major works. 4.8 Besides the different claim procedures adopted in the 1999 FIDIC contracts for major works to those in the 1987 Red Book, two important questions arise as a result of the provisions of Sub-Clause 3.5. The first relates to the precise meaning of the word fair in the phrase the Engineer shall make a fair determination in the first paragraph of the sub-clause. This word embodies a broad and elastic concept that is extremely hard to capture in a precise manner. Attempts have been made to grapple with the meaning of that term in a number of court cases. In a case in the New Zealand Court of Appeal, Cooke J, said referring to Hatrick v Nelson Carlton Construction [1964] NZLR 72, In Hatrick the term fairness was avoided in the judgments,

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Richmond J saying that he resisted it partly because of its vagueness and partly because it might be regarded as equivalent to natural justice. .. Fairness is a broad and even elastic concept, but it is not altogether the worse for that. In relation to persons bound to act judicially fairness requires compliance with the rules of natural justice. In other cases this is not necessarily so. 11 In the subsequent Amec case in the English Court of Appeal, referred to in paragraph 4.12 and footnote 14 below, Lord Justice May said I would not be coy about saying that the Engineer has to act fairly, so long as what is regarded as fair is flexible and tempered to the particular facts and occasion. Fairness also entitles one or both of the parties to ask for a speedy decision, if limitation is becoming a problem; and fairness obliges the Engineer, I think, to give a speedy decision in such circumstances, provided that it is given honestly and independently and that it is in truth a properly considered decision. So, it seems that acting fairly has to be viewed in two different ways. When acting in a judicial capacity, fairness requires compliance with the rules of natural justice, but in all other situations, acting fairly is elastic and flexible and tempered to the particular facts and occasion.

4.9 The second question that arises from Sub-Clause 3.5 of the 1999 FIDIC contracts for major works relates to its final sentence: Each Party shall give effect to each agreement or determination unless and until revised under Clause 20. The question is: What happens if one or all the parties do not give effect to each agreement or determination. Presumably, the matter becomes a dispute and has to be dealt with under the remaining part of Clause 20? But then, what is the definition of a dispute and how and when does it precisely arise? 4.10 The questions posed in the preceding paragraphs form some of the very contentious issues that are usually met under the Conditions of Contract for construction project. Litigation and arbitration in the construction field has frequently commenced with such an issue posed from the beginning, which has usually to be resolved first as a
Quoted from Cooke J, in Canterbury Pipe Lines v The Christchurch Drainage Board (1979) 16 BLR 76, at 98, sitting in the New Zealand Court of Appeal. He added that
11

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preliminary point before dealing with the merits of the case. 12 It is therefore of great general interest and importance, particularly as there is usually a great deal of money at stake. 4.11 In a recent case in the English Technology and Construction Court, the judge had to deal with this specific point under Clause 66 of the standard ICE (Institution of Civil Engineers) Conditions of Contract, which has similar, but not precisely the same, procedures. In that case, having reviewed the authorities, Jackson J. derived the following propositions: 13 1. The word dispute which occurs in many arbitration clauses and also in section 108 of the Housing Grants Act should be given its normal meaning. It does not have some special or unusual meaning conferred upon it by lawyers. 2. Despite the simple meaning of the word dispute, there has been much litigation over the years as to whether or not disputes existed in particular situations. This litigation has not generated any hard-edged legal rules as to what is or is not a dispute. However, the accumulating judicial decisions have produced helpful guidance. 3. The mere fact that one party (whom I shall call the claimant) notifies the other party (whom I shall call the respondent) of a claim does not automatically and immediately give rise to a dispute. It is clear, both as a matter of language and from judicial decisions, that a dispute does not arise unless and until it emerges that the claim is not admitted. 4. The circumstances from which it may emerge that a claim is not admitted are Protean. For example, there may be an express rejection of the claim. There may be discussions between the parties from which objectively it is to be inferred that the claim is not admitted. The respondent may prevaricate, thus giving rise to the inference that he does not admit the claim. The respondent may simply remain silent for a period of time, thus giving rise to the same inference. 5. The period of time for which a respondent may remain silent before a dispute is to be inferred depends heavily upon the facts of the case and the contractual structure. Where the gist of the claim is well known and it is obviously controversial, a very short period of silence may suffice to give rise to this inference. Where the claim is notified to some agent of the respondent who has a legal duty to consider the claim independently and then give a considered response,

12 13

See Chapter 16 of the Authors book quoted in footnote 2 above. Amec Civil Engineering Ltd v Secretary of State for Transport, [2004] EWHC 2339 (TCC).

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a longer period of time may be required before it can be inferred that mere silence gives rise to a dispute. 6. If the claimant imposes upon the respondent a deadline for responding to the claim, that deadline does not have the automatic effect of curtailing what would otherwise be a reasonable time for responding. On the other hand, a stated deadline and the reasons for its imposition may be relevant factors when the court comes to consider what is a reasonable time for responding. 7. If the claim as presented by the claimant is so nebulous and ill-defined that the respondent cannot sensibly respond to it, neither silence by the respondent nor even an express non-admission is likely to give rise to a dispute for the purposes of arbitration or adjudication. 4.12 In a subsequent case in England, Clarke LJ quoted Jackson Js seven propositions and accepted them: 14 63. For my part I would accept those propositions as broadly correct. I entirely accept that all depends on the circumstances of the particular case. I would, in particular, endorse the general approach that while the mere making of a claim does not amount to a dispute, a dispute will be held to exist once it can reasonably be inferred that a claim is not admitted. I note that Jackson J does not endorse the suggestion in some of the cases, either that a dispute may not arise until negotiation or discussion have been concluded, or that a dispute should not be likely inferred. In my opinion he was right not to do so. 64. It appears to me that negotiation and discussion are likely to be more consistent with the existence of a dispute, albeit an as yet unresolved dispute, than with an absence of a dispute. It also appears to me that the court is likely to be willing readily to infer that a claim is not admitted and that a dispute exists so that it can be referred to arbitration or adjudication. I make these observations in the hope that they may be of some assistance and not because I detect any disagreement between them and the propositions advanced by Jackson J. 4.13 The decision of Jackson J in the Amec case was appealed to the English Court of Appeal where it came before Lord Justice May, Lord Justice Rix and Lord Justice Hooper. The Court approved Jackson Js decision and made further observations regarding other important areas and issues that are frequently debated in construction disputes. The logical analysis of the decision in the Court of Appeal is well worth reading and considering in full by all construction professionals. These issues are
14

Collins (Contractors) Limited v Baltic Quay Management (1994) Limited [2004] EWCA Civ 1757.

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outside the scope of this paper except those referred to above and perhaps one other, which is dealt with in following paragraph. Of course, this decision is binding on all lower courts and on arbitrators in England and Wales; and is persuasive in other common law countries. However, it is suggested here that its logic ought to be followed also in all international arbitrations where the same issues are dealt with. 15 4.14 Although not of immediate relevance to the 1999 FIDIC contracts for major works, but to the earlier FIDIC Forms of Contract, an interesting point was also decided in this appeal. It is the difference between the words difference and dispute, which had eluded lawyers for some time. 16 In his judgment, Lord Justice May discussing Clause 66 of the ICE Contract stated that Clause 66 refers, not only to a dispute, but also to a difference. Dispute or difference seems to me to be less hard-edged than dispute alone. Lord Justice Rix added in this connection: I agree that the word difference probably goes wider than the concept of a dispute.

Amec Civil Engineering Ltd v Secretary of State for Transport, [2005] EWCA Civ 291. In the Authors book on the FIDIC Forms of Contract, which was first published in 1991, the author suggested that the word difference is wider in concept than the word dispute, but some lawyers disagreed, see page 150 of the third edition of the book.
16

15

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STEP 1

An event or circumstance occurs, of which the Em* considers himself to be entitled to payment and/or to any extension of the
Defects Notification Period, the Em or the E* shall give notice and particulars to the C under any clause of the Conditions or

otherwise.

STEP 2.1

Yes

Does the Em or E give notice to the C* as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim of entitlement?

No

No notice is required for payments under Sub-Clauses 4.19 and 4.20, or for services requested by the C. Notice for extension of the DNP shall be given before to the expiry of such period.
STEP 2.4

STEPS 2.2 & 2.3

The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount and/or extension to which the Em considers himself to be entitled in connection with the Contract.

Yes

Does the Em or E give the C the particulars required with the notice? STEP 3

No

The Contract Conditions are silent on the consequences in that connection.

Proceed to Sub-Clause 3.5 of the Contract Conditions, as in Figure 1(b)

* In these Flow Charts, Figures 1 & 2 , Em = Employer; E = Engineer; and C = Contractor. Figure No. 1(a). Claim Procedure under Sub-Clause 2.5 of the 1999 FIDIC contracts for major works.

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Continued from Figure 1(a) above

STEP 3

STEP 4

The E shall then proceed in accordance with Sub-Clause 3.5 to agree or determine (i) the amount (if any) which the Em is entitled to be paid by the C, and/or (ii) the extension (if any) of the DNP in accordance with Sub-Clause 11.3. S-C 2.5 Sub-Clause 3.5 requires the E to consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract.

Yes
STEP 5 a

Does the Engineer proceed in accordance with S-C 3.5 & consult with each party?
STEP 5b

No

Is agreement between the parties achieved & notice with particulars given by the E?

No

Does the E make a fair determination & give notice with support particulars?

No Yes
STEP 6

Yes

Yes

This amount may be included as a deduction in the Contract Price & Payment Certificate, PC. The Em shall only be entitled to set off against or make any deduction from an amount certified in a PC, or to otherwise claim against the C, under this Sub-Clause.

Is determination acceptable to the Ps?

STEP 7 No

End

A dispute results & the provisions of Sub-Clauses 20.3 to 20.8 apply

Figure No. 1(b). Claim Procedure under Sub-Clause 2.5 and continued as required under Sub-Clause 3.5 of the 1999 FIDIC contracts for major works.

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STEP 1

An event or circumstance occurs, of which the C became aware or should have become aware, and for which he considers himself to be entitled to EoT and/or additional payment, under any clause of the Conditions or otherwise.
STEPS 2 & 2.1

Yes
STEPS 2.2 & 2.3

Does the C give notice to the E within 28 days after the event or circumstance giving rise to a claim of entitlement?

No

The C should also submit supporting particulars and notices as required by the Contract.
STEP 3

No entitlement to EoT & no additional payment, and the employer is discharged from all liability in that connection.

The C is to keep & E to monitor contemporaneous records.

Within 42 days after the C became aware (or should have become aware) of the event or circumstance,** the C should send to the E fully detailed claim which includes full supporting particulars of the basis of the claim and of the EoT and/or additional payment claimed.
STEP 4

End

Yes

Does the event or circumstance giving rise to the claim have a continuing effect?
STEPS 4 a to c

No

(a) the fully detailed claim shall be considered as interim; (b) the C to send further monthly interim claims, giving the accumulated delay &/or amount claimed, and such further particulars as the E may reasonably require; and (c) the C to send a final claim within 28 days after the end of the effects resulting from the event or circumstance.**

Proceed to Figure 2b below

** or within such other period as may be proposed by the C and approved by the E.
Figure No. 2(a). Claim Procedure under Sub-Clause 20.1of the 1999 FIDIC contracts for major works

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Continued from Figure 2(a) above

Yes

Does the C comply with this Sub-Clause & all others?

No

Any EoT and/or additional payment shall take account of the extent (if any) to which failure to comply has prevented or prejudiced proper investigation of the claim. STEP 5

Within 42 days after receiving a claim or any further particulars supporting a previous claim,** the E shall respond with approval or disapproval and detailed comments. He may also request any necessary further particulars, but shall nevertheless give his response on the principles of the claim within such time.

Yes

Does the Engineer comply with this clause?

No

Are the Parties satisfied with the Es Response? ii

No
STEP 6

The provisions of Sub-Clause 3.5 apply

Yes

End

Each Payment Certificate shall include such amounts for any claim as have been reasonably substantiated as due under the relevant provision of the Contract. Unless and until the particulars supplied are sufficient to substantiate the whole of the claim, the Contractor shall only be entitled to payment for such part of the claim as he has been able to substantiate.

** or within such other period as may be proposed by the E and approved by the C,
Figure No. 2(b). Claim Procedure under Sub-Clause 20.1 of the 1999 FIDIC contracts for major works, continued below.

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Continued from Figure 2(b) above

STEP 7

STEP 8

The E shall proceed in accordance with Sub-Clause 3.5 to agree or determine (i) the EoT (if any) for Completion (before or after its expiry) in accordance with Sub-Clause 8.4, and/or (ii) the additional payment (if any) to which the C is entitled under the Contract. S-C 20.1 Sub-Clause 3.5 requires the E to consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract.

Yes
STEP 9a

Does the Engineer proceed in accordance with S-C 3.5 & consult with each party?
STEP 9 b

No

Is agreement between the parties achieved & notice with particulars given by the E?

No

Does the E make a fair determination & give notice with support particulars?

No Yes
STEP 10

Yes

Yes

Each Payment Certificate shall include such amounts for any claim as have been reasonably substantiated as due under the relevant provision of the Contract. Unless and until the particulars supplied are sufficient to substantiate the whole of the claim, the Contractor shall only be entitled to payment for such part of the claim as he has been able to substantiate.

Is determination acceptable to the Ps?

STEP 11

No

End

A dispute results & the provisions of Sub-Clauses 20.3 to 20.8 apply

** or within such other period as maythe proposed by the C and approved by works. required under Sub-Clause 3.5 of be 1999 FIDIC contracts for major the E.

Figure No. 2(c). Claim Procedure under Sub-Clause 20.1 and continued as

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5.

Dispute Resolution

5.1 In a comparative sense, the multi-tier dispute resolution procedure of Clause 67 of FIDICs well established fourth edition of the Red Book (1987) has been retained in the 1999 FIDIC contracts for major works, but the role of the Engineer as an adjudicator of disputes has been relegated in favour of allocating the role of adjudication to a board of in dependent professionals, usually three, referred to as Dispute Adjudication Board, DAB. However, the role of the DAB has been made wider to encompass dispute avoidance as well as dispute resolution. resolution can be initiated by one party alone once a dispute arises. 17 Dispute

avoidance can only be used if both parties wish it to take place whereas dispute

5.2 The dispute resolution procedure of the 1999 FIDIC contracts for major works is contained in Sub-Clauses 20.2 to 20.8 of the Contract Conditions. As mentioned above, it is also a multi-tier process. It starts with a dispute adjudication procedure followed by an amicable dispute resolution mechanism and if both of these fail, then arbitration. Once again, due to the fact that the procedure is a difficult and complex one, it is easier explained and better understood by using flow charts. Figure No. 3 shows the procedure itself and Figure No. 4 illustrates the compliance requirements contained in the fourth paragraph of Sub-Clause 20.4. As can be seen from Figure No. 3, essentially, the procedure comprises only five steps that can be summarised as follows: 1. Step 1: A dispute arises. 2. Step 2: The dispute is referred to the DAB in writing for its decision, under SubClause 20.4. 3. Step 3: The DAB gives notice of its decision within 84 days or it fails to give a decision within that period.

17

As this topic is extremely wide and goes beyond the scope of this paper, interested readers could refer to Chapter 26 of the Authors book quoted in footnote 2 above; and also to a paper by the author on Dispute Boards & Dispute Resolution presented at an ICC/FIDIC Conference held in Paris on 17th and 18th of October 2005.

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4. Step 4: The Parties react to the decision of the DAB, which could be one of two possibilities: (a) Both Parties are satisfied with that decision, the dispute is resolved and such decision becomes final and binding; or (b) At least one of the Parties is dissatisfied with the decision of the DAB, or with its lack of decision, and thus notifies the other Party of its dissatisfaction within 28 days. 18 In this case, the Parties are given 56 days to attempt resolving their dispute by amicable settlement, under SubClause 20.5. If the attempt is successful, the dispute is resolved. If not, step 5 applies. 5. Step 5: If the attempt to amicably resolve the dispute fails, such dispute is to be finally settled by international arbitration, under Sub-Clause 20.6.

5.3 It is important to note that irrespective of whether the dispute is resolved through steps 4(a) or 4(b), the decision of the DAB becomes binding on the Parties pursuant to the terms of Sub-Clause 20.4, which provides in its fourth paragraph the following wording: The 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 as described below. .

5.4 The effect of this provision on the decision of the DAB is known technically as a temporarily final & binding effect. The decision must be complied with by both parties, which is a characteristic feature of the FIDIC DAB procedure under the 1999 FIDIC contracts for major works distinguishing it from the DRB procedure under other forms of contract. The decision becomes, in effect, a contractual obligation on both Parties such that non-compliance with it by either of them is a breach of contract and the Party in breach would be liable in damages. However, such liability for damages on its own is:

If the notice of dissatisfaction is not given within the required 28 days, the decision of the DAB will become final and binding and the provisions relating to Step 4(a) will apply.

18

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STEP 1

A dispute arises under Sub-Clause 20.1 or 2.5

STEP 2

The dispute is referred to the DAB for its decision under Sub-Clause 20.4
STEP 3

DAB provides its decision within 84 days under Sub-Clause 20.4 **

or

DAB fails to do so within 84 days under Sub-Clause 20.4

STEP 4

Yes
STEP 4b

Is either Party dissatisfied with the decision?

No
STEP 4a

Does that Party give its notice of dissatisfaction under 20.4 in the time allowed (28 days)?

No

Dispute is settled and the decision is final and binding, Sub-Clause 20.4

Yes
The Parties have 56 days to resolve the Dispute amicably, SubClause 20.5

Is the dispute settled amicably?

Yes

Dispute is settled

No
STEP 5

Dispute shall be finally settled by International Arbitration, Sub-Clause 20.6

** The 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, see 4th paragraph of Sub-Clause 20.4.

Figure No. 3. Dispute Resolution Procedure under Clause 20 of the 1999 FIDIC contracts for major works.

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STEP 3

DAB provides its decision within 84 days under Sub-Clause 20.4**

STEP 4a STEP 4 STEP 4b

No

Is either Party dissatisfied?

Yes

No

Does that Party give its notice of dissatisfaction within 28 days?

The Decision is final & binding

Yes

Do the Parties comply with DABs decision?

Proceed under SubClauses 20.5 & 20.6.

Yes No
End

Do the Parties comply with the DABs decision?

Proceed to SubClause 20.7 & refer the failure itself to arbitration

No

Yes

GAP

Non-compliant Party is in breach of contract & subject to damages

Dispute will be settled through arbitration

** The 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, see 4th paragraph of Sub-Clause 20.4.

Figure No. 4. Compliance with the Decision of the DAB under the 1999 FIDIC contracts for major works.

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1. Insufficient to ensure that the decision of the DAB is complied with promptly, since (a) The dissatisfied party might feel so strongly against the decision that it might ignore it and continue its work, or the position it had adopted, in breach of the DABs decision, taking on board the risk that in the end, at some future date, it might be vindicated and found not to be liable in damages; (b) The dissatisfied party might simply keep silent and not respond;

2. Unlikely to be an appropriate remedy in the circumstances of a dispute, since the dispute might require instantaneous attention such as the case where the DABs decision is in connection with allegations of defective design, material or workmanship under Sub-Clause 15.1; 19 and 3. Not decisive enough to ensure the smooth running of a project or a contract to proper completion, since additional investigation, instruction or drawing might be quickly required.

5.5

Sub-Clause 20.7, in its present wording quoted below, resolves this problem in the event that a DABs decision is not complied with, but unfortunately it only deals with the situation when the decision of the DAB has become final and binding. Accordingly, as can be seen from Figure No. 4 above, the compliance by the Parties with the decision of the DAB where the decision has not become final and binding, i.e. where one of the Parties is dissatisfied with the decision, remains without a prompt and decisive mechanism to enforce it promptly. wording of Sub-Clause 20.7 is as follows: 20.7 Failure to Comply with Dispute Adjudication Boards Decision In the event that: (a) neither Party has given notice of dissatisfaction within the period stated in Sub-Clause 20.4 [Obtaining Dispute Adjudication Boards Decision], (b) (c) the DABs related decision (if any) has become final and binding, and a Party fails to comply with this decision, For completeness sake, the present

Failure to comply with a Notice to Correct under Sub-Clause 15.1 entitles the Employer to terminate the Contract under Sub-Clause 15.2 with all of its serious consequences.

19

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then the other Party may, without prejudice to any other rights it may have, refer the failure itself to arbitration under Sub-Clause 20.6 [Arbitration]. Sub-Clause 20.4 [Obtaining Dispute Adjudication Boards Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply to this reference.

5.6

The provisions that describe the situation where one Party is dissatisfied with the DABs decision are contained in the fifth and sixth paragraphs of Sub-Clause 20.4. They provide that the dissatisfied Party must give a notice to this effect to the other Party within 28 days of the DABs decision. These two paragraphs also provide that, except as stated elsewhere (Sub-Clauses 20.7 and 20.8), neither Party shall be entitled to proceed to arbitration of the dispute unless such notice of dissatisfaction has been given.

5.7

There are three consequences to a properly given decision by the DAB under SubClause 20.4 of the 1999 FIDIC contracts for major works. These are as follows: 1. The decision of the DAB affects the Parties rights and obligations and as such it is binding on the Parties who are required to promptly give effect to it unless and until it shall be revised in an amicable settlement or an arbitral award, as described in Sub-Clauses 20.5 and 20.6 of the contract conditions. 2. Sub-clause 20.4 also stipulates that If the DAB has given its decision and no notice of dissatisfaction has been given by either Party within 28 days after it received the DABs decision, then the decision shall become final and binding upon both Parties. (emphasis added.) 3. However, if a notice of dissatisfaction is given by either Party within 28 days after receiving the decision, setting out the matter in dispute and the reason(s) for dissatisfaction, then both Parties are required to attempt to settle their dispute amicably, as stipulated under Sub-Clause 20.5, before commencement of arbitration. Furthermore, as set out in Sub-Clause 20.6, unless settled amicably, any dispute in respect of which the DABs decision has not become final and binding may be finally settled by international arbitration.

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5.8

As a result of the first consequence, Sub-Clause 20.7 deals with the possibility of noncompliance with the DABs decision. However, although the clear intention of SubClause 20.4 is that the DABs decision should be complied with promptly, unless and until it is revised in a subsequent forum (amicable settlement or arbitration), and irrespective of whether or not one of the Parties is dissatisfied with it, Sub-Clause 20.7 is worded in such a way that it only deals with the event where the Parties are satisfied with the decision. The draftsmen did not deal with circumstances where the parties are dissatisfied with the decision, leaving that situation without any prompt solution or elucidation, hence creating a gap.

5.9 It is also worth noting in connection with the amicable dispute resolution requirement in the 1987 Red Book and the 1999 FIDIC contracts for major works that it is obligatory on the parties, and to correct the erroneous belief that some commentators have that this is intended to be a cooling off period. There are two reasons for the process being obligatory, the first is to remove any perceived idea that a proposal by one party towards amicable settlement is a sign of weakness in its case and second reason of making the process a mandatory step before reference to arbitration is the avoidance of any possible blame being attached to the decision maker who pursues amicable settlement of a dispute instead of the ultimate forum of arbitration.

5.10 Finally, it is worth mentioning that Sub-Clause 20.8 of the 1999 FIDIC contracts for major works provides that where there is no DAB in place, any dispute arising should proceed directly to arbitration without the benefit of the two intermediate steps of DAB and Amicable Settlement. In this regard, it is in stark contrast with the provisions of the 1987 Red Book, which required an Engineers decision before either party could proceed to arbitration. That position presented a problem in circumstances where the dispute arises after the works had been completed and the Engineer has departed from the Site. This problem does not exist any longer in the 1999 FIDIC contracts for major works. Nael G. Bunni, January 2006.

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