Subcontracts and Multiparty Arbitration in Construction Disputes

Major construction projects typically involve several parties and interrelated contracts, including subcontracts. While the provisions of the main contract between the employer and the contractor do not usually become a part of the subcontractor’s agreement, a dispute arising out of the main contract may give rise to claims and disputes under the subcontract and vice versa.

In this chapter we discuss the use and importance of subcontracts in construction law, as well as their relationship to main contracts. We then discuss the circumstances that give rise to multiparty arbitration in construction disputes. In doing so, particular attention is given to the International Federation of Consulting Engineers (FIDIC) conditions of contract and subcontract for construction.

The importance and function of subcontracts in construction projects

International construction contracts have become invariably more complex. In practice, it is not easy for one contractor to have the technical expertise to undertake the whole of works. Thus, it is technically and financially more efficient for contractors to employ subcontractors to provide material or execute parts of the works.[2] The use of subcontracts is also important for employers, who only need to enter into a single contract and obtain a single price for the whole works, including the price for subcontracts.[3]

The contractual interrelation between main contracts and subcontracts

The main contract and subcontract in a construction project are typically interrelated, and in essence, a subcontract is concluded in view and in the light of the main contract.[4] In a typical build-only contract, for example, the subcontractor will have to work on the basis of the design and drawings submitted by the employer, whereas in a design-and-build contract, the subcontractor will have to work on the basis of the specifications set out by the employer.

Moreover, circumstances and changes affecting the main contract will almost invariably affect the subcontract and vice versa. For example, any delay in the performance of the subcontract may give rise to liability of the contractor under the main contract. Similarly, if the employer fails to provide timely access to the site or submit the design to the contractor, or requests a variation from the contractor, the scope and time frames of works for the subcontract will necessarily be impacted.[5] Indeed, provisions in main contracts for construction often make references to the role of the subcontractor, and equally, provisions in subcontracts make references to provisions in the main contract.[6]

However, despite their close interrelation, the main contract and the subcontract for construction will typically remain two distinct and separate contracts. No multiparty contractual relationship will usually be established between the employer, the contractor and the subcontractor.[7] Similarly, no direct liability between the employer and the subcontractor will typically arise, unless the parties expressly agree or the governing national law provides otherwise.[8]

In effect, the employer, contractor and subcontractor or several subcontractors form a notional ‘contractual chain’ whereby each party is bound by rights, duties and liabilities with respect to its direct contractual party only. The parties at the two ends of the chain will have no contractual relationship between them, and will be subject to no direct liability, claims or remedies. Of course, every chain is as strong as its weakest link. Thus, if the two sets of contracts (employer–contractor and contractor–subcontractor) are not properly aligned in terms of contractual rights, duties and risks, the contractor may be exposed to risks and liabilities under the main contract, which the contractor may not be able to pass on to the subcontractor under the subcontract.[9] By way of example, if the main contract provides for the right of the employer to suspend works and, in turn, states that the main contractor would be entitled to claim extension of time but not additional costs for suspension, the main contractor may be exposed to liability for suspension costs that would not pass on to the subcontractor if the latter is entitled to claim both extension of time and costs for suspension under the subcontract.[10]

There are two different types of subcontractors: domestic subcontractors and nominated subcontractors. A domestic subcontractor is chosen by the main contractor, whereas a nominated subcontractor is selected by, or agreed with, the employer under nomination agreements in the main contract.[11]

Opting for a nominated subcontractor may be beneficial to the employer as well as to the contractor. From the employer’s point of view, nominated subcontractors allow the employer or the engineer to be involved in the choice of a specialist subcontractor and, thus, have better control on the quality of the subcontractor’s work or the materials used.[12] The option of a nominated subcontractor can also save time, as the employer may identify the subcontractor before the conclusion of the main contract and inform the main contractor at the time of tender of its suggested choice of the subcontractor. If the employer intends to use nominated subcontractors, this should be made clear in the tender documents to give the contractor the opportunity to take this matter into account when pricing for the project.[13]

A new provision in the 2017 FIDIC Conditions of Contract for Construction is Sub-Clause 5.1, which requires the contractor to obtain the engineer’s prior consent to all proposed subcontractors, except for suppliers of materials or (obviously) for nominated subcontractors. As is further stated in the provision, if the engineer does not respond within 14 days of receiving the contractor’s request, including details of the proposed subcontractor, objecting to the proposed subcontractor, the engineer shall be deemed to have given its consent.

In all cases, a nominated subcontractor cannot be selected by the employer against the contractor’s wishes. Sub-Clause 5.2.2 of the 2017 FIDIC Conditions of Contract for Construction, for example, provides that the contractor shall not be under any obligation to employ a nominated subcontractor against whom the contractor raises a reasonable objection by notice to the engineer no later than 14 days after receiving the engineer’s instructions, with supporting particulars.[14] Reasonable objections include the case where the subcontractor lacks sufficient competence, resources or financial strength; or where the subcontractor insists on terms of the subcontract that are not aligned with the main contract and may leave the contractor exposed to liability against the employer; or the case where the subcontractor does not agree to indemnify the contractor in the case of negligence or misuse of goods by the nominated subcontractor, its agents and employees.[15] If the contractor objects to the nominated subcontractor, the employer may be able to overcome such objection by agreeing to provide an indemnity to the contractor with respect to the contractor’s grounds for objection.[16]

The contractor may want to involve the employer in the selection of the subcontractor in an attempt to minimise its risk and liability that may arise from the subcontractor’s work.[17] However, whether this would be possible will depend on a number of legal and factual circumstances. Specifically, certain national laws provide for direct claims or remedies between the employer and the subcontractor even if there is no direct contractual relationship between these two parties.[18] In addition, in factual circumstances where the employer, or an architect on behalf of the employer, approaches the nominated subcontractor during the planning of the project to discuss the price and other terms of the subcontractor’s work before the identity of the main contractor is yet known, it might be found that there is sufficient direct contact between the employer and the subcontractor to establish a direct contractual relationship. In this regard, direct claims or remedies may be possible if the subcontractor can be held liable against the employer on the basis of an implied warranty with regard to the employer, or a direct collateral agreement between the employer and the subcontractor can be established.[19] For example, in the case of Shanklin Pier v. Detel Products, where the owners entered into a contract with the contractors to repair and repaint a pier that was demolished during the war. The subcontractor met with the employer for the purpose of obtaining the contract for the repainting of the pier. During the meeting the subcontractor made certain warranties, including that it should have a life of at least seven to 10 years. The issue before the court was whether an enforceable warranty could arise between parties other than the parties to the main contract. The English court held that the employer was entitled to recover against the subcontractor for breach of an express warranty, notwithstanding that the contract was concluded between the contractors and the subcontractors.[20]

Finally, direct claims may be possible if a duty of care is established by certain representations on the part of the subcontractor; for example, in IBA v. EMI.[21] In this case, EMI agreed to construct a television mast for IBA. EMI employed BICC as its subcontractor to design and execute the construction of the mast itself. Upon the collapse of the mast, IBA alleged breach of contract against EMI and BICC and alleged a breach of warranty directly against the subcontractor, BICC. Based on certain representations made by BICC in a letter it had sent to IBA, the court found that such communication between the employer and the subcontractor had established a duty of care to the employer and made the subcontractor directly liable with regard to the employer.

Parties’ rights and duties under main contracts and subcontracts should be aligned

As mentioned above, there is usually no direct liability between the employer and the subcontractor and no multiparty contractual relationship in a typical main construction contract and subcontract scenario. Thus, the contractor is usually liable to the employer and the subcontractor is liable to the contractor.[22] These types of distinct liabilities under the two contracts are usually achieved by well-drafted back-to-back contracts.[23]

An example is the FIDIC Conditions of Subcontract for Construction, which were first published in 2011 to be used in conjunction with the 1999 FIDIC Conditions of Contract for Construction (and now the 2017 edition) (the Red Book).[24] The 1999 FIDIC Contract Conditions and the FIDIC Subcontract Conditions have 20 clauses each.[25] While the 2017 FIDIC Contract Conditions has 21 clauses, it is largely compatible in content and structure with the FIDIC Subcontract Conditions.[26]

Another way to align the provisions between the two contracts is by incorporating by reference provisions of the main contract into the subcontract. However, incorporation by reference requires clear and express language as to the exact nature and scope of the rights, duties and remedies that are incorporated in the subcontract.[27] Otherwise, disputes may arise in this respect. For example, in the case of Lafarge Redland Aggregate Ltd v. Shephard Hill Civil Engineering, the subcontract made extensive references to the main contract, including with regard to an obligation of the subcontractor to read and note the provisions of the main contract. The question before the English court was whether such references might establish direct liability of the subcontractor as to the employer. The court held that there was no privity between the employer and the subcontractor, and that while the provisions in the main contract may have had an important bearing on the contractual relationship between the contractor and the subcontractor, they did not establish a contractual relationship of any kind between the employer and the subcontractor.[28]

While back-to-back contracts ensure that the rights and obligations of the parties under the main contract and the subcontract are aligned, it is the contractor that will be directly liable against the employer for any fault, delay or damage that may arise from the works of the subcontractor. As is now provided in Sub-Clause 5.1 of the 2017 FIDIC Contract Conditions, ‘the Contractor shall be responsible for the work of all Subcontractors, for managing and coordinating all the Subcontractors’ works, and for the acts and defaults of any Subcontractors, any Subcontractors’ agents or employees as if they were the acts or defaults of the Contractor’.[29] The provision does not distinguish between domestic and nominated subcontractors, and is applicable to both.[30]

National laws, however, may take a different approach from FIDIC’s approach of the contractor’s strict liability towards the employer. For example, English law provides that a contractor is not necessarily responsible for any design carried out by a nominated subcontractor, or for whether the subcontractor has complied with the performance specifications of the goods and materials.[31] Unless such provisions of the governing national law are mandatory, the contractor’s strict liability under FIDIC conditions will require the contractor to agree with the subcontractor to include in the subcontract clauses that provide that the subcontractor will indemnify the contractor and hold it harmless against damages for which the contractor becomes liable under the main contract as a result of a breach of the subcontract.[32] The failure of the subcontractor to include provisions to that effect may entitle the contractor to object to a nominated subcontractor.[33]

Other clauses in the FIDIC Conditions of Subcontract for Construction aim to align the rights and duties of the parties under the subcontract and the main contract.[34] By way of example:

  • Sub-Clause 1.8 provides that the same laws and language will govern both contracts;[35]
  • Sub-Clause 1.10 provides that there is no privity between the employer and the subcontractor;[36]
  • Sub-Clause 2.2 provides that the subcontractor shall perform and assume all obligations of the contractor under the main contract other than where the provisions of the subcontract otherwise require, and execute the subcontract works and remedy any defects in such a manner that does not contribute to any breach by the contractor of his or her obligations under the main contract;[37]
  • Sub-Clause 2.3 provides that instructions and determinations of the engineer must be notified to the subcontractor ‘as contractor’s instructions’;[38]
  • Sub-Clause 2.4 provides that the subcontractor shall have the same rights and remedies that the main contractor has under the main contract;[39]
  • Sub-Clause 3.5 provides that the contractor is responsible for the coordination of the main works and the subcontract works, and with the works under any other subcontract;[40]
  • Clause 8 coordinates the progress of the main contract and the subcontract and is aligned with the provisions in the main contract;[41] for example:
    • Sub-Clause 8.1 states that the contractor shall give the subcontractor not less that 14 days’ notice of the subcontract commencement date and provides that the subcontractor shall commence the execution of the subcontract as soon as practicable after the commencement date and shall proceed with the works without delay;[42]
    • Sub-Clause 8.3 provides that the subcontractor shall submit a detailed programme for the execution of the subcontract works to the contractor within 14 days of receipt of the contractor’s letter of acceptance or the contractor’s programme submitted under the main contract, whichever is later, and that the form and detail of the programme shall fully comply with the programming and reporting requirements of the main contract;[43]
    • Sub-Clause 8.4 provides that the subcontractor shall be entitled to an extension of time to the extent that completion of works is delayed, inter alia, by any of the causes set out in the main contract;[44]
    • Sub-Clause 8.6 states that if the contractor instructs the subcontractor to suspend progress of the subcontract works, the provisions relating to the ‘consequences of suspension’ and ‘prolonged suspension’ included in the main contract shall apply to the subcontract unless the cause of the suspension is the responsibility of the subcontractor;[45] and
    • Sub-Clause 8.7 stipulates that if the subcontractor fails to comply with the subcontract time for completion and this failure causes or contributes to a failure by the contractor to comply with the main contract, the contractor shall be entitled to deduct delay damages from the subcontract price;[46]
  • Clause 14 provides for the ‘pay when paid’ method and thus passes the risk for delay in payments by the employer to the subcontractor.[47] To that effect, Sub-Clause 14.6 states that the contractor is entitled to withhold or defer payment of any sums in a subcontractor’s monthly statement if: (1) the amounts included in the statement are not certified by the engineer; (2) the employer has failed to make payment to the contractor in respect of these amounts; or (3) the contractor considers that any sum in a subcontractor’s monthly statement is not due in accordance with the subcontract. This notwithstanding, the contractor is not entitled to withhold or defer payment of any sum if the failure by the employer to make payment is due to the default of the contractor under the main contract or the employer’s bankruptcy.[48] Clause 14 does not provide for the ‘pay-if-paid’ method and, therefore, the contractor is required to finally pay any withheld or deferred amounts within seven days of receipt by the contractor of payment from the employer or within 56 days of the expiry of the subcontract defects notification period, irrespective of whether the employer has paid these amounts;[49] and
  • Sub-Clause 17.1 extends the subcontractor’s responsibility for the damage of the subcontract works until the final takeover by the employer.[50]

Similarly, the 2017 FIDIC Conditions of Contract for Construction include provisions referring to the subcontract, notably Sub-Clause 5.2.4, which entitles the engineer to require the contractor to provide evidence that it has paid the nominated subcontractor the sums due under the payment certificates. If the contractor fails to submit such evidence, the employer is entitled to directly pay the nominated subcontractor and request the contractor to repay such amount.[51]

Multiparty arbitration in construction disputes

General observations on multiparty arbitrations

The completion of a construction project may involve several parties and interrelated agreements, and any dispute between the employer and the contractor may arise from the same facts and give rise to similar legal issues in a dispute between the contractor and the subcontractor.

As mentioned above, the provisions of the main contract between the contractor and the employer, including the dispute resolution provision, will not usually be a part of the subcontractor’s agreement. Accordingly, multiparty arbitration proceedings between an employer, a contractor and a subcontractor will not usually be possible in the context of a construction dispute.[52] A single set of multiparty arbitration will usually be in the interest of the contractor who will otherwise need to bring a separate claim against the subcontractor before a different arbitral tribunal to recover any liquidated damages that may have been awarded in favour of the employer in a previous arbitration.[53] By contrast, the employer will generally have little interest in participating in multiparty arbitration proceedings that involve a subcontractor. The employer’s main interest is to hold the main contractor fully liable, and it usually will have no concern of whether the main contractor will subsequently be able to pass on its liability to any other responsible party. As is rightly noted:

[I]f [the employer] is to defend claims, he would prefer to defend claims from a single source, namely the main contractor. The employer may fear that a multiparty arbitration procedure will be open to abuse by a recalcitrant party, given that it increases the opportunity for procedural objections. Furthermore, should he need to advance claims, he may well hope to be able to hold the main contractor fully liable, leaving him to pursue claims against the other parties involved.[54]

Having said that, the employer may want to bring an arbitration claim against the subcontractor directly if, for example, the contractor has become insolvent,[55] or if the employer can establish a direct duty of care or a direct claim against the subcontractor.[56]

While a party may want a single tribunal to decide all disputes between an employer, contractor and subcontractor, multiparty arbitration will only be possible if all parties consent to it, either before the dispute arises or after it has arisen.[57] It is indeed challenging to force non-signatories to participate in an arbitration to which they have not consented. This ‘lack of power’ in relation to third parties was in fact identified as one of arbitration’s ‘worst features’ in the 2018 Queen Mary International Arbitration Survey.

Consent for multiparty arbitration before the dispute arises may be established if the arbitration clauses in the main construction contract and the subcontract expressly allow for multiparty arbitration, or if the institutional arbitration rules governing the arbitration proceedings provide for multiparty arbitration.[58]

In non-construction arbitrations, tribunals under certain circumstances may ascertain implied consent for multiparty arbitration on the basis of different legal doctrines such as agency, assignment, third-party beneficiary, incorporation by reference, alter ego or equitable or arbitral estoppel.[59] Under these doctrines, an arbitration agreement between two signatory parties can be ‘extended’ to bind a non-signatory party. However, under a typical construction contract and subcontract, it is unlikely that an arbitration agreement in the main construction contract between the employer and the contractor can be ‘extended’ to bind the non-signatory subcontractor under any of the above legal doctrines. Unless exceptional factual circumstances exist, the legal position of a subcontractor is not usually akin to that of the principal, or the assignee,[60] or the alter ego of the main contractor.[61] Equally, it will be typically difficult for a subcontractor to be held as the third-party beneficiary of the substantive benefit, including the arbitration clause, of the main contract.

If all the relevant parties (employer, contractor and subcontractor) wish to resolve their dispute in a single set of multiparty arbitration proceedings, it is safer to enter into a single arbitration agreement, or to enter into two identical arbitration clauses (one between the employer and the contractor and one between the contractor and the subcontractor) that expressly provide for multiparty proceedings. If the employer, the contractor and the subcontractor wish to enter into two identical arbitration clauses, they should be aware that unclear drafting may lead to confusion or disagreements.[62]

For example, in City & General v. AYH,[63] City & General (CG) entered into a building contract with Kier, as the main contractor for the refurbishment and building of the former Patent Office Library in London. CG further appointed AYH to act as a project manager. The contract between CG and AYH included an arbitration clause providing that any dispute would be referred to arbitration by a single arbitrator, and that if the dispute raised issues that were the same as, or connected with, issues raised in related disputes between either party and a third person, already referred to arbitration, that dispute would be referred to the arbitrator appointed to determine the related dispute.

When a dispute arose between CG and AYH, a dispute had already arisen and an arbitrator been appointed between CG and Kiev. CG and AYH disagreed as to whether their dispute raised issues that ‘were the same as, or connected with, issues’ raised in the arbitration between CG and Kiev and therefore whether their dispute should be referred to the arbitrator appointed to determine the dispute between CG and Kiev. Relying on Judge Humphrey Lloyd’s decision in Trafalgar House Construction (Regions) Limited v. Railtrack,[64] Justice Jackson noted that the arbitration clause was unclear and that, accordingly, it was proper to have regard to its commercial purpose, namely, to avoid multiplicity of proceedings. Justice Jackson observed that if a material portion in both disputes was connected, it would make commercial sense for both disputes to be dealt with by the same tribunal, and he then went on to find that a number of issues in the arbitration against AYH were substantially the same as, or connected with, issues arising in the arbitration with Kier. He therefore ordered that the arbitrator who was appointed in the arbitration between CG and AYE be appointed in respect of the arbitration between CG and AYH.[65]

Multiparty proceedings under FIDIC Conditions of Contract and Subcontract

The FIDIC Conditions of Contract and Subcontract include compatible dispute resolution clauses to achieve the coordinated resolution of disputes that may arise under the main contract and the subcontract. For example, Sub-Clause 20.1 of the FIDIC Conditions of Subcontract provides that whenever the contractor is required under the FIDIC conditions of the main contract to give any notice or information to the engineer or the employer or to keep contemporary records, the subcontractor shall also give a similar notice or other information in writing to the contractor and keep the contemporary records that will enable the contractor to comply with the terms of the main contract. Similarly, Sub-Clause 20.2 of the FIDIC Conditions of Subcontract provides that if the subcontractor considers itself entitled to any extension of the subcontract time and any additional payment under the terms of the subcontract, the equivalent provision of Sub-Clause 20.2 of the main contract will apply, except that the period of notice for the subcontractor’s claims shall be no later than 21 days after the subcontractor became aware or should have become aware of the relevant event or circumstance giving rise to the claim. Such periods (and the period for the subcontractor to substantiate its claim) are deliberately shorter than the periods for the main contractor to give notice (and substantiate its claim) to the engineer under the main contract.[66]

However, while under Clause 21 of the 2017 FIDIC Conditions of Contract and Clause 20 of the FIDIC Conditions of Subcontract the dispute resolution processes under the two contracts are coordinated, they remain separate and distinct.

Specifically, under Clause 20 of the FIDIC Conditions of Subcontract, if the subcontractor has a claim against the contractor, the contractor will make a fair determination of the claim.[67] If the subcontractor is not satisfied with the determination, the dispute will be referred to the dispute adjudication board (DAB) of the subcontract.[68] The contractor must then decide whether the dispute is related or unrelated to the main contract. If, according to the main contractor, the dispute under the subcontract is unrelated to the main contract, either party (i.e., the main contractor or the subcontractor) shall be entitled to refer the subcontract dispute to the DAB under the subcontract.[69] If either party issues a notice of dissatisfaction against the decision of DAB under the subcontract, the main contractor and the subcontractor shall attempt to amicably settle the dispute and then proceed to bilateral arbitration.[70]

If the contractor considers that the dispute under the subcontract involves an issue that is related to a dispute under the main contract, then in any notice of dispute given by the contractor or within 14 days of receiving a notice of dispute from the subcontractor, the contractor may notify the subcontractor, with reasons, that the dispute is related to a dispute under the main contract. In such a case, the parties shall not be able to refer a dispute to the DAB under the subcontract for a period of at least 112 days or as agreed between the parties. If the subject of the subcontract dispute has not been previously referred to the under the main contract,[71] the contractor shall refer the dispute to it, and the subcontractor shall provide the contractor with all information that may be reasonably required to enable the contractor to pursue it, which includes the subject of the subcontract dispute.[72] After the DAB under the main contract issues its decision (or if the period that the parties have agreed to defer any referral to DAB under the subcontract expires), each party has different options: the contractor is entitled to refer the subcontract dispute to the DAB under the subcontract, while the subcontractor has the option of either referring the subcontract dispute to the DAB under the subcontract or going straight to arbitration.[73]

While the decision of the DAB under the main contract will not be binding on the subcontractor or the DAB under the subcontract,[74] the latter should normally take it into account to adjudicate the dispute between the contractor and the subcontractor. However, if a party gives a notice of dissatisfaction against the decision of the DAB under the subcontract, the dispute will proceed to arbitration under the subcontract between the contractor and the subcontractor. Under the FIDIC subcontract, the employer will not be able to participate in the arbitration between the contractor and the subcontractor, and the arbitration proceedings will not be consolidated with (or otherwise be bound by the outcome of) any arbitration proceedings between the employer and the contractor.

Overall, the default Clause 20 under the FIDIC Conditions of Subcontract provides for a harmonised dispute resolution process only during the adjudication phase. The referral of a claim to the contractor for determination under the FIDIC Subcontract Conditions is a distinct and separate procedure from the referral of a claim to the engineer for determination under the FIDIC Contract Conditions. Equally, the referral of a dispute to an arbitration panel under the FIDIC Subcontract Conditions is a distinct and separate procedure from the referral of a dispute to an arbitration panel under the FIDIC Contract Conditions. Prominent commentators have criticised this approach noting that ‘If the sole goal were saving time and cost and avoiding inconsistent results, all disputes between the employer and/or the contractor and/or the subcontractor should be decided by a single DAB and a single arbitration procedure in which all three parties could participate’.[75]

In addition to the default provision of Clause 20, the Appendix of the FIDIC Conditions of Subcontract provides for two alternative dispute resolution processes that the parties may agree to follow. In such case, the parties will have to amend default Clause 20 and incorporate one of the two alternative options.[76] Under the first option, the dispute resolution process under the subcontract does not include a subcontract DAB: where a dispute arises, the contractor and the subcontractor will attempt to amicably settle the dispute and, failing any amicable solution, will refer their dispute to arbitration.[77] If parties opted for this alternative dispute resolution process, there will be no harmonisation or coordination of the two processes at any stage.

Alternatively, the Appendix provides for a complex procedure with the aim of binding the subcontractor to the decision of both the DAB and the arbitration award under the main contract. Specifically, within seven days of receipt of a subcontractor’s notice of claim, the contractor must notify the subcontractor of whether the subcontractor’s claim will be treated as related or unrelated to the main contract claim. Any disputes about whether the claim is related or unrelated will be resolved under the International Chamber of Commerce (ICC) Rules for a Pre-Arbitral Referee Procedure.

If the claim is treated as related, the contractor will submit a notice of the claim to the engineer under the main contract with the subcontractor’s support. If the contractor becomes entitled to extension of time and additional payment under the main contract, the contractor will have to pass on an appropriate share of the benefit to the subcontractor.

If the contractor wants to challenge the decision of the engineer, it may refer it to the main contract DAB and give the subcontractor a reasonable opportunity to be involved in the resolution of the dispute, including in the preparation of submissions, attending the hearing before the DAB and making oral submissions. When the DAB issues its decision, the contractor must notify the subcontractor within seven days, and unless the subcontractor issues a notice of dissatisfaction, the DAB decision will be deemed binding on the subcontractor. However, if the subcontractor is not satisfied with the DAB decision, the contractor may either give a notice of dissatisfaction under the main contract or disagree with the subcontractor. In this case, the dispute will be considered as being unrelated to the main contract and will be decided between the contractor and the subcontractor through amicable settlement and ICC arbitration.

After the contractor issues a notice of dissatisfaction, the contractor and the employer will attempt to resolve the dispute amicably under the main contract, with the involvement of the subcontractor. Failing an amicable settlement, the dispute will be referred to arbitration under the main contract, in which case the contractor will have to keep the subcontractor informed and, crucially, give the subcontractor a reasonable opportunity to participate. In all cases, the contractor will notify the subcontractor of an award within seven days, and the award will be binding on the subcontractor as it is binding on the contractor.

Overall, while the third alternative aims to produce an efficient means to resolve related disputes, it is highly complex and is likely to give rise to many issues, with anecdotal experience so far showing that it is not generally preferred by parties.

Arbitration rules allowing for third-party claims

Multiparty arbitration may be allowed where the applicable arbitration rules provide for third-party claims. Rules allowing multiparty arbitration are intended to permit proceedings to occur more efficiently and to preclude the possibility of conflicting results. Although not all arbitration rules contain multiparty provisions, many arbitral institutions have revised their rules in recent years to cater for these.[78] While some rules merely provide that multiparty proceedings are allowed where the parties consent to such joinder,[79] other rules include relatively detailed provisions regarding the joinder of additional parties or the consolidation of multiple arbitration proceedings.

For example, Article 22(1)(x) of the London Court of International Arbitration (LCIA) Rules of 2020 empowers an arbitral tribunal to allow one or more third parties to be joined in the arbitration provided that the third party and the applicant party have consented expressly to the joinder.[80] As such, the LCIA Rules allow the ‘forced joinder of a party’ as long as the applicant party and the party to be joined agree to the joinder. The consent of other parties involved in the arbitration is not required.[81]

The LCIA Rules of 2020 also allow an arbitral tribunal and the LCIA Court to consolidate multiple proceedings in some circumstances. Thus, in accordance with Article 22A, consolidation of related LCIA proceedings may be ordered where all the parties to the arbitrations have agreed in writing to the consolidation.[82] The parties’ agreement could be made either before or after the initiation of the arbitration proceedings into which the other proceedings are to be consolidated. In addition, consolidation is possible without the agreement of all parties, provided that: (1) the arbitration proceedings have been commenced under the same arbitration agreement, or under compatible arbitration agreements; (2) the arbitrations either concern the same parties or arise out of the same transaction or series of related transactions; (3) no arbitral tribunal has yet been formed or, if already formed, that such tribunals are composed of the same arbitrators; and (4) the parties were given a reasonable opportunity to express their views.[83]

In circumstances where the tribunal considers that consolidation is not appropriate, it will nevertheless be empowered to order the concurrent conduct of two or more LCIA arbitrations, provided that the arbitrations are commenced under the same arbitration agreement or any compatible arbitration agreements, either between the same disputing parties or arising out of the same transaction or series of related transactions, and the same arbitral tribunal is constituted in respect of each arbitration.[84]

Similarly, Articles 7 to 10 of the ICC Rules of 2021 provide an innovative framework for multiparty arbitrations and allow:

  • the joinder of a third party;
  • claims between multiple parties;
  • claims based on multiple contracts; and
  • the consolidation of multiple arbitrations.

Thus, the ICC Rules allow the joinder of an additional party, such as a subcontractor, if a request is made to the Secretariat before the confirmation of the tribunal, and the request must indicate the legal basis for the joinder. Joinder will be allowed if the Secretariat is prima facie satisfied that there is an arbitration clause that may be binding on all parties.[85] If the Secretariat refuses the joinder, the party may ask a national court to determine whether the arbitration clause is binding on the non-signatory third party.[86]

If joinder is allowed, claims may be made by any party against any other party, provided that they are made before the terms of reference are signed.[87] The tribunal may allow the joinder of an additional party even if the request is made after the appointment of the tribunal, provided that the additional party accepts the constitution of the tribunal and agrees to the terms of reference. In making its decision, the tribunal shall take into account all relevant circumstances.[88]

Moreover, claims arising out of, or in connection with, several contracts may be made in a single arbitration regardless of whether these claims are made under one or more than one arbitration agreement under the ICC Rules.[89] This may apply where, for example, an employer has signed several contracts with different contractors and the contracts include an ICC arbitration clause.

Finally, Article 10 of the ICC Rules provides the ICC Court with authority to consolidate related ICC arbitral proceedings in three circumstances. First, the ICC Court may order the consolidation of multiple arbitrations if all the parties have agreed to consolidation.[90] The parties’ agreement may be recorded in separate bilateral agreements with reciprocal consolidation provisions or by virtue of a multilateral agreement.[91] Second, consolidation may be ordered if all of the claims in the arbitrations are made under the same arbitration agreement.[92] Third, consolidation may be ordered where claims are made under more than one arbitration agreement, provided that the arbitrations are between the same parties, the disputes arise in connection with the same legal relationship and the arbitration agreements are compatible.[93] In these circumstances, the ICC Court is empowered to order consolidation even if the parties to the separate arbitrations have not agreed to consolidation.[94]

Although the circumstances in which Article 10 allows consolidation are materially expanded from some of the earlier versions of the ICC Rules, consolidation under the 2021 ICC Rules remains limited to cases involving claims under the same contract, or related contracts, all with ICC arbitration clauses.[95]

On a related note, multiparty arbitration may raise problems in relation to the constitution of the arbitral tribunal. The right to appoint an arbitrator is a sacrosanct right in international arbitration and remains instrumental in multiparty arbitration.[96] This was confirmed in the well-known Dutco case where the French Court of Cassation invalidated an award where two respondents jointly nominated an arbitrator while reserving their right to challenge such appointment, and provided that parties should be treated equally in the constitution of arbitral tribunals. Arbitral institutions, including the ICC, have amended their rules to comply with this principle.[97]

Where consent is not ascertained, it is generally difficult to have multiparty arbitration. In such cases, the parties may opt for appointing the same arbitral tribunal in the related proceedings[98] or request concurring hearings[99] to avoid inconsistent decisions regarding intertwined issues.


Notes

[1] Stavros Brekoulakis is a professor and the director of the School of International Arbitration at Queen Mary University of London and an associate member of 3 Verulam Buildings. Ahmed El Far is an associate at Three Crowns LLP.

[2] J Bailey, Construction Law, Routledge (2011), p. 1294; J Florian Pulkowski, ‘The Subcontractor’s Direct Claim in International Business Law’, (2004) 21 International Construction Law Review, 31; A Masadeh, ‘Vicarious Performance and Privity in Construction Contracts’, 31 International Construction Law Review 1, 108 (2014).

[3] Laurence McIntosh Ltd v. Balfour Beatty Group Ltd [2006] CSOH 197, 45–46.

[4] J Bailey, Construction Law, Routledge (2011), p. 1295.

[5] D Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, Wiley Blackwell (2017), p. 32.

[6] For example, see Sub-Clauses 5.1 and 5.2.3 of the 2017 FIDIC Conditions of Contract for Construction (Sub-Clauses 4.4 and 5.3 of the 1999 Edition). Also see Sub-Clauses 1.1, 1.8, 2.1, 2.5, 4.2 and 8.6 of the FIDIC Conditions of Subcontracts of 2011.

[7] A Masadeh, ‘Vicarious Performance and Privity in Construction Contracts’, 31 International Construction Law Review 1, 108 (2014).

[8] C Chern, Law of Construction Disputes (Third Edition), Informa (2020), p. 138; J Florian Pulkowski, ‘The Subcontractor’s Direct Claim in International Business Law’, (2004) 21 International Construction Law Review, 31, 36 (2004); J Bailey, Construction Law, Routledge (2011), pp. 1295–1297. French law allows direct recourse between the employer and the subcontractor; see Article 12 of the Law on Sub-contracting No. 75-1334 of 1975; Article 1597 of the Spanish Civil Code; Article 1798 of the Belgian Civil Code; M A B Chao-Duivis, ‘Subcontracting in Europe: the Results of a Questionnaire’, (2013) 30 International Construction Law Review, 318, 319; F Chaix and S Marchand, ‘The Right of Recourse of an Employer Against a Subcontractor’, (1998) 1 International Construction Law Review, 211, p. 221; B Hanotiau, Complex Arbitrations: Multiparty, Multicontract, Multi-issue and Class Actions (Second Edition), Kluwer Law International (2020), Paragraphs 915–919; ICC Case No. 6230 of 1990, in J Arnaldez, Y Derains and D Hascher, Collection of ICC Arbitral Awards (1991–1995) (Swiss law governed the main contract and the subcontract), pp. 91–92.

[9] L Di Paola, ‘Back-to-Back Contracts’, (2009) 26 International Construction Law Review, 489, pp. 489–490.

[10] See Smith v. Johnson Bros [1954] 1 DLR 392. In this case, the main contract provided for the right of the employer to suspend works, in which case the main contractor would be entitled to claim extension of time, although not additional costs for suspension. The subcontract equally provided for the right of the main contractor to suspend works, but provided that in such a case the subcontractor would be entitled to both extension of time and costs for suspension. When the employer suspended works, the contractor claimed extension of time from the employer under the main contract, but was faced with the subcontractor’s claim under the subcontract for both extension of time and additional costs and expenses for suspension.

[11] C Chern, Law of Construction Disputes (Third Edition), Informa (2020), p. 127.

[12] J Bailey, Construction Law, Routledge (2011), p. 1307; D Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, Wiley Blackwell (2017), p. 48.

[13] J Glover and S Hughes, Understanding the FIDIC Red Book: A Clause-By-Clause Commentary (Second Edition), Sweet & Maxwell (2011), Paragraph 5-003.

[14] See Clause 5.2.2 of the 2017 FIDIC Conditions of Contract for Construction.

[15] To that effect, see Clause 5.2.2(a)–(c) of the 2017 FIDIC Conditions of Contract for Construction; E Baker, B Mellors, et al., FIDIC Contracts: Law and Practice, Informa (2009), p. 133.

[16] J Glover and S Hughes, Understanding the FIDIC Red Book: A Clause-By-Clause Commentary (Second Edition), Sweet & Maxwell (2011), Paragraph 5-008.

[17] ibid., at 1308; J Adriaanse, Construction Contract Law: The Essentials (Third Edition), Palgrave Macmillan (2010), pp. 252–256.

[18] M A B Chao-Duivis, ‘Subcontracting in Europe: the Results of a Questionnaire’, (2013) 30 International Construction Law Review, pp. 318, 325–­327 (2013); ICC Case No. 6230 of 1990, XVII Yearbook Commercial Arbitration pp. 164, 169–170 (1992).

[19] However, see the South African case of Concrete Construction v. Keidan [1955] 4 SA 315, which denied privity between the employer and the subcontractor despite direct contact; J Bailey, Construction Law, Routledge (2011), pp. 1295–1297.

[20] See the English case of Shanklin Pier Ltd v. Detel Products Ltd [1951] 2 K.B. 854; also see Welsh Health Technical Services Organisation v. Haden Young Ltd [1988] 37 B.L.R. 130.

[21] See Independent Broadcasting Authority v. EMI Electronics Ltd [1980] 14 B.L.R. 1.

[22] J Bailey, Construction Law, Routledge (2011), pp. 1296 and 1300.

[23] L Di Paola, ‘Back-to-Back Contracts’, (2009) 26 International Construction Law Review, p. 489; M Dubisson, ‘Arbitration in Subcontracts for International Projects’, (1984) 1 Journal of International Arbitration, p. 198.

[24] FIDIC is expected to launch a new subcontract form in the coming years.

[25] The majority of clauses in the FIDIC Subcontract Conditions mirror the equivalent clauses in the FIDIC Contract Conditions; for example, Clause 8: Commencement, Clause 9: Tests on Completion, Clause 10: Taking Over, Clause 11: Defects Liability, Clause 12: Measurement and Evaluation, Clause 14: Price and Payment, Clauses 15 and 16: Termination and Suspension, Clause 17: Risk, Clause 18: Insurance, Clause 19: Force Majeure and Clause 20: Claims, Disputes and Arbitration.

[26] The main differences in the 2017 FIDIC Contract Conditions is that Clause 18 is on exceptional events (as opposed to Clause 18 in the Subcontract Conditions, which is on insurance) and Clause 19 is on insurance (as opposed to Clause 19 in the Subcontract, which is on force majeure). The previous Clause 20 in the 1999 FIDIC Contract Conditions now breaks down to two clauses on employer and contractor claims (Clause 20) and disputes and arbitration (Clause 21).

[27] J McGuinness, The Law and Management of Building Subcontracts (Second Edition), Blackwell Publishing (2007), pp. 54–55; for the arbitration clause to be incorporated by reference, it is generally required at common law that the parties clearly state that, see L Di Paola, ‘Back-to-Back Contracts’, (2009) 26 International Construction Law Review, pp. 489, 492 and 497–499; C Seppala, ‘The New FIDIC International Civil Engineering Subcontract’ (1995) 5 International Construction Law Review, p. 11.

[28] See Lafarge Redland Aggregates Ltd v. Shephard Hill Civil Engineering Ltd [2000] 1 WLR.

[29] See Sub-Clause 5.1 of the 2017 FIDIC Conditions of Contract for Construction. It was previously provided in Clause 4 of the 1999 FIDIC Edition.

[30] See E Baker, B Mellors, et al., FIDIC Contracts: Law and Practice, Informa (2009), p. 130.

[31] J Glover and S Hughes, Understanding the FIDIC Red Book: A Clause-By-Clause Commentary (Second Edition), Sweet & Maxwell (2011), pp. 88–89.

[32] See Sub-Clause 2.2 of the FIDIC Conditions of Subcontract for Construction of 2011.

[33] See Sub-Clause 5.2 of the 2017 FIDIC Conditions of Contract for Construction.

[34] E Kratochvilova and M Mendelblat, ‘Testing the Water – a New FIDIC Subcontract’, (2011) 28 International Construction Law Review, pp. 1, 4.

[35] Sub-Clause 1.8 of the FIDIC Conditions of Subcontract for Construction of 2011.

[36] Sub-Clause 1.10 of the FIDIC Conditions of Subcontract for Construction of 2011.

[37] Sub-Clause 2.2 of the FIDIC Conditions of Subcontract for Construction of 2011.

[38] Sub-Clause 2.3 of the FIDIC Conditions of Subcontract for Construction of 2011.

[39] Sub-Clause 2.4 of the FIDIC Conditions of Subcontract for Construction of 2011.

[40] Sub-Clause 3.5 of the FIDIC Conditions of Subcontract for Construction of 2011.

[41] Clause 8 of the FIDIC Conditions of Subcontract for Construction of 2011.

[42] Sub-Clause 8.1 of the FIDIC Conditions of Subcontract for Construction of 2011; Sub-Clause 8.1 of the 2017 FIDIC Conditions of Contract for Construction.

[43] Sub-Clause 8.3 of the FIDIC Conditions of Subcontract for Construction of 2011; Sub-Clause 8.3 of the 2017 FIDIC Conditions of Contract for Construction.

[44] Sub-Clause 8.4(d) of the FIDIC Conditions of Subcontract for Construction of 2011; Sub-Clause 8.5 of the 2017 FIDIC Conditions of Contract for Construction.

[45] Sub-Clause 8.6 of the FIDIC Conditions of Subcontract for Construction of 2011; Sub-Clause 8.9 of the 2017 FIDIC Conditions of Contract for Construction.

[46] Sub-Clause 8.7 of the FIDIC Conditions of Subcontract for Construction of 2011; Sub-Clause 8.8 of the 2017 FIDIC Conditions of Contract for Construction.

[47] Clause 14 of the FIDIC Conditions of Subcontract for Construction of 2011. In some jurisdictions, such as the UK, the pay-when-paid method is not enforceable. To that effect, see Section 113(1) of the Housing Grants, Construction and Regeneration Act; and M A B Chao-Duivis, ‘Subcontracting in Europe: the Results of a Questionnaire’ (2013) 30 International Construction Law Review, 318, pp. 323–324. Other clauses include Sub-Clause 3.3, which is equivalent to Clause 2.5 of the 2017 FIDIC Conditions of Contract for Construction, and Sub-Clause 3.4.

[48] Sub-Clause 14.6 of the FIDIC Conditions of Subcontract for Construction of 2011.

[49] Sub-Clauses 14.6 and 14.8 of the FIDIC Conditions of Subcontract for Construction of 2011.

[50] Sub-Clause 17.1 of the FIDIC Conditions of Subcontract for Construction of 2011.

[51] Sub-Clause 5.2.4 of the 2017 FIDIC Conditions of Contract for Construction.

[52] S Brekoulakis, Third Parties in International Commercial Arbitration, Oxford University Press (2010), Paragraphs 1.09–1.13.

[53] B Hanotiau, Complex Arbitrations: Multiparty, Multicontract, Multi-issue and Class Actions (Second Edition) Kluwer Law International (2020), Paragraph 510.

[54] J Marrin, ‘Multiparty Arbitration in the Construction Industry’, in Permanent Court of Arbitration, Multiple Party Actions in International Arbitration, Oxford University Press (2009), pp. 398–399; D Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, Wiley Blackwell (2017), p. 47; B Hanotiau, Complex Arbitrations: Multiparty, Multicontract, Multi-issue and Class Actions (Second Edition), Kluwer Law International (2020), Paragraph 510.

[55] D Kondev, ‘Do Recent Overhauls of Arbitration Rules Respond to the Need for Multi-party Arbitration in the Construction Industry?’, (2015) 32 International Construction Law Review, pp. 63, 66.

[56] See previous section. See also D Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, Wiley Blackwell (2017), p. 48.

[57] A Steingruber, Consent in International Arbitration, Oxford University Press (2012), Paragraph 9.01.

[58] D Kondev, ‘Do Recent Overhauls of Arbitration Rules Respond to the Need for Multi-party Arbitration in the Construction Industry?’, (2015) 32 International Construction Law Review, pp. 63, 64.

[59] W W Park, ‘Non-signatories and International Contracts: an Arbitrator’s Dilemma’, in Permanent Court of Arbitration, Multiple Party Actions in International Arbitration, Oxford University Press (2009), Paragraph 1.12.

[60] Unless the contractor expressly assigns the benefit of the subcontract to the subcontractor, see Sub-Clause 5.1 of the 2017 FIDIC Conditions of Contract for Construction (Guidance for the Preparation of Particular Conditions); it was previously provided in Sub-Clause 4.5 of the 1999 Edition.

[61] On a different note, in exceptional cases, tribunals may decide to pierce or lift the corporate veil of a company (e.g., for a contractor) to reach its parent company. For example, see ICC Case No. 14208/14236 of 2008, in ICC International Court of Arbitration Bulletin, Vol. 24 (2013), pp. 62–70. The issue before the arbitral tribunal was whether it may pierce the corporate veil of the contractor to reach its parent company. By applying transnational norms, the tribunal decided that the corporate veil may be pierced if: (1) the dominant shareholder has complete control over the subsidiary; and (2) there is evidence of fraud or an abuse of right. The tribunal decided to extend the arbitration clause to the non-signatory given that the parent company dominated and controlled its subsidiary, and abused the corporate structure of the subsidiary to protect its own interests.

[62] Trafalgar House Construction v. Railtrack [1995] 75 BLR 55.

[63] City & General (Holborn) v. AYH Plc [2005] EWHC 2494 (TCC).

[64] [1995] 75 BLR 55.

[65] City & General (Holborn) v. AYH Plc [2005] EWHC 2494 (TCC).

[66] Sub-Clauses 20.1 and 20.2 of the 2017 FIDIC Conditions of Contract for Construction and Sub-Clause 20.2 of the FIDIC Conditions of Subcontract for Construction of 2011.

[67] Sub-Clause 20.2 of the FIDIC Conditions of Subcontract for Construction of 2011; E Kratochvilova and M Mendelblat, ‘The FIDIC Subcontract, first edition’, (2012) 29 International Construction Law Review, pp. 104, 109.

[68] Sub-Clause 20.4 of the FIDIC Conditions of Subcontract for Construction of 2011.

[69] See ibid.

[70] See Sub-Clauses 20.6 and 20.7 of the FIDIC Conditions of Subcontract for Construction of 2011.

[71] We note that the dispute adjudication board is now called dispute avoidance/adjudication board (DAAB) under the 2017 FIDIC Conditions of Contract for Construction.

[72] See Sub-Clause 20.4 of the FIDIC Conditions of Subcontract for Construction of 2011.

[73] ibid.

[74] ibid.

[75] C Seppälä, Presentation in the Milan Chamber of Arbitration Annual Conference, 1 December 2011.

[76] D Kondev, ‘Do Recent Overhauls of Arbitration Rules Respond to the Need for Multi-party Arbitration in the Construction Industry?’, (2015) 32 International Construction Law Review, pp. 63, 69.

[77] E Kratochvilova and M Mendelblat, ‘Testing the Water – a new FIDIC Subcontract’, (2011) 28 International Construction Law Review, pp. 1, 12.

[78] See M Gómez Carrion, ‘Joinder of Third Parties: New Institutional Developments’, (2015) 31 Arbitration International, p. 479; G Born, International Commercial Arbitration (Third Edition), Kluwer Law International (2021), p. 2795.

[79] For example, see Article 17(5) of the UNCITRAL Arbitration Rules (2013). But see Articles 4(1) and 4(2) of the Swiss Rules (2012) where there is no need for all the parties to consent to the joinder.

[80] Article 22(1)(x) of the LCIA Rules of Arbitration (2020).

[81] G Born, International Commercial Arbitration (Third Edition), Kluwer Law International (2021), p. 2801.

[82] Article 22A of the LCIA Rules of Arbitration (2020).

[83] ibid.; G Born, International Commercial Arbitration (Third Edition), Kluwer Law International (2021), p. 2800.

[84] ibid.

[85] See Article 6(4)(i) of the ICC Rules of Arbitration (2021).

[86] To that effect, see Article 6(6) of the ICC Rules of Arbitration (2021).

[87] Article 8(1) of the ICC Rules of Arbitration (2021).

[88] Article 7(5) of the ICC Rules of Arbitration (2021).

[89] Article 9 of the ICC Rules of Arbitration (2021).

[90] Article 10(a) of the ICC Rules of Arbitration (2021).

[91] J Künzle, Multiple Contracts and Coordination in International Construction Projects: A Swiss Law Analysis, Kluwer Law International (2020), p. 187.

[92] Article 10(b) of the ICC Rules of Arbitration (2021).

[93] Article 10(c) of the ICC Rules of Arbitration (2021).

[94] J Künzle, Multiple Contracts and Coordination in International Construction Projects: A Swiss Law Analysis, Kluwer Law International (2020), p. 187.

[95] G Born, International Commercial Arbitration (Third Edition), Kluwer Law International (2021), p. 2797.

[96] Siemens AG and BKMI Industrienlagen GmbH v. Dutco Consortium Constr. Co., Cass. Civ. 7 January 1992 (French Court of Cassation); B Hanotiau, Complex Arbitrations, Multiparty, Multicontract, Multi-issue and Class Actions (Second Edition), Kluwer Law International (2020), Paragraphs 888–902.

[97] Article 12(6) of the ICC Rules of Arbitration (2021).

[98] Abu Dhabi Gas Liquefaction Co v. Eastern Bechtel Corp [1982] 2 LIoyd’s Rep. 425, where the court provided that it was desirable that there should be one arbitrator to avoid inconsistent findings.

[99] For example, see Section 35 of the English Arbitration Act of 1996; and see Rule 14.b of the Rules of the London Maritime Arbitrators Association of 2006.

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