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DAAB Legality: What the 2017 Indonesian Construction Services Law

As skyscrapers erect, apartment buildings emerge, and infrastructure materializes all around Indonesia, one symptom of progress is certain: construction disputes. While best efforts are undoubtedly made to protect cross-border and domestic parties through proper contracts, discrepancies arise. The construction contracts for many international projects use a FIDIC (an international standard organization for consulting engineering & construction) construction-contract template as the basis. Parties then adjust the clauses in the template pursuant to their project’s needs. Interestingly, the FIDIC 2017 contracts introduced a mediation-like procedure as a dispute settlement mechanism known as Dispute Avoidance Adjudication Board (“DAAB”).

What is DAAB?

DAAB is an adjudicating panel/board in which members are appointed by both parties (the employer and the contractor) from the construction contract. Each member of the DAAB is on both the contractor’s and employer’s payroll during the life span of the contract (from the execution to project is completion or until the contract is terminated). The role of the DAAB is to resolve disputes by facilitating negotiation between the parties and issuing recommendations before the parties commence arbitration. The goal is to avoid further legal pursuits.

In the previous version of FIDIC contracts, the term used in reference to this mechanism was the Dispute Adjudicating Board (DAB). The addition of the term ‘Avoidance’ in the new DAAB means that the board is given additional power to ‘provide assistance and/or informally discuss and attempt to resolve any issue that may have arise.’

DAAB Implementation in Construction Contracts under the Construction Services Law

Now that we’ve established what the DAAB is and the rationale behind creating it, what is the legal provisions that allow its actual enactment? The Law No. 2 of 2017 concerning Construction Services (“CSL”), Article 88, provides that the disputing party has the right to form a Dispute Resolution Board to internally resolve a dispute. Therefore, the CSL allows FIDIC contracts’ DAAB concept to be applied in construction contracts for projects in the Indonesia.

DAAB’s Role in Construction Disputes

But what real value does the DAAB have? The DAAB’s resolution can be used as evidence either in arbitration or litigation. The arbitration tribunal or panel of judges will consider it when examining the merit of the case. Furthermore, the DAAB members can provide statements in arbitration or court proceedings.

In a construction contract equipped with a DAAB clause, any party is prevented from escalating the dispute to arbitration or litigation before exhausting this procedure. Typically, this bar against further proceedings is effective for arbitration. Precedents show that arbitration institutions and ad-hoc tribunals refused jurisdiction if the DAAB mechanism had not been exhausted prior to commencing arbitration proceedings. However, the DAAB clause in practice is ineffective for litigation before Indonesian court. While Indonesian courts may refuse jurisdiction on the basis of premature claims, they can only do so in a final judgment. Premature claims are examined as demurrer and, under Indonesian civil procedure laws, only demurrer on absolute jurisdiction may be decided in an interlocutory judgment. Therefore, dismissal of premature claims must be decided in the final judgment after the examination on the merits of the case.

It can also be argued that the claimant in litigation who refuses to go through the DAAB mechanism does not have good faith to settle the dispute amicably.

Our Conclusion:

We at SLF support the underlying rationale that underpins the DAAB. Under the Art. 88 of CSL, the FIDIC contracts’ DAAB concept can be legally adopted and implemented for projects in Indonesia. Project management has demonstrated that having the DAAB as a Dispute Board is more cost effective and efficient compared to escalating a dispute directly to arbitration or litigation. The DAAB members are hired for their professional expertise in construction and are continuously updated on the project. Therefore, DAAB members have more direct and complete knowledge about the project. This allows them to resolve disputes more effectively. Moreover, their resolution and statement can be an important piece of evidence in arbitration or litigation.

For additional questions on how to properly insert this provision into your contracts, please contact Schinder Law Firm. After all, we aim to best protect our clients’ interests.


By : Budhi Satya Makmur, S.H., M.H.