Chern on Dispute Boards

Practice and Procedure

Cyril Chern

• Publisher: Informa Law from Routledge
• Year: 2019
• ISBN:
  9780429662881
• Edition: 4
• Topic: Law
• Subtopic: Construction Law
• Index: Law

Chern on Dispute Boards examines the law of dispute boards and their development internationally, while also covering procedural topics that are of particular concern to those utilising dispute boards. It deals with advanced practitioner issues in the emerging law of dispute boards on an international scale, laying out their methods and methodology not only under the common law, but also under other legal systems such as Civil law and Shari'ah law. Excelling in describing the "how and why", this book also gives samples and/or forms of actual working dispute boards that any practitioner could use and adapt to their own needs.

This updated fourth edition explains the various international formats and types of dispute boards in use today and brings readers up-to-date on the ever-evolving law within the field. The text guides the reader through the complexities of actual commercial and construction disputes and their successful resolution and also presents a way forward for the dispute board members themselves to administer actual dispute boards all over the world.

This book is essential reading for construction lawyers, engineers and dispute board stakeholders worldwide.

Chapter One

The dispute board concept and philosophy

Disputes and litigation cost both time and money. In construction projects and any long-term continuing activity, the amount of time lost and money spent in resolving such disputes can take years and costs become extreme. The idea of a project specific dispute and/or claim resolution procedure which would be on-going and stay as part of the activity from start to end gave birth to the concept of dispute boards. Here trained and knowledgeable dispute resolvers are chosen at the start of a project and stay on until the end resolving any and all disputes that may arise—they know the parties, the project and the difficulties and can act quickly and economically to prevent the loss of time and money in the resolution of any problem that may arise. Due to this dispute boards continue to grow in use worldwide with the leading reason being their ease of use, financial economy and positive and fast results. The concept of a dispute board and its benefits can be best shown by the following dispute situation and the various methods of its resolution:

During the construction of a bridge over a large river in a developing part of the country a dispute breaks out over an unforeseen ground condition which is causing delay to the project. The contractor claims that the situation was not foreseeable and as a result it has incurred an additional £500,000 and it has lost 75 days in time. It wants to be compensated and wants an extension of time to its contract for completion. The employer denies all of this and claims that the ground conditions were well known to the contractor and that it failed to review the site conditions properly before commencing work and never notified the employer, as was its responsibility, within 28 days of starting under the terms of their contract.

Before the advent of dispute boards the parties had three basic choices: mediation, arbitration, or litigation (with litigation being the most prevalent in the courts of the developing nations). The results of the three would be as follows:

Mediation

The contractor requested that the employer agree a mediator but since the best-case scenario for the employer would be to pay money and give additional time it refused to go to mediation and threatened the contractor with a claim for breach of contract and its termination if the contractor did not proceed and complete the project on time and on budget. Thus, there was no beneficial result for the contractor on its claim or any resolution of the underlying dispute.

Arbitration

The contractor next informed the employer that it demanded arbitration of the dispute. If the contract had an arbitration provision then the contractor could pursue that course of action but if it did not the employer again had no reason to go to arbitration as it had a 100 per cent chance of not paying any money nor give any more time if it did nothing, so it just gave the contractor the same response as it did to the request for mediation. If the contract had an arbitration clause that was not specific it would have ended up in arbitration in the country where the project was located and that may or may not have a viable arbitration establishment. Even assuming that the contract provided for arbitration before the International Court of Arbitration of the International Chamber of Commerce (ICC) in Paris, as the appointing body the cost for that arbitration with three arbitrators would be approximately US$110,101¹ and then added to this would be the cost of counsel for both the contractor and the employer, which would conservatively be an additional $100,000 each, and the time to arbitration of about two to three years while the project is stalled does not yield a very pretty picture.

1Based upon the ICC Arbitration Cost calculator—£500,000 at the current exchange rate equals approx. $655,000, equalling a total fee of US$124,130—see https://iccwbo.org/dispute-resolution-services/arbitration/costs-and-payments/cost-calculator/.

Litigation

The worst option remaining would be litigation by the contractor in the developing country under its legal system, where the contractor was not local and the court system is clogged, resulting in an approximate eight- to ten-year delay till some sort of resolution, plus the costs involved—a highly unpleasant experience and again the project is stalled until litigation is completed, which does neither the employer and/or the contractor any good.

Before dispute boards (DBs) these were basically the only ways in which disputes could get resolved and usually the project was stalled or stopped, the contractor would not get paid but would have to spend a lot of money seeking recovery, the employer would have a half-finished project and neither side would win. To best understand how dispute boards are a better solution, compare the result of that scenario in a DB setting.

Dispute board

Here the parties had a dispute board written into their contract and it was operational from the start of the project. By the time that this dispute arose, the DB had visited the site on several occasions, had seen the soil conditions, knew the parties, and had discussed the situation all along the way till the claim was made for the additional money and the extension of time. Here too the DB was a dispute adjudication board (DAB), which had the right to give binding decisions on any claims/disputes that came before it. This dispute arose and was given to the sole DAB by the contractor. Under the terms of the DAB agreement the DAB had to investigate the dispute and the claim and give its decision within 84 days. The DAB was on a daily rate basis of £3,000 per day and was composed of one sole DAB member. It investigated the claim, it already had knowledge of the underlying situation and it gave its decision on Day 75 (nine days before the deadline) awarding the contractor £424,000 and an additional 35 days, which is all the DAB felt was warranted. This particular DAB clause provided that the decision was final and binding and that was it. The parties continued with construction during the investigation by the DAB, no stoppage occurred, and the contractor was paid accordingly at the next payment interval and the contract was extended by the 35 days. The parties continued on and the cost to the project of the DAB for the claim amounted to five days of investigation and two days of writing the decision for a total of seven days, at a cost to the project (the parties split the cost of the DAB) of £21,000. Because no lawyers were involved in any hearings the costs were kept to a minimum. Compare this result to that of the other traditional methods and its speed and economy help explain why the use of dispute boards is increasing on a daily basis worldwide.

This increase is also because statistically the construction industries have a high rate of disputes and delay, and until recently these have not been easily resolved without recourse to lengthy arbitrations or, worse yet, to the courts.

In 1986, Lord Donaldson, one of England’s great judges, put it best when he said:

It may be that as a judge I have a distorted view of some aspects of life, but I cannot imagine a civil engineering contract, particularly one of any size, which does not give rise to some disputes. This is not to the discredit of either party to the contract. It is simply the nature of the beast. What is to their discredit is that they fail to resolve those disputes as quickly, economically and sensibly as possible.

The ‘nature of the beast’ is changing, however, thanks in great measure to the use of dispute boards. As an example, some early dispute boards, such as the Ertan Hydroelectric Dam in China, valued at US$2 billion,² had 40 disputes referred to its dispute review board (DRB) for decision and no decision of this dispute board went on to arbitration or litigation of any kind. 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, at which time the decision of the dispute review board was upheld; and the Katse Dam in South Africa, valued at US$2.5 billion, had 12 disputes referred to its dispute board and of these only one went on to arbitration, where, again, the decision of the dispute review board was upheld. In each instance, the dispute board did resolve those disputes as quickly, economically and sensibly as possible.

2Note that, worldwide, dispute board valuations are generally computed in US dollars.

Dispute boards work and sometimes their mere presence and the ability of the dispute board members to give informal opinions before any dispute even arises can be of immense assistance. A good example of this in the United Kingdom is the Docklands Light Railway, valued at US$500 million, where no disputes ever fully arose or were submitted to the dispute board; or the Saltend Private Gas Turbine Power Plant in the north of England, valued at US$200 million, where both the number of disputes referred to the dispute board and the number that went to arbitration were zero. Needless to say, such statistics were unheard of in the construction industry before dispute boards.

What is a dispute board?

Of the various methods of dispute resolution, the most familiar are either arbitration or litigation, i.e. a court trial. In both you have a ‘judge’, be it an actual judge or an arbitrator chosen by the parties, and in each the ‘judge’ is presented with evidence of an event or set of events that have happened in the past which have caused a dispute and which now the parties hope to resolve. A similar method is adjudication, where the title ‘judge’ is substituted with the title ‘adjudicator’. Here the adjudicator again reviews events from the past to come to a decision in the same way that a ‘judge’ or arbitrator does, but usually on a shorter time schedule. Following along this line we come to dispute boards. A dispute board is different in a number of ways. For starters it is specific to the ‘job site’, and as a dispute adjudication process it typically comprises three independent and impartial persons (adjudicators) selected by the contracting parties. The significant difference between dispute boards and most other alternative dispute resolution techniques (and possibly the reason why dispute boards have had such success in recent years) is that the dispute board is appointed at the commencement of a project before any disputes arise and before any events have occurred which would lead to any dispute, and by undertaking regular visits to the site it is actively involved throughout the project (and possibly any agreed period thereafter).

A dispute board becomes a part of the project administration and thereby can influence, during the contract period, the performance of the contracting parties. In contrast to other methods of dispute resolution in the construction industry a dispute board acts in ‘real-time’ as compared to dealing with events now which occurred in the far distant past such as in court proceedings and arbitrations. The idea behind a standing dispute board is that it may be called upon early in the evolution of any dispute, which cannot be resolved by the parties, and asked to give decisions or recommendations on how the matters in issue should be resolved. It is usual (but not compulsory) that an opportunity remains for the matter to be referred to arbitration or to the courts if the dispute board’s decision does not find acceptance by the parties. Thus, a dispute board may be likened to the UK’s adjudication process, either under statutory-compliant contracts or under the regime established by statute itself.³ What a dispute board does that UK statutory adjudication does not do is to provide a regular and continuing forum for discussion of difficult or contentious matters, to identify ways forward by acting in an informal capacity and to create valuable opportunities for the parties to avoid disputes by keeping proactive communication alive. Another aspect, which is less often discussed, is that by establishing a dispute board from the inception of the project, the dispute board members become part of the project team and are thought of in a different fashion, and because of their ‘hands-on’ approach, they can be trusted to be fair and impartial, and their advice is respected and taken more readily than would be the case with a third party or stranger to the project, e.g. a judge or arbitrator. It is this two-way communication between the dispute board and the parties that keeps the dispute board conversant with what is happening on a project, and which many times can help prevent a minor issue from turning into a major dispute with the attendant animosity that is created in such situations.

3Housing Grants, Construction and Regeneration Act 1996.

The term ‘dispute board’ is a generic term that includes (a) the dispute review board, which is a device that originated in the USA (and continues to be used most often there) and which provides non-binding recommendations; (b) the dispute adjudication board, which emerged from the earlier US model, and which provides a decision that has interim-binding force and which is used most everywhere else in the world except the USA; and (c) the combined dispute board (CDB), which is a hybrid of dispute review boards and dispute adjudication boards and was created by the ICC in 2004. Various other terms have been used, such as dispute settlement panel, dispute mediation board, dispute avoidance panel, dispute resolution board and dispute conciliation panel. Fundamentally these different varieties of dispute review devices are the same, each providing early adjudication based on the contractual bargain between the parties.

A dispute board is a creature of contract; the parties establish and empower a dispute board with certain jurisdiction and to investigate in an inquisitorial fashion the basis for the dispute/claim involved and to hear and either advise on the resolution of disputes or to make decisions on the disputes presented—hence the difference between a dispute review board and a dispute adjudication board. Within the UK it is entirely possible for the contracting parties to establish a dispute adjudication board to adjudicate construction contract disputes within the statutory requirement for adjudication.⁴ As yet, there are no statutory requirements for dispute review boards to be established to adjudicate disputes under construction contracts.

4See the Institution of Civil Engineers (ICE) Dispute Board Procedure published in 2004.

While the origins of dispute boards are found in the construction industry, their ambit is far wider than construction and dispute boards are now found in the financial services industry, the maritime industry, long-term concession projects and operational and maintenance contracts. The scope for dispute boards is substantial. The emergence of the ICC as an active supporter of dispute boards,⁵ as well as the Dispute Board Federation (DBF) and the Dispute Resolution Board Foundation (DRBF), makes it highly probable that dispute boards will be established in a range of industries that, until now, have not used adjudication to any great extent.

5The ICC Dispute Board Procedure launched in the UK on 13 October 2004.

Dispute boards philosophy

Avoidance of disputes has been, since the inception of dispute boards, the main ambition. By acting immediately and in locum during the progression of a project, the members of the dispute board who are in effect adjudicators are able not only to early-on identify pitfalls and haza...