SEMINAR – EFFECTIVE CONTRACT MANAGEMENT

Chamber of Construction Industry Sri Lanka – 22nd August 2007.

AN OVERVIEW OF international CONSTRUCTION CONTRACTS

& DISPUTE RESOLUTION –

Chrishmal Warnasuriya BA (Col), P.Dip (Hons), LLM (Hons) (London) 1

INTRODUCTION:

I must first express my sincere gratitude to your Chamber and its very energetic
CEO for inviting me to share a few thoughts on this subject with you. It is indeed a
privilege to finally meet many of you leading the industry today. Coming in last on
a list of such illustrious speakers is indeed a ‘hard act to follow’, especially when all
of you are just itching to get away; nevertheless I shall try to keep you stuck to your
seats at least for a few minutes longer.

Taking into account the fact that all of you are busy professionals operating in a
commercial environment which demands ‘instant magic’ and considering further
that I’ve been afforded a modest 30 minutes to place before you what usually
requires much longer even for a basic study, I have decided against a MS PP
presentation (by which you will only retain what you see) but prepared this paper
instead. You will note that this has much more detail and depth than what I shall
present ‘on my feet’. All I will do is guide you through the salient points on this,
but you will hopefully retain this paper and use it as your ‘first information’ if you
like, to come to terms with these concepts whenever you’re presented with a
situation in international construction.

I have attempted to keep the language as ‘non-legalistic’ as possible so that it may

be easily understood by everyone and given only the necessary information, relying
on ‘footnotes’ to give you additional information where appropriate.

1
The author passed out as an Attorney-at-Law of Sri Lanka in May 2000, having apprenticed under Mr. Faisz
Musthapha PC at whose Chambers he continued as a ‘junior counsel’ pursuing a primarily appellate practice in
Public & Administrative Law, Civil & Commercial Appeals, Constitutional Law & Fundamental Rights
jurisdiction appearing mainly before the Court of Appeal and Supreme Court. He thereafter moved to UK and
read at King’s College, University of London and passed out in 2006 with a Master’s Degree in Laws (Hons)
Specialising in Commercial & Corporate Law, including the subject Int. Construction Contracts & Int.
Arbitration. He went on to complete a pupillage as a Barrister at 2 Paper Buildings in London (Chambers of
Sir Desmond De Silva, QC) and has just returned to active practice in Colombo in July 2007, where he has
added to his areas of practice Commercial Banking & Int. Finance, Corporate Law, Public & Private Int. Law,
Construction Law, Arbitration, Immigration and Int. Human Rights Law.

Chrishmal also holds a BA in Political Science, Int. Relations & Journalism from Colombo and a Postgraduate
Diploma (Hons) in Int. Relations & Conflict Resolution from the BCIS. He is a member of the Association of
Sri Lankan Lawyers in the UK (ASLLUK) and of the Bar Association of Sri Lanka (BASL). He regularly
contributes to publications both here and in the UK and can be contacted on [email protected] or
[email protected] for any clarifications on this presentation.

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I must strongly advocate however, that although ‘law’ as it used to be practiced has
undergone many a change over the years (as for instance this seminar – where we
the practitioners bring the law to you, as opposed to a decade ago where you may
be visiting us in chambers for even a percentage of this information), it must be
borne in mind that this paper is an ‘overview’ only and should therefore be relied
on purely for your information and education, not as ultimate authority based on
which you should contract. You as contractors, engineers or employers would
naturally be expected to be aware of these concepts when you’re confronted with an
issue. It is always best to immediately seek sound professional advice from a
specialised legal practitioner when you are faced with an actual situation for only
they will know the intricate operating of these rules, how they’ve been interpreted
recently and any provisos (or exceptions) in their practical application. When faced
with any situation it is also unnecessary to entertain the age-old fears over
protracted litigation, since the 21st century practitioner also appreciates that time
itself is a valuable commodity with a severe opportunity cost and he/she has been
trained therefore, to think that their primary task is to do everything possible to
keep a client out of court rather than inside it!

For the very same practical reasons my presentation today shall be based on:

 Some notable legal issues arising out of FIDIC standard form of Construction
Contracts (International Federation of Consulting Engineers), 2 specifically the
1999 publications; the Red Book (construction)3, Yellow Book (plant-design &
build)4, Silver Book (EPC-turnkey)5 and the Green Book (short contracts)6;

 And the manner of resolving any disputes arising from the provisions of the
FIDIC modelled contracts.

I shall where appropriate (and time permitting) attempt to draw parallels with
other forms of contracts and the operation of ‘ordinary laws’ in relation to similar
disputes.
1. RESOURCE MATERIAL:

a. Some useful websites:

I give below some useful websites where you may seek immediate recourse to as a
‘first port of call’, which can be extremely helpful as ‘information only’.
2
Federation Internationale des Ingenieurs-Conseil
3
For building and engineering works primarily designed by the employer
4
For electrical and mechanical plant and & engineering works, design-build by the contractor
5
For projects where contractor engineers, procures and constructs
6
For projects typically 6 months or under, of relatively lesser value, ideally under US$ 5,00,000.

2
For publications – These are mainly ‘institutionalised’ publications.

 FIDIC 7 - www.fidic.org
For general information plus papers (some from the ICLR) and speeches, for Multilateral
Development Bank (MDB) Harmonised Edition see home page

 UNCITRAL (UN Commission on Int. Trade Law) - www.uncitral.org

A useful site, access to UNCITRAL Model Law on Procurement Practice; Legislative Guide
on Privately Funded Infrastructure Projects; Excerpts from the Legal Guide to Drawing Up
International Construction Contracts (1988); for UNCITRAL Rules of Arbitration, organising
proceedings and Model Law see www.uncitral.org/english/texts/arbitration/arb-rules.htm

 The World Bank - www.worldbank.com

The World Bank publishes a series of Standard Bidding Documents for projects of various
types and sizes, available through its publications departments in Washington D.C. and
around the world. The Sample Bidding Documents may be found at:
http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/PROCUREMENT/0,,contentMDK:2
0063085~menuPK:84284~pagePK:84269~piPK:60001558~theSitePK:84266,00.html

 European Bank for Reconstruction and Development - www.ebrd.com

 European Union - http://europa.eu.int

For information on Public Procurement and for the Court of Justice and Court of First
Instance see http://www.curia.eu.int/en (English language site).

For a ‘professional’ perspective – Some Solicitors sites are quite useful:

 Linklaters’ Dispute Toolkit - www.linklaters.com/disputetoolkit

Provides precedent with explanatory texts for arbitration clauses, jurisdiction clauses, ADR
clauses, boilerplate clauses dealing with governing law, sovereign immunity and service of
process with explanatory text etc and also links to more than 100 dispute related websites.

 Lovells’ Arbitration site - http://graduates.lovells.com/LovellsArbitrationGuide

For guidance and information on drafting arbitration agreements international commercial
contracts, texts of arbitration laws (with summaries) and procedural rules as well as a
drafting engine, which may be used to prepare an arbitration agreement.

 Pinsent Masons - http://www.pinsentmasons.com

This is a specialist construction law firm and provides an adjudication service, including
case summaries, commentary and FAQs.

For Case Law – Most decided cases that I quote (and available for reference) are
based on ‘English Law’ and I will also refer (where
appropriate) to relevant Arbitration Rules (such as ICC).

The British and Irish Legal Institute - http://www.bailii.org

7
See note 2 above

3
This provides excellent coverage of all the decisions of the House of Lords and Court of
Appeal as well as the main High Court cases.

International Court of Arbitration (of the ICC) - www.iccwbo.org/index_court.asp

This body functioning under the auspices of the Int. Chamber of Commerce (ICC) is the
world’s foremost in the resolution of international construction disputes. Over 20% of its
business is concerned with construction with members from over 60 countries. You may
download its Rules of Arbitration, of Pre-Arbitral Referee and ICC Dispute Board Rules.

London Court of International Arbitration (LCIA) - www.lcia-arbitration.com

This too (based in London) provides a comprehensive international dispute resolution
service, both under its own Rules and under the UNCITRAL Rules.

Swiss Arbitration Association - www.arbitration-ch.org

Int. Centre for Settlement of Investment Disputes (ICSID) - www.worldbank.org/icsid/

You can find references to decided cases and decisions on pending cases. ICSID was
established under the Convention on the Settlement of Investment Disputes between States
and Nationals of Other States of 1966, in pursuance of the World Bank’s overriding
consideration to facilitate the settlement of investment disputes between governments and
foreign investors to which Sri Lanka ratified on 12th Oct’1967.8

International Bar Association - www.ibanet.org

Particularly interesting in the context of ‘rules of evidence’ applicable for many Arbitration
Proceedings

b. Some selected articles:

Some of the following articles have been written by highly respected authors on this
subject (most of them who sit as Int. Arbitrators and they shed invaluable light on
our subject matter. I shall try to refer to at least some of these articles during my short
presentation (depending on time availability) but I strongly recommend a
comprehensive reading to anyone with specific interest on any area. The reader
should ordinarily be able to find the article without much difficulty in the ICLR9 with
the reference supplied and where such a reference is not given, I can make it
available via email to anyone interested.

On the ‘Applicable Law’ (governing law) to an Int. Construction Contract:

 Oxalic acid & the applicable law: the Rome Convention and construction – Phillip
Britton (The Society of Construction Law Publication, 2002)
 The Law governing an international engineering contract - R.H. Christie

On the FIDIC Contract:

8
Point of interest – see case of Asian Agricultural Products Limited v. Democratic Socialist Republic of
Sri Lanka (Case No. ARB/87/3), to do with a joint venture on Shrimp Farming which was referred to ICSID
and decided in 1987.

9
Publication - International Construction Law Review

4
 The New standard form of int. construction contracts – Christopher Seppala
(International Business Lawyer, February 2002)
 FIDIC Subcontract form – Christopher Seppala [1995] 12 ICLR 5
 The pre-arbitral procedure for the settlement of claims under the FIDIC Contract –
Christopher Seppala [1986 3 ICLR 315]

On BOT (build, operate & transfer) projects:

 Universal Issues – Frilet [1997] 14 ICLR 499
 Underlying Conditions – Wiwen-Nilssen [1997] 14 ICLR 513

On Package Deals, Turnkey, Design & Build Contracts etc:

 Turnkey Heavy Plant Contracts – Prof. Friedrich Nicklisch [1990] 7 ICLR 250
 EPC Turnkey Contract, a comparison with The FIDIC Orange book - Dr J Goedel [1997]
14 ICLR 33

On the role & function of the Engineer:

 Rôle of Engineer as Control Administrator - Prof. Friedrich Nicklisch [1990] 7 ICLR 322
 Role of Intermediary in Dubai - Horsfall Turner [1994] 11 ICLR 204

On risks & their allocation:

 Contract Structures and Risk Allocation – Prof. Friedrich Nicklisch [1992] 9 ICLR 113
 Right of Recourse of Employer against a Subcontractor - F. Chaix & S Marchand [1998] 15
ICLR 211
 Role and Responsibility of Owner - Vera van Houtte [1999] 16 ICLR 59

On International Arbitrations:
 Report on Construction Arbitrations – Prof.’s Nael Bunni & H.H. Humphrey Lloyd, QC
[2001] 18 ICLR 644
 Multi-Party Arbitration under ICC Rules - Christopher Seppala [1990] 7 ICLR 358
 Hong Kong Dispute Resolution – D. Lewis [1993] 10 ICLR 76; [1994] 11 ICLR 25, [1995]
ICLR 131
 Arbitration in the Netherlands - A G J van Wassenauer [1993] ICLR 43
 Resolution of disputes in Vietnam - RA Shadbolt [1995] 12 ICLR 267
 Resolving Disputes in Singapore: Litigation, Arbitration and ADR – Chan [1998] 15
ICLR 259
2. AN ‘INTERNATIONAL’ CONSTRUCTION CONTRACT:

a. Why is it different to a ‘domestic’ contract:

I will not undermine the intellectual capacity of this forum by launching a high-
school like lecture on ‘similarities & differences’ between domestic and
international construction contracts; suffice though I believe to set down the
following salient features of ‘playing on the international arena’ of construction.

 The ‘international’ dimension –

5
Although it appears very obvious at first glance, I’m certain that those with
experience will readily agree that you encounter a completely novel set of everyday
issues when dealing in the international marketplace (as opposed to dealing with
‘your own people’ in the domestic arena); which, if not handled tactfully on first
occurrence will almost undoubtedly lead to ‘a dispute’.

A simple example – FIDIC Clause 4.12

This clause (popularly referred to simply as ‘clause 12) pertains to Unforeseeable

Physical Conditions’. In interpretation (because of the operation of Clause 1.1.6.8) it
is now widely accepted that what is being referred to are ‘those conditions that are
unforeseeable to an experienced contractor‘(and not the ‘ordinary reasonable man’
test) at the time of tender.

Now this looks simple enough at first glance. However say you were tendering for
works in Singapore and encountered certain issues with subterranean conditions
subsequent to base date, which you will now claim as an ‘unforeseeable ground
condition’ based upon which you will naturally seek an extension.

It is quite possible that you will not be granted such an extension since if you claim
to be a contractor on the international marketplace, you will be deemed to have
known and expected to have provided for all such conditions as an ‘experienced
contractor’, Singapore being such a small land space without largely diverse or
complicated ground conditions; all of which must be known by now by experience.

 Crossing multiple jurisdictions –

This is an area where one would undoubtedly face adverse consequences, if not
provided for adequately at the stage of contracting. I will attempt to explain this
factor through the following example.
As many of you experienced persons would know, the prevalent legal systems of
the world can be liberally divided as ‘common law’ systems and ‘civil law systems’.
The concept of ‘frustration of contract’, for instance, which generally means that the
performance of the contract has become impossible and therefore demands
discharge automatically is viewed very differently within these two systems of law.

You will find that the civil law jurisdictions (such as Germany/France) will more
readily accept this phenomenon based upon their concept of impossibiliun nulla
obligatio est10 upon which a contractor’s obligations may be immediately considered
discharged. However even in 1863 common law systems (such as the UK)
demanded that one performs the contract or pays damages in lieu of failure, even
where performance had been rendered impossible. 11 Although the position is now
slightly improved, at first instance common law would still consider a person who
10
Latin legal maxim – meaning that “as to the impossible, there is no obligation”. This is manifested by their
principles of ‘force majeure‘ etc…

6
for a defined or ascertainable amount promises to carry out and complete a
construction project to have assumed all the risks inherent in it, and would discharge
the contract as ‘frustrated’ only if there has been ‘a radical change’ in the obligation,
so as to render it an entirely different obligation than that was originally contracted to
do12. In this regard I recommend a reading of Davis Contractors Ltd. Vs Fareham
UDC13 where even an acute shortage of skilled labour and material that extended
the time for completion by almost 16 months was still not considered ‘a radical
change of the obligation’ so as to merit ‘frustration of contract’.

b. Diagram of possible parties in an ‘International’ Construction:

(Please see overleaf)

Diagram of possible parties in an ‘International’ Construction:

Project Manager Sponsoring Ministry/Government

Agency

A
Insurer
Insurer Architect Operator - User A User/Consumer
A

Insurer A Civil or Structural A Employer Bank

Engineer
A
Indemnity
Insurer Mechanical/ CONTRACT BOND Export Credit
A
Electrical Engineer
A Bank

A
Other
11 Insurer
Contract – 27th Ed (Oxford-1998) at page 504 quoting the case of Taylor v Caldwell
See Anson’s Law of Consultants
(1863) 3 B&S 826 per Blackburn J
12
Ibid – at page 516
MAIN PRIME CONTRACTOR
13 Re Insurers Primary JOINT VENTURE OF Plant Purchases
[1956] AC 696
Insurers PARTNERS 1-A-2-A-3

Architectural Site Investigation Substructure Materials Superstructure

Engineering or Clearance Sub-contractor Equipment Sub-contractor 7
and Other Sub-Contractor PilingofSub-
(Part JV) and Suppliers
Shippers (Part of JV)
Consultants sub-contract
 A

A A A
A

A
A
A

A A A A A
A
Mechanical
A A and
Electrical
Materials Sub-contractor
A
Equipment
suppliers
 I have inserted ‘A’ and used straight lines (_____) where I felt any issues
arising were more likely to be settled through arbitration
 I have used dotted lines (----------) where I felt disputes were more likely to be
settled in courts of law based on domestic legislation.
 However it doesn’t necessarily have to be so always and it is quite possible
for this position to be reversed, depending on surrounding circumstances.
c. The FIDIC forms of Contract

What I intend on giving here is a brief introduction (in point-form) to the four new
FIDIC books published in 1999. For a more detailed study I suggest a reading of the
articles by Wade14 or Seppala.15

 Red Book – recommended for building and engineering works where most of
the designing is done by the Employer. Some designing may of course be done by
the contractor.

o The administration of the contract, supervision, approval of work, payment,

etc. is certified by the Engineer (who is the Employer’s employee)
o Work done is measured periodically and payment made according to Bill of
Quantities. There is an option for ‘lump-sum payment’.
o Certain ‘new clauses’ have come in that favour the contractor much more
than the previous editions
14
Christopher Wade – “An overview of FIDIC Contracts”, presented at ICC-FIDIC Conference, Cairo, 2005
15
Christopher Seppala – “New Standard Forms of International Construction Contract” published in
International Business Lawyer (February 2001)

8
 Yellow Book – mostly used in projects for Electrical/Mechanical Plant or even
engineering works where most of the design is done by the contractor.

This new Yellow Book replaces both the old Yellow & Orange (turnkey) Books.
Whilst the old Yellow dealt only with electrical & mechanical construction works,
the new one is not necessarily limited by ‘nature of works’ but is suitable for all
types of projects where main responsibility for design lies with Contractor, though
some design may be carried out by Employer/Engineer. Some notable features are:

o The administration of contract, supervision, approval of work, payment etc.

is by the Engineer
o Payments are usually on a Lump Sum basis, against a Schedule of Payments
but testing (of works) procedures are usually more complicated than Red
Book

 Silver Book – Since this is a completely new book to FIDIC an extra description
is warranted.

This book is recommended for EPC (turnkey) projects, intended at catering to the
void created in the international marketplace by the Red and Yellow Books for
constructions with ‘price/time certainty’. The traditional books with their balanced
risk-sharing brought with it a host of difficulties for some Employers:

o Employer needed to pay extra (unbudgeted costs) when specific risks

actually occurred
o Contractor did not have to estimate for unlikely hard-to-value risks
o And most importantly the final price and time was uncertain.

However, certain Employers in the market are privately funded (as in many BOT
projects) who require more certainty in final price and time, to attain which, the
contractor needs to take on more risks, subject of course to the demand for a higher
price which some Employers in the international market do not mind spending.
This book is therefore meant to cater to such projects where Employers require
more certainty, less risk and where parties contract with full understanding and
acceptance of these risks.

This move to deviate from FIDIC’s standards of balanced risk sharing between the
employer and contractor has been widely criticised as placing a more onerous
liability on the contractor. Therefore effectively the silver book is intended at a strict
2 party contract without the intervention of the 3 rd intermediary (the engineer), such
as an EPC contract within a BOT (or similar type) structure. Some of its main
features are:

o responsibility for design lies solely with Contractor where Employer

provides its requirements (usually ‘performance specification’ type),

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 o Contractor carries out all engineering, procurement, construction providing
a fully-equipped facility, ready for operation at ‘the turn of a key’,
o No Engineer – instead the Employer may appoint a representative to look
after its interests
o Lump sum contract price, extended testing procedures after completion
o Contractor takes majority of risks which Employer pays more to cover
o Final price and time of completion is more certain
o Employer’s requirements are usually very brief (and performance type) and
Contractor assumes overall control of project
o Procurement procedures are different, with only a small number of tenderers
o Contractor is given freedom to carry out works in his chosen manner, BUT
has to prove reliability and performance of completed project
o Such privately-financed (BOT type) projects are subject to more negotiation
than public funded ones

Therefore this contract is NOT suited (Yellow Book recommended) where –

o time or information is insufficient before Contract or where considerable

work is underground or difficult to inspect
o Employer intends to supervise closely or control or review or where an
intermediary determines interim payments
o part of Works is designed by Employer
o bidding is public without negotiations
 Green Book – the Short Form of Contract. This is ideally suited for short
contracts of typically 6 months or under, or for ones of a relatively small value.

Since the main forms of contract were rather long and unnecessarily unwieldy for
relatively simple projects, FIDIC also prepared a much simpler form, originally
intended for works of value up to US$ 500,000 and six months’ duration. However
as it progressed it was understood that the amount of the contract sum should not
be the governing factor, but rather the complexity of the work, since a simple yet
repetitive project (like sewer laying) may cost much more BUT may not need a
complicated form, whilst some other project with much less work (like a dredging
contract) may. The Green Book therefore –

o Has all the provisions necessary for such works in a total of 15 clauses, with a
total length of only 10 pages
o The sentences are short, language uncomplicated and simple to understand,
making it ideal for many contracts of a simple nature, particularly in
developing countries (such as ours) for projects such as roads, water and
sewage, electricity transmission, and the like
o The World Bank has found it so useful that it is now incorporated in their
Standard Bidding Documents for Simple Works
o The printed Book is some 35 pages long, BUT includes the Agreement with
its Appendix, Rules for Adjudication and Adjudicator’s Agreement, and 10
pages of Notes for Guidance,

10
 o Risk sharing is basically on the same balanced principle as the Red & Yellow
Books. There is no ‘Engineer’, so it is a direct contract BUT the Employer
may appoint representative. Design can be carried out by either party and all
types of construction work may be covered. Payment may be on a lump sum
or on any other basis.

Some salient features of new FIDIC Contracts:

 Additional protections for the Contractor –

o 2.4 – Obligation on the Employer to satisfy the Contractor (within 28 days)

with evidence of its ability to pay the contract price
o 2.5 – burden cast on the employer/engineer to give notice of any payments
due to it and if not, employer cannot set it off
o 4.2 – Employer cannot claim on the performance security except under given
situations
o 8.4 & 8.5 – very wide provisions entitling the Contractor for extensions of
time due to delay (including delays attributable to ‘authorities’)
o 13.7 – allowance for varying contract price due to price increases caused by
legislation or even interpretation of the laws
o 14.7 – entitlement to receive compounded finance charges, to reduce rate of
work or even suspend work totally for any non-payment of interim payment
certificates within 56 days after submitting documents
o 20.1 – burden on the engineer to respond to a claim within 42 days

 DAB - In the new books, the role of the Engineer to settle disputes has been
supplanted by a Dispute Adjudication Board (DAB), thus negating the necessity
for the Engineer to be ‘impartial’ any longer

o There is also provision for this DAB to be set up at the time of contract (only
in the new red book) to remain on site throughout the contract
o In the case of yellow and silver books this is provided for each dispute
(clause 20). This is a marked departure from the old red and yellow books,
where any dispute needed to be referred to the engineer as a pre-condition to
arbitration

(See detailed note on DAB’s on page 26 below)

 Similarities in the Red & Yellow books – both contain identical or similar
provisions on many matters:

o traditional competitive tendering procedures

o risk sharing is balanced between parties (as in the old books), e.g. employer
takes risk of ‘adverse physical conditions’ (4.12), unforeseeable ‘operation of

11
 the forces of nature’ [17.3(h)] and design by Employer [17.3(g)], as well as
other phenomena such as war (anywhere), terrorism, riot, & similar (within
the country) (17.3)

o All claims must follow a strict procedure, employer’s claims (2.5) &
contractor’s claims (20.1), which are then determined by Engineer in terms of
3.5

 Points of variance between the FIDIC Books –

o The earlier position was that the difference lay in the ‘nature of the work’
which was primarily ‘civil’ or mechanical’ engineering

o The previous Red Book was primarily intended for civil engineering
construction works such as roads, water & sewage facilities, bridges, dams,
hydropower stations, tunnels etc where most of the work was carried out on
site. The employer or his engineer provided the detailed design. Here
payments were on a monthly basis, where the work was available for
measurement and scrutiny

o As opposed to this the previous Yellow Book was for contracts where the
major part of the work was carried out ‘off-site’ at the manufacturer’s
workshops, which is the case in most electrical and mechanical plant. This
had more emphasis on testing & commissioning procedures, guarantees, etc
for manufactured plant such as turbines, generators, switchyard equipment.
Here the Contractor was responsible for most of the design. For such work
being carried out at the factory, monthly measurement is not practicable and
therefore payments were mostly on a ‘lump sum basis’ as for instance upon
stages of completion.

o Whilst the new Red & Yellow books have retained most of these features, the
deciding factor for selection has now evolved to be based on ‘who is
responsible for the design’ rather than naming it ‘civil’ or ‘mechanical’
engineering. Thus in modern composite projects the all-important allocation
of risks is mainly dependent upon who is responsible for the design and not
which particular type of work dominates

o Build, operate and transfer (BOT) conditions (as in the Silver book) would
usually include an agreement to provide infrastructure to be compensated
later through the operation of the project, such as a PPP initiative

o Clause 4.12 in the Silver Book is quite different in wording, emphasising on

‘result predictability’ and ‘certainty’ and further that the contract price shall
not be adjusted due to unforeseen events.

12
 o Clause 8.4 also enforces a strict limitation on time extensions, as opposed to
the other books, whilst Clause 20.1 requires the submission of a ‘fully detailed
claim’ with ‘full supporting particulars’ for the satisfaction of a claim by the
contractor; which would invariably mean all records (whether primary,
secondary or tertiary) unlike in the other books

o Since no two projects are identical, the books have a Part I, which contains
the standard conditions applicable, hopefully to the great majority of
projects, and a Part II containing the ‘Conditions of Particular Application’,
which must be drafted to suit the precise requirements of the actual project
in hand.

3. MAIN AREAS OF DISPUTES/CLAIMS:

Having thus introduced you to FIDIC, I intend to very briefly discuss a few areas in
it which I feel require careful construction and interpretation to avoid many
possible disputes. Since these are ONLY brief observations I recommend a reading
of the referred articles (set out under ‘resource materials’ above or given as
‘footnotes’) for a more comprehensive grasp of these areas.

a. Governing (applicable/proper) law:

It would not be incorrect to say that the single-most encountered obstacle in all
international contracts (not necessarily only in constructions) if not provided for
specifically in the contract is the search for the ‘governing (or proper) law of the
contract and the principle known as ‘the conflict of laws’; the question as to which
system of law would govern the terms of the contract.

The membership of the EU has to a large extent ‘contained’ this problem following
the ratification of the ‘Rome Convention’16 and thereafter legislating for it through
domestic enabling statutes, similar to the Contracts (Applicable Law) Act of the UK17
to arrive at the ‘governing law’ (a similar concept is the UNCITRAL model law on
arbitration, which is discussed later in this paper). These however are only
applicable to those ratifying states to the Convention. What of the others? The
prevalent philosophy is that in respect of other countries the general law of
interpretation (common law) applies to search for the ‘proper law’ of the contract.

16
The Convention on the Law Applicable to Contractual Obligations of 1980 (for short, the Rome Convention)
17
In the UK, S 2(1) of the Contracts (Applicable Law) Act 1990 gave statutory force to the Rome Convention
on the law applicable to contractual obligations

13
One must be careful not to be confused by this whole phenomenon and remember
that any such ‘search for a law’ only arises in the absence of a selected law that has
already been chosen by the parties to interpret their contract (subject to certain very
limited exceptions such as ‘provisions contrary to the lex situs). This is why FIDIC
has made specific provision at clause 1.4 for the parties to select their law.

In the absence of such an express provision, the convention 18 or the common law
must kick in to figure out the applicable system of law. The search is generally
three-fold. It begins by seeing whether the parties have expressly chosen a
particular system of law. If not express, can their choice be implied? If even an
implied choice cannot be discerned, then with which system of law is the contract
most closely connected? What the convention refers to as ‘governing law’ and the
common law refers to as ‘proper law’ is more or less the same 19. I have set out some
salient features below in the form of a comparative table for ease of reference.
EU STATES GOVERNED BY THE COMMON LAW RULES FOR
‘ROME’ CONVENTION FINDING THE ‘PROPER LAW’

 Article 8 - the applicable law In Amin Rasheed Shipping Corp v Kuwait

governs the existence and validity Insurance Co20 it was held that ‘the
of a contract proper law’ is the law which governs the
contract and the parties’ obligations
 Article 10.1 – it governs the under it; the law which determines
interpretation, performance in (normally) its validity and legality, its
terms of procedural law, construction and effect, and the
consequences of breach including conditions of its discharge.’
the assessment of damages,
various ways of extinguishing
obligations, prescription and
limitation of actions and
consequences of nullity of the
contract.

 Article 10.2 – allows for regard to

be had to the law of the country
of performance when ruling on
defective performance

 Article 3.1 - A contract shall be  In the case of Mount Albert

governed by the law chosen by Borough Council v Australasia
the parties Temperance and General Mutual
Life Assurance Society Ltd21 it was
18
The Rome Convention
19
Christie R.H., QC – ‘the law governing an international engineering contract’ at page 2
20
[1984] AC 50 per Wilberforce LJ (at page 69)
21
[1938] AC 234 (PC) – per Wright LJ (at page 240)

14
  Article 1 (2) (d) - specifically decided that “it may be that the
excludes ‘arbitration agreements’ parties have in terms in their
or those contracts where the agreement expressed which law
parties have already selected a they intend to govern, and in that
law. case their intention will be
effectuated by the court”
 Furthermore even the Roman-
Dutch common law which also
has roots in our legal system
evidences similar provisions as in
the South African case Improvair
(Cape) (Pty) Ltd v Establissements
Neu22 in which it is noted that an
express agreement of the parties
was deemed to be their choice on
whether South African or French
law governed their partnership
for joint tender.

Article 3.3 – Freedom for parties to select  Vita Food Products Inc v Unus
‘any system of law’ to govern their Shipping Co Ltd23 this same
contract, notwithstanding the fact that it principle applied and recognized.
may have no connection at all to the  The HOL endorsed this PC
contract. decision in Compagnie Tunisienne
de Navigation SA v Compagnie
d’Armement Maritime SA24

Christie argues25 that this ‘freedom to

choose a law’ proves invaluable in an
engineering contract where parties may
be either unwilling to subject the
contract to the law of the other party’s
country or the law of the country where
the works are to be performed.

22
1983 2 SA 138 (C) 145A-F (South African case)
23
[1939] AC 277 (PC)
24
[1971] AC 572 (HOL)
25
Christie R.H., QC – ‘the law governing an international engineering contract’ at page 4

15
In the absence of such an express choice, Christie in his article gives an invaluable
the ‘Convention’ allows for the implied ‘mirror image’ on how even the common
choice of the parties to be construed, law interprets the parties intentions,
done by recourse to the Giuliano & precisely in the same manner as the
Lagarde report26: convention:

(a) From their use of a standard form of (a) In the case of Amin Rasheed
contract which is known to be Shipping Corp v Kuwait Insurance
governed by the law of that country; Co27 the preferred choice of a
or standard Lloyd’s marine policy
by a Kuwaiti insurance company
was held to be ‘an implied
choice’. Another close upon this
interpretation is Whitworth Street
Estates (Manchester) Ltd v James
Miller and Partners Ltd28 where a
standard English building
contract was held to mean a
choice of English Law as the
‘proper law’ impliedly chosen.

(b) from their express choice of that (b) In The Njegos case29 the fact that
country in previous or related the previous charterparty for the
transactions between them; or same voyage was governed by
English Law was deemed to be an
implied choice once again for the
subsequent dispute on the bills of
lading

(c) from the choice of the courts of that (c) The Compagnie Tunisienne de
country to settle their disputes, or Navigation SA v Compagnie
‘the choice of a place’ (lex situs) d’Armement Maritime SA30 case
where disputes are to be settled by may be cited as authority for the
arbitration; or contention that an arbitration
clause specifying a venue for the
arbitration was an indication of
the party’s choice of law. The
same line of decision is reflected

26
OJ 1980 C282/1 AND in Plender & Wilderspin – European Contracts Convention (2nd Ed-2001) at Annex
IV, made applicable in the UK under S 3 (3) (a) of the Act of 1990 (see FN 17 above)
27
[1984] AC 50
28
[1970] AC 583
29
[1936] AC 90
30
See FN 24 above

16
 in The Mariannina31 case English
Law was held to be the ‘implied
choice’ since the bills of lading
specified arbitration in London by
a maritime arbitrator.

(d) From references in the contract to (d) On references to particular

particular provisions of the law of provisions leading to the
that country. conclusion as to ‘implied choice of
parties’, George C Anspach Co Ltd v
CNR32 reference was made to
United States statutes.

In cases where there is neither an The common law position is similar, as it

express choice nor an apparent implied will not allow a miscarriage of justice
choice of law or if in the courts opinion simply to follow the interpretation rules
such choice does not lead to the right to ascertain an ‘implied choice’.
result, Article 4 sets out provisions for
ascertaining the applicable law to the See case law –
contract.  Golden Acres Ltd v Queensland
Estates Pty Ltd36
There is case law on this point, in the  The Hollandia37
form of –
 Samcrete Egypt SAE v Land Rover33
 Kenburn Waste v Heinz Bergmann34
 Ennstone Building Products v
Stanger35

Point to remember – ALWAYS select your system of law expressly when

contracting, as allowed at Clause 4.1 of FIDIC.

31
[1983] 1 Lloyd’s Rep 12 (CA) 14-15
32
[1950] 3 DLR 26 37 (Can)
33
[2001] EWCA Civ2019, [2002] CLC 533 CA
34
[2002] FSR 45, CA
35
[2002]EWCA Civ916, [2002]1WLR 3059CA

36
[1969] Qd R 378 (Aus)

37
[1938] 1 AC 565

17
Perhaps it is also the appropriate time for those of us in ‘this region’ to seriously
consider formulating our own set of rules (not only on interpreting questions on the
‘choice of law’ but maybe even extending to other broader issues in ‘regional
construction) in the form of a ‘regional treaty’; similar to the style and concept
adopted by the EU with regard to the Rome Convention, for minimising
construction related disputes in this region and/or involving
Contractors/Employers of the region.

b. The Engineer & Impartiality

Clause 1.1.2.4 defines the appointment of the ‘Engineer’ and Clause 3.2 allows for
replacement by affording notice to the Contractor. It may be of interest to note the
following provisions in the FIDIC contract and possible interpretations that may be
drawn.

 Clause 3.1 – the Engineer’s duties and authority

o Note – Employer may delegate his authority for ‘specified works’ in the
contract and such actions are then deemed to be with approval

o If so the applicable laws of agency should apply for such delegation (such as
instances where the agent can bind the principle for certain actions) in
contract and in common law

o If a State authority in Sri Lanka is the Employer, it may be interesting to see

how our Courts would look at such delegation especially in respect of Public
Law principles and Fundamental Rights jurisdiction.38

o The only way to minimize such interpretation and ‘general principles’ to

operate is to be as specific and express as possible and provide for all such
matters in the contract document

 Clause 3.2 – it is also possible for the Engineer to delegate works to assistants

o Here is an interesting question for you to use as an exercise. Having so

delegated an act (which must be with notice in writing) could the Engineer
then decide to exercise it without revoking it?

38
As for instance the principle of delegatus non potest delegare in Public Law (that powers of discretion etc,
conferred specifically upon a person can ONLY be exercised by such person and no other)

18
 o If you read Clause 3.2 (b) you will note that this asserts the Engineer’s
authority (even under such delegation), allowing the Contractor to refer any
decision of such a delegated assistant to the engineer for his final decision

 Clause 3.3 – allows the Engineer to vary his instructions to the contractor and
specifies that it must be in writing, unless the Contractor confirms such an oral
instruction.

Especially in view of the fact that the new FIDIC books have replaced the
Engineer’s ‘on site adjudicatory role’ by providing for a ‘Dispute Adjudication
Board (DAB at Clause 20.2) I feel it worthwhile to review the Engineer’s new role to
ascertain how impartial he is required to be in his present context.
I am personally of the view (with which quite a few commentators agree) that the
Engineer’s impartiality has diminished to a great extent in the present FIDIC
editions in view of the following provisions (Clauses):

 3.1 – he is deemed to act for the employer

 3.5 – the express duty to exercise discretion impartially on any situation (as
previously) has been replaced by making a fair determination only in respect of
matters arising under 3.5

 3.4 – The Employer can replace him (having given notice to the Contractor and
subject to objections) but this ‘fear’ in my view would not allow for impartiality

 Extensions of time –

o Bateson39 compares the earlier FIDIC provisions which, he claims, by

implication precluded the Contractor seeking an extension for delays
attributable to the Engineer, which now a Contractor could; in view of the
Engineer being considered as Employer’s personnel

o One can see that this argument holds some merit since the contractor’s duty
of ‘general indemnity’ (17.1) covering Employer’s personnel, in terms of the
interpretation clause (1.1.2.6) includes the Engineer

39
Bateson, David in his paper titled ‘Impartiality of the Engineer’ (FIDIC – August 2000)

19
 c. Ground Conditions & Risk Allocation

This is another area in which I feel there is potential for many disputes to arise,
which would ultimately of course depend on the circumstances of each case. I
should like to explore specifically the following FIDIC provisions in this regard:

 Clause 4.10 - Site Data (and ‘relevant data’)

o Most obligations referred to there should have been completed before

tendering (and therefore prior to contract); which may therefore allow an
interpretation that these are not obligations under the contract BUT these
remain nevertheless part of the contract

o Furthermore, what is this relevant data that the employer is supposed to

give the contractor? Does it mean ONLY the primary information and their
interpretations OR is it simply to make available the ‘core information’
itself and ask the contractor interpret it?

 See 1.2 (interpretation clause) which stipulates that the ‘marginal note’
cannot be relied on for interpreting the contract. Therefore although
4.10 refers to ‘site data’ on the margin, all relevant data does not
necessarily have to be limited to site data in terms of this interpretation
 Also note the qualifying words when referring to the Contractor’s
obligation to ascertain facts
 The words ‘practicable’ & ‘cost & time’ are also important
considerations when interpreting this since the search for ‘site data’
must also therefore be within these qualified limits for the Contractor,
which may therefore not allow him to take into account all relevant
matters on certain occasions

o Also note that 4.11 ties down the contractor to a price, which is deemed to
be after having considered all such ‘site data’ (and therefore calculated for
any contingencies) and forms his acceptance of the above site information
and whatever risks as necessary

 Clause 4.12 - Unforeseeable Physical Conditions

20
This is another ‘twister’ for any interpreter of a FIDIC contract.

o Note that ‘Unforeseeable’ (is capitalised) and must be referred to

interpretation. In terms of the given definitions (at 1.1.6.8) it means not
reasonably foreseeable by an experienced contractor by the date of
submission of the tender

 It should necessarily follow therefore that the Contractor referred to at

4.10 & 4.11 (as indeed elsewhere) means such an experienced contractor

o Also note that there is a limitation even on this, that what is referred to is
ONLY what he sees at the time of tender

 Therefore it should follow, should it not, that what he may discover

thereafter need not necessarily have been foreseeable by him as an
‘experienced Contractor’ as at base date?

o If and when the Contractor comes across such a ‘condition’ which he

considers to have been an ‘Unforeseen one’ he will then notify the engineer
of such a condition, and why it was unforeseeable

 Having received this notice the engineer is required to make his own
evaluation
 Before proceeding for payment [under sub-paragraph (b)] the engineer
is also entitled to make an overall evaluation of other conditions
encountered, whether they had been more favourable than estimated by
the Contractor
 Note – that since the emergence of such a condition invariably leads to a
request for an extension of time and/or additional payment and/or
both, the Engineer is allowed to ‘net such times/payments’ as against
other favourable conditions
 It is therefore my view that ‘Clause 12 (4.12)’ needs to be viewed more
as an insurance policy rather than a means to recover all costs over such
time/expenditure, ONLY to recover those parts which were actually
unforeseeable and impossible to overcome

o Also note - although this clause in both ‘red & yellow books’ is more or less
the same, the ‘silver book’ categorically disentitles the contractor from
recompense for such risks, and expects him to have estimated for all of
that, which (as I have argued before) is the whole idea of the Silver Book

21
4. DISPUTES & MECHANISMS FOR RESOLUTION UNDER FIDIC:

a. Claims and Disputes

A reading of the totality of the provisions of Clause 20 manifests that a Contractor

has a total of 42 days to make a ‘fully detailed’ claim under the contract. This is
‘under contract’. Essentially a Contractor may assert two types of claims:

 “Legal” claims - which the Contractor may be entitled to assert under the law
governing the contract, the most obvious one being breach of contract. It is
important to bare in mind that FIDIC contracts are not exclusive of remedies
that may be available to a party under the governing law and for instance, the
Contractor may consider:

o That the Employer had “misrepresented” the conditions at site, and it

would be more advantageous to claim ‘in law’ for such misrepresentation
rather than to claim for ‘unforeseeable physical conditions under 4.12, or

o That the Employer has wrongfully terminated the contract, upon the basis
of breach of contract, rather than upon the basis of the termination clause
(15),

Nothing in FIDIC expressly precludes this although as a general rule, it will be in

the Contractor’s interest to claim under the contract wherever feasible, since the
Red and Yellow Books confer upon the Engineer the power and authority to decide
the Contractor’s claims in the first instance and the Engineer will be unable to
evaluate a claim based in ‘general law’ without obtaining legal advice.

 “Contractual” claims – which the Contractor is entitled to assert by virtue of the

specific provisions of the FIDIC contract, which the 1999 editions each contain,
specifying events which, should they occur, will entitle the Contractor to claim
from the Employer.

The basic claims procedure operates in the following manner:

 Sub-Clause 20.1 – New provisions in the 1999 editions

o If the Contractor considers himself entitled to an extension of time for

Completion and/or additional payment under any clause of the Conditions

22
 or otherwise, the Contractor must give notice to the Engineer (or to the
Employer – in the Silver Book) as soon as practicable and not later than 28
days.
o Mere notice of claim is sufficient at this stage (28 days) and does not need
to state the amount or time claimed nor the contractual basis of the claim
nor provide any supporting documents40

o 20.1 - If the Contractor fails to do so, there is no extension of time and he is

not entitled to additional payment, and the Employer shall be discharged
from all liability in connection with the claim. It is also important to keep
the following provisions in mind:
 1.3 - Each notice of claim must be in writing and properly delivered
 14.3 – Since the requirements of 20.1 are expressly stated to be “in
addition to those of any other Sub-Clause which may apply to a claim”,
commentators41 argue that the Contractor must also comply with the
requirements of the clause which may have given him the substantive
right to claim. It would then appear that even 14.3 must form such
‘other clause’ since all such ‘additional claims’ needed to have been
included in the monthly progress reports produced for interim payment
certificates

o It is worthwhile I believe, to take special note of the provisions of 20.1:

 Within 42 days after becoming aware (of circumstance giving rise to the
claim), the Contractor must send to the Engineer a fully detailed claim
which includes full supporting particulars of the basis of the claim and
of the extension of time and/or additional payment
 He is also required to “keep such contemporary records as may be
necessary to substantiate any claim”
 Note – a court decision that defined “contemporary records”:

Her Majesty’s Attorney General for the Falkland Islands v. Gordon Forbes
Construction (Falklands) Limited42

“original or primary documents, or copies thereof, produced or

prepared at or about the time giving rise to the claim, whether
by or for the contractor or the employer.”

They were held not to mean:

“witness statements produced after the time giving rise to the
claim where such statements cannot be considered to be original
or primary documents prepared at or about the time giving rise
to the claim.”

40
Equally, the Engineer is not required to respond to this, the Contractor’s notice of claim, only to the fully
detailed claim with supporting particulars
41
Seppala, Christopher R – Contractor’s Claims under FIDIC Contracts for Major Works, [2000] 17 ICLR 235
42
[2003] BLR 208, 285

23
  Within 42 days after receiving a claim the Engineer must respond “with
approval, or with disapproval and detailed comments”. He may also
request any necessary further particulars “but shall nevertheless give
his response within such time”
 If the Contractor fails to comply with this or another Sub-Clause, 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

Interestingly this is the first time a FIDIC contract has required the Engineer or the
Employer to respond to the claim of a Contractor within a given time period or in a
given manner.

 Determination of claims - please note:

In terms of both standard claims (2.1) and general procedure (20.1), having received
‘a notice of claim’ the Engineer must ‘proceed in accordance with Sub- Clause 3.5
(Determinations)’

o 1.3 - Any such determination must be accompanied by ‘supporting

particulars’ (3.5) and ‘shall not be unreasonably withheld or delayed

o 3.5 – specifies that such a ‘determination’ is binding on the parties unless later
revised by the DAB or international arbitration pursuant to Clause 20

24
 b. Dispute Adjudication Boards

Prior to having a closer look at the actual process of how a dispute escalates into an
international arbitration, it may be worthwhile to understand the working of the
DAB within the FIDIC structure; especially since it is a new addition.

 Is it a ‘mini-arbitration’?

It may be argued that a DAB proceeding is in effect a ‘mini-arbitration’ though it

must be noted that 20.4 specifically prohibits a DAB to act as ‘arbitrators’. Usually
the persons involved are nominated from those with knowledge of the industry.

The history of DAB’s lies in the US, where the Engineer at most times tended to be
an agent of the employer and therefore there were questions with regard to his
impartiality in arriving at decisions (as in the present case of FIDIC). Interestingly
the World Bank picked up this US idea first and thereafter FIDIC (as indeed many
others) has now incorporated the concept into these new editions.

Historically the DAB has two categories:

(i) DAB (as in 20.2) – which is an adjudication board that produce decisions
(as in FIDIC) which are at most times binding until reviewed, AND

(ii) Dispute Review Board - the review board is much more common to
favour the US model that issues recommendations,

Interestingly under the ICC rules of DAB even ‘recommendations’ are deemed
‘decisions’! In so far as FIDIC is concerned however the DAB procedure is
‘annexed’ at pages 67 & 68 to the Red Book and if a party is dissatisfied of a
decision, if it has been communicated under 20.4 OR if there is non-compliance
under 20.7, then they can move to Int. Arbitration under clause 20.6.

c. The ‘Process’ of initial resolution:

25
 I rely with gratitude on the diagrams of Prof. Bunni43 to explain the provisions of
FIDIC for the resolution of disputes ultimately leading to an Int. Arbitration.

A dispute arises under

STEP 1 20.1 or 2.5 after decision
of Engineer under 3.5

STEP 2 The dispute is referred to the DAB for its

decision under Sub-Clause 20.4

STEP 3 DAB provides its decision within DAB fails to give decision
or within 84 days under 20.4
84 days under Sub-Clause 20.4 **

Is either Party dissatisfied

STEP 4 Yes No
with the decision?

Does that Party give its STEP 4b STEP 4a Dispute is settled and
notice of dissatisfaction the decision is final and
under 20.4 in the time
No
binding, Sub-Clause 20.4
allowed (28 days)?

Yes

Parties have 56 days to

resolve the Dispute Is the dispute Dispute
amicably, Sub-Clause settled amicably? Yes is
20.5 settled

No

STEP 5
Dispute finally settled by ICC - International Arbitration - 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.

43
Prof. Bunni, Nael G - The Gap in Sub-Clause 20.7 of The 1999 FIDIC Contracts for Major Works

26
Dr. Bunni further highlights what he terms as ‘a gap’44 in the FIDIC procedure ,
where a party does NOT comply with the DAB’s decision:

STEP 3 DAB decision within 84 days

under Sub-Clause 20.4**

STEP 4 Is either Party

dissatisfied?

No Yes
STEP 4a STEP
4b

No Does that Party give notice of

dissatisfaction - 28 days?

The Decision is
final & binding Yes

Proceed under Sub-

Do the Parties comply Clauses 20.5 & 20.6.
with DAB’s decision?

Yes
Do the Parties comply
No with the DAB’s decision?

End
Proceed to 20.7 &
refer the failure
itself to arbitration No Yes

Non-compliant Party is in Dispute will

Gap breach of contract & subject be settled STEP 5
to damages 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.

‘GAP’ – Non Compliance with Decision of the DAB

d. International Arbitration

44
Ibid – at page 4

27
As noted above, at the end of the FIDIC procedure for dispute resolution lays the
beginning of an Int. Arbitration in terms of the ICC rules of arbitration (20.6).

It is now customary in many parts of the world, indeed many

industrialised/commercialised nations including Sri Lanka have ratified to an
international convention under the auspices of the UN to this effect (the New York
Convention45), that a competent court will immediately discern certain
characteristics of an ‘arbitrable matter’ when referred to it and thereafter respect
such arbitration clause by exercising judicial restraint on adjudicating upon those
matters that form part of the underlying contract; unless in the face of very few and
limited circumstances (exceptions to arbitration clauses).

It is pertinent to note the following provisions of the New York convention

(emphasis where added is mine):

Article II

1. Each Contracting State shall recognize an agreement in writing under which the parties undertake
to submit to arbitration all or any differences which have arisen or which may arise between them in
respect of a defined legal relationship, whether contractual or not, concerning a subject matter
capable of settlement by arbitration.

2. The term "agreement in writing" shall include an arbitral clause in a contract or an arbitration
agreement, signed by the parties or contained in an exchange of letters or telegrams.

3. The court of a Contracting State, when seized of an action in a matter in respect of which the
parties have made an agreement within the meaning of this article, at the request of one of the
parties, refer the parties to arbitration, unless it finds that the said agreement is null and void,
inoperative or incapable of being performed

These provisions have been given ‘domestic legal effect’ in Sri Lanka by the
enactment of the Arbitration Act, No. 11 of 1995.46

This recognition is primarily based on the principles of ‘sanctity’ and ‘freedom’ of

contract, that parties are free to contract upon terms they deem appropriate and in
so far as possible (unless as for instance where such a contract is manifestly
unlawful) courts will respect these rights of parties and not interfere with them. 47

 Certain basic characteristics form special features of an (international)

arbitration:

o Generally decisions are binding on both parties and conclusive

45
United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10
June 1958)
46
See (in particular) – Ss 3, 4 & 5 of the 1995 Act
47
See (generally) Beatson J – Anson’s Law of Contract, 27th Ed. Pp 4-7

28
 o A fair tribunal must relate their decisions to, and always be mindful of public
policy and not give decisions in oblivion to it, for if not; that itself will open
the matter for scrutiny by courts again and courts will not hesitate to strike
down such decisions given contrary to public policy48
o The procedure governing the arbitration itself (such as the applicable rules of
evidence) must be seen to be fair
o There may be instances where an ad hoc arbitration needs to be held, as for
instance:
 where the formation of the contract itself (which includes the arbitration
clause) is challenged by a party,
 where the contract itself stands terminated with a breach, and thus there
are questions as to how further provisions leading to arbitration (as
agreed by parties) can be held to apply

 UNCITRAL – one cannot discuss the gamut of Int. Arbitrations without at least
a mention of this ‘model law’49, specifically where Sri Lanka is a signatory to this
UN Commission.

This set of rules was designed to assist States in reforming and modernizing their
laws on arbitral procedure so as to take into account the particular features and
needs of international commercial arbitration. It covers the entire spectrum of the
arbitral process from the arbitration agreement, the composition and jurisdiction of
the arbitral tribunal and the extent of court intervention through to the recognition
and enforcement of the arbitral award. Since the adoption of this ‘model law’, the
practical difference is that the variety of rules of procedure in many countries has
been harmonized subjecting all international commercial arbitrations (governed by
this model law) to the same law of arbitration ( lex arbitri); notwithstanding the fact
that the law of the seat of arbitration (lex situs) maybe quite different.

This model has now been adopted almost universally but in the event of a country
that has not adopted it, it is always safe to select a ‘law to govern the arbitration’
which is in conformity with the public policy of that land, and also consonant to the
law of the contract.

(See discussion on governing/applicable law above at page 14)

48
See – S 4 of Arbitration Act No. 11 of 1995
49
Adopted by UNCITRAL on 21 June 1985 (for further explanation see page 3 above)

29
 e. Reference to ICC Arbitration under 20.6 of FIDIC

 Clause 20.6 – stipulates that unless settled amicably, any dispute where the
DAB’s decision has not become final and binding shall be finally settled by Int.
Arbitration. Unless otherwise agreed by the parties, it shall be:

o Under the ICC rules of arbitration

o By three arbitrators
o In the language ‘of communication’ specified in the contract

It appears therefore that the preference of FIDIC is for the ICC rules but there is
nothing precluding the parties from preferring any other (such as the UNCITRAL)
rules to govern their arbitration.

 Terms of Reference – Article 18 ICC rules

As soon as the arbitral tribunal has received the file from the ICC secretariat
referring the matter for arbitration, it is required to draw up its ‘terms of reference’:

o On the basis of documents, OR

o In the presence of the parties, OR
o In the light of their most recent submissions

I believe that this provides the ideal first opportunity to allow the tribunal to ‘get
into grips’ with the case at hand and what they need to decide on. Therefore it is in
the best interests of the parties to ensure that the terms are as comprehensive and
thorough as possible. The parties must then signify their agreement to these terms
by signing it, and since such endorsement is in each other’s presence, it also opens
up an ideal forum for discussion and resolution of as many ancillary issues as
possible (raising objections etc), thus crystallising the issues for determination.

Furthermore since the award is scrutinized by the ICC Court (under A27) before
being finalised, the ‘terms’ also constitute a basis upon which the court could
evaluate whether the final award is consonant with what the tribunal has ventured
to decide on, or whether they have exceeded their mandate etc.

 Bias:

I also feel it may be of interest for you to at least have a basic knowledge of what
constitutes ‘bias’ by an arbitral tribunal and how one would go about challenging it.

What I intend to do is therefore to refer to some decided cases on this point, to see
how courts of law have dealt with this somewhat ‘delicate matter’ and see whether
we can discern a form of ‘a test’ on which we could evaluate whether in fact there
has been such a biased decision.
Please note that emphasis (and comments) where added are all mine and do not
form part of the official judgment.
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 o The Gough test50 –

This is what we usually adopt as a ‘first test’. Note how the test has been employed
in the following celebrated case of former Chilean dictator Pinochet:

R. v Bow Street Metropolitan Stipendiary Magistrate Ex p. Pinochet Ugarte (No.2)51

Following the House of Lords' decision that PU, as former head of state of Chile, did not have
immunity from arrest and extradition [2000] 1 A.C. 61, [1998] C.L.Y. 2354), PU discovered that one
of the judges who heard the appeal, H, had been an unpaid director and chairman of Amnesty
International Charity Ltd (AIC) since 1990. AIC was wholly controlled by Amnesty International
(AI), which had been allowed to intervene in the appeal, and PU sought to have the decision set
aside on the ground that H's connection with AI was such as to give the appearance that he might
have been biased against PU.

Held - allowing the application and directing … the Divisional Court's decision be reheard by a
differently constituted committee, that the fundamental principle was that a person could not be a
judge in his own cause. Although AI had effectively become a party to the appeal, H could not be
treated as its alter ego and automatically disqualified on the ground that he was personally a party
to the appeal. The question was whether a non pecuniary interest in non financial litigation was
sufficient automatically to disqualify a person from sitting as a judge in the cause. One of AIC's
objects was "to procure the abolition of torture, extra judicial execution and disappearance", and it
was clear that AIC had an interest in the proceedings, which was to establish that PU was not
entitled to immunity. The fact that H was not a member of AI but a director of its wholly owned
company, which carried on much of its work, was irrelevant if the absolute impartiality of the
judiciary was to be maintained. The fundamental principle that justice should not only be done but
be seen to be done had to be applied to a judge involved, either personally or as a company director,
in promoting the same causes in the same organisation as a party to the action.

AT&T Corp v Saudi Cable Co52

Issues - Bias; Conflict of interest; International Chamber of Commerce Arbitrators

A sought to appeal … for the removal of the chairman of an arbitration tribunal and the setting
aside of three partial awards in favour of S. A had become aware of the arbitrator's position as a
non executive director of a rival telecommunications company and sought his removal because of
the appearance of bias. A contended that the application of the bias test in R. v Gough was not
binding on an arbitrator and that a lesser test of reasonable suspicion of bias should be applied
owing to the consensual nature of arbitration …
Held - … the relevant test applicable in all cases was the existence of a real danger of bias … given
that the arbitrator was not disqualified under the common law test of bias, it was unreasonable to
consider that he lacked the requisite independence to which the ICC Rules referred.

50
R. v Gough (Robert) [1993] A.C. 646
51
[2000] 1 AC 119
52
[2000] 2 All E.R. (Comm) 625, [2000] 2 Lloyd's Rep. 127

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 o Note – the two-fold bias test (as appearing from the above cases).

It would appear then that suspected bias of an arbitrator can be further divided into
‘actual bias’ and ‘apparent bias’, the latter being decided using the age-old test of
the ‘fair minded observer’. This is further manifest in the following case study:

Director General of Fair Trading v Proprietary Association of Great Britain 53

Also known as: Medicaments and Related Classes of Goods (No.2), Re

P, a trade association … appealed against (a decision) on the ground of apparent bias. P contended
that (1) R, one of the members of the court, had applied, albeit unsuccessfully, for a position in a
company in which DG's principal expert witness was a director, and (2) the court … (should
consider not only) … actual bias (but also) … whether the facts were such as to give rise to a
reasonable apprehension of the possibility of bias.

Held - … that it was a long established rule of English common law that a tribunal should be
independent and impartial, and latterly the Human Rights Act 1998 Sch. 1 Part I Art. 6 had given
effect to the right to a fair trial. When presented with a complaint of bias, the court had to identify
all factors relevant to the allegation and then determine whether a fair-minded observer would
apprehend a real danger of bias. On the facts of the instant case that process would have led a fair-
minded observer to deduce that R was at risk of partiality; hence she ought to have recused herself.
Having failed to do so, she should be disqualified, with the result that the other court members
would have to stand down.

 Multi Party Arbitrations –

I must, at least in passing for the sake of completeness, make reference and let you
know that there is provision available for more than two parties to be involved in
arbitrations in certain situations. Some such examples are:

o Where there are ‘cross claims’ against the same persons, but these claims
arise out of separate arbitration agreements (or contracts)

o Where the ‘cause of action’ is the same (or identical) but is alleged against
more than one person, as for instance an agent and an undisclosed
principal or some partners against the same debtor

o It may also be different ‘causes of action’ arising under different contracts

but at least involving one common party and based on the same events, as
for instance:

 in a ‘string of disputes’ where the claim is passed on from one party to

the next with each intermediate party being both a respondent and a
claimant where some goods have been purchased and resold and re-
purchased etc

53
[2002] 1 W.L.R. 269, [2002] 1 All E.R. 853

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  more towards our point of discussion, it could also be where an attempt
is being made to attribute responsibility for delay in large construction
contract, with numerous main contractors and sub-contractors but with
one employer

The procedure adopted in such multi partite arbitrations may differ from one to
another but can generally be categorised into one of the following heads:

o A single hearing, one panel of arbitrators with all the disputes and all the
parties

o Successive hearings before the same panel involving different parties

o Different panels of arbitrators but some common membership, such as the

same Chairperson

o It could also be a single hearing only between the parties that ultimately
stand to gain or lose (such as in the aforementioned ‘string sales’ where
you invite the first seller and the last buyer and the others agree to be
bound by such decision

There are obvious benefits in such multi partite arbitrations, the main being of
course a considerable saving on the cost factor of arbitrating, but it is essential that
all connected parties expressly agree to such a course of action, since any failure to
hear a party with an ‘interest’ would undoubtedly cause a miscarriage of justice and
thus possibly open the entire arbitration up to review by courts.

Chrishmal Warnasuriya
20/08/2007 – Colombo, Sri Lanka.

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