September 1, 2015
The Singapore Court of Appeal in this case clarified that an arbitral tribunal could issue an interim award based on a binding but non-final Dispute Adjudication Board (“DAB”) decision (made under the FIDIC Red Book Contract). The interim award is enforceable as judgment of the Singapore High Court, pending the tribunal’s final award on the merits of that DAB decision.
Any failure to comply with a binding but non-final DAB decision may be referred directly to arbitration without having to first attempt amicable settlement and/or allowing the period for amicable settlement to lapse.
If the arbitral tribunal eventually overturns the DAB decision, an account of money would be made, such that any overpayment or underpayment in the Interim Award would be dealt with in the Final Award.
Background of the case
The appellants, PT Perusahaan Gas Negara (Persero) TBK (“PGN”), entered into a contract (“Contract”) with CRW Joint Operation (Indonesia) (“CRW”) based on FIDIC 1999 Red Book for the design, installation, testing and precommissioning of a natural gas pipeline (from South Sumatra to West Java in Indonesia).
The dispute concerned variation claims under the Contract, and the matter was brought before the DAB constituted under the Contract.
The DAB found in favour of CRW, requiring PGN to pay US$17.3 million (“Adjudicated Sum”) to CRW (“DAB No 3”).
The Contract required both the parties to comply with the DAB decision. Parties could issue a Notice of Dissatisfaction (“NOD”) against a DAB decision and proceed to refer the dispute to mediation and/or arbitration. However, in the interim, the DAB decision would have to be given effect. PGN did not pay the Adjudicated Sum. As a result, in 2009, CRW commenced arbitral proceedings to compel PGN to comply with the contractual obligations, to make prompt payment as per DAB No 3. PGN argued that the arbitral tribunal ought to hear the merits of the DAB decision before making a decision.
The majority of the arbitral tribunal (“2009 Arbitral Tribunal”) held that PGN was required to comply with DAB No 3 in making prompt payment of the Adjudicated Sum, and issued a final award for the sums decided in the DAB decision (“2009 Award”).
Proceedings to set aside 2009 Award
Following this, PGN successfully applied to the High Court to set aside the 2009 Award.
The Court of Appeal (“CA”) upheld the High Court decision. The CA stated that the 2009 Arbitral Tribunal ought to have heard the merits of DAB No 3 before granting a final award. It also found that the non-compliance of the paying party, in making prompt payment of the adjudicated sum under a DAB decision, should be dealt with by way of an interim/partial award, while the merits of DAB decision should be dealt with in the same arbitral proceedings by way of a final award (“2011 CA Decision”).
Unsurprisingly, based on the CA’s recommendation, CRW then commenced a new arbitral action to seek an interim/partial award to enforce the DAB No 3 and a final award for the same sum (or such sums assessed by the tribunal if they revised the DAB decision).
The arbitral tribunal (“2011 Arbitral Tribunal”) issued an interim award, by a majority, to compel PGN to comply promptly with the DAB No 3 (“Interim Award”).
Proceedings at the High Court in the Present Case
CRW then obtained leave from the High Court to enforce the Interim Award against PGN. In turn, PGN applied to the High Court to set aside the award, on the basis that the 2011 Arbitral Tribunal was acting in excess of their jurisdiction or parties’ agreed procedure in issuing the Interim Award.
PGN’s objection was built on s19B of the International Arbitration Act (“IAA”) which:
- did not allow for provisional awards (and PGN argued that the Interim Award was a provisional award), and
- prohibited awards from being varied or amended (except in certain very specific situations).
This meant that the 2011 Arbitral Tribunal would not be allowed to issue a final award which disagreed with the Interim Award, because this would amount to varying or amending the Interim Award.
Findings of the High Court
The High Court held that:
- s19B of the IAA does not prohibit awards where the relief is effective for a limited period only (termed as “provisional”). It merely states that all arbitral awards (interim or final) were final and conclusive with respect to the issues they dealt with (and cannot be amended by the arbitral tribunal except in very specific situations).
- The Interim Award was not in breach of s19B of the IAA because it was final and determinative of the issue in question, namely whether PGN had a contractual obligation to promptly pay CRW the adjudicated sum under DAB No 3.
The subsequent decision on the merits of DAB No 3 would not vary the Interim Award (which would have contravened s19B of the IAA), given that the final award can be worded to stand alongside the Interim Award.
Issues on Appeal
PGN appealed to the CA against the High Court decision.
In the present appeal, the following issues were raised:
- Should the Interim Award (issued by the 2011 Arbitral Tribunal) ordering PGN to pay CRW the adjudicated sum under DAB No 3 be set aside?
- Consequently, whether the order of the High Court granting CRW leave to enforce the Interim Award against PGN as a court judgment should be set aside as well?
Findings of the Court of Appeal
The CA majority held that the Interim Award was valid and that PGN is contractually obligated to pay CRW the sum of US$17.3 million in DAB No 3 promptly – pending the 2011 Arbitral Tribunal’s determination of the merits of in DAB No 3.
Notably, it further held (contrary to the 2011 CA decision) that a failure to comply with a binding but non-final DAB decision could be referred directly to arbitration.
The majority judgment is summarised as follows:
- The terms “partial” award and “interim” award are used interchangeably to refer to the same category of arbitral awards made in the course of arbitral proceedings to dispose with finality certain preliminary claims prior to disposal of all other issues. A “final” award also resolves an issue with preclusive effect. Therefore, a “partial” or “interim” award qualifies as “award” under s2 of the IAA, and can be enforced as a judgment of the Singapore High Court. In contrast, a “provisional” award does not definitively dispose of any preliminary or substantive issues in arbitration. It is capable of being revoked, and hence does not qualify under s2 of the IAA as an award.
- Clause 20.4 of the FIDIC 1999 Red Book (identical to Clause 20.4 of the Contract) imposes a distinct contractual obligation on parties to comply promptly with a DAB decision once issued. This is regardless of whether a NOD is issued or if an arbitral tribunal subsequently re-opens the DAB decision to determine its merits. Therefore, PGN has to make prompt payment of the Adjudicated Sum to CRW notwithstanding its views on the merits of the DAB’s decision. Issuing a NOD does not give PGN a defence to avoid prompt payment.
- A failure to comply with a binding but non-final DAB can be referred directly to arbitration, and enforced by way of a separate interim award (within the same arbitration that is also concerned with the merits of the DAB decision), without having to first:
- Refer the paying party’s non-compliance of the Interim Award to the DAB for another decision prior to arbitration
- Attempt to settle amicably; or
- Issue an NOD with respect to the paying party’s non-compliance
- If there are both disputes over the paying party’s non-compliance with a binding but non-final DAB decision (non-compliance), as well as the dispute over the merits of that DAB decision before an arbitration tribunal (such as in the 2011 Arbitration) (merits), the tribunal can:
- make an interim or partial award on the non-compliance;
- proceed to consider the merits; and
- subsequently make a final determination of the underlying dispute between parties.
- The Interim Award made by the majority of the 2011 Arbitral Tribunal was not intended to be varied by further awards. It could not be varied due to s19B which renders the Interim Award as final and binding regardless of the issue which the award was made. The Interim Award remains binding independent of any subsequent award made with respect to the merits of the DAB decision.
However, once the award on the merits of the DAB decision is made, an account would inevitably have to be taken of the amounts actually due to each other. This is not considered a variation of the Interim Award. The correctness of the DAB No 3 is wholly distinct from the determination made in the Interim Award.
Senior Judge Chan Sek Keong (“Chan SJ”) opined that the Interim Award should be set aside, given that the dispute with regard to the contractual obligation to promptly pay the adjudicated sum under DAB No 3, was not referable to arbitration under Clause 20.6 of the 1999 FIDIC Red Book. The Interim Award was in substance a provisional award, hence falling outside the ambit of an “award” under s2 of the IAA and not enforceable under s19 of the IAA in the same manner.
The summary of Chan SJ’s decision is as follows:
A dispute with regard to the contractual obligation to promptly pay the adjudicated sum under a DAB decision is not referable to arbitration under Clause 20.6 of the FIDIC Red Book, as Clause 20.4 requires parties to first (a) attempt to settle amicably and (b) to allow 56 days to pass following the issuance of the NOD. Clause 20.4 is further clear that only a dispute as to correctness of the DAB’s adjudication can be referred to arbitration.
The Interim Award was in substance a Provisional Award. The majority of the 2011 Arbitral Tribunal intended the Interim Award to be of effect only until the 2011 Arbitral Tribunal’s final resolution as to the merits of DAB No 3. This is seen from how the Interim Award was then expressly revised by the Partial Award by excluding two Heads of Claim from the Interim Award, contrary to s19B of the IAA. Hence, the Interim award cannot be enforceable as judgment under the IAA. This definition of a provisional award is also consistent with that under s39 of the Arbitration Act 1996 (UK)
Implications and Takeaways
The CA majority decision took a different view from the 2011 CA decision. It clarified the status of an interim arbitral award, which can be final and binding on the preliminary issues. The arbitral tribunal cannot further decide on matters already determined by the interim arbitral award, pending the final decision of the underlying dispute in the arbitration.
The decision is also in line with s19B of the IAA, which considers any award by the arbitral tribunal to be final and binding. If the arbitral tribunal eventually overturns the DAB decision, an account of money would be made, such that any overpayment or underpayment in the Interim Award would be dealt with in the Final Award.
Further, the CA majority also opined that the 1999 FIDIC Red Book contractual dispute resolution mechanism allows a failure to comply with a binding but non-final DAB decision to be referred directly to arbitration without having to first attempt amicable settlement and/or allowing the period for amicable settlement to lapse. This is in line with FIDIC’s views expressed in the FIDIC Guidance Memorandum (2013).
Lastly, the CA majority’s decision gives full practical effect to Clause 20 of the 1999 FIDIC Red Book. The receiving party no longer faces uncertainty as to whether they can promptly enforce an arbitral award ordering prompt compliance with a DAB decision. The Interim Award will be enforceable as an award of the Singapore High Court under IAA, even if the arbitral tribunal has yet to decide on the merits of the DAB Decision.