Why is Amicable Settlement a Part of Contractual Machinery?

By Dr. Chandana Jayalath
Disputes occur when parties fail to address conflicts of their interests as they often attempt to find solutions within the bounds of the contract where the rights and obligations are typically set out. Forgetting the fact that contracts are not ‘water proofed’, parties tend to limit their scope of thinking within the hard bound copies. The reality is that contracts do not operate in a vacuum. A contract that caters to all eventualities is indeed rare, so that parties will have to turn to another side, willingly or unwillingly, for a settlement. This is why negotiation has become a day to day phenomenon.
Negotiations help produce an agreement upon courses of action whilst bargaining for collective advantage and crafting outcomes in satisfying various interests, as long as the participation is in good faith. But parties who come with dirty hands make a settlement impossible, despite of formalities under contract. However, negotiation is free with rational negotiators who can walk away from the negotiating table at will. Constraints that are imposed by a contract essentially form the basis of contract governance, rather than dominating once behavior. Various researches reveal that procedural requirements influence all types of negotiators. This suggests that if negotiators are having concern for both themselves as well as their counterparts, amicable settlement is possible notwithstanding what the contract expressly provides or forbids.

It has become increasingly obvious to those in the construction industry that they have a choice in the way their disputes are resolved and administered. They are no longer required to submit to the sovereign jurisdiction of the local or international courts and adopt the procedural and evidential burdens. More frequently, by reason of the increasing popularity of ADR, parties prefer the option of retaining control in the whole dispute process rather than handing their fate over to a third party judge. This has resulted in a change in the manner the contracts are formulated. Many, including standard forms, require that parties undertake a process of amicable dispute resolution before issuing proceedings. Accordingly, amicable settlement has been popular in construction contracts since a long time.

Parties to a dispute prefer amicable settlement compared to other modes of dispute resolution apparently because of inherent advantages, one of which is that the dispute can be treated internally within the limits of expectations as mentioned. Amicable settlement as a non adversarial approach is now being developed into a formal process in many standard forms. For instance, once a notice of dissatisfaction has been given under sub clause 20.4 in FIDIC, both parties shall attempt to settle the dispute amicably before the commencement of arbitration. However, unless both parties agree otherwise, arbitration may be commenced on or after the fifty-sixth day after the day on which the notice of dissatisfaction was given, even if no attempt at amicable settlement has been made.


Accordingly, the clause 20 provides for a multi-tiered dispute resolution procedure, starting from submitting a claim to the engineer, who makes a determination under sub-clause 3.5, referring a dispute to the Dispute Adjudication Board (DAB) for its decision, giving a notice of dissatisfaction in respect of the DAB’s decision, then amicable settlement and finally the arbitration. Why the FIDIC Conditions made amicable settlement a part of mandatory procedure is a question of interest. According to FIDIC’s Guide to the 4th Edition, where this procedure was first appeared, the reason for the relevant sub clause is to give an express right for the parties to enter into negotiations when there is no reference to amicable settlement in the contract. This is important despite of various bargains that would have taken place on ad-hoc basis. This suggestion arises from several considerations.

It is unlikely that a party will refer a dispute to the DAB unless and until the dispute has been negotiated for some time, and without success. The time limits for the DAB operation already foresee up to some three and half months before a DAB determination is received from the DAB, during which the parties are still free to continue amicable settlement negotiations. It is also possible that the minimum of 56 days for amicable settlement negotiations may lead the parties to significantly different views on a fair resolution of the dispute. Top of all, parties might feel fed up with the stereo type process so that a buffer time will eventually result in a stop-over settlement that may not be final and binding for ever in all cases but may ease out hardship over dispute. Parties under circumstances may not invoke the next step in the gauntlet because the issues have been sorted out within the contractual machinery itself.

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