Construction Dispute Boards
Chapter 11
Construction Dispute Boards
11.1 Construction disputes
Construction projects are naturally prone to disputes. Contracting parties usually allocate risk to the party best able to control it. However, there is sometimes uncertainty about who is to bear a particular risk and to what extent. The reason may lie in a poorly drafted contract or ignorance of it. Sometimes the risks are allocated inefficiently in the contract. Other factors may include a lack of experience or to gain a short-term advantage. In other cases, the parties are not willing to bear the consequences of the risks allocated to them. These and many other situations often give rise to disputes. Settlement of disputes in construction requires speed, an informal approach and expertise. This is why every good contract includes a dispute resolution system.
11.2 Dispute boards
Every construction project is unique and perhaps this is why there is a general absence of ‘corporate memory’ in the construction industry (Chern, 2010). Regrettably, similar types of disputes arise on many construction projects and it is naïve to think we can eradicate disputes by clever contract drafting alone. What parties want is a dispute review device that is considered fair, economic and causes the least disruption to the due performance of the contract. The concept of dispute boards originated in the USA, where they have been in use for over 30 years. Their earliest reported use was in the Boundary Dam project in Washington in the 1960s. Following successful use of dispute boards on large projects, implementation of Dispute Adjudication Boards by the World Bank and FIDIC in their guides and sample forms were the further key aspects of their expansion (Chern, 2010).
A dispute board is a body set up to resolve disputes (prior to arbitration or litigation) that have arisen within a construction project. In general, there are two kinds of dispute boards: (1) the Dispute Review Board (which makes recommendations); and (2) the Dispute Adjudication Board (which makes resolutions).
In practice, there are not many alternatives to dispute boards. Courts often lack expertise with the exception of countries where specialized courts are established, such as in the UK or Germany. Some countries, for example, the Netherlands, have arbitration systems with tribunals that specializse in construction disputes (Lloyd, 2009). Furthermore, both litigation and arbitration are costly and time-consuming.
The arbitration process has become increasingly inefficient; however, construction disputes still represent a large share of the arbitration market. According to the ICC, construction and engineering disputes accounted for almost 17% of the total caseload in 2010. In 2011, the Chartered Institute of Arbitrators held a conference in London entitled ‘Costs in International Arbitration’. It found that the typical amount spent by a party going through the arbitration process from pre-commencement to post-hearing (excluding enforcement) was in the region of £1.5m, where the median claim was just under £10m. In 25% of the cases of between £10m to £50m, the costs exceeded £5m. In over 50% of the cases where the dispute exceeded £100m, costs exceeded £5m. Nearly 75% of costs were for external legal representation.
(Chern, 2010) stated in an article on the role of dispute boards in construction that:
The statistics show that if there is an operational Dispute Board in existence on a project, close to 99% of all disputes referred to it will be successfully resolved within less than 90 days and at a cost of about 2% of the amount of the dispute.
In Poland, for example, construction disputes in large transport infrastructure construction projects are dealt with by the High Court in Warsaw (XXV Civil Division) because the General Directorate of National Roads and Motorways (the GDDKiA) has its registered office in the Court’s district. Because of the large number of disputes in Poland in recent years, a natural process of specialization of the Court’s judges has followed.
Judges themselves admit that alternative dispute resolution (ADR) is a better model for hearing construction disputes. However, it is the employer who selects the method of dispute resolution and it is common for public authorities in the CEE (such as GDDKiA in Poland) to consistently delete DAB and arbitration clauses from the FIDIC forms in favour of domestic litigation.
11.2.1 Dispute avoidance
The construction industry has a reputation for disputes and conflict. (Chern, 2010) gives evidence from Australia where 50% of all legal costs associated with construction is expended in connection with disputes. In almost 10% of projects, between 8% and 10% of the total project cost was legal cost. Disputes are naturally connected to construction projects because of the amount of risk involved. Disputes are not completely avoidable but the participants of construction projects should do as much as possible to eliminate them. The situation is aggravated by the increased use of joint ventures both in consulting and in contracting. Such organizations are less autonomous and perhaps less able to negotiate settlements of their contractual problems. Dispute avoidance is, however, possible in the preparation phase via an appropriate procurement plan including the choice of delivery method, consultants and designers. Other key aspects of dispute avoidance are: (1) the ability to procure the work by an experienced contractor for a realistic bid price; (2) efficient risk allocation; and (3) how time, variation and claim management procedures are established and how disputes are resolved. Simply naming a dispute board in a project contract can be one of the strongest tools to avoid the dispute.
11.2.2 Dispute boards: Advantages and disadvantages
Due to the enormous volume of correspondence and occasional ‘friction’ between participants, it is usual to see minor disputes accompany large construction projects on a daily basis. A certain, intermediate dispute resolution level is, therefore, widely appreciated. It can make people (such as the top management of the interested parties) sit together at a joint table to try to find a compromise approach and thus avoid costly arbitration or litigation proceedings. At these meetings, opinions can get vented, tensions released and personal antagonisms extinguished in the presence of impartial, well-informed experts. Experienced pundits provide the parties with a solution that will likely result in a required compromise. Active on these boards are experts who need not be lawyers (or if lawyers, lawyers with extensive practical backgrounds in the field of construction projects), which is why they are spoken of as being ‘user-friendly’. The boards can also be made up of suitable combinations of personalities with varied experience and specializations.
A dispute board becomes part of the project administration and can thereby influence (during the contract period), the performance of contracting parties. It has ‘real-time’ value. Many disputes concern ‘non-absolute’ matters and, in such cases, the dispute board can devise solutions which avoid ‘win-lose’ situations while keeping within contractual limitations. Working relationships are less affected and site-level partnering can continue (Chern, 2010).
The use of dispute boards is the best method of dispute avoidance because it leads the participants to find agreement. For example, the Ertan Hydroelectric Dam in China, valued at US$2 billion, had 40 disputes referred to its dispute board for decision, with no decision of this board continuing on to arbitration or litigation. The Hong Kong International Airport, valued at US$15 billion, had six disputes referred to its dispute board and, of those, only one went on to arbitration (in which case the board’s decision was upheld). The Katse Dam in South Africa, valued at US$2.5 billion, had 12 disputes referred to its dispute board. Again, only one decision went on to arbitration and was also upheld.
One disadvantage of these boards is that they tend not pay off in terms of cost in smaller projects (Chern, 2010).
11.2.3 Dispute Adjudication Board (DAB)
The DAB—i.e. one or three adjudicators selected by the parties—must decide in compliance with the dispute resolution process described in the contract (see the procedure under FIDIC forms below). Alongside this contractual adjudication, there is also statutory adjudication available in some countries (see the procedure under UK and Australian statutory adjudication below).
In civil law jurisdictions, decisions handed down by DABs are persuasive in nature only and are usually not binding or enforceable. In common law jurisdictions, on the other hand, the decision is often final and binding if the parties do not appeal it within the contractually agreed period of time.
If the contracting parties want to make a DAB’s decision enforceable, they can modify the DAB’s status to ad hoc arbitration. The arbitration clause for an institutional arbitration court (or for an additional ad hoc arbitration) may be re-worded so that this arbitration court (or the arbitrator or the arbitrators ad hoc) would become the authority to examine the DAB’s award or resolution, should one of the contracting parties challenge the award or resolution via a lawsuit.
11.2.4 Dispute Review Board (DRB)
As with DAB, the DRB usually consists of three reviewers who must be impartial, experienced and respected. The employer and the contractor select one member each. The chosen member must be approved by the other party. The two appointed DRB members then choose the third member who, in turn, also needs to be approved by both parties. All members select a chair of the DRB who, again, is subject to the parties’ approval. Organization and set-up of the DRB takes place before the commencement of the construction project.
The DRB familiarizes itself with the contractual documents, with the project procedures, with the participants themselves and closely follows the progress of the works. The members of the DRB conduct site visits periodically.
The system aims to resolve differences early on at the job level. Where formal disputes cannot be avoided, the DRB holds a hearing and issues a written recommendation. While not binding upon the parties, recommendations are, in practice, usually accepted by the parties to the dispute. By doing so, they help themselves and maintain the credibility, reputation and expertise of the DRB and its members. The contract may also provide that DRB recommendations be admissible in any potential future litigation or arbitration (DRBF, 2013).