Sample Essay 4: Temrs of Reference
von Holger Langer, LL.M.
Disputes concerning an international construction contract are to be resolved by arbitration under the ICC Rules (1998). They involve questions about the validity of decisions of the Engineer on differences which arose concerning instructions and their consequential effect in terms of time and cost and also concerning defects in the works. In addition there remain the original differences which the Engineer was asked to decide.
1. How should the Terms of Reference, especially the sections “Summary of Claims” and “Issues to be Determined” be drawn up?
2. What should each section say?
3. On the assumptions that on 14 March 2000 (a) the terms of reference were signed on 14 March 2000; (b) a procedural meeting was held and (c) the tribunal then decided on the timetable culminating in a 5 day hearing commencing on 11 December 2000 – write out a provisional timetable which sets out the dates which must be taken by each or both of the parties leading up to that hearing.
The case at issue is to be resolved under the provisions of the ICC Rules of Arbitration (1998). Art. 18 (1) provides for a characteristic feature of this set of rules: the production of Terms of Reference prior to the commencement of the actual arbitral proceedings on the basis of documents or in the presence of the parties and in the light of the parties most recent submissions. These Terms of Reference serve several purposes. First of all, they are designed to focus the arbitral proceedings on the essential issues at the earliest possible date, which is of special significance in Construction Arbitrations, as these cases tend to be complex and hence difficult to structure and to focus. Since the Terms of Reference are to be drafted by the Arbitral Tribunal, they enable the Tribunal to become familiar with the parties claims and to clarify at an early stage any misunderstandings which could adversely affect the proceedings at a later stage. The Arbitral Tribunal is therefore required to structure the substance of the dispute and to establish the likely essential issues, especially to emphasize issues which may be regarded as fundamental or of a preliminary nature, such as questions concerning the existence or the extent of the Tribunal’s jurisdiction to determine the parties claims. The Terms of Reference hereby enable the parties and the Tribunal throughout the arbitral proceedings to verify that all issues relevant are being covered by the oral and written submissions. This allows for a precise determination whether the tribunal has fulfilled, exceeded or fallen short of its mission, which is of particular relevance when it comes to questions of recognition and enforcement of the final award, e.g. regarding the International Court of Arbitration when scrutinizing the final award according to Art. 27.
Furthermore, the Terms of Reference assist the Tribunal to structure the arbitral proceedings. The determination of the essential issues at an early stage facilitates the establishment of a preliminary framework of the arbitral proceedings, thereby allowing for expeditious proceedings at a later stage.
On the part of the parties, the Terms of Reference can assist in reassessing the parties’ cases in view of the essential issues as determined by the Tribunal.
When drafting the Terms of Reference, the Arbitral Tribunal should keep these desired purposes in mind. Art. 16 of the former set of ICC Rules of 1988 provided that new claims must not be filed after the signing of the Terms of Reference. It was therefore desirable to provide for wide Terms of Reference. This provision was changed in the 1998 ICC Rules. Art. 19 allows now for amendments contingent upon authorization by the Arbitral Tribunal on a case by case basis. Nevertheless, the new provision is still aimed to prevent the parties from filing new claims, but since the Terms of Reference have to be signed by the parties as well as the Tribunal more flexibility is added by the new provision, so that the parties’ consent to the text of the Terms is easier to achieve. On the part of the Tribunal it is still desirable to draw up wide Terms of Reference to keep enough flexibility managing the case and to prevent restrictions that might impede the arbitral proceedings. However, the Terms of Reference should be drafted with clarity and brevity. Art. 20 (1) provides for a focus on time-effective (and thereby also cost-efficient) conduct of the proceedings by pointing out that “the Arbitral Tribunal shall proceed within as short a time as possible to establish the facts of the case by all appropriate means”. To meet this requirement it is vital to establish the true objectives and commercial interests of the parties. The Tribunal should therefore pay special attention as to the sufficiency of the parties’ prior submissions for the setting up of useful Terms of Reference.
As to the contents of the Terms of Reference, a number of particulars shall be included as set out in the various sub-paragraphs of Art. 18 (1):
(1) Art. 18 (1) (a) – Names of the Parties
The full names and descriptions of the parties are required, including the country of the parties. The responsibility to do so in the Terms of Reference lies with the parties, i.e. with the Claimant in its request for arbitration. Especially in Construction Arbitrations it might be of considerable interest to ascertain the precise nature of a corporate or state body or joint venture by providing the full name and to ascertain the actual or legal existence by providing an appropriate description. Moreover, the proper identification of the parties may be important in view of later enforceability of the final award.
(2) Art. 18 (1) (b) – Addresses
Furthermore, the Addresses of the parties to which notifications and communications may be made have to be given. It is quite customary to name under this section the individual who has responsibility on behalf of the party for handling such communication as well as, where appropriate, to name the legal representative of the party. In this case it should be pointed out to which of the two a notification or communication will be deemed to have been validly made.
(3) Art. 18 (1) (c) – Summary of claims
As a key part of the Terms of Reference Art. 18 (1) (c) provides for a summary of the parties’ respective claims. These are not to be confused with the issues to be determined according to Art. 18 (1) (d). As set out before, the summary of the parties’ claims together with the issues to be determined is aimed at ensuring that the Arbitral Tribunal will accomplish its mission and will not exceed its powers. It is therefore necessary to clearly identify the parties’ claims. The basis for the drawing up of this section is the parties’ most recent submissions, cf. Art. 18 (1), but it has to be noted that a mere reference to the parties’ submissions is considered not to be sufficient. Consequently, the summary of the parties’ respective claims has to be directly derived from the facts alleged by each party as well as the prayers for relief in support of which the factual allegations are made. This should be done in a manner broad enough to encompass all claims and counterclaims, but should be limited to the requirements of the dispute. Since the summary is intended to give the Arbitral Tribunal a possibility to direct the proceedings in an efficient manner, it should point out briefly the uncontested factual and legal background of the dispute, such as the underlying contractual relationship between the parties and the general obligations arising out of it. Furthermore, the summary should continue to point out clearly which relief each of the parties is seeking for and which factual allegations can be given for support. A good way of bringing out the parties’ respective cases is the use of schedules. In the case at hand this could be a schedule of the Claimant’s case showing the amount of work he has done (in addition), the substantiated and properly calculated price applicable to this work and the events relied upon, such as in this case the Engineer’s instructions, followed by the presentation of the Defendant’s defence to this claim, e.g. denial that binding instructions have been given. In a second schedule the Defendant’s counterclaim could be summarized, such as in the case at hand the alleged defects in the work, i.e. the reasons, why the work does not comply with the contractual provisions, the proposed remedial work necessary and the cost incurred for the remedying of the alleged defects, followed by the Claimant’s defence to this counterclaim. It is of particular relevance that the quantification of each claim is analysed and that the Tribunal indicates to the parties whenever further submissions in view of the quantification are necessary.
à Later, not in the Terms of Reference
Since Arbitration is consensual by nature it has to be kept in mind that the Terms of Reference have to be signed by the parties in accordance with Art. 18 (2). Therefore, it might be helpful to leave the drafting of this section to a certain extent to the parties, to give each of the parties the assurance that its case has been duly summarized.
One of the most significant features of the summary of claims is that they determine the limit of the Terms of Reference in the sense of Art. 19. New claims that fall outside of this limit are only admissible when they are specially authorized by the Arbitral Tribunal.
(4) Art. 18 (1) (d) – Issues to be determined
In contrast to the summary of the parties’ respective claims, which consist of an outline of the parties’ remedies sought and the allegations relied upon, the issues to be determined identify the questions of fact and substantive or procedural law which appear to be relevant to the adjudication of the parties’ cases.
In this context, it is desirable to identify first of all the likely preliminary issues, such as questions concerning the validity of the arbitration clause, the applicable law governing the parties’ obligations or in general questions of admissibility of the parties’ claims, such as time bar provisions, contractual conditions etc. In addition, all other issues to be determined have to be identified and organized in terms of claim and counterclaim etc. In the case at hand, likely issues to be determined would be: What was the nature of the Engineer’s decisions (Did he give proper instructions)? Did they lead to a variation? Is the claimant entitled to an extension of time and additional costs (and to which amount)? Concerning the alleged defects, what was the obligation of the Claimant under the contract? Is the Claimant liable to the Defendant (and to which amount)?
Anyhow, it has to be kept in mind that the Terms of Reference only assist the Tribunal in managing the case in a time- and cost-efficient manner and that the Tribunal determines the issues not necessarily in congruence with the Terms of Reference but with regard to further investigations during the hearings.
(5) Art. 18 (1) (e) – Name, description and address of Arbitrators
This section does usually not cause any problems.
(6) Art. 18 (1) (f) – Place of Arbitration
The Place of Arbitration is either the place agreed by the parties or the place fixed by the Court of International Arbitration under Art. 14 (1). It is insofar of great significance, as the Tribunal will have to comply with local mandatory rules applicable to International Arbitrations, e.g. requirements that might affect the validity of the final award.
(7) Art. 18 (1) (g) – Procedural Rules
The parties are free to choose the procedural rules applicable to their proceedings, only limited by mandatory rules applicable to such proceedings under the law of the place of arbitration. This section gives a useful opportunity to determine questions like the language in which the proceedings will be held or the need for a written official record. Nevertheless, the determination of the procedural rules should be left as far as possible to the Arbitral Tribunal, to facilitate an efficient and expeditious conduct of the proceedings. It is likewise desirable to state in this section whether the Arbitral Tribunal has the power to act as an amiable compositeur or to decide ex aequo et bono.
In addition to the described particulars, it might be useful to include in the Terms of Reference further determinations, such as the applicable law or an agreement of the parties concerning the validity of the Tribunal’s appointment, to avoid later disputes between the parties in view of these issues.
(8) Art. 18 (4) – Provisional timetable
According to Art. 18 (4), the Arbitral Tribunal shall establish a provisional timetable that it intends to follow in the further proceedings. It is assumed that at the time of the drafting of Terms of Reference the initial Claim and Counterclaim, as well as the respective answers have been made. The provisional timetable should then provide for a preliminary meeting to decide upon the Terms of Reference in the presence of the parties. Subsequently the parties should have the opportunity to reassess their cases on the basis of the Terms of Reference and to submit replies and rejoinders to the opposing parties allegations as well as the witness statements supporting their case. Before entering into the process of discovery a preparatory meeting should be scheduled. The Tribunal’s timetable should then provide for a appropriate number of hearings, to give each party the opportunity to present their evidence (documents, witnesses, expert witnesses etc.) in support of the alleged facts. It should then conclude the proceedings by allowing the parties to submit final briefs subsequent to the hearings of the Tribunal and to make their closing statements including a statement of costs. Finally, the Tribunal should include an appropriate length of time for the drafting and making of the award. According to Art. 18 (4), the provisional timetable should be established in a separate document and communicated to the parties as soon as possible.
A. Summary of Claims
1. Plaintiff’s Case
The Plaintiff’s claim arises out of a Contract dated … concluded between “Employer” (Defendant / Counterclaimant) and “Contractor” (Plaintiff), under which it was agreed that the Plaintiff would carry out “Construction work” in accordance with the Terms of the said Contract in a fixed period of time.
In its Request for Arbitration, filed with the ICC Court of Arbitration and recorded under Number …, the Plaintiff claims the following:
· The Plaintiff claims that it has at any time fulfilled all its obligations under the Contract with utmost diligence. In particular, it sets out that it requested a variation order from the Engineer regarding additional work that was necessary due to the encounter of obstacles during the ordinary construction work. Such instruction was given by written notice dated … by the Engineer and confirmed by the Plaintiff by letter dated … to which no rejection of the statement was received. The Plaintiff then completed the works in accordance with the contractual specifications as amended and altered by the Engineer’s instruction.
· The Plaintiff claims to be entitled to have the additional work measured and valued as set out and included in the monthly statements submitted to the Engineer. It requests payment by the Defendant / Counterclaimant of the following amounts:
- Work performed under the Contract …..
- Additional Work …..
- Costs and expenses relating to the arbitration …..
· Furthermore, the Plaintiff claims to be entitled to an extension of time of the agreed construction period in accordance with Clause 8.4 (a) FIDIC (Red Book 1999).
· The Plaintiff claims to be not bound by the decisions of the Engineer in this matter, since a consultation of each party as provided in Clause 3.5 FIDIC (Red Book 1999) did not happen.
· Furthermore, the Plaintiff claims to have at any time fulfilled its contractual obligations in respect of the alleged defective work.
· The Plaintiff claims that the material supplied and used during the construction of the defective work was at any time in accordance with the Specifications and the Engineer’s instructions.
· The Plaintiff claims that the construction of the defective parts was at any time in compliance with the design specifications provided and that, consequently, the defects are not due to a default in the construction of the parts.
· In its Request for Arbitration the Plaintiff alleges the Defendant of the following violations of the Terms and Conditions of the said Contract:
(1) Illegally refusing to certify and to accept handing over part of the work completed.
(2) Being in default in respect to payments due under the Contract for works performed and for extra work.
(3) Illegally and unreasonably claiming and withholding payments due to the Plaintiff as delay damages.
(4) Illegally and unreasonably claiming and withholding payments due to the Plaintiff as damages for defects in the work.
· The Plaintiff requests the Arbitral Tribunal
(1) To hold that the Plaintiff has fully performed its contractual obligations.
(2) To hold that the Defendant / Counterclaimant in contrary has not fulfilled its contractual obligations.
(3) To hold that the Defendant is bound to certify and to accept handing over of the works as in compliance with the contract.
(4) To hold that the Defendant / Counterclaimant is not entitled to damages whatsoever.
(5) To hold that all retentions and deductions withheld by the Defendant / Counterclaimant as damages shall be reimbursed to the Plaintiff in full.
(6) To hold that in any case the valuation of the counterclaim is unreasonable and not founded.
(7) To award the Plaintiff the payment as set out above, including interest on delayed payments, loss of profit and consequential damages as well as all legal and other fees, and costs of arbitration as provided in Art. 31 ICC Rules (1998).
2. Defendant’s / Counterclaimant’s Case
The Defendant’s counterclaim arises out of the same Contract as set out above. The Defendant’s Request for Arbitration is filed with the ICC Court of Arbitration and recorded under Number … With the agreement of the parties, the two related cases will be considered jointly by the Arbitral Tribunal.
The Defendant answers the Plaintiff’s Claim by asserting that:
· The item claimed by the Plaintiff does not constitute additional work, but is included in the Plaintiff’s contractual obligations.
· The Engineer’s submission to the Plaintiff did not constitute a variation order.
· The Plaintiff failed to give notice of any claim it considered itself entitled to in respect of the alleged additional work.
· The measurements included in the monthly statements were for record purposes only and do not entitle the Plaintiff to any additional payment.
· In any case is the valuation given by the Plaintiff unreasonable and not founded.
· The Plaintiff did not complete the work within the agreed time period.
· Furthermore, the Plaintiff is in breach of his contractual obligations by not handing over the work in compliance with the contractual specifications and therefore has to remedy any defects in the works at his own expense.
· Consequently, the Defendant claims that it is not bound to certify or pay for the work
· The Defendant claims to be entitled to damages by the Plaintiff for delay and in respect of defective work, particularly the following amounts:
· The Defendant requests the Arbitral Tribunal
(1) To hold that the Plaintiff did not fulfil his obligations under the contract.
(2) To hold that the Defendant fulfilled all obligations under the contract.
(3) To reject the Plaintiff’s claim for additional payment and extension of time.
(4) To hold that in any case the valuation of the Plaintiff’s claim is unreasonable and not founded.
(5) To award the Defendant damages in respect of delay and defective work, including all legal and other fees, and costs of arbitration as provided in Art. 31 ICC Rules (1998).
B. Issues to be determined
(1) Did the Plaintiff and / or the Defendant breach any of their obligations under the contract?
(2) Is the Defendant bound to certify and to accept handing over of the works as in compliance with the contract?
(3) Is, and to what extent, the Plaintiff entitled to be awarded payment of the amounts it claims from the Defendant in respect of the additional work?
(4) Is, and to what extent, the Defendant entitled to be awarded damages in the amount it claims from the Plaintiff in respect of delay and defective work?
(5) Any other issues which may be found relevant by the Arbitral Tribunal as been directly or indirectly related to the case.
(6) Fixing and allocating the Arbitration Costs.
C. Provisional Timetable
Option A. Decision of preliminary issues
Starting 14 March 2000 (assumes directions have been given in a separate document
1. All documents relied on in respect of preliminary issues (validity of Engineer’s decisions and consequences of validity for the tribunal’s power to determine the respective claims) to be exchanged by 14 April 2000
2. Any statement from any witness [whose name has been notified by 28 March 2000] to be exchanged by 30 April 2000.
3. Notice to be given by 15 May 2000 if any witness is required to attend for questioning together with a list of the matters in the statement which are not accepted and the reasons why they are not accepted and of any further matters upon which questioning is desired.
4. Pre-hearing submissions by 15 May 2000.
5. Hearing of issues to take place in the Hotel Paradiso, Oulu on 15 and 16 June 2000 between 1000-1230 and 1400-1700. All reservations and catering and other arrangements to be made for the tribunal by the claimant.
On the assumption that an award on the preliminary issues will be published by mid June and will not prevent the tribunal from investigating the claims of either party:
6. By 15 July 2000 the parties’ experts to discuss remaining issues in order to agree on common facts and assumptions and technical issues.
7. Any additional or supplementary statement from any witness [whose name has been notified by 15 July 2000] to be exchanged by 31 July 2000.
8. Reports from experts to be exchanged by 15 August 2000.
9. Any further evidence whether in documents or from witnesses which is consequent on opinions of experts to be submitted by 15 September 2000.
10. Notice to be given by 30 September 2000 if any witness is required to attend for questioning together with a list of the matters in the statement which are not accepted and the reasons why they are not accepted and of any further matters upon which questioning is desired.
11. Parties’ pre-hearing submissions by 30 October 2000.
12. Hearing to take place in the Hotel Paradiso, Oulu for 5 days starting on 11 December 2000 between 1000-1230 and 1400-1700 on each day. All reservations and catering and other arrangements to be made for the tribunal by the claimant.Option B. No decision of preliminary issues
Starting 14 March 2000 (assumes directions have been given in a separate document)
1. All further documents relied on to be exchanged by 30 April 2000.
2. Any statement from any witness [whose name has been notified by 28 March 2000] to be exchanged by 15 June 2000.
3. Notice to be given by 30 June 2000 if any witness is required to attend for questioning together with a list of the matters in the statement which are not accepted and the reasons why they are not accepted and of any further matters upon which questioning is desired.
4. By 15 July 2000 the parties’ experts to discuss issues in order to agree on common facts and assumptions and technical issues.
5. Reports from experts to be exchanged by 15 August 2000.
6. Any further evidence whether in documents or from witnesses which is consequent on opinions of experts to be submitted by 15 September 2000.
7. Parties’ pre-hearing submissions by 30 October 2000.
8. Hearing to take place in the Hotel Paradiso, Oulu for 5 days starting on 11 December 2000 between 1000-1230 and 1400-1700 on each day. All reservations and catering and other arrangements to be made for the tribunal by the claimant.
Essay evaluation: 90 % (distinction)