International Construction Arbitration

John Savage
Partner and Head of International Arbitration, Asia

December 13, 2007

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Outline of the Presentation

I. Introduction to International Construction Arbitration

II. Issues that Cause International Construction Disputes

III. Typical International Construction Claims

IV. Common Mechanisms for Resolving International Construction Disputes

V. Introduction to FIDIC and its Dispute Resolution Provisions

VI. Conduct of a Typical International Arbitration

VII. Investment Treaty Arbitration and Construction Disputes

VIII. Advice on Drafting International Construction Dispute Resolution Provisions

IX. Advice on Preparing for and Conducting International Construction Disputes

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I. Introduction to International Construction Arbitration (1)

Typical Features of International Construction Disputes (1)

• Technically complex, fact intensive: require technical experts as well as
lawyers
• Often more than two parties, even in turnkey projects (involvement of
subcontractors, suppliers, lenders, consultants, other contractors etc)
• Often more than one relevant contract (subcontracts, supply contracts,
construction of other facilities on same project, offtake contracts, operation
and maintenance etc)
• Parties of (sometimes many) different nationalities on the same job
• Site may be in another country altogether

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I. Introduction to International Construction Arbitration (2)

Typical Features of International Construction Disputes (2)

• Large sums in dispute, at least in absolute terms
• Project usually of long duration, with disputes emerging throughout
• English law often applies, or at least contracts often inspired by English law
• Use of standard form contracts (e.g. FIDIC contracts)
• Not a separate area of law, in English law at least (general contract and tort
law apply in most cases), but specialised lawyers, judges and arbitrators in
practice

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II. Issues that Cause International Construction Disputes (1)

• Alleged interference by or deficiencies of Owner, such as:

− Lack of site possession
− Late approvals or instructions
− Changes in design/materials/specification
− Non payment

• Alleged deficiencies of Contractor, such as:

− Contractor design omissions and deficiencies
− Defective manufacture and construction
− Delayed performance (various causes attributable to contractor)
− Excessive cost, when contract price not fixed

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II. Issues that Cause International Construction Disputes (2)

• Third party events, such as:

−Adverse site conditions
−Adverse weather
−Material escalation
−Hostilities/strikes

−Changes in law

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III. Typical International Construction Claims (1)

• Contractor usually claims one or more of the following:

− Compensation for extra work performed
− Compensation and/or schedule relief for acceleration, delay and/or
disruption
− Payment and interest
− Blocking draw of performance bond

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III. Typical International Construction Claims (2)

• Owner usually claims one or more of the following:

− Damages (usually liquidated) for delay, or for poor performance (plant
not at specification)
− Correction or compensation for defective work (under warranties)
− Draw on performance bond

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IV. Common Mechanisms for Resolving International Construction Disputes (1)

Non Binding Dispute Resolution Mechanisms

• Mediation
• Early Neutral Evaluation

Temporarily Binding Dispute Resolution Mechanisms

• Statutory Adjudication
• Dispute Boards
• Expert Determination (but can be final…?)

Binding Dispute Resolution Forms

• Arbitration
• Court Litigation
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IV. Common Mechanisms for Resolving International Construction Disputes (2)

 Mediation (not binding)

− Process conducted by third party mediator
− Confidential
− Without prejudice
− Objective is to facilitate settlement of dispute by parties, not an
evaluation
− Can be effective if parties committed to process, attendees have power
to settle, and if mediator competent

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IV. Common Mechanisms for Resolving International Construction Disputes (3)

• Early Neutral Evaluation (not binding)

− An independent third party will give an evaluation of the dispute, like a
one person Dispute Review Board
− Parties will then have a predetermined period of time for follow-up direct
negotiation with the goal of reaching settlement

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IV. Common Mechanisms for Resolving International Construction Disputes (4)

• Statutory Adjudication (temporarily binding)

− Most important dispute resolution process in UK construction industry due to 1996
Construction Act
− The Act makes adjudication mandatory for an agreement which involves
“construction operations” in England, Wales or Scotland
− Party can apply for adjudication “at any time”. Rapid procedure before an individual
or a board, but must meet statutory conditions. Temporarily binding decision

− Speedy but needs a court system to enforce adjudication decisions

− Legislation has been adopted elsewhere, mainly in Commonwealth jurisdictions such
as Australia, New Zealand, Singapore, Hong Kong
− Parties to international projects need to be aware that legislation may exist

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IV. Common Mechanisms for Resolving International Construction Disputes (5)

• Dispute Boards (temporarily binding)

− Procedure where a standing panel of 1 or 3 engineers/lawyers appointed
at the outset of project, and visit the site 3 or 4 times a year to monitor
progress and deal with potential problems
− When requested by the parties the Dispute Board conducts an informal
hearing of the dispute and issues a recommendation or decision
(depending on the contract). Decision temporarily binding, but can be
challenged through arbitration or litigation
− FIDIC and ICC have their own Dispute Board procedures

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IV. Common Mechanisms for Resolving International Construction Disputes (6)

• Expert Determination (1) (temporarily binding?)

A third party with expertise in a particular field is asked to give a

determination on a disputed issue in that field
− Generally used for a single issue or a handful of related issues, not a
whole dispute
− Either technical, financial or contractual issues
− Flexible procedures, query if due process required
− Parties can choose to use ICC Rules for Expertise in their contract
− ICC International Centre for Expertise can administer the expert
determination or act as appointing authority for the expert

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IV. Common Mechanisms for Resolving International Construction Disputes (7)

• Expert Determination (2) (temporarily binding?)

Difficulties with expert determination:

− Finality/recourse (is it an arbitral award capable of challenge?)
− Which dispute resolved by expert, which by arbitrators
− What to do with legal questions brought before expert
− Flexibility/vagueness of procedures
− Enforcement

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IV. Common Mechanisms for Resolving International Construction Disputes (8)

• Arbitration (1) (binding)

− Most international construction contracts specify arbitration as final
resort if interim dispute resolution measures fail
− Arbitration generally preferred over court litigation (see later slides)
− Larger disputes usually involve 3 member tribunal
− Common to have use of tiered dispute resolution clauses, e.g.
negotiation then arbitration, dispute board then arbitration etc.

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IV. Common Mechanisms for Resolving International Construction Disputes (9)

• Arbitration (2) (binding)

No institutions specialised in construction cases. Instead, we recommend

usual top international arbitration institutions, such as:
− International Chamber of Commerce (ICC)
− London Court of International Arbitration (LCIA)
− Singapore International Arbitration Centre (SIAC)
− Hong Kong International Arbitration Centre (HKIAC)
− Beijing Arbitration Commission (BAC) or CIETAC for arbitration in China

(Note: leading institutions’ arbitration rules are largely similar)

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IV. Common Mechanisms for Resolving International Construction Disputes (10)

• Court litigation (binding)

− usually in the country of one or other party (not neutral)
− usually subject to one or more levels of appeal
− cost and duration can vary enormously from country to country

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IV. Common Mechanisms for Resolving International Construction Disputes (11)

Advantages of international arbitration over court litigation for international

disputes?

• Neutrality: avoid home courts of other party

• Enforceability: arbitral awards much more enforceable across borders than
court judgments, thanks to New York Convention
• Flexibility: parties can design, in their contract, their own dispute resolution
mechanism
• Finality: no court or other review of the merits of an arbitral award
• Cost and time savings? As compared to which courts?
• Confidentiality?

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IV. Common Mechanisms for Resolving International Construction Disputes (12)

Advantages of court litigation over international arbitration?

 Joinder or consolidation available before courts without further party consent
 No 50-50 decisions in court. Perhaps, but is that what happens today in
arbitration?
 Lack of finality (review of merits available)?
 Courts can be less expensive and time-consuming? In Singapore, yes, but not
in India, for example

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IV. Common Mechanisms for Resolving International Construction Disputes (13)

What if we don’t include an arbitration clause in our contract?

• No arbitration clause in contract usually = no arbitration.
• But exceptions include:
− where parties agree to arbitration when dispute arises (rare)
− where party has grievance against state or state body, and there is
investment treaty coverage (investment treaties usually allow arbitration
without prior arbitration clause)
• Alternative to arbitration is either selection in contract of court(s) or, if no
selection, court with jurisdiction by default

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V. Introduction to FIDIC and its Dispute Resolution Provisions (1)

What is FIDIC?
• FIDIC stands for Fédération Internationale des Ingénieurs-Conseils or International
Federation of Consulting Engineers
• Formed in 1913, now a global organisation with members from 70 plus countries
and secretariat based in Switzerland
• FIDIC Forms of Contract are widely used forms (i.e. model contracts) for
engineering, construction, provision of mechanical and electrical works in
international projects
• FIDIC introduced the concept of Dispute Board into its Orange Book contract in
1995
• In November 1996 FIDIC introduced the procedure into Clause 67 of its Red Book

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V. Introduction to FIDIC and its Dispute Resolution Provisions (2)

• In 1999, FIDIC revised its Forms of Contract

• The four FIDIC Forms of Contract are:
− Conditions of Contract for Construction (New Red Book)
− Conditions of Contract for Plant and Design-Build (New Yellow Book)
− Conditions of Contract for EPC Turnkey Projects (Silver Book)
− Short Form of Contract (Green Book)

(Note that FIDIC will be launching its Design, Build and Operate (DBO)
Contract (Gold Book) in mid 2008)

Note that these are just model contracts. The parties are expected to adapt
them to their own projects

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V. Introduction to FIDIC and its Dispute Resolution Provisions (3)

• FIDIC Dispute Resolution provision is set out in Clause 20 of the New Red, New
Yellow and Silver Books
• Approach used by FIDIC is the Dispute Adjudication Board (DAB) which issues a
decision, as opposed to Dispute Review Board which issues a recommendation
• The FIDIC DAB provisions apply whenever a FIDIC contract is used unless parties
delete the provision
• FIDIC DAB decisions are immediately binding and parties are obliged to comply with
the decision pending other stages of the dispute resolution procedure, e.g. revised by
amicable settlement or arbitral award
• New Red (Construction Contract) and New Yellow (Plant and Design-Build Contract)
Books provide for Engineer to act as adjudicator and DAB. Silver Book (EPC
Contract) has no Engineer, so disputes under Silver Book must be handled by DAB.

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V. Introduction to FIDIC and its Dispute Resolution Provisions (4)
FIDIC Procedure for Contractor’s Claims
New Red/Yellow Books Silver Book

28 day Notice of Claim to Engineer 28 day Notice of Claim to Employer

Clause 20.1
Contractor’s Claims
42 day “Fully Detailed Claim” 42 day “Fully Detailed Claim”
to Engineer to Employer

“Final Claim” 28 days after end of effects “Final Claim” 28 days after end of effects

42 days after receipt of claim 42 days after receipt of claim

Engineer’s Response Employer’s Response

Clause 3.5 Clause 3.5 Engineer to“Agree or Determine” Clause 3.5 Employer to“Agree or Determine”
Determinations

Given effect unless

Agreement/Determination
Contractor’s Notice of Dissatisfaction
given effect unless revised under Clause 20
14 days of receipt 25
 V. Introduction to FIDIC and its Dispute Resolution Provisions (5)
FIDIC Procedure for Contractor’s Claims
Reference to Dispute Adjudication Board (DAB)
Clause 20.2 (1 or 3 people)

DAB Decision No DAB Decision

Clause 20.4 within 84 days of reference within 84 days of reference

No Notice of Dissatisfaction Notice of Dissatisfaction Notice of Dissatisfaction

within 28 days of Decision within 28 days of Decision within 28 days after 84 days of reference

DAB Decision
final and binding
Clause 20.5 “Amicable Settlement” stage

Clause 20.6 ICC Arbitration

within 56 days after Notice of Dissatisfaction
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 V. Introduction to FIDIC and its Dispute Resolution Provisions (6)
FIDIC Procedure for Employer’s Claims
New Red/Yellow Books Silver Book

Clause 2.5 Employer or Engineer gives Employer gives

Employer’s Claims notice and particulars to Contractor notice and particulars to Contractor

Clause 3.5 Clause 3.5 Engineer to Clause 3.5 Employer to

Determinations “Agree or Determine” “Agree or Determine”

Agreement/Determination given Given effect unless

effect unless revised Contractor’s Notice of Dissatisfaction
under Clause 20 14 days of receipt

Clauses 20.2 and 20.4 Reference to Dispute Adjudication Board (DAB)

(See previous diagram for (1 or 3 people)
full Clause 20.4 procedure)
Clause 20.5 “Amicable Settlement” stage

Clause 20.6 ICC Arbitration

within 56 days after Notice of Dissatisfaction
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V. Introduction to FIDIC and its Dispute Resolution Provisions (7)

• Procedural Rules for DAB are set out in Annex to Dispute Adjudication Agreement
• DAB shall visit site at intervals of not more than 140 days but not less than 70
days at request of either Employer or Contractor
• DAB to use site visits to become and remain acquainted with progress of the
Works and actual/potential problems or claims
• DAB to produce a report after each site visit
• DAB may conduct hearings and request exchange of statements
• DAB can adopt an inquisitorial procedure and refuse admission to hearings or
grant audience to any persons other than parties’ representatives
• DAB can open up, review and revise any certificate, decision, determination,
instruction, opinion or valuation of the Engineer

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VI. Conduct of a Typical International Arbitration (1)

A Typical ICC Arbitration Procedure

Answer to Request Terms of Reference

Request for Constitution of
and Filing of and Procedural
Arbitration Arbitral Tribunal
Counterclaims Timetable

Application for
Interim
Relief

Exchange of Limited Discovery

Post-Hearing
Hearings Written (Exchange of
Submissions
Submissions Documents)

Final Award & Costs Typical duration: 15-24 months

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VI. Conduct of a Typical International Arbitration (2)

Four phases of the typical international arbitration

• Introductory phase: exchange of outline initial submissions and
constitution of tribunal.
• Written phase: exchange of longer written pleadings and evidence.
• Hearing phase: witness hearings and hearings of argument.
• Award phase: arbitrators deliberate and draft their award.

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VI. Conduct of a Typical International Arbitration (3)

General remarks about international arbitration procedure

• Often an international hybrid of common and civil law procedures.
• Examples: IBA guidelines on evidence and conflicts.
• More informal than courts (no wigs, advocates usually sit)…
• … but equally adversarial.
• Often fascinating and difficult cultural clashes (e.g. document production,
preparation of witnesses…).

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VI. Conduct of a Typical International Arbitration (4)

International arbitration personnel

• Worldwide arbitration community/mafia. Centred in Europe, especially
France, Switzerland and the UK. Paris probably still the headquarters
of international arbitration (seat of the ICC). But now a growing pool of
international arbitrators from Asia and based in Asia.
• Increasingly two groups: arbitrators (older, academics, barristers, and
in boutique firms) and counsel (younger, in larger firms). The former
often graduate from the latter. Some overlap between the two groups.
• Case for specialisation: arbitration procedures and personnel
increasingly distinct from those of local courts. What you know and
who you know are both important.

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VII. Investment Treaty Arbitration and Construction Disputes (1)

• If the owner in an international construction project is a sovereign state instead of a

private company, a contractor with a claim may be able to start investment treaty
arbitration instead of following contractual dispute resolution procedures
• Or if state interferes with a contractor’s project with a private owner, contractor may
still have a claim against the state under an investment treaty
• Typical claims under investment treaties are based on interference by the state in the
project, including by action of the legislature, the courts, local government, tax
authorities etc
• Investment treaty arbitration can be better than “normal” arbitration as it gives access
to neutral, offshore proceedings, and international law remedies that may not be
available under contract or in the courts
• Can be very powerful, especially as China has concluded over 100 BITs, with new
(and effective) second generation treaties now replacing first generation (less
effective) treaties

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VII. Investment Treaty Arbitration and Construction Disputes (2)

• An investment treaty is an agreement concluded by two or more states to

promote and protect investment by investors of those states in the territory
of other states party to the treaty. Example:

Investment
China State X
Treaty

Investment
Investment
Chinese
State X
Investor State X China
Protection Protection Investor
and and
Promotion Promotion

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VII. Investment Treaty Arbitration and Construction Disputes (3)

• BITs cover investments by an investor of one country in the territory of the other
country
• “ Investor of a Contracting State” is usually defined to include:
− Individuals who are nationals of the State; and
− Companies organised under the laws of the State
• Indirectly controlled investments are often covered
• “Investment” is usually broadly defined to include any kind of asset, which can
include any claim to money or to performance under contract
• So definition of covered investment is very wide, far beyond traditional conception

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VII. Investment Treaty Arbitration and Construction Disputes (4)

• Question – are construction projects considered an “investment” in the

context of investment treaty arbitration?
• See Salini v Morocco (2001) – two Italian contractors filed for ICSID
arbitration against Morocco over a dispute arising under a contract for
construction of a highway. The contract provided for resolution of disputes
in domestic courts. Claimants alleged that Morocco’s failure to pay was a
violation of the “fair and equitable treatment and protection against indirect
expropriation” in the Morocco-Italy BIT. Morocco raised jurisdictional
objection that dispute was not in relation to investment under Art. 25(1) of
ICSID Convention and Art 1 of the Morocco-Italy BIT.
• Held: Contract for construction of a highway was an investment under both
treaties. Tribunal upheld jurisdiction over the investors' claims.

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VII. Investment Treaty Arbitration and Construction Disputes (5)

• See also R.F.C.C. v Morocco, Bayindir v Pakistan (both highway

construction projects), Impregilo v Pakistan (construction of a dam) and
Saipem v Bangladesh (pipeline construction project)
• In all cases, the construction projects were held to be investments covered
by investment treaty in question and the ICSID Convention. The contractors
could therefore all proceed with their claims in neutral, offshore international
arbitration regardless of the dispute resolution provision in their contract
• So, if you have a dispute with a state or state agency, think about
investment treaty arbitration even if you have an arbitration or litigation
clause in your contract, or even if you have no contract

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VIII. Advice on Drafting International Construction Dispute Resolution Provisions (1)

• Consider interim dispute resolution mechanism, as can be advantageous to

contractors
• Final mechanism should be arbitration in most cases
• Resist temptation to overdraft, keep dispute resolution provisions simple:
use model institutional clauses or standard form contracts (easily available
online) as the basis
• Caution with carve-out clauses, e.g. sending some disputes to court/expert
and the rest to arbitration

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VIII. Advice on Drafting International Construction Dispute Resolution Provisions (2)

• Resist temptation to limit pool of arbitrators, e.g. by requiring arbitrator to

have esoteric experience
• Don’t forget the governing law clause; and if you are using a standard form
contract, choose governing law that is compatible with the contract
• Consider consolidation/joinder for supplier/subcontractor contracts
• If consolidation/joinder impossible, try to get the dispute resolution clauses as
similar as possible, e.g. same arbitration rules, governing law provisions

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VIII. Advice on Drafting International Construction Dispute Resolution Provisions (3)

• Ideally, make sure that dispute resolution clauses in performance bonds are
identical with main contract dispute resolution provisions
• No language stating that contractor must wait until after completion before
commencing final dispute resolution proceedings
• Ask for courts or (more realistically) arbitration in your home jurisdiction as a
starting point
• Agree to an arbitration friendly place of arbitration if home jurisdiction not
available, e.g. Hong Kong, Singapore, London, Paris
• If in doubt, seek specialist advice
• Keep enforcement considerations in mind, e.g. location of other party’s assets

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VIII. Advice on Drafting International Construction Dispute Resolution Provisions (4)

• For China-related arbitration, consider:

− That PRC Arbitration Law is currently interpreted by many as not permitting in
China either ad hoc arbitration or arbitration administered by institutions based
outside China
− Specifying that arbitration administered by selected institution, rather than merely
referring to selected arbitration rules
− Providing for appointment of arbitrators other than those on the institution’s panel
− Providing that sole/presiding arbitrator not being the same nationality as the
parties
− Avoiding two languages (e.g. English and Chinese) as the languages of the
arbitration: keep it to only one language

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IX. Advice on Preparing for and Conducting International Construction Disputes (1)

• Before a dispute arises:

− Establish sound, dedicated policies and procedures for
correspondence, other documentation and claims handling
− Keep supporting documents and contemporaneous evidence well, e.g.
diaries, photographs, maps, drawings (preferably electronically)
− Maintain a set of programmes which are regularly updated
throughout the course of the project so that the delay experts will be
able to prepare their report in the event of a delay claim

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IX. Advice on Preparing for and Conducting International Construction Disputes (2)

• When a dispute arises:

− Keep a close eye on notice provisions and other conditions precedent to
claims in your contract, and time limitations for bringing claims and
defences
− Gather facts and seek legal and expert advice early
− Take care in what you write and don’t write to the opposing party (do
protest, don’t make unintended concessions)
− Evaluate chances of success early, and act upon that evaluation
− Carefully explore all settlement options, especially ADR (e.g. mediation)
− Look at exposure of performance bonds

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IX. Advice on Preparing for and Conducting International Construction Disputes (3)

• During arbitration or litigation:

− Set up dedicated internal team to maximise efficiency and minimise
disruption to project
− Work with specialist external lawyers, arbitrators and experts,
− Work together with your external team, don’t just let them get on with it
− Prepare and monitor realistic litigation budgets
− Get management commitment to ensure cooperation of project participants
− Always keep settlement and ADR possibilities in mind

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Contact Information

John Savage
Shearman & Sterling LLP
6 Battery Road, #25-03
Singapore 049909

Tel : +65 6230 3008

Fax : +65 6230 3899
Email : john.savage@shearman.com
Website : www.shearman.com

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