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Consented or not? – Arbitration under the new conditions of contract mandatory for public works (Government Decision no. 1/2018)

INTRODUCTION

The Government Decision no. 1/2018 for the approval of general and particular conditions of contract for certain categories of public procurement contracts related to the investment objectives financed by public funds (“G.D. no. 1/2018”) replaced the former standardised public procurement contracts based on FIDIC Conditions of Contract, previously mandatory for the road and railway infrastructure works only, with new ones conceived by the Romanian authorities (yet inspired by FIDIC), extending in the same time their applicability to all the investment objectives financed by public funds of which the total estimated value is equal or exceeds € 5,548,00.00.

Even though most clauses of new conditions of contract bring more clarity and predictability into the contractual relationship between the contractor and employer, there still are several contractual provisions which are in contradiction with the relevant laws, creating controversies as to their applicability.

In particular, the provisions of the particular conditions of contract which prohibits to the employer to bring amendments to essential provisions of general conditions of contract such as Clause 70 [Disputes and Arbitration], i.e. the arbitration clause that provides that the disputes resulted from or related to the new conditions of contract shall be settled by the Court of International Commercial Arbitration attached to the Chamber of Commerce and Industry of Romania, raise serious legal challenges for the employers (contracting authorities) and contractors alike.

 

THE CONSENT – THE CORNERSTONE OF ARBITRATION

The consent is absolutely essential in arbitration, as without it there can be no valid arbitration agreement.

In this regard, the legal literature and jurisprudence emphasized that arbitration “is a matter of consent, not coercion”[1], that “it owes its existence to the will of the parties alone”[2] that “[a]rbitration is strictly a matter of consent and thus is a way to resolve those disputes – but only those disputes – that the parties have agreed to submit to arbitration”[3], that, “unlike court proceedings, arbitration proceedings are consensual.”[4], and that “there is no contrary authority from either national courts or elsewhere”[5].

But why is the consent so important to arbitration? Because when they agree to arbitrate, not only the parties exclude the jurisdiction of national courts in respect of their disputes, but also they consent to all the implications and consequences that derive from this choice, including but not limited to the payment of the significant costs of arbitration and extremely limited situations in which the judicial review of arbitral awards is admissible.

 

LEGAL CAPACITY OF THE ROMANIAN STATE-OWNED ENTITIES AND PUBLIC AUTHORITIES TO ENTER INTO ARBITRATION AGREEMENTS

Because an arbitration agreement has legal consequences, parties to an arbitration agreement must possess legal capacity if it is to be binding. Where an agreement to arbitrate was entered into by an entity that lacked appropriate legal capacity, that agreement is void. Moreover, if an arbitration is held based on such an agreement, any award arising from that arbitration may be set aside, or recognition and enforcement may be denied.

Legal capacity to enter into an arbitration agreement is determined by the law applicable to the parties, rather than by the law applicable to the arbitration agreement or by the law of the seat of the arbitration.

In this regard, art. 542 of the Romanian Civil Procedure Code provides that the State and public authorities have the faculty to conclude arbitral agreements only if they are authorized by law or by international conventions to which Romania is a party, whilst the legal entities of public law which have included in their statement of objects also economic activities have the faculty to conclude arbitral agreements, unless the law, or their articles of incorporation or bylaws provide otherwise.

In case of public procurement contracts art. 57 of Law no. 101/2016 gives a general authorization to the Romanian public authorities to conclude arbitration agreements, mentioning that “the parties may agree that the disputes related to interpretation, conclusion, performance, amendment and termination of contracts to be settled by arbitration”. Absent one party’s consent to this end, the national courts will have jurisdiction to settle this type of disputes (pursuant to art. 53 (1) of Law no. 101/2016).

 

THE NEW STANDARD CONDITIONS OF CONTRACT ADOPTED BY G.D. NO. 1/2018 DO WORK DIFFERENTLY THAN THE PREVIOUSLY APPLICABLE FIDIC CONDITIONS OF CONTRACT

It is noteworthy that for a long time being the Romanian public authorities were not expressly authorized to conclude arbitration agreements by the relevant public procurement legislation. Only on 1 January 2013, when the amendments brought by GEO No. 77/2012 to GEO 34/2006 came into force, such an express authorization was introduced into the public procurement legislation (by art. 2881 of GEO 34/2006).

Under these circumstances the Romanian Government issued Decision no. 1405/2010 regarding the approval for the use of some conditions of contract of the International Federation of Consulting Engineers (FIDIC) for the investment objectives from the field of transportation infrastructure of national interest financed by public funds (“G.D. no. 1405/2010”), whereby all the units subordinated or under the authority of the Ministry of Transportation and Infrastructure became obliged to use the General Conditions of Contract of FIDIC Yellow Book or Red Book at the execution of public works, and became authorized to conclude arbitration agreements.

However, G.D. no. 1405/2010 provided that the aforementioned General Conditions of Contracts will be either modified or completed by particular conditions of contract approved by orders issued by the Ministry of Transportation and Infrastructure.

Indeed, the Ministry of Transportation and Infrastructure issued several orders whereby it customized the general conditions of contract, adapting them to the different particularities of the units subordinated or under its authority and requirements of specific infrastructure projects carried out by these units.

In this respect, the Ministry of Transportation and Infrastructure issued the following orders:

  • For road infrastructure works: Order no. 146/2011 (comprising the customary FIDIC arbitration clause provided by Sub-Clause 20.6), further amended/completed/replaced by Orders no. 558/2011, 211/2012 and 600/2017 (the last one replaced the arbitration clause provided by Sub-Clause 20.6 stating that the jurisdiction to settle the contractual disputes lies with the Romanian Administrative Courts);
  • For subway infrastructure works: Order no. 1033/2011 (jurisdiction: Romanian Administrative Courts);
  • For railway infrastructure works: Order no. 1034/2011 (standard FIDIC arbitration clause), replaced by Order 774/2013 (jurisdiction: Romanian Administrative Courts, any kind of arbitration being expressly forbidden), replaced by Order no. 1317/2014 (whereby the customary FIDIC arbitration clause provided by Sub-Clause 20.6 of the General Conditions of Contract became applicable).

The former way the FIDIC Conditions of Contract have worked, where the general conditions could be subsequently modified by the particular conditions, appendix to tender and even by the contract agreement, was replaced entirely by the new contractual mechanisms of G.D. no. 1/2018.

The general conditions of contract are now remarkably detailed, whilst the employers are allowed to “issue particular conditions” and to amend only the following Sub-Clauses of the General Conditions:

  • 1 [The duties of the Supervisor];
  • 1. [Calendar for submission of a complete copy of the technical project and of all the Employer’s Documents][6] –;
  • 1. [Deadlines and sectors for giving access to the Site];
  • 2. [Access on the Site of other persons];
  • 1 [Responsibilities regarding building permits];
  • 2 [Modalities and the calendar for approval of the design prepared by the Contractor];
  • 1 [The extent to which the traffic and communications may be affected]; and
  • 1 [The currency or currencies of the Contract];
  • and, additionally, in the design-build conditions of contract provided by G.D. no. 1/2018, sub-clause 45.4 [Measurement and evaluation of parts of Works payable according to the supplied quantities or performed works and identification of these parts].

Modifications brought to any other clause/sub-clause than the aforementioned are considered null and void by the particular conditions of contract adopted by G.D. no. 1/2018.

Last but not least, the former contract agreement and appendix to tender used under the FIDIC Conditions of Contract were merged into a single document called “contract agreement”, having a pre-determined content which cannot be amended.

In a nutshell, the G.D. no. 1405/2010 was intended for the exclusive use of the units subordinated or under the authority of the Ministry of Transportation and Infrastructure, the latter having the full authorization to adapt/amend/complete any sub-clause of the general Conditions of Contract, including but not limited to Sub-Clause 20.6 regarding the jurisdiction for settlement of contractual disputes by orders (particular conditions) issued in this regard. Moreover, the units subordinated or under the authority of the said Ministry have had the possibility to bring further amendments by appendix to tender and contract agreement, including also in some cases amendments negotiated/agreed with the contractors to the benefit of the projects.

On the contrary G.D. no. 1/2018 extended the applicability of the new mandatory conditions of contracts to all the investment objectives financed by public funds, forbidding in the same time the customization of such contracts by particular conditions or other contractual document according to its users needs and specific requirements of the relevant projects. Thus, the new conditions of contract mandatory for public works are excessively standardized, leaving no other option for both the employer and contractor than to simply adhere to its provisions.

 

CONSENT TO ARBITRATION UNDER G.D. NO. 1405/2010 AND G.D. NO. 1/2018

Under the mechanism of G.D. no. 1405/2010 the Ministry of Transportation and Infrastructure were fully authorized to decide at its own discretion whether in the public procurement contracts to be concluded by the units subordinated or under its authority it will be used the standard arbitration clause provided by FIDIC Conditions of Contract or that clause will be replaced by the provisions that the national courts will have jurisdiction to handle the contractual disputes.

In other words the Ministry of Transportation and Infrastructure were fully authorized to propose arbitration clauses to the contractors and to consent to arbitration on behalf of the units subordinated or under its authority.

As far as the contractors’ consent to arbitration is concerned, it was considered that the participation at a public tender without challenging the tender documentation (including the arbitration clause comprised by the public procurement contracts included in the tender documentation) represents the contractors’ adherence to the said documentation and implies that the contractors consented to arbitration.

However, it is noteworthy that insertion by the Ministry of Transportation and Infrastructure into the public procurement contracts based on FIDIC Conditions of Contract of a clause stating that the national courts will have jurisdiction to handle the contractual disputes instead of an arbitral tribunal (as it happened in case of Orders no. 600/2017, 1033/2011 and 774/2013) does not need the prior consent of the contractor since this is a clear option of the said Ministry, expressed on behalf of the units subordinated or under its authority, to not enter into an arbitration agreement with the contractor.

On a different note, G.D. no. 1/2018 compels both the employers (including the units subordinated or under the authority of the actual Ministry of Transportation) and contractors to submit their contractual disputes to arbitration, irrespective they consented or not, forbidding them expressly to amend or replace the arbitral clause.

 

CONTRACTING AUTHORITIES DILEMMA – COMPLYING WITH THE LAW OR WITH THE PARTICULAR CONDITIONS OF CONTRACT? – PRACTICAL SOLUTIONS

From the very first moment it decides to initiate a tender procedure for the award of a procurement contract for public works, the contracting authorities faces an impossible dilemma: how to draft the tender documentation so that to comply with the provisions of both Law no. 101/2016 and conditions of contract adopted by G.D. no. 1/2018 regarding the jurisdiction to settle the contractual disputes. Would it be safe for the contracting authorities to impose to the future contractor the mandatory arbitration clause as it is, or it must comply with the provisions of Law no. 101/2016 and the Civil Code?

Pursuant to art. 4 of G.D. no. 1/2018 the provisions of the said enactment together with those of the general conditions and particular conditions of contract annexed thereto must be applied with the strict observance of  Law no. 98/2016, Law no. 99/2016 and Law no. 101/2016, and of all the applicable legislation in force, the relevant law provision prevailing over the contractual one whenever a sub-clause of the general conditions of contract and particular conditions of contract is in contradiction to a provision of Law no. 98/2016, Law no. 99/2016, Law no. 101/2016, the Civil Code or any other Romanian law.

The provisions of art. 4 of G.D. no. 1/2018 are logical since under the Romanian law the government decisions are secondary legislation, adopted by the central organisms of executive power for enforcement of laws (i.e. the primary legislation), which cannot exceed, contravene to or derogate from the limits set forth by the primary legislation.

It is therefore self-evident that by the general conditions and particular conditions of contract of G.D. no. 1/2018, issued for the enforcement of public procurement laws (Law no. 98/2016, Law no. 99/2016, and Law no. 101/2016), it cannot be imposed narrower terms than those included into such enactments, or derogations from the Civil Code which are not expressly provided by the public procurement laws.

Under these circumstances, if the arbitration clause provided by Clause 70 [Disputes and Arbitration] of the general conditions of contract may produce effects as long as both parties consented to it, the sub-clause included into the particular conditions of contract which prohibits the employers to amend Clause 70 in accordance with the provisions of Law no. 101/2016 in order to exclude the jurisdiction of the arbitral tribunal in favor of the national courts is inoperable under the Romanian law.

Moreover, under the Romanian law, the arbitration clause included in the general conditions of contract adopted by G.D. no. 1/2018 is an “unusual clause”, i.e. a standard clause “established in prior by one of the parties to be used in a general and repetitive manner and which are included in the contract without being negotiated with the other party” (art. 1202 and 1203 of the Civil Code).

Pursuant to the provisions of art. 1203 of the Civil Code, the arbitration clauses whereby it derogates from the norms regarding the jurisdiction of the national courts do not produce effects unless they are expressly accepted, in writing, by the other party.

In this regard, in the legal literature[7] it was mentioned that:

“A simple signature of the party applied on the contract is not sufficient. In the same manner, it is not sufficient an acceptance expressed in general terms, the clauses shall be identified and accepted in an adequate manner.”

Coming back to the contracting authorities’ dilemma on how it should prepare the tender documentation to accommodate all the aforementioned, the most practical and safe approach to avoid the conflicts created by G.D. no. 1/2018 between the public procurement laws on one hand and the particular conditions of contract on the other hand would be to include in the said documentation the next provision:

“The jurisdiction to settle the disputes regarding the performance, annulment, nullity, termination for non-performance, or termination for convenience of this public procurement contract lies with the fiscal and administrative contentious section of the tribunal from the area where the contracting authority has its headquarters, unless the parties shall agree in writing at the moment of the public procurement contract conclusion to submit these types of contractual disputes to arbitration pursuant to Clause 70 of the general conditions of contract.”

Thus, not only will the contracting authority ensure the full compliance of the tender documentation with the relevant legal norms, but also it will create the proper framework required by law to obtain the valid consent of the contractor for the future submission of the contractual disputes to arbitration.

 In the same manner, by using this approach, the contracting authority itself will preserve its right to choose between the jurisdiction of the national court and that of the arbitral tribunal at the moment of the conclusion of the public procurement contract subject to tender procedure.

 

INSTEAD OF CONCLUSIONS

The new standard conditions of contract adopted by G.D. no. 1/2018 were received a very warm welcome from the companies involved in the construction of large infrastructure projects, especially because it re-introduced the jurisdiction of the arbitral court for the settlement of contractual disputes in the place of that of the national courts previously provided by Order no. 600/2017.

It is beyond any doubt that the new standard conditions of contract adopted by G.D. no. 1/2018 bring more clarity and predictability into the contractual relationship between the contractor and employer although, conversely, they proved to be excessively standardized, and cannot be customized to cover all the specific needs of the users from so many different sectors of construction industry that it was intended to be addressed.

However, the idea to make the arbitration mandatory to all the parties to a contract by a government decision, and the mean used to this end, i.e. by an annex to secondary legislation issued for the enforcement of the public procurement laws, it is not only an absolute premiere, yet without precedent in the democratic countries, but also extremely questionable from the legal perspective.

Arbitration is and must remain a private means of dispute resolution whereby the parties agree to be bound by the decision of an arbitrator of their choice whose decision is final and whose award has the legal force of final decision rendered by a national court.

The main feature of arbitration is that it is consensual in nature and private in character. The concept of “party autonomy” associated with arbitration allows the parties to select their arbitrators taking into consideration inter alia their special expertise in the relevant field, the seat of arbitration and the rules of procedure to be followed by the arbitrators.

When a government, disregarding the parties’ will and the relevant laws, decides by a normative deed which is the arbitration institution to settle the contractual disputes of the parties, the seat of arbitration and the rules of procedure to be followed by the arbitrators, no one can speak about “party autonomy” anymore.

If ad absurdum we would consider acceptable the extravagant approach used by the authors of the new standard conditions of contract adopted by G.D. no. 1/2018, we would have nothing else to do than to acknowledge the end of the arbitration as we knew it, i.e. as a private dispute resolution mechanism alternative to the state courts, and its transformation into an appendix of the state justice system.

The matter of the forced arbitration clause included in G.D. no. 1/2018 and the other shortcomings of the new conditions of contract acknowledged during their application to date must be reviewed as soon as possible with due care so that to ensure the unconditioned compliance of the contractual provisions with all the applicable Romanian law provisions and to allow indeed a customized, predictable and safe utilization by its intended users.


[1] Volt Info. Scis. v. Bd. of Trs., 468, 479 (1989) and Stolt-Nielsen S. A. v. Animal Feeds Int’l Corp., 559. 662, 697-98 of the Supreme Court USA as cited in Nelson, William Alan II, Take It or Leave It: Unconscionability of Mandatory Pre-Dispute Arbitration Agreements in the Securities Industry, p. 25 (quoted in K. Lekka, Is a mandatory binding arbitration clause in a prefixed contract consistent with the prerequisite of voluntarily agreement? Matters of validity and award’s recognition and enforcement under the N.Y. Convention, 2016, p. 3).
[2] Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, ¶51 (Canadian S.Ct.) as quoted in K. Lekka, Is a mandatory binding arbitration clause in a prefixed contract consistent with the prerequisite of voluntarily agreement? Matters of validity and award’s recognition and enforcement under the N.Y. Convention, 2016, p. 3.
[3] Granite Rock Co. v. Int’l Bhd of Teamsters, 130 S.Ct. 2847, 2857 (U.S. S.Ct. 2010). See Judgment of 8 July 2003, DFT 129 III 675, 679 (Swiss Federal Tribunal) as quoted in Gary B. Born, International Commercial Arbitration (Second Edition), Kluwer Law International, 2014, p. 250.
[4] Altain Khuder LLC v. IMC Mining Inc., XXXVI Y.B. Comm. Arb, 251, ¶295 (Victoria S.Ct.) (2011) as quoted in Gary B. Born, International Commercial Arbitration (Second Edition), Kluwer Law International, 2014, p. 250.
[5] Gary B. Born, International Commercial Arbitration (Second Edition), Kluwer Law International, 2014, p. 250.
[6] i.e. Sub-clause 8.2. in the Design-build Conditions of Contract provided by G.D. no. 1/2018
[7] F.A. Baias, E. Chelaru, R. Constantinovici, I. Macovei, “The new Civil Code – Articles commented”, 1st Edition,  C.H. Beck Publishing, Bucharest, 2012, p. 1264-1266

Răzvan Cristian RUGINĂ

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