J.S. Daniel paper on Arbitrated cases in lebanon and decisions of arbitrators


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J.S. Daniel paper on Arbitrated cases in lebanon and decisions of arbitrators

  2. 2. Introduction:Arbitration is a legal institution for the resolution of disputes outside the courts, wherein the parties to adispute refer it to one or more persons (the “arbitrators” or “arbitral tribunal”), by whose decision (the“award”) they agree to be bound.Arbitration advantages are: • Flexibility: the parties and the arbitrator have much freedom in their choices as to the conduct of the arbitration process. • Speed and economy: the flexibility of the arbitration process makes it faster than court litigation and therefore, taking into consideration that "time is money", ultimately less expensive. • Confidentiality: particularly valued by the business community, which appreciates the discretion of the arbitration process, the fact that hearings are not public and that only the parties have access to the award. • Neutrality: the flexibility and principle of free will of the parties governing the arbitration process make it possible for the parties to structure a neutral procedure, especially with regard to the applicable law, the place and the language of the arbitration as well as the nationality of the arbitrator(s). • Specialized competence of the arbitrators: in arbitration, the parties have the unique opportunity to choose the arbitrator(s). This enables them to have their disputes resolved by persons with specialized competence and expertise in the relevant field.In Lebanon , arbitration is accepted for most kinds of disputes arising out of civil, administrative orcommercial contracts, whether internal or international.Moreover, arbitration has even become permitted in administrative contracts since the Lebanese lawN°440 dated 29 July 2002 expressly authorized the public legal entities (state-municipalities and publicestablishments) to include arbitration clauses in their administrative contracts (such as concessions, publicworks and BOT contracts).Parties wishing to refer their disputes to arbitration have a choice between ad hoc arbitration in which theprocess will be administered by the arbitrators themselves and institutional arbitration in which the partieswill designate an institution to administer the arbitration process.Decisions of Arbitrators:There is no rule or guideline for the decisions to be taken by the Arbitrators in a particular case. Each casehas its own particularity, circumstances and events, diversity, type of work and other factors. What reallymatters is to have a strong case backed up by particulars, supported by claim expertise and substantiatedby contract documents, reports, correspondences, analyses, graphics, etc. and consistent with the actualevents that occurred in the construction phase. The Arbitrators generally prefer to have the requests fromeither the Claimant or Respondent supported and indicated in any Contract Documents between bothPage 2 of 6 Author: Jihad Daniel CIArb, FEIIC, ACA, SEE
  3. 3. Parties in order to avoid as much as possible entering into judgment and evaluation. Also, the Arbitratorsprefer the usage of any internationally known and reliable formulas for calculating and estimating delaydamages, this applies also to reasonable analysis technique for time impact and assessment of delays.Here below is example of two arbitrated cases in Lebanon (we protected the anonymity of the Contractorand confidentiality of the arbitration process):1st Arbitrated Case:Lebanese Contractor versus Ministry of Public Works & Transportation – Lebanese Government • Project Description: 41 km of new roads and rehabilitation of existing roads’ wearing course and retaining walls. • Original Contract value : 6.6 M$ after tendering process – FIDIC Contract • Reduced amount of 1.6 M$ which represents 11 km of roads • Contract signed on 18-04-2001 and Contractual completion date:20-01-2003 (Contract duration of 792 days) • Delaying events occurred such as unforeseen soil conditions, incomplete expropriation of houses along the road & consequential interference with local residents, political meddling, additions and modifications, employer’s financial difficulties and late payments, threaten and offense from third party, closure of sand & gravel sources, inclement weather conditions and sudden shortage of bitumen liquid in the market • Contractor requested 344 days of extension in Sep-02 • MOU signed in Dec-02 extending project completion 150 days up to 19-06-2003. • Claimant amount 12,270,000 $ and Respondent amount is 8,850,000 $ and Accepted Compensated amount by the Arbitral Tribunal is 3,115,000 $.Compensation for Loss of Benefit due to reduction in scope of work:The Arbitral Tribunal found out that a 10% percentage is acceptable and reasonable in view of theproportion of reduction from the original scope of work (11 from 41 km or 1.6 M$ from 6.6 M$).However, if any work was undertaken in that canceled scope, this should be deducted from the originalamount and the 10% will be applied to the remaining amount. In this case, 280,000 $ was the amountachieved in the deducted scope, therefore 132,000 $ of compensation was accepted.Compensation for escalation of essential aggregates:The Arbitral Tribunal found out that escalation was not foreseen and that those escalated materials (sand,gravel, etc.) were mostly essential for that Roads project and numerous quantities needed. The ArbitralTribunal accepted the full claimed amount of 545,000 $ without any deduction.Compensation for extension of time:Extension of time caused by additional works and unforeseen events (such as sudden unavailability ofbitumen liquid in the market or adverse weather conditions), the Arbitral Tribunal found out that amountclaimed of 250,000 $ is reasonable and accepted.Page 3 of 6 Author: Jihad Daniel CIArb, FEIIC, ACA, SEE
  4. 4. Compensation for due interests:This compensation includes three parts as composed by the Arbitral Tribunal as follows: 1- Interest on late certified payment and is reasonably eligible and contractually based. 2- Interest on financing the works incurred on the Contractor caused by Contract’s financing disorder due to escalation of prices for essential materials which increased more than 15% cost of the Project. 3- Interest that the Contractor lost due to inaction from the Employer to immediately compensate him for loss of benefit.The Arbitral Tribunal stated that the interests of above items occurred at the same period as per theexpert’s report and items 2 & 3 were the result of other circumstances which were claimed separately.Also, the Arbitral Tribunal stated that items 2 & 3 are not based on any Contract clause and that only item1 is eligible due to the fact that it is contractually bound. Therefore the total amount of interest on late duepayment was totally accepted (it amounted only of 15,000 $)Compensation for Acceleration:The Arbitral Tribunal stressed on having a directed acceleration from Employer based on Contract clause,substantiated documents/reports for accelerated measures (additional working hours shown on dailyreports, additional equipment/manpower, etc.) and that acceleration cost should be realistic and reflectperiod when the Contractor effectively undertook accelerated steps. The claimed amount of accelerationwas reduced to half and became 773,000 $ including 10% of benefit.Compensation for utilization of additional equipment:The Contractor has claimed the percentage of addition in the Project in taking modified contract amountof 5 M$ (= 6.6 – 1.6) after reduction of the 11 km (amounted of 1.6 M$) with the contract amountincluded all additions which amounted of 7.5 M$. The percentage calculated by the Contractor was thefollowing:1st method: 7.5/5 x 100 = 50% and 2nd method: (1.6 + 7.5)/6.6 x 100 = 38%However, the Employer does his calculation as follows: (contract value with addition – original contractvalue)/(original contract value) x 100.The Arbitral Tribunal concurred with the formula of the Employer but restricted the Contract to 30 km asthe 11 km were reduced from scope of work, therefore the percentage of addition is (7.5 – 5)/5 x 100 =50%.The Arbitral Tribunal further stated that the claimed amount is exaggerated but compensation is logicallypermissible, thus an amount of 500,000 $ including benefit was determined.Compensation for Intervention and Interference of third parties :Stoppage of work due to the above events (about 28 incidents).The Arbitral Tribunal found that theamount is exaggerated as the stoppage should not exceed more than one day and working team could bemoved to other open fronted area in less than one day. The Contractor has claimed for 812,000 $ and theConsultant 112,000 $ and therefore, the Arbitral Tribunal evaluated it as 200,000 $.Compensation for loss of business opportunity:The Contractor claimed that during three years time he lost the opportunity of getting more projects andprevented him from getting about 42.5 M$ of contract values instead of 37 M$ as per his record. TheArbitral Tribunal found the claimed figure exaggerated and based on record the Company has undertakenduring that period other projects, therefore the estimated amount determined by the Arbitral Tribunal was500,000 $ for that item.Page 4 of 6 Author: Jihad Daniel CIArb, FEIIC, ACA, SEE
  5. 5. Compensation for VAT and other added taxes:Further to above compensation, the Arbitral Tribunal stated that claimed amount to reflect physicaladditional amount incurred by the Contractor, therefore it is illogic that any additional taxes to beimplemented which indicates that this claim is not based on realistic or contractual basis. Besides, theArbitral Tribunal stated that it is illogical that the Contractor claimed added taxes on the Employer(Government) which owns those VAT or other added taxes. Thus, the Arbitral Tribunal rejected thiscompensation.Compensation for Engineers and Lawyers’ fees:The Contractor has claimed an amount of 400,000 $ which was found exaggerated by the ArbitralTribunal and was reduced to half (200,000 $) in view of the quantity and quality of reports, graphics,substantiated documents, provided particulars, etc.Note: Due to the fact that the total claim was about 21 M$, the Arbitral Tribunal fees amounted of200,000 $ to be paid by both Parties. Usually an advanced amount of 50% will be paid at thecommencement of arbitration and the remaining after the announcement of the award.2nd Arbitrated Case:Egyptian Contractor/Lebanese Contractor (JV) versus Ministry of Public Works & Transportation –Lebanese Government • Project Description: 41 km of new roads and rehabilitation of existing roads’ wearing course and retaining walls. • Original Contract value : 5.3 M$ after Tendering Process – FIDIC Contract • Contract signed on 23-June-1999 • Delaying events occurred such as site possession from another Contractor who left a messed up site behind him, inaccurate or/and incomplete design of main and center line of roads, design changes in some parts of the roads, etc. • On 02-May-00 the Contractor requested an EOT of 25 months to complete the Project due to a/m delaying events (mainly design) and on 01-Aug-00 the Engineer assessed a 5 months EOT with a possible of another surplus of 3 months upon Client’s agreement. There was no issuance of any formal extension of time. On 04-Sep-00, the Engineer noted that the Contractor has stopped work on site since 25-Aug-07 and reserved the right of the Employer to terminate the contract if the Contractor would not resume his work. On 11-Sep-07, a meeting was held between all Parties where the Contractor promised and committed to endeavor his best effort and provide more equipment and manpower from Egypt (his country of origin) to achieve optimum completion date. On 18-Sep-07, the Contractor confirmed again what was agreed in previous meeting. However, on 21-Sep-07, the Employer issued a letter to Contractor terminating the Contract as that latter has stopped work more than the stipulated 28 days as per Contract Conditions. • Claimant amount 4.4 M $ and Respondent amount was 3 M $ and Accepted Compensated amount by the Arbitral Tribunal was 664,000 $. • Claimant amount comprised of compensation for termination of Contract (2 M$), loss of benefit (414,000 $), loss of reputation (1 M$), loss of business opportunity (500,000 $), performance guarantee (21,000 $), loss of business interests (450,000 $). Total about 4.4 M$.Page 5 of 6 Author: Jihad Daniel CIArb, FEIIC, ACA, SEE
  6. 6. • Respondent amount comprised of advance payments (517,000 $), works rejected or incomplete (91,000 $), amount for general security after termination (39,000 $) and deduction of 20% in result of termination of contract due to Claimant’s fault and under his responsibility (853,000 $) and loss of business and interest caused by breach of contract by Claimant (1.5 M$). Total about 3 M$.The Arbitral Tribunal has decided the following: 1- Executed parts of works amounted of 602,000 $ and paid amount of works was 370,000 $ up to termination date. Therefore the remaining to be paid to the Contractor is the difference 232,000 $. 2- Claimant to be compensated also for paid materials on site, materials ordered, expenses and withdrew of machineries, etc. which was estimated 250,000 $. 3- Claimant to be compensated for loss of benefit and interest of performance guarantee, which amounted of 800,000 $ Therefore, the total compensated amount eligible to the Claimant was 1,282,000 $. 4- Deduction to be made on damages under the Claimant’s responsibility and advance payment paid by the Employer, rejected or incomplete works and other expenses due to Respondent Therefore, the total amount estimated by the Arbitral Tribunal for the Respondent was 618,000 $. In conclusion, the total due to the Claimant by the Respondent was 1,282,000 – 618,000 = 664,000 $. Fees to be paid to the Arbitral Tribunal (including administrative expenses, etc.): 35,000 $.Page 6 of 6 Author: Jihad Daniel CIArb, FEIIC, ACA, SEE