In a Judgment rendered on July 13, 2011 in Civil Appeal No. 59 of 2000, CRW Joint Operation v. PT Perusahan Gas Negara (Persero) TBK, the Singapore Court of Appeals (SCA) clarified the dispute resolution mechanism under the 1999 FIDIC Red Book, formally known as the “Conditions of Contract for Construction: For Building and Engineering Works Designed by the Employer,” particularly the nature and enforcement of the Dispute Adjudication Board’s (DAB) decision and the effect of a referral of such decision to arbitration.
In 2006, CRW Joint Operation (CRW) and PT Perusahan Gas Negara (Persero) TBK (PGN) entered into a gas pipeline construction contract that adopted, with some modifications, the standard provisions in the Red Book. A dispute under the contract was referred to the DAB consisting of a single ajudicator.
In 2008, the DAB awarded the sum of $17,298,834.57 to CRW. PGN promptly filed a notice of dissatisfaction (NOD), while CRW proceeded to invoice PGN for the award. CRW subsequently filed a request for arbitration under Sub-clause 20.6 of the Red Book with the ICC International Court of Arbitration for the sole purpose of giving prompt effect to the DAB’s decision.
In 2009, the arbitral tribunal consisting of three members issued a Final Award in favor of CRW. It ruled that PGN was required under the Red Book to immediately comply with the DAB’s decision and pay CRW the awarded sum. The arbitral tribunal did not hear the parties on the merits of the DAB’s decision, since it held that PGN was not entitled to open up, review and revise the DAB’s decision. However, it stated PGN had a right to commence fresh arbitration to revise the DAB’s decision.
The matter was elevated to the Singapore High Court, which set aside the Final Award, holding, among others, that the arbitral tribunal erred in issuing a Final Award without hearing the parties on the merits of the DAB’s decision. CRW appealed the court’s decision to the SCA, which dismissed the appeal.
The SCA discussed Sub-clauses 20.4 to 20.7 of the Red Book, which deal with dispute resolution. It noted that under the Red Book, the DAB’s 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.” The Red Book also provides that “unless settled amicably, any dispute in respect of which the DAB’s decision (if any) has not become final and binding shall befinally settled by international arbitration.” The Red Book’s arbitration clause also states that “the arbitrator(s) shall have full power to open up, review and revise … any decision of the DAB, relevant to the dispute.”
In summary, the SCA clarified the dispute resolution scheme under the FIDIC Red Book as follows: (a) the DAB’s decision is contractually binding on the parties and immediately enforceable, but it is not considered final if it has been referred to arbitration; (b) in such case, the enforcement of the DAB’s binding but non-final decision depends on the terms of the contract, but “the practical response is for the successful party in the DAB proceedings to secure an interim or partial award from the arbitral tribunal in respect of the DAB decision pending consideration of the merits of the parties dispute(s) in the same arbitration;” and (c) the Red Book’s arbitration clause contemplates a single arbitration that will resolve all the differences of the parties with respect to the DAB’s decision.
Based on this analysis, the SCA held that the arbitral tribunal erred when it resolved the immediate enforceability of the DAB’s decision through a Final Award, but failed to hear and resolve the substantive dispute of the parties on the merits of that decision. This contravened the Red Book’s requirement that arbitration must comprehensively resolve the parties’ dispute as to the DAB’s decision.
The SCA stated that the correct procedure under the Red Book was for the arbitral tribunal to first, make an interim or partial award in favor of CRW for the amount awarded by the DAB, consistent with the immediately enforceable nature of the DAB’s decision; and, second, proceed to hear and resolve the substance of the parties’ dispute as regards the DAB’s decision before issuing a Final Award.
The Elements of Arbitration
Arbitration enables parties to resolve their disputes njsamicably. It provides solutions that are less time- consuming, less tedious, less confrontational, and more productive of goodwill and lasting relationship.
Still, many parties do not resort to arbitration, or do their utmost to avoid arbitration even when it is a proper remedy. Sometimes, this is due to lack of understanding of what arbitration is.
The Arbitration Law, Republic Act No. 876 (1953), does not directly define arbitration. Instead, it describes how an arbitration comes about:
Section 2. Persons and matters subject to arbitration. - Two or more persons or parties may submit to the arbitration of one or more arbitrators any controversy existing between them at the time of the submission and which may be the subject of an action, or the parties to any contract may in such contract agree to settle by arbitration a controversy thereafter arising between them. Such submission or contract shall be valid, enforceable and irrevocable, save upon such grounds as exist at law for the revocation of any contract. Such submission or contract may include questions arising out of valuations, appraisals or other controversies that may be collateral, incidental, precedent or subsequent to any issue between the parties. A controversy cannot be arbitrated where one of the parties to the controversy is an infant, or a person judicially declared to be incompetent, unless the appropriate court having jurisdiction approves a petition for permission to submit such controversy to arbitration made by the general guardian or guardian ad litem of the infant or of the incompetent. But where a person capable of entering into a submission or contract has knowingly entered into the same with a person incapable of so doing, the objection on the ground of incapacity can be taken only in behalf of the person so incapacitated.
The broader Alternative Dispute Resolution Act of 2004, Republic Act No. 9285 (2004), provides that arbitration is a “voluntary dispute resolution process in which one or more arbitrators, appointed in accordance with the agreement of the parties, or rules promulgated pursuant to said Act, resolve a dispute by rendering an award. Still, arbitration has yet to acquire a singular international definition.
As pointed out by Eric E. Bergsten in his Module 5.1, International Arbitration, for the United Nations Conference on Trade and Development (UNCTAD) Course on Dispute Settlement in International Trade, Investment and Intellectual Property, Article II, paragraph I of the New York Convention on the Enforcement of Arbitral Awards provides that “Each contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration…” but the Convention itself does not define what an arbitration is.
Identifying the elements of arbitration will help in understanding this “wave of the future” in dispute resolution. Bergsten suggests the following principal characteristics that define arbitration:
- (1) Arbitration is a mechanism for the settlement of disputes.
- (2) Arbitration is consensual.
- (3) Arbitration is a private procedure.
- (4) Arbitration leads to a final and binding determination of the rights and obligations of the parties.
The generally consensual nature of the agreement to arbitrate is recognized by the Philippine Supreme Court. It has held several times that an agreement to submit all disputes to arbitration is a contract. In an August 2009 decision, it said that:
Except where a compulsory arbitration is provided by statute, the first step toward the settlement of a difference by arbitration is the entry by the parties into a valid agreement to arbitrate. An agreement to arbitrate is a contract, the relation of the parties is contractual, and the rights and liabilities of the parties are controlled by the law of contracts. In an agreement for arbitration, the ordinary elements of a valid contract must appear, including an agreement to arbitrate some specific thing, and an agreement to abide by the award, either in express language or by implication. As such, the arbitration agreement binds the parties thereto, as well as their assigns and heirs, and as long as it does not exclude the courts totally, may be enforced with the assistance of the courts even though arbitration is not undertaken in court.
The Supreme Court also provided in its Special Rules on Alternative Dispute Resolution, which became effective on October 30, 2009, that where the parties have agreed to submit their dispute to arbitration, courts shall refer the parties to arbitration pursuant to the ADR Act of 2004, bearing in mind that such arbitration agreement is the law between the parties and that they are expected to abide by it in good faith.
The Special ADR Rules further directs the courts not to whimsically or jealously refuse to refer parties to arbitration. The courts may not refuse to refer a dispute to arbitration even if (a) the referral tends to oust a court of its jurisdiction; (b) the court is in a better position to resolve the dispute subject of arbitration; (c) the referral would result in multiplicity of suits; (d) the arbitration proceeding has not commenced; (e) the place of arbitration is in a foreign country; (f ) one or more of the issues are legal and one or more of the arbitrators are not lawyers; (g) one or more of the arbitrators are not Philippine nationals; or (h) one or more of the arbitrators are alleged not to possess the required qualification under the arbitration agreement or law. 7 8
The value of arbitral awards in finally determining parties’ rights and obligations is emphasized by the arbitral laws and rules. While agreements to arbitrate still allow limited involvement by the courts, Philippine arbitral laws and rules provide for very specific grounds upon which courts may vacate or refuse to enforce awards. These grounds conflate with similar grounds allowed in the New York Convention.