Time, Costs, Lessons from the Persero arbitration

Justice delayed is justice denied. The Persero Cases are three cases fought out in Singapore between 2011 and 2015 that relate to the enforcement of arbitral awards from construction contracts. They are a series of fascinating battles between two Indonesian parties (PT Perusahaan Gas Negara (Persero) TBK, an Indonesian company, and CRW Joint Operation, an Indonesian joint operation (a jv that doesn’t involve the setting up of a new legal entity) to a FIDIC construction contract with the amount in dispute ranging between 13 and 18 million dollars. The cases are complex and bring up numerous important points that merit mention as separate blog posts. This particular post highlights the potential implications of time and costs in arbitration, if done badly.

Timeline

Consider the timeline:

  • The contract was signed in 2006.
  • Disputes arose probably in early 2008.
  • A Dispute Adjudication Board (a dispute settlement mechanism within the FIDIC contract)  ruled in favour of one party (the “Winner”)  in November 2008.
  • The other party (the “Loser”) filed a notice of dissatisfaction (as required) in December 2008 and refused to pay.
  • In mid -February 2009, Winner commenced arbitration.
  • At end-November 2009, the 3 person arbitration tribunal made the award in reference to the refusal to pay (not considering the underlying dispute.)
  • Loser approached the Singapore High Court to set aside the award. The judgment (Persero I) came down in July 2010.
  • The decision was appealed and The Singapore Court of Appeal judgment came in October 4, 2011 in favour of Loser.
  • This led to a second arbitration in 2011 which again went in Winner’s favour.
  • In July 2014, the High Court faced with a enforcement request of the second award ruled again in Winner’s favour.
  • That judgment was appealed. The Singapore Court of Appeal’s ruling on this came  in May 2015 and finally went in favour of the original claimant.

So, looking back, the dispute, from genesis to resolution, occupied the parties’ time and money from early 2008 to mid-2015, i.e. slightly over 7 years. The S&P is said to generate an average return on investment of 13%. I assume the businesses were targetting a rate of return higher than that.

But at that rate of return, not accounting for all the internal and external organisational costs (employees, officers and directors have to run around distractedly doing this!), and the legal fees and regulatory fees relating to one DAB proceeding, two arbitrations, and four sets of court proceedings, the delay in dispute resolution probably ate up the entire original disputed amount, in addition to poisoning the business relationship and potentially causing reputitional damage to one or both parties.

Then imagine the fees racked up by everyone’s legal representives involved in this dispute resolution.

And those are the costs in one jurisdiction.

Why did all this take place?

The blame for this must be laid at the feet of the drafters of the arbitration clause in the FIDIC contract. The FIDIC “Red Book” and “Pink Book” incorporate a dispute resolution mechanism (Dispute Adjudication Board or “DAB”) that seeks to take in disputes between parties and spit out results that are akin to liquidated damages. The drafters then sought to piggyback the enforcement of such liquidated damages/internal “awards” using  convention and legislation crafted to support arbitral awards. Further, they sought to specify the role of the arbitral tribunal to simply be a rubber stamp of the internal dispute resolution mechanism, by defining a new dispute out of the non-payment of liquidated damages as a separate dispute from the original dispute. So, if a party gets an incompetent or biased DAB resulting in a bad decision, this contractual mechanism would allow a tainted DAB decision, which has no support in international convention or legislation,  to free-ride on legislation that supports arbitral awards, without the oversight over normal arbitral awards that courts would normally apply.

Defenders of this approach say that this is within the context of pay-now argue later and that the underlying dispute may still be subject to review and adjudication.

The story concluded with the Court of Appeal ruling (not unanimously) in favour of the claimant.

Observers of the sorry spectacle will wonder how well the claimant was served by the dispute resolution clause in the contract they used.

Drafters of the FIDIC contract templates are naturally screaming loudly about how all the courts until the last one were interpreting the contract badly (a weird reversal of reality) rather than the contract was drafted badly.

And of course, however finally conclusive the anaconda-like reasoning of the drafters of the FIDIC contract may try to be, application of their labyrinthine contractual clauses led to 8 years of time and money wasted for the Claimant.

And it is not clear such disputes will not constantly re-appear because … in the long run, no arbitration convention will blindly support the results of an internal dispute resolution mechanism (which is explicitly designated as NOT arbitration) without checks and balances as to how decisions come about.

The “Don’t worry, pay now, you can always argue later … it works elsewhere!” seems like flimsy protection. (It always seems like the more flimsy the argument, the more vehemently it is made.)

Conclusion:

Arbitration can be time consuming and expensive if the arbitration clause/agreement is complex, unpredictable, kludgy or too cute.

What’s the moral of the story?

No, the moral of the story IS NOT : avoid arbitration clauses. It is,  do them well.

International companies uses contracts incorporating arbitration for many very good reasons. All drafters are fallible and the Persero case has highlighted how the FIDIC dispute resolution mechanism can go horribly wrong. No use blaming the courts for “getting it wrong.” You’re the one paying the bills and the courts are the final “arbiters” of arbitration. By definition, they always get it right.

The moral of the story is that to avoid massive costs, you should consider reviewing your standard agreement to ensure that:

The Arbitration mechanism/agreement you use or agree to is reliable, confidential and cost-effective.

Companies should use arbitration to avail of its many benefits and fashion their arbitration clauses/agreements to focus on simplicity, speed, and cost, because “getting it right” may be a bigger, more expensive headache, than “getting it done.”

You may consider using rules like those at the International Expedited Arbitration Centre using an expedited documents-only arbitration. Check them out at http://expeditedadr.com.

If you have any follow-up questions on the information on this or any of our other blog posts, please feel free to contact me at hari@startuplegals.ca. I look forward to hearing from you!

Hari Balaraman
Hari is a member of the Chartered Institute of Arbitrators, and is a corporate lawyer with experience in Information Technology, Renewable Energy and Nuclear Energy. He has worked in Canada, the US, Denmark, the UK, and India. in addition to his big-law experience, he was General Counsel at an US based IT Services company supervising internal and external counsel in jurisdictions across the world.