Dispute Boards have proven to be a highly effective way to manage the risk of disputes, cost overruns and delays on construction projects. When entering into a significant construction contract you should carefully consider investing in a Dispute Board to help you manage these risks. This article explains how Dispute Boards work and how to set them up for success.
Construction projects are highly prone to delays, cost overruns and disputes
The construction sector is notorious for its adversarial nature. Competitive tendering processes result in fixed prices or rates incorporating low margins and contingencies for risks. Time becomes precious when contractors accept tight deadlines for completion coupled with liability to pay pre-agreed (liquidated) damages for each day completion is late.
Events that cause the contractor to incur additional costs and/or delays can not only reduce the contractor’s expected profit margin, but also expose the contractor to significant loses. Accordingly, claims by contractors for extra money and extra time are common. These claims commonly lead to disputes regarding the contractor’s entitlement to make the claim (merit or entitlement disputes) and/or the quantum of extra money or extra time the contractor is entitled to (quantum disputes).
The search for better ways to avoid and resolve disputes
The above is not a recent phenomenon – the endemic nature of claims and dispute within the construction sector was recognised in the seminal “No Dispute” report over 30 years ago. As such, the search for better ways to resolve disputed claims has been a long one.
Arbitration was once a popular alternative to court litigation, mostly due to the ability to select arbitrators with relevant experience and design the arbitration process to suit the nature of the dispute, and the desire of the parties for a faster and cheaper process than offered available via litigation, and to keep the proceedings and outcome confidential. But the cost and time benefits of arbitration, relative to court litigation, are not guaranteed and can turn on a number of factors outside the control of any one party. Many arbitrators are reluctant to depart from arbitration processes that closely mimic the court process (including full discovery, and cross examination of witnesses), for fear that a party will challenge the arbitration process or outcome on the basis that did not afford them adequate procedural fairness. Consequently, arbitration processes can become slower and/or more costly for a party than litigation.
A variety of other processes have evolved under the banner of “alternative dispute resolution” or ADR. The main ones are, or are variants of, the following:
- Escalated negotiation – where the dispute is put through a negotiation process, often between people holding positions more senior than those involved in the project of a daily basis (eg CEO negotiations);
- Mediation (also called conciliation) – where a third party is introduced to the negotiation process, to assist the parties to structure their negotiations with a view to agreeing a negotiated outcome; and
- Expert determination (in some countries, also called adjudication) – where the issues in dispute are referred to a third party who then determines the outcome for the parties.
Some countries have also followed the UK’s lead and introduced a statutory, court assisted, adjudication process for construction payment disputes, where payment disputes under construction contracts can be referred by the claimant to a third party adjudicator who promptly determines the dispute on an interim basis, and the court enforces the adjudicator’s decision regarding the payment to be made pending the outcome of any further litigation or dispute resolution process (“pay now, argue later”). In Australia, the legislation that establishes this process is known as “security of payment” legislation.
All these processes are reactive in nature. They generally only apply after the issue has escalated to a point where one party has formally notified the other party that they are in dispute. They generally don’t help the parties to pro-actively resolve their issues before they become a formally notified dispute.
The Dispute Board process, when done well, fundamentally differs from these other ADR processes because of its focus on dispute avoidance, as well as dispute resolution, in that it aims to pro-actively assist the parties to resolve issues before they escalate into disputes.
Being a contractual process that the parties can tailor to suit their needs, Dispute Boards have taken different forms (and different names) over the years. The usual elements, and key variants, can be summarised as follows.
Dispute Boards usually comprise 3 individuals, who are selected for the role based on their experience, capabilities and independence in relation to the contract subject matter. One person Dispute Boards are also possible, although finding a single individual with all the skills and experience needed to successfully fulfil the role can be difficult.
The Dispute Board is established at the commencement of the project, ideally at the same time as the relevant construction contract is signed, or very soon thereafter. Appointment of a Dispute Board from outset of construction enables it to build relationship of trust and confidence that increases the prospects of the Dispute Board’s recommendations being accepted by the contract parties.
The Dispute Board has two primary functions:
- a dispute avoidance function; and
- a dispute resolution function.
Dispute avoidance function
The dispute avoidance function usually involves regular site visits and meetings at which the Dispute Board is informed of issues that could cause cost increases or delays and is also informed about any unresolved issues that could become disputes. The Dispute Board discusses and consults with the parties on ways and means to consensually resolve issues before they turn into full blown disputes, thereby assisting the parties to “nip issues in the bud”.
Because the dispute avoidance function is about assisting the contract parties to amicably resolve their issues, I like to think of the dispute avoidance function as akin to ‘pro-active mediation’.
Sometimes, the dispute avoidance process allows the contract parties to request a non-binding written advisory opinion, with supporting reasons, from the Dispute Board. Even when not expressly provided for, a pro-active Dispute Board may suggest that the parties should jointly request an advisory opinion on a particular issue. Advisory opinions can assist the contract parties to amicably resolve an issue, or provide justification for the resolution reached. This option is also quicker and less costly than proceeding through the steps of a Dispute Board hearing.
At the regular Dispute Board meetings, the Dispute Board receives an update on the progress of all aspects of the project. The Dispute Board members take an inquisitorial approach to flush out and unpack issues that may delay completion or result in increased costs, and to encourage the parties to take immediate action on such matters.
A pro-active Dispute Board will typically request that the parties provide a report (preferably jointly) on the status of the project, the current work on site, the future work program, delays experienced, emerging commercial issues and the like. These meetings also provide a reason for the contract parties to review their performance, identify current and future issues, remove roadblocks to progress and actively engage with each other, in advance of each meeting.
It is often agreed that the Dispute Board will meet when the senior executives of the contracting parties are at the site, so that the senior executives can participate, as they are commonly the only ones with the authority to make significant commercial decisions to resolve project issues.
Between the meetings, the Dispute Board is kept apprised of progress through monthly reports, minutes of meetings and other documentation the parties and/or the DB considers necessary to keep the Dispute Board properly informed.
To encourage frankness and openness between the parties and the Dispute Board, information and documents provided to the Dispute Board, and documents generated within the Dispute Board process (such as minutes of Dispute Board meetings), are typically afforded “without prejudice” status, meaning they can’t be used against a party in any subsequent court or arbitration proceedings.
Dispute resolution function
The dispute resolution function is generally triggered when the parties have been unable to resolve an issue and one of the parties wishes to formally refer the issue to the Dispute Board for a formal written decision. The process thereafter is like an expert determination process, involving:
- a written claim by the party that has formally referred to dispute to the Dispute Board for a decision;
- a written response to the claim by the other party, which also raises any cross claims that the respondent wishes to raise;
- a written reply by the claimant, to the respondent’s response and cross claims;
- a hearing at which each party can present its position on the dispute to the Dispute Board, and the Dispute Board can ask questions; and
- a written decision by the Dispute Board, with reasons.
The legal effect of the written decision tends to be one of the following:
- a non-binding recommendation; or
- an interim binding determination, which is binding on the contract parties unless and until it is overturned by subsequent arbitration or litigation; or
- a final and binding determination.
The first option is common in the United States of America and some other countries. The second option is most common in Australia, and is the approach adopted in FIDIC contracts. The third option is the least common.
Many disputes revolve around questions of merit or entitlement, rather than quantum. Once the entitlement issue has been resolved, the parties can often reach agreement on the quantum. Accordingly, it is best practice for the Dispute Board to suggest that the parties initially refer the entitlement question to the Dispute Board for a decision, and to only refer the quantum issue to the Dispute Board if the need to do so subsequently arises. Indeed, some Dispute Board procedures default to a two-step referral process.
Documenting Dispute Board arrangements
The Dispute Board arrangements are usually documented across three related documents.
Firstly, the Construction Contract will typically contain provisions that:
- require the parties to establish a Dispute Board by entering into a separate Dispute Board Agreement with the Dispute Board members, and
- set out in broad terms how the Dispute Board will operate.
These provisions in the Construction Contract are commonly called the “Dispute Board Specification”.
The second document is the Dispute Board Agreement. This separate agreement between the parties to the construction contract and the members of the Dispute Board:
- establishes the Dispute Board and describes its functions;
- sets out the responsibilities of Dispute Board members and the parties to the contract, including:
- the obligations of the Dispute Board members to avoid and disclose any conflicts of interest and to maintain confidentiality; and
- the commitment of the contract parties to pay the costs of the Dispute Board members, usually in equal proportions;
- generally references the Dispute Board Specification and the Dispute Board Rules/Operating Procedures;
- sets out the proposed term of the Dispute Board and includes provisions dealing with resignation, termination and replacement of Dispute Board members; and
- releases the Dispute Board members from any liability arising out of the role, except in the case of fraud.
Thirdly, the Dispute Board Rules/Operating Procedures provide more detail on the rules and procedures that have been agreed to by the Dispute Board members and the contract parties. These rules and procedures often include such details as the project information to be given to the DB members, meeting and site visit arrangements, representation at meetings and site visits, communication protocols, dispute avoidance techniques, and the process to be followed if a dispute is referred to the Dispute Board for a decision or recommendation. The rules and procedures are usually flexible so that they can be altered from time to time by agreement between the Dispute Board members and the parties to reflect their specific needs and circumstances.
Selecting Dispute Board members
The success or otherwise of a Dispute Board usually turns on the quality of its members. Accordingly, it is critical that the parties are careful in selecting them.
Selection criteria typically revolve around experience, availability, and independence/impartiality.
Experience-related criteria might include:
- Experience in the type of project, especially if it is of a specialised nature (for example, tunnelling, dredging or telecommunications);
- Management and commercial experience on major projects;
- Dispute resolution experience (for example as a mediator, expert, arbitrator or dispute board member);
- Familiarity with the contract delivery method for the project (Construct only, D&C, PPP etc); and
- Prior training and experience as a Dispute Board member, or as a mediator, expert or arbitrator.
It is not the role of the Dispute Board to change the risk allocation and responsibilities agreed between the parties in their contract. Rather, the Dispute Board’s objective is to ensure a successful and best-for-project outcome for all parties, consistent with their contractual arrangements and obligations. For this reason, I always recommend to my clients that they should ensure that at least one of the Dispute Board members is a lawyer who understands the importance of giving effect to contractual agreements.
Some clients baulk at the cost of regular Dispute Board meetings for a project that they hope will be dispute free in any event. Why pay for something that may not be needed?
I suggest to such clients that they think about the Dispute Board as a form of insurance – insurance against the cost of disputes, and against the cost of project delays.
Experience tells us that the likelihood of significant disputes on major construction projects is high – significantly higher that the likelihood of other events that parties commonly insure against. The legal costs and management time that can expended on construction disputes can be massive. When compared against these potential costs, the costs and management time associated with monthly Dispute Board meeting pale into insignificance.
The Australian experience also indicates that Dispute Boards are a very effective form of insurance against the cost of disputes. Dispute Boards have now been used on over 100 Australian projects with an aggregate value exceeding A$50 billion. Across these projects, there have been:
- only 25 formal decisions issued by the DB. All other issues have been resolved amicably, with the DB’s assistance; and
- no instances of issues being subsequently referred to litigation or arbitration.
Further information is available in the Dispute Board Manual – A Guide to Best Practices and Procedures published by the Dispute Resolution Board Foundation. This article draws heavily from the manual.
About the author
Owen Hayford is a specialist legal and commercial advisor on infrastructure and construction projects. As a former partner of top tier legal and professional services firms, he has advised many clients on the establishment of Dispute Boards and other dispute resolution processes. More recently, Owen has established Infralegal – a specialist independent legal and commercial advisory firm to the infrastructure sector – from where he is able to act as a Dispute Board member.