By: Aviral Shrivastava
International Arbitration was created as a technique to eliminate erroneous or time-consuming litigation, and since then it has earned widespread acceptance. Despite this, constructive debates of the cost-mechanism and, more specifically, issues linked with diverse interpretations of the Arbitration Clause and the Arbitration Agreement have been made.
With this enhanced discernment, came a new image of the construction industry’s broadened interest in Alternative Dispute Resolution Methods, including Arbitration, Mediation, Dispute-Adjudication Boards, and mini trials that are non-binding in nature.
However, the criticism persists because the aspect of interpretation of Arbitration Agreements in construction contracts is perplexed due to the dispute between the specific laws that govern the construction aspects and the International Sales Law that governs the supply of goods and services part of any construction contract. The General and Particular Conditions of the International Federation of Consulting Engineers Suite of Contracts [“FIDIC”] are the transnational rules containing interpretation of construction terms in the form of a template that forms the foundation of any construction contract, whereas the United Nations Convention on the Sale of Goods [“CISG”] is a sales convention that governs the supply of goods as well as services.
CISG is used as the contract’s applicable law whereas FIDIC is used to draft the construction contract, which is why the arbitrators face a significant challenge in interpreting the contract. The present article by providing a comparison between the usages of CISG and FIDIC sheds light on the conflict of interpretation in a Construction Arbitration Contract and various approaches that can tackle this web of ambiguous interpretations.
A Conflicting Comparison between the usage of CISG and FIDIC
CISG as an applicable law governs the interpretation of the contract, including the Arbitration Agreement. The law governing the Arbitration Agreement governs the substantive validity of an Arbitration Agreement, which includes the substantive rights of the parties. Further, it provide the parties with a neutral set of principles under Art. 7 which they can adopt as necessary by operating as a gap filler to supply terms that the parties have not negotiated. On the other hand, FIDIC is used to understand the intention of the parties behind the incorporation of the clauses of the contract, specifically, the construction aspects of the contract.
In Construction Arbitrations, conflicts frequently arise with respect to applicability of CISG or FIDIC as the governing law to the construction aspects of the contract. The interpretation of, construction terms like Force Majeure, Contractor’s personnel and services is provided by the FIDIC. However, the interpretation of services in construction aspects can also be governed indirectly by CISG under its ambit. This leading conflict poses great problems to the arbitrators in choosing one law for interpretation.
Approaches to tackle Conflicts
In order to resolve these types of disputes in Construction Arbitration, many courts have offered various strategies for the arbitrators to choose one ruling factor for the interpretation of services.
Subject to the interpretation of Contract
The applicability of CISG or FIDIC in Construction Arbitrations fluctuates according to the interpretation of the contract. In Wickman Machine Tool Sales Ltd v L Schuler, the United Kingdom House of Lords held that the courts must give effect to the objective meaning of the clear words while interpreting a contract. In Attica Sea Carriers Corp v Ferrostaal Poseidon Bulk Reederei, the US Court of Appeal held that in the absence of clear words, the court must determine as to which of the rival interpretations hold more relevance in the concerned case.
If there is a clear indication of applying CISG as the applicable law, then rival interpretations in the form of FIDIC would not be applicable. In Iran v Westinghouse, the ICC tribunal ruled that, according to Article 13(3) of the ICC Rules, arbitrators should employ conflict rules only if the parties have not indicated the applicable law. Moreover, if there is parties’ choice of amendments to the FIDIC in a contract having CISG as the applicable law, then the same is a strong indication that the parties do not want the applicable law to govern the contract.
In construction contracts, parties generally describe their respective obligations by using plain and ordinary words. The word ‘shall’ in the parties’ agreement signifies the mandatory nature of the obligations to be performed by the parties. On the contrary, the word ‘may’ show the permissive or optional nature of the obligations laid down in the contract. The optional and permissive nature rendered by the term ‘may‘ creates ambiguity while interpretation of the contract. Furthermore, for the FIDIC Suite of Contracts to be the governing law, the particular conditions in the contract should be clear and unambiguous.
The existence of a clear choice of law clause has been construed as a strong indicator of the parties’ intention of having one law governing their relationship. In BCY v BCZ, the Singapore HC observed that the intention of the parties can be derived from the relevant factual background.
When the contract is straightforward and unambiguous, it should be interpreted on its terms, but when the meaning of the contract is ambiguous then the intent of the parties becomes a determining factor for the choice of law.
Therefore, if the parties’ intention and the clear words of the contract expressly provides for the FIDIC to govern the construction aspects of the contract, then in such cases, FIDIC would be used to interpret the construction aspects of the contract.
On the basis of the Type of Contract
If there are two separate contracts, the CISG will be applicable to the contract of sales and domestic law to the contract of services.[i] However, CISG could also be completely applicable, if the preponderant part of the obligations consists of the supply of goods and does not consist of the supply of labour or other services.
In Globe Nuclear Services v AO Techs nab export, the tribunal stated that a service contract mentioned under Article 3 of the CISG, is a contract in which the preponderant part of the obligations consists of the supply of labour or other services. Further, the intention of parties should be considered while interpreting the parties’ agreement, as to understand the relevant factors or obligations which are to be given precedence over the various other obligations present in the entire contract.
According to Article 3(2) of the CISG, a mixed contract is a contract in which two different obligations are included in the same contract, which could be separately provided in two different contracts.[ii] The principle of the ‘Preponderant part’ under the CISG states that, when there are two separate obligations, first to supply and the other to provide services and the supply part has more weightage than the services part,[iii] in the same contract, then the CISG would completely govern the contract.[iv]
Further, other legal consideration for the CISG to govern a mixed contract includes, one contract price to pay for goods and services and one single document containing all the obligations of the supplier.[v] Therefore, if the contract is a mixed contract, then the arbitrators must resort to finding the weightage of supply of goods and supply of services in any construction contract to decide on the applicability of either CISG or FIDIC to interpret the contract.
Using FIDIC as a Lex-Constructionis
In cases where CISG is the applicable law, FIDIC in the form of Lex-Mercatoria is often advisable to cover the loopholes in the applicable law. The Lex Mercatoria is a transnational rule which is used as a complement to the applicable law of the contract.[vi] In Italian enterprise v Syrian enterprise, the ICC Tribunal applied the doctrine of Lex Mercatoria to give the arbitral award as there were inherent legal inconsistencies with the governing law. Furthermore, in Re Pabalk Ticaret v Norcolor, the ICC tribunal stated that the principles of international Lex Mercatoria are to be given precedence over any applicable rule of law, whenever there arises a difficulty in choosing that particular applicable law.
However, it is important to note that even if FIDIC Suite of Contracts is used as Lex Mercatoria, it cannot overrule the governing law, as Lex Mercatoria only complements the governing law and cannot override it.
In Dow Chemical Co. v Mahlum, the Nevada SC held that Lex Mercatoria in International Arbitration should apply when it brings a proper harmonization of laws. FIDIC Suite of Contracts is the set of laws which is specifically used in the interpretation of the construction aspect of the contract and thus harmonizes the contract in consonance with the international sales law.
Lex Mercatoria in construction projects, also referred to as Lex Constructionis, is universally accepted and used in the standard form of contracts. The World Bank has mandated the use of FIDIC Suite of Contracts as the standard construction form of contract across the world.[vii] Furthermore, the UNCITRAL guide for industrial works contracts,[viii] has approved the Lex Constructionis as a method of determining the law applicable to a contract by the virtue of the principle of private international law or conflict of laws.[ix]
Using FIDIC in the form of a Trade Usage
Further, the principle of Lex Mercatoria is enshrined under Article 9 of the CISG, in the form of trade usages. However, trade usages do not constitute rules of law and cannot take precedence over the applicable laws.[x] Moreover, trade usages suggest the possible way of application of the governing law in a particular dispute.[xi] FIDIC Suite of Contracts is a rule which is used as a standard form for drafting construction contracts.[xii]
Analysis and Takeaways
With these approaches in mind, the arbitrators can always find a way to solve the ambiguities in the interpretation of International Construction Contracts using FIDIC as Lex Constructionis to interpret the Construction Aspects of the contract and CISG as the International Sales Law to interpret the supply of goods and services, also depending on the laws the parties have chosen to govern the contract with FIDIC only supplementing the governing law and not overriding it.
This will help in negating the criticisms born out towards Arbitration generally or Construction Arbitration specifically and will help in achieving the true purpose of International Arbitration i.e., speedy and effective disposal of disputes.
Aviral is an ambitious, focused and committed fourth year law student of Institute of Law, Nirma University with a special interest in Taxation Laws (Indirect) and International Arbitration (Investment Law, Commercial Law, Construction-FIDIC and Space Laws).
[i] Ingeborg Schlechtriem & Peter Schwenzer, Commentary On United Nations Convention On International Sale Of Goods (3rd ed. 2010).
[ii] Cour d’ appeal de Colmar (CA), 26 February 2008, CISG-online 1657. See also, Handels G
gericht des Kantons Zürich (HGer Zurich) (Switzerland) 8 April 1999 (Windmill drives), CISG-online, 489(Pace).
[iii] Ingeborg Schlechtriem & Peter Schwenzer, Commentary On United Nations Convention On International Sale Of Goods (3rd ed. 2010).
[iv] Oberlandesgericht Innsbruck (OLG) (Austria), 18 December 2007, CISG-online 1735.
[v] Int. Ct Russian CCI, 5th March 1998, CISG-online 1827.
[vi] W.L. Craig, W.W. Park, AND J. Paulsson, International Chamber Of Commerce Arbitration (2nd ed. 1990).
[vii] U. Draettaet al., Breach and Adaptation of International Contracts – An Introduction to Lex Mercatoria, BUTTERWORTHS, LONDON AND EDINBURGH (1992).
[viii] United Nations Commission on International Trade Law (UNCITRAL), Legal Guide on Drawing Up International Contracts for the Construction of Industrial Works, New York Publication (1988).
[ix] Ibid at Ch. XXVIII, p. 301.
[x] ICC Arbitral Award (2010) Case No. 13954 in XXXV Y.B. Com. Arb. (2010).
[xi] Gary B. Born, International Commercial Arbitration (3rd ed. 2014).
[xii] Donald Charret, The International Application Of Fidic Contracts (1st ed. 2019).