International Federation of Consulting Engineers

Construction Disputes and Alternative Disputes Resolution in Indonesia Speaker:Sarwono Hardjomuljadi Dr, Ir, MSc, MSBA, MPA, MDRBF, MDBF, ACIArb, ACPE Special Adviser to the Minister of Public Works,Indonesia FIDIC International Accredited Trainer Country Representative of DRBF

ADR FIDIC MDB Harmonised Construction Contract Conference CLAIMS

NO YES

AGREED DISPUTES FINISHED LITIGATION

by amicable settlement by mediation by Dispute Boards by arbitration Question : why do we always talk about using the Dispute Board while there are other methods to resolve disputes? Answer:

? (The answer to this question is the key element in convincing the users of Dispute Boards).

FIDIC MDB Harmonised Construction Contract Conference BILATERAL AND MULTILATERAL LOAN for Public Works Sector (as per December 31, 2011) Australia 5.34% Korea 3.04% France 0.86% China 3.77% World Bank 21.64% JICA 55.13% ADB 5.99% IDB 4.23%

FIDIC MDB Harmonised Construction Contract Conference

Obstacles in using DB in Indonesia are: 1. Question on Legal base 2. Question on Payment / cost 3. Question on Power of DB decision

FIDIC MDB Harmonised Construction Contract Conference

Legal base

Users sometimes express their concern that the DB provisions will not be in accordance with the country’s law and is reflected by a misunderstanding on the DB process. The DB process is a “contract administration process” to avoid formal disputes which might be referred to the arbitration under the MDB Conditions. The DB Decisions on formal disputes presented are final and binding to the Parties unless either Party gives a timely Notice of Dissatisfaction to the Decision. If one Party has stated his dissatisfaction, the dispute will then go to the arbitration for seeking a final and binding arbitral Award in accordance with the Sub-Clause 20.6.

FIDIC MDB Harmonised Construction Contract Conference

Payment / cost

How if the cost of DB is not included in the GOI budget and the loan itself? In order to support the use of DB, all cost incurred should be included in the loan and some lenders has recently agreed to finance also the cost of DB.

FIDIC MDB Harmonised Construction Contract Conference

Power of DB decision

…………………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 as describe below.

………………...If either Party is dissatisfied with the DB’s decision, then either Party may, within 28 days after receiving the decision, give

Notice of Dissatisfaction

to the other Party indicating its dissatisfaction and intention to commence arbitration.

………………..If the DB has given its decision as to a matter in dispute to both Parties, and no Notice of Dissatisfaction has been given by either 28 days after it received the DB’s decision

shall become final and binding

upon both Parties.

FIDIC MDB Harmonised Construction Contract Conference

Why the parties are reluctant to use the DB ?

The Employer and the Contractor are reluctant

to spend money before the occurrence of dispute.

It is advisable that when dispute has not occurred (the standing time), DB will only receive a kind of retainer fee (starting from the contract signing until the dispute occurs) for the services such as reading and analyzing information of potential dispute from parties, discussing through email or conducting meeting if necessary, to allow the DB becoming and remaining conversant with all project developments.

Minimum 3 days fee per month should be OK. When dispute occurs, the hourly fee will then be applied.

The use of DB is proven to be actually more advantageous than the costly and lengthy dispute.

FIDIC MDB Harmonised Construction Contract Conference

Experience

The case, CRW Joint Operation v Perusahaan Gas Negara, involved in a contract between a publicly-owned Indonesian company (the employer) and an Indonesian joint operation (the contractor) for the construction of a pipeline. The contract was based on the FIDIC Conditions of Contract for Construction, 1999 (the Red Book) and was governed by Indonesian law.

The parties referred the dispute to a

single-person dispute adjudication board

, which valued the variations and ordered the employer to pay them. The employer refused to do so and issued a

notice of dissatisfaction

with the dispute adjudication board decision. The contractor then filed a request for arbitration with the ICC seeking to oblige the employer to

"promptly give effect" to the "binding" dispute adjudication board decision,

in accordance with sub-clause 20.4 of the Red Book. The majority of the arbitral tribunal (chairman Alan Thambiayah and co-arbitrator Neil Kaplan CBE QC SBS) found that the dispute adjudication board decision was binding on, and to be given immediate effect by, the parties and that the contractor was entitled to immediate payment of the sum. The other co-arbitrator, H Priyatna Abdurrasyid, issued a dissenting opinion on separate grounds.

From an article in the December 8, 2011 issue of GAR by Christopher R. Seppälä

FIDIC MDB Harmonised Construction Contract Conference

Subsequently, the employer obtained an order from the

setting aside the award

.

Singapore High Court

The contractor appealed to the

Singapore Court of Appeal, which dismissed the appeal

. Although the courts based their respective judgments on somewhat different grounds, the assumption that a "binding" decision of a dispute adjudication board (that is, one that has been the subject of a notice of dissatisfaction) should not be enforced by arbitration, due to a perceived "gap" in sub-clause 20.7, featured heavily in their reasoning.

From an article in the December 8, 2011 issue of GAR by Christopher R.

Seppälä

FIDIC MDB Harmonised Construction Contract Conference Sub Clause 20.1

Contractor’s Claims

If the disputes cannot be solved by the parties and afterwards come to the litigation process i.e. the court, the employer will always be the loser, whatever the court decision. If the decision is in favour of the contractor, the employer has to pay the penalties and if the decision is in the favour of the employer, there arises the possibility that the completion will be delayed- as the contractor has not enough resources to complete the work - and there is the possibility of poor quality works due to the financial difficulties.

Sub Clause 20.2 Appointment of the Dispute Board The DB shall comprise, as stated in the Contract Data, either one or three suitably qualified persons (“the members”), each of whom shall be fluent in the language for communication defined in the Contract and shall be a professional experienced in the type of construction involved in the Works and with the interpretation of contractual documents. If the number is not so stated and the Parties do not agree otherwise, the DB shall comprise three persons.

The appointment of three members DB is easier and less time consuming, because instead of one member whom should be agreed and approved by both parties, three member DB are consist of three member, one member proposed by each party respectively and the third, the chair apointed by the member. The appointment of single Dispute Board, often cause the first dispute between the parties. It seems that three member is more suitable for the Construction Contract Commonly the member appointed by parties will try to find the respectable person whom recognised by them as person who have enough knowledge in the substance of construction process and having capability to coordinate the DB.

FIDIC MDB Harmonised Construction Contract Conference Sub Clause 20.4

Obtaining Dispute Board’s Decision Within

84 days

after receiving such reference, or within such other period as may be proposed by the DB and approved by both Parties, the DB shall give its decision, which shall be reasoned and shall state that it is given under this Sub-Clause. 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 as described below.

Unless the Contract has already been abandoned, repudiated or terminated, the Contractor shall continue to proceed with the Works in accordance with the Contract

.

FIDIC MDB Harmonised Construction Contract Conference

The DB decision becomes final and binding upon its issuance. It means the parties should immediately comply with, notwithstanding a party’s dissatisfaction. Depending on the DB provisions in the Conditions of Contract, the parties may negotiate the issues or the unsatisfied party may immediately invoke arbitration. Even if it is objected to, the DB decision is binding until the parties agree otherwise or the arbitral tribunal decides differently (Omoto, 2012).

There was a controversial decision by the Singapore High Court and then by the Singapore Supreme Court in the case between PT PGN (Persero) and PT CRW, where they set aside the Arbitration Award and was against the immediate effect of a “final and binding” decision in the international best practice (Peter Megens, 2012).

Eventhough the above circumstance is very rare, it should not hamper the use of DB and everybody should understand that the cost of arbitration and/or litigation are categorized as “legal cost” whereas the cost of DB can be categorized as “project management cost” which would be easier to obtain either from the government or the lender.

FIDIC MDB Harmonised Construction Contract Conference Sub Clause 20.4

Obtaining Dispute Board’s Decision If either Party is dissatisfied with the DB’s decision, then either Party may, within

28 days

after receiving the decision, give notice to the other Party of its dissatisfaction and intention to commence arbitration. If the DB fails to give its decision within the period of

84 days

(or as otherwise approved) after receiving such reference, then either Party may, within

28 days

after this period has expired, give notice to the other Party of its dissatisfaction and intention to commence arbitration.

Fail to decide FIDIC MDB Harmonised Construction Contract Conference 84 days (Clause 20.4 Para 5) DB/DRB/ DAB Clause 20, Claims, Disputes and Arbitration 84 days (Clause 20.4 Para 4) Agreed Decision 28 days (Clause 20.4 Para 5) Disagreed 28 days (Clause 20.4 Para 5) Notice of Dissatisfication to other Party 56 days (Clause 20.5 Para 1) Commence of Arbitration Final and binding Yes Amicable Setlement No © Sarwono Hardjomuljadi

FIDIC MDB Harmonised Construction Contract Conference Sub Clause 20.5 Amicable Settlement If the DB has given its decision as to a matter in dispute to both Parties, and no notice of dissatisfaction has been given by either Party within

28 days

after it received the DB’s decision, then the decision shall become final and binding upon both Parties.

Where notice of dissatisfaction has been given under Sub-Clause 20.4 above, both Parties shall attempt to settle the dispute amicably before the commencement of arbitration. However, unless both Parties agree otherwise, arbitration may be commenced on or after the fifty-sixth day after the day on which a notice of dissatisfaction and intention to commence arbitration was given, even if no attempt at amicable settlement has been made.

FIDIC MDB Harmonised Construction Contract Conference The best way is to avoid the development of different interpretation becoming a formal dispute, by amicable settlement

The alternative dispute resolution in Indonesia has already its legal base, i.e. the Law No. 30 Year 1999 which allows the use of alternative dispute resolution besides the arbitration and litigation.

Dispute Board is one of the best alternative disputes resolutions. The cost of DB could be categorized as “

project management cost”

whereas the cost of other dispute resolutions is categorized as

“legal cost”.

The Disputte Board appointed at the early stage of the project is actually part of the “project management” based activity, instead of the “legal” based activity. The involvement of Dispute Board at the outset enables the Dispute Board to monitor all stages of the project and when any disagreements do arise, the Dispute Board is prepared to guide the parties in achieving an amicable settlement and avoiding its development into formal disputes.

FIDIC MDB Harmonised Construction Contract Conference Sarwono Hardjomuljadi

Dr, Ir, MSc (Civ), MSBA (Bus), MPA, MDRBF, MDBF, ACIArb, ACPE

FIDIC Contract International Accredited Trainer (FIDIC IAT)

Federation Internationale des Ingenieurs-Conseils FIDIC - Box 311 - CH-1215 Geneva 15 - Switzerland SKYPE fidic.secretariat - Tl +41-22-799 49 00 - Fx +41-22-799 49 01 – w ww.FIDIC.org

Country Representative for Indonesia (MDRBF)

The Dispute Resolution Board Foundation 19550 International Blvd. So Suite 314 Seattle, Washington 98188, USA Tel.(206) 878-3336, Fax (206) 878-3338 www.drb.org

Corporate Panel Member (MDBF)

The Dispute Board Federation 14, rue du Rhone 1204 Geneva, Switzerland Tel: +41 22 819 19 68, Fax: +41 44 732 69 95 www.dbfederation.org

Associate Member (ACIArb)

Chartered Institute of Arbitrators 12 Bloomsbury Square London, WC1A 2LP, UK Tel: +44 (0)20 7421 7444; Fax: +44 (0)20 7404 4023 www.ciarb.org

International Federation of Consulting Engineers

President Vice-President Geoff French, UK Pablo Bueno, Spain Secretariat FIDIC World Trade Center 2 Geneva Airport Box 311 CH-1215 Geneva 15 Switzerland Tel: +41 22 799 49 00 Fax: +41 22 799 49 01 [email protected]

www.fidic.org

Managing Director Enrico Vink