When "amicable settlement" clauses in FIDIC contracts fail

Construction contracts often provide for settlement discussions to occur before an arbitration is commenced. However, this type of 'multi-tier' dispute resolution clause can lead to disputes over whether or not the occurrence of settlement discussions is a compulsory requirement before arbitration can be validly commenced.

The recent decision of the Singapore International Commercial Court (SICC) in CZQ v CZS [2023] SGHC(I) 16 illustrates why parties must use clear and unequivocal language to make a specific action (e.g. settlement discussions) a mandatory precondition to arbitration. CZQ also sheds light on an uncertainty about the dispute resolution mechanism in the 1999 FIDIC standard form, indicating that the requirement under the standard Sub-Clause 20.5 for pre-arbitration settlement discussions is not a mandatory precondition to commencing arbitration. This may have significant implications for users of the 1999 FIDIC standard forms.

BACKGROUND

CZQ involved an amended 1999 FIDIC Yellow Book. The parties deleted Sub-Clause 20.2 and revised Sub-Clause 20.5 to exclude any reference of disputes to a Dispute Adjudicate Board (DAB) and provide for settlement discussions ahead of arbitration under Sub-Clause 20.6. The revised provisions stated:

"20.5 – Amicable Settlement

(a)        If any dispute arises out of or in connection with the Contract, or the execution of Works… then either Party shall notify the other Party that a formal dispute exists. Representatives of the Parties shall, in good faith, meet within 7 days of the date of the notice to attempt to amicably resolve the dispute,

(b)        If the representatives of the Parties cannot resolve a dispute within 7 days from the first meeting, 1 or more senior officer(s) from each Party shall meet in person within 14 days from the first meeting of the representatives in an effort to resolve the dispute. If the senior officers of the Parties are unable to resolve the dispute within 7 days from their first meeting, then either Party shall notify the other Party that the dispute will be submitted to arbitration in accordance with Sub-Clause 20.6.

20.6 – Arbitration

Unless settled amicably, any dispute shall be finally settled by international arbitration…"

A dispute arose between the parties. No settlement meetings took place. The employer commenced arbitration against the contractor and its guarantor.  The respondents challenged the arbitral tribunal's jurisdiction, arguing that the settlement meetings required by Sub-Clause 20.5 were a mandatory precondition to arbitration that had not been complied with. The tribunal rejected the respondents' challenge and found that it had jurisdiction. The respondents subsequently appealed the tribunal's decision under Section 10 of the Singapore International Arbitration Act.

SICC DISMISSES THE CHALLENGE

The SICC dismissed the respondents' challenge, finding that the tribunal had jurisdiction.  Settlement meetings under Sub-Clause 20.5 were not a precondition to a party commencing arbitration under Sub-Clause 20.6. The SICC made the following key points:

• The SICC rejected the respondents' argument that the words "unless settled amicably" were a reference to the amicable settlement procedure in Sub-Clause 20.5. Sub-Clause 20.6 did not expressly refer to Sub-Clause 20.5 or the amicable settlement procedure in Sub-Clause 20.5, and this reference could not be implied.
• A dispute could be settled amicably in various ways. One of which was the Sub-Clause 20.5 procedure. The contract did not prevent the parties from exploring other forms of amicable settlement and such a limitation would have been commercially unrealistic.
• The final sentence of Sub-Clause 20.5 did not make compliance with the clause a condition precedent to arbitration. It simply meant that if either party initiated the Sub-Clause 20.5 settlement procedure and the dispute remained unresolved, either party was entitled to notify the other Party that the dispute would be referred to arbitration.

PRACTICAL TAKEAWAYS

Preconditions to arbitration need precise language

CZQ is a useful reminder that precise language in multi-tier dispute resolution clauses is critical, as uncertainty in drafting can otherwise frustrate a party's ability to rely on the clause.

An agreement which merely states that parties will seek to settle their disputes amicably and only refer the matter to arbitration where they cannot settle is generally not a legally enforceable obligation under English law (and many other common law jurisdictions).  Such an agreement lacks certainty as there would be no objective criteria to measure a party's compliance with the provision (Kajima Construction Europe (UK) Limited and another v Children's Ark Partnership Limited [2023] EWCA Civ 292).

For amicable settlement to be enforceable as a mandatory pre-condition to arbitration, parties will need to precisely define the means by which an attempt to resolve the dispute should be made, including what the form or process of resolution should be (e.g. negotiation) and who is to be involved (e.g. directors).

However, even if this level of detail is provided, it will not automatically make amicable settlement a mandatory precondition. For that, parties must state so explicitly. CZQ helpfully summarises the language that common law courts generally expect for the creation of preconditions to arbitration:

• Explicitly state the order of steps to be followed before arbitration. In Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104, the contract stated that if any dispute or claim should arise, "the Parties shall first seek to resolve the dispute or claim by friendly discussion…If no solution can be arrived at in between the Parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration". This language was upheld as a mandatory pre-condition.
• Arbitration clause should cross-refer to specific contractual step(s): In International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd [2014] 1 SLR 130, Clause 37.2 provided for the reference of disputes to mediation. Clause 37.3 – the arbitration clause – then referred to Clause 37.2 in providing for the arbitration of disputes "which cannot be settled by mediation pursuant to Clause 37.2". Again, this language was upheld as a mandatory pre-condition.

In contrast, the bespoke dispute resolution clause in CZQ lacked this type of language.  Parties should therefore take this guidance into account when drafting and negotiating multi-tiered dispute resolution clauses that are intended to impose mandatory pre-conditions to arbitration (or litigation).

Addressing uncertainty in the 1999 FIDIC standard forms

There is some uncertainty as to whether amicable settlement under Sub-Clause 20.5 in the 1999 standard FIDIC forms is a mandatory precondition to arbitration. Unlike in the bespoke clauses in CZQ, parties using the 1999 standard forms can refer a dispute to a DAB and if a party wishes to challenge the DAB's decision via arbitration:

• "both Parties shall attempt to settle the dispute amicably before the commencement of arbitration"; but also that
• unless the parties agree otherwise "arbitration may be commenced on or after the fifty-sixth day after the day on which notice of dissatisfaction was given, even if no attempt at amicable settlement has been made" (emphasis added).

This is seemingly contradictory language which has split commentaries on whether an attempt at amicable settlement is a mandatory precondition to arbitration. CZQ clarifies, albeit in passing, that attempting amicable settlement under the standard Sub-Clause 20.5 is not a mandatory precondition. This is consistent with the standard Sub-Clause 20.6 lacking an express reference to the amicable settlement procedure in Sub-Clause 20.5 (in contrast to the position in the Lufthansa case noted above).  Accordingly, a party technically only has to wait out the 56-day "waiting period" in the standard Sub-Clause 20.5 before commencing arbitration, subject to it having first issued a notice of dissatisfaction against the DAB's decision as required by the standard Sub-Clause 20.4.

The SICC's clarification is important as the 1999 FIDIC standard forms are still widely used internationally. Users should consider their contracts which incorporate the standard terms unamended, as tribunals and courts applying common law principles may find that amicable settlement attempts are not a precondition to arbitration in light of CZQ. This can have a significant impact on negotiating strategies and pre-arbitration preparations. Further, a misunderstanding of the standard FIDIC multi-tier dispute resolution procedure can risk parties incurring wasted time and costs by having to first argue jurisdictional issues before being able to address the substantive issues in dispute in an arbitration.

For further information, please contact Daniel Waldek, Lim Tse Wei or your usual Herbert Smith Freehills contact.