Introduction

9.1

9.2 Delay and cost overruns in construction projects have become a much-discussed topic in recent years. Such discussions were mostly fuelled by the two substantial infrastructure projects and the major concert hall; namely Stuttgart 21 (Stuttgart 21),³ Airport Berlin-Brandenburg (BER)⁴ and the Elbphilharmonie Hamburg,⁵ which have highlighted the complexity and impact of construction disputes. Each of these projects has attracted widespread media attention, addressing the severe delays and the repeated postponement of the expected completion dates, with continually escalating cost overruns. Beyond such mega projects, there is also considerable discontent in the construction industry with the time taken for the resolution of construction disputes by technically-inexperienced state court judges. In these surroundings, one potential cure is adjudication.

Adjudication: Recent developments in Germany

9.3 It is fair to say that the resolution of construction disputes by means of adjudication has enjoyed a certain renaissance in Europe since the implementation in the United Kingdom of the Housing Grants, Construction and Regeneration Act 1996 (the HGCRA) [Appendix 1.1]. The HGCRA is one of the reasons that adjudication since 1999 has been a standard component part of dispute resolution in the 1999 FIDIC Contract Series (as to which, see the immediately preceding chapter). This trend continued when the ICC published its Dispute Board Rules, in 2004. These Rules, inter alia, provide for dispute adjudication board proceedings under the auspices of the ICC on a contractual basis.⁶

9.4 With some years’ delay, initiatives to implement adjudication as a means of dispute resolution in the construction industry were also taken in Germany. First, institutional rules for contractually agreed adjudication proceedings were promulgated, most notably by the Deutsche Beton- und Bautechnikverein in conjunction with the Deutsche Gesellschaft für Baurecht eV and the German Institution of Arbitration (DIS).

9.5 Secondly, initiatives were started to introduce a statutory instrument for the swift resolution of construction disputes, potentially including adjudication. These initiatives came from two directions. In 2010, the Ministry of Justice instigated a Working Group tasked with analysing deficits in German construction law and potential remedies. The Working Group’s report, published in 2013, recommended against statutory adjudication, but proposed, amongst others, a so-called Construction Order (Bauverfügung) on the state court level (paragraphs 9.70 et seq. below) of the Construction Order. The Deutsche Baugerichtstag eV, which originally had recommended to the legislator implementing statutory adjudication proceedings, has moved away from this recommendation in 2014. Instead, it supports the introduction of a Construction Order proposed by the Working Group, but also proposes the creation of a mechanism for the enforcement of adjudication decisions (paragraphs 9.42 et seq.). In June 2015, additional support for adjudication came in form of a report prepared by the Reform Commission on the Construction of Major Projects (Reformkommission Bau von Großprojekten), a commission instigated by the German Ministry of Transport (as to which, we see further below). The final part of this chapter will look at the provisions for the resolution of construction disputes with public authorities under the VOB/B (paragraphs 9.70 et seq.).

DIS Rules on Adjudication and Expert Determination

9.6 In 2008, the German Institution of Arbitration (DIS) tasked working groups with drafting rules for various forms of alternative dispute resolution (ADR) proceedings under the auspices of the DIS. 2010 then saw the promulgation of two sets of rules bearing the specific features of adjudication proceedings, namely the DIS Rules on Adjudication [Appendix 12] and the DIS Rules on Expert Determination. The main elements of these DIS Rules are summarised below. Both sets of rules are similar in that they provide for a decision by a third-party neutral to be rendered in a comparatively short period of time, and which is provisionally binding on the parties. In both cases, the parties can object to the decision and refer the dispute to arbitration proceedings. The difference between the two sets of rules is that the DIS Rules on Adjudication provide for a standing adjudicator or panel of adjudicators to accompany a project even before disputes arise, whereas the DIS Rules on Expert Determination only concern dispute resolution.

DIS Rules on Adjudication

9.7 The DIS Rules on Adjudication came into force on 1 July 2010⁷ and are conceived as a set of rules for “project-accompanying adjudication”. Accordingly, the DAB, or the sole adjudicator, is appointed, at the beginning of a project, and is kept informed of the developments throughout the project. The main objective of the early constitution is to permit the adjudicator(s) to be involved in the project at a point in time where discrepancies start to crystallise, yet before these turn into full-grown disputes.

DAB as a standing board during the project

9.8 The number of adjudicators under the DIS Rules, is either one, or three, depending on the parties’ agreement. In the absence of such an agreement, a dispute adjudication board (DAB) of three arbitrators shall be constituted: see §3.1 of the DIS Rules on Adjudication.⁸ Unless otherwise agreed by the parties, the chairman of the DAB, or the sole adjudicator, shall be a lawyer: see §3.3 thereof.

9.9 As soon as the DAB is constituted, the parties shall provide the adjudicators with the complete texts of the contractual document, and further documents, to the extent necessary: see §6.1 of the DIS Rules on Adjudication. As a default rule, the parties shall keep the adjudicators abreast of the project’s progress on a monthly basis: see §6.3 thereof. The adjudicators are also entitled to request further information from the parties: see §6.3 thereof. In addition, the parties and the DAB shall have meetings at least every six months in order to discuss the current developments in the project. Such meetings are mainly intended to be an early warning system for issues that may become contentious. If desired by one of the parties, or upon its own initiative, the DAB may work towards an amicable settlement of differences between the parties: see §6.7 thereof. The rules clarify that the DAB is not bound by any preliminary view, which it may express in such attempts to settle differences, in the event of subsequent dispute-related adjudication proceedings.

Basic elements of the DAB disputes procedure under the DIS Rules

9.10 In case of a dispute, any party can initiate DAB proceedings by written notice to the DAB and the other party, setting out the full particulars of the claim: see §7 of the DIS Rules on Adjudication. The other side shall reply in writing within six weeks after the commencement of the proceedings: see §9 thereof. Thereafter, the initiating party may reply within three weeks, whilst the responding side can comment in writing within another three weeks: see §10 thereof.

9.11 A hearing is only mandatory if so requested by one, or both, parties. If not, it is within the DAB’s discretion to decide whether a hearing shall take place: see §14.1 of the Rules. The DAB also has certain inquisitorial powers. Accordingly, the DAB can question any person whom it believes to be in a position to provide relevant information. Further, the DAB can request the parties to provide documents: see §15.1 thereof. The DIS Rules also expressly authorise the DAB to make proposals for an amicable settlement: see §15.1 thereof. This authority, also typical for German court proceedings, may well turn out to be one of the DIS Rules’ assets. As insiders to the project, the adjudicators are in the right place to conceive meaningful settlement proposals. Such a settlement burdens the ongoing project to a lesser extent than an adversarial DAB decision would.

9.12 If a decision is necessary, the DAB is bound to render its decisions as soon as possible, normally within four weeks after the hearing, or, in case there is no hearing, within four weeks after receipt of the last written submission: see §17.6 of the DIS Rules on Adjudication. In any event, the DAB decision must be rendered five months after commencement of the proceedings at the latest: see §17.6 thereof. This deadline can be prolonged only by agreement of the parties. In case the DAB decision is not rendered within the deadline, and there is no prolongation agreement, the DAB proceedings terminate automatically: see §26.2 thereof.

Effect of the DAB decision

9.13 As typical of adjudication decisions, the DAB decision is binding, unless and until it is reversed by a court decision, or arbitral award: see §22.1 of the Rules. The Rules expressly provide that it constitutes an intentional and material breach of contract if the DAB decision is not complied with.⁹ The consequences of such a breach are those determined in the contract (if any), or the applicable substantive law. Accordingly, if the contract provides that a material breach gives rise to a termination right, a party not complying with a DAB decision risks termination and thus exposure to substantial damage claims. §22.1 further clarifies that non-compliance with the DAB decision is an intentional and material breach of contract even if the DAB decision is later vacated by a court or arbitral tribunal. Notwithstanding the fact that the Rules legitimise a termination of the contract, any party is well advised to carefully consider potential consequences. So far, there is no German case law on the question whether non-compliance with an adjudication decision justifies a termination of a contract. In particular in a situation where an adjudication decision concerns a comparatively small aspect of a project, it is questionable whether courts will still accept a termination based on the “mere” non-compliance with the decision.

Declaration of non-recognition

9.14 In order to avoid the DAB decision becoming final and binding, a party must file a notice that it does not recognise the decision in full, or in part, within one month after receipt of the decision: see §23.1 of the DIS Rules on Adjudication. In a case where such a declaration of non-recognition is filed, both parties can initiate court proceedings, or arbitration, depending on the contractual agreement.

Enforcement of a DAB decision

9.15 The German court system does not provide for a tried and tested mechanism for the swift enforcement of adjudication decisions. Given that the German legal system does not know summary judgements, enforcing a DAB decision remains difficult. In fact, non-compliance with an adjudication decision is a simple breach of contract, based on which court proceedings, or arbitration proceedings, can be initiated. It is likely, though, that such court proceedings will not merely deal with the issue of non-compliance with the adjudication decision, but incidentally also test whether the adjudication decision was correct in the court’s view.

9.16 It has been suggested that adjudication decisions may be enforceable by way of special proceedings for documentary evidence (Urkundenprozess) according to §592 ZPO.10 In such proceedings, only documentary evidence is admissible in the first part of the proceedings. Accordingly, the contract, requiring the parties to perform adjudication decisions, and the decision itself could be introduced as evidence; a judgement, requiring the other side to perform the adjudication decision, could then be available in a time frame of a few months. It must be noted, however, that German courts have, so far, not dealt with this issue. It therefore remains to be seen whether they would condone an enforcement of adjudication decisions by way of the Urkundenprozess.

9.17 The DIS Rules provide that a party can bring a claim for the performance of a binding DAB decision before the state courts even if the contract provides for arbitration: see §23.5 thereof. Accordingly, the successful party in adjudication can, at least, avoid the costs of full-blown arbitration proceedings by turning to the state courts. It remains to be seen to what extent German courts will expedite court proceedings in this situation. Alternatively, a party, trying to enforce a binding DAB decision, can initiate an arbitration according to the DIS Supplementary Rules for Expedited Proceedings: see §23.5 thereof. The duration of arbitration proceedings, under the Supplementary rules, should be no longer than six months in the case of a sole arbitrator, and nine months in the case of a three-member tribunal.

9.18 §28 determines that the parties are entitled to submit written submissions and documents from the DAB proceedings, and, of course, the DAB decision itself, as evidence in a subsequent arbitration or court case.

Preliminary rulings

9.19 The DAB is further authorised to make preliminary rulings, eg to order the continuation of works, acceleration measures, payment of milestone payments, prohibition of the calling of bonds, and certain other measures: see §20.1 of the DIS Rules on Adjudication. While such measures are not enforceable, §20.6 provides that it constitutes an intentional and material breach of contract if such an interim measure is not complied with, even if such an order should later be reversed by a court or arbitral tribunal. However, there is a difference between non-compliance with a DAB decision and non-compliance with an interim order. The Rules expressly state that the failure to comply with an interim measure cannot serve as a justification for terminating the contract: see §20.8 thereof. Nevertheless, a party is well advised to think twice before ignoring such interim measures. Given that non-compliance with such a measure constitutes a material and intentional breach of contract, the other side may avail itself of damage claims, which may not be capped by any limitation of liability clauses in the contract due to the intentional nature of the breach.

DIS Rules on Expert Determination

9.20 The DIS Rules on Expert Determination came into force on 1 May 2010.¹¹ The German name (Schiedsgutachtenordnung) is somewhat ambiguous, as it is usually associated with third-party determinations within the meaning of §§317 to 319 German Civil Code. What the DIS Rules on Expert Determination, in fact, provide for are adjudication proceedings just as provided for in the DIS Rules on Adjudication, the difference being that there is no standing board in case of the DIS Rules on Expert Determination. Accordingly, the experts are only appointed, and involved, once a request for the resolution of a dispute is filed in accordance with the Rules.

9.25 In regard of the further procedure, namely the sequence and the time limits for submissions, the (optional) oral hearing, preliminary rulings and the decision making, the provisions are essentially the same as the DIS Rules on Adjudication (paragraphs 9.7 et seq. above). There are only slight differences in light of the fact that experts are appointed ad hoc only when disputes arise, whereas adjudicators under the DIS Rules on Adjudication are appointed at the beginning of the project. Accordingly, the maximum time limit for rendering the final decision12 is five months in case of the DIS Rules on Adjudication (paragraph 9.11 above), whereas it is six months in case of the DIS Rules on Expert Determination: see §17.6 thereof.

9.26 The decision under the DIS Rules on Expert Determination has the same effect as a decision under the DIS Rules on Adjudication (paragraph 9.12 above).