Lindy Patterson QC and Nicholas Higgs, 39 Essex Chambers
This is an extract from the third edition of GAR’s The Guide to Construction Arbitration. The whole publication is available here.
Concept and purpose of dispute boards
Dispute boards are a regular feature of international construction and infrastructure contracts. They are one of the alternative dispute resolution options within such contracts and are intended to provide contemporaneous determinations, or recommendations, in disputes. Such decisions are binding unless or until revised by the ultimate dispute resolution forum, namely, arbitration or litigation. The theory is that parties ‘comply now, argue later’, so allowing the contract to proceed without undue interruption while preserving parties’ right to seek an ultimate determination of the dispute through the usual channels of court or arbitration.
As the aim of this process is to avoid, if possible, the time and expense of arbitration, most contracts with dispute board provisions require a board decision or recommendation as a necessary precondition to arbitration.
Many of these boards also have a dispute avoidance role, as explained further below.
History of dispute boards
Modern dispute boards were first developed in the United States in the 1970s as a replacement for engineer’s adjudication. An independent dispute board was seen by contractors as preferable to the engineer, who is invariably appointed and remunerated by the employer, being the penultimate arbiter of disputes prior to arbitration and litigation. The success of dispute boards on major infrastructure projects such as the Eisenhower Tunnel Contract in Colorado in the 1970s and on the World Bank-funded El Cajon Dam in Honduras in the 1980s encouraged both the World Bank and FIDIC to introduce them as the first stage of dispute resolution in their contract documents in the 1990s. Notable early examples of their use included the Channel Tunnel project, Hong Kong International Airport and the Ertan Hydroelectric Power project in Sichuan, China.
The 1999 editions of the FIDIC conditions of contract for Construction (the Red Book); Plant & Design and Build (the Yellow Book) and EPC /Turnkey (the Silver Book) all provide for dispute boards in one form or another.
The 2017 editions of the FIDIC ‘rainbow suite’ maintain and expand the dispute board provisions, as explained further below. The New Engineering Contract Fourth Edition (NEC4) provides for dispute boards that issue recommendations.
The dispute board within the contract
The dispute board is a creature of contract. Accordingly, the dispute board only has those powers that are expressly given to it by agreement. There is no place for implied powers. The process is not underpinned by legislation or conventions, unlike arbitration or statutory adjudication. The contractual provisions will be contained within the dispute resolution section of the underlying contract. It will state how and when the dispute board is to be formed. It may also provide that the board’s powers are contained within either separate dispute board rules or the template agreement that each member must sign with the parties. This is the dispute board member’s agreement, which each dispute board member enters into with both parties to the contract. Certain institutions have templates or styles for each of these three contractual sources, namely, the dispute board contract clause; the dispute board rules and the dispute board member’s agreement.
Different forms of dispute board
The standing board
Many contracts provide that the board is to be appointed at the beginning of the contract – for example, within a prescribed time from contract signature or contract commencement – and that it is to operate throughout the lifetime of the contract. Such boards are described as ‘standing’ boards. A standing board will receive regular progress updates and visit the site at intervals to be agreed with the parties. The powers of a standing board often include a dispute avoidance role, as well as adjudicating disputes.
The ad hoc board
The ad hoc board is where the board is appointed upon a dispute arising. The sole role of such a board is to deal with that dispute or disputes referred to it. The appointment of the board will expire on the board giving its decision unless the parties agree otherwise. The ad hoc board is often perceived to be cheaper.
The different types of dispute board
There are several different types of dispute board and accompanying acronyms.
If the board is to adjudicate disputes by issuing decisions, it is a dispute adjudication board (DAB). The DAB will issue a decision that will be binding unless or until it is overturned by the ultimate dispute resolution forum, usually arbitration. The FIDIC 1999 standard forms provide for a DAB.
If the board is to issue recommendations, it is described as a dispute review board (DRB). The acronym DRB is also used as the umbrella term for dispute boards.
There is also a hybrid known as the ‘combined dispute board’, which can issue both recommendations and decisions.
The ICC Rules provide options for all three types.
Constituting the dispute board
The dispute board clause will provide, if dispute board members are not already named in the contract, in the case of a three person board, that each contracting party nominates one individual, and when those two individuals are agreed they shall appoint a chairperson. The party nominees will often be engineers or other construction professionals experienced in construction projects. The chair will often be a lawyer. Parties require to agree one another’s nominees and the chair. In the case of a one-person board, both parties must agree the identity of that individual.
The dispute board clause will usually name a default appointing body for either the chair or all three board members, where one party refuses to appoint or agree the board or the board appointment process has broken down.
The dispute board is constituted by each board member entering into a member’s agreement with the contracting parties. This will refer to the underlying contract provisions and identify by reference or set out the rules under which the board is to operate.
The member’s agreement will also set out the member’s remuneration, usually a daily fee for time spent. With standing boards there may be provision for a monthly retainer to secure the board’s commitment and availability.
Most contracts require an advance on payment of members’ fees and/or expenses before they embark on site visits or determine disputes.
Impartiality and independence of dispute board members and natural justice
The concept of natural justice is important in the dispute board process, as a breach of natural justice may result in any decision being unenforceable.
The dispute board clause or the member’s agreement or the rules will provide that a board member should be impartial and independent of the parties.
It is advisable, even where the rules or member’s agreement do not expressly provide for this, that a member or prospective member apply the same rules of disclosure regarding any possible conflicts of interest as it would when acting as an arbitrator.
As far as procedural fairness is concerned, for example, affording each party a reasonable opportunity to present its case, this must be looked at in the context of the procedure as a whole. Although not as fast-track as domestic adjudication, a board may be limited in the time that it has for its decision, and in the volume of evidence it can consider. Parties often agree to extended periods for the decision where the nature of the dispute or the location of the project require this.
The decision of a board that has previously played a role in dispute avoidance could in certain jurisdictions be subject to challenge on natural justice grounds. As a result, boards are generally extremely careful as to how this dispute avoidance role is exercised.,
Since September 2018, a challenge made against a dispute board member for alleged lack of independence or impartiality ‘or otherwise’ under the FIDIC 2017 Contracts shall be determined by the ICC.
Who pays for the dispute board?
The contract, the member’s agreement or the rules will determine parties’ liability for the dispute board members’ fees and expenses. The default is that each party is liable for one half. Many contracts provide that the contractor pay the fees in full and then include one half in its applications for payment.
One of the complaints of employers regarding inclusion of dispute boards in their contracts on the insistence of external funders is that this funding often does not include its share of the cost of a board. However, one funder states in its standard bidding documents that the cost of a DAB is an eligible cost for inclusion in a loan application and it is understood that other multilateral development banks may well follow.
In practice, where one party is reluctant to be involved in the dispute board process, the other may pay the board’s fees in their entirety so that the board can operate, and then that party recovers one half from the other.
Practice and procedures of the dispute board
Where it is a standing board, there will be provision for the board:
- to identify what information it should or wishes to receive to keep it up to date with the operation of the contract; and
- to establish the frequency of site visits.
This will normally be agreed and minuted at the first meeting between the board and the parties. There may be a stipulated minimum frequency of site visits. This may be adjusted depending upon the stage the works have reached. Should disputes arise, hearings on these disputes will usually be dealt with as part of a site visit. Such visits, as well as viewing the works themselves, will involve an update on progress and any issues arising.
Where such visits or meetings identify issues between the parties, the rules may provide that the board can give informal advice or assistance. The aim in those situations is for a matter to be resolved before it becomes a full-blown dispute. The contract or rules may provide that this can only be given if both parties agree.
Sometimes the mere act of bringing together the parties for a regular visit of the dispute board can assist in avoiding disputes.
The rules contain details of the procedure, including how to refer a dispute, the time scale for the defence or response and the need for and nature of any hearing. A normal contractual timescale for determining a referred dispute is around three months. One or both parties may require a hearing.
The dispute board will issue its decision or recommendation and will normally be required to provide reasons. The rules will provide for a majority decision.
Binding nature of a dispute board decision
A typical dispute board clause will provide that parties shall comply with a dispute board decision.
It will also normally provide a period within which a party that is dissatisfied with the decision issues a notice of dissatisfaction. In the event that such notice is not issued within the specified time, the clause will provide that the decision is final and binding.
Where a notice of dissatisfaction is issued in accordance with the contract or rules, then the next stage is for the dispute to go to arbitration for final determination.
Where a dispute board decision is a condition precedent to arbitration
Most contracts that incorporate dispute boards provide that a dispute requires first to be referred to a dispute board before it proceeds to arbitration. Issues can arise where one party obstructs or delays the process for obtaining such a decision or goes straight to arbitration. In such circumstances, an arbitration tribunal or court may be called upon to determine whether it can deal with the dispute without a dispute board decision. The question is whether this is an issue of jurisdiction or admissibility. This depends upon the approach taken by the arbitral tribunal. If treated as an issue of jurisdiction, the tribunal should dismiss the case. If treated as an issue of admissibility (i.e., procedural), the tribunal may suspend arbitration proceedings until the dispute board has been constituted if not in place and/or until it has issued a decision or recommendation on the dispute.
When judicial support has been sought, the approach of the courts in some jurisdictions has been to prevent a party from benefiting from its own delay or failure to engage in the contractual dispute mechanisms. Thus, the English courts refused to allow a party to avoid following the dispute board provisions in the contract and proceed straight to litigation. The litigation was stayed pending a dispute board decision. By contrast, in a case where a party deliberately delayed the appointment of a board and then challenged the jurisdiction of an arbitral tribunal, the Swiss federal court upheld the arbitral tribunal’s jurisdiction.
Enforcement of a dispute board decision
As a creature of contract, enforcing a dispute board decision without any underpinning of legislative support means that it cannot be enforced in the same way as, for example, an arbitration award. A party must go to the court or to arbitration.
What is being enforced is, in effect, a contractual agreement. The ordinary recourse for failing to abide by the dispute board’s decision would be an action for breach of contract against the defaulting party. The failure of a party to comply with a dispute board decision is, therefore, a dispute under the underlying contract that requires to be referred to arbitration and an arbitral award sought. That assumes that the issue of non-compliance does not itself need to be referred first for another dispute board decision as a pre-requisite to arbitration.
At enforcement stage, the question is whether an arbitral tribunal or court will review the merits of the dispute board decision or enforce it on its terms, either in a final award or as an interim measure. A number of courts and arbitral tribunals have dealt with these issues.
Enforcement is made more difficult when the decision that it is sought to enforce is challenged and therefore is potentially only temporarily binding. This is especially the case in jurisdictions that are unused to processes that produce similar-type decisions that are only temporarily binding. Lack of specificity in the 1999 FIDIC editions as to a remedy for non-compliance with a temporarily binding decision contributed to the difficulties of enforcement. FIDIC initially issued a memorandum to clarify that the failure itself could be directly referred to arbitration, with revised drafting in the 2017 editions.
The well-known example in Singapore is the Persero case,which concerned a DAB decision for the payment of S$17 million arising out of a gas pipeline project in Indonesia. Initially, the Singapore Court of Appeal set aside an arbitral award that solely considered the failure to pay under the DAB decision and required payment of the amount determined by the DAB. This court decision was the subject of much criticism by commentators. The contractor launched a second arbitration, this time on the substantive merits of the dispute, and asked the tribunal to issue an interim award requiring payment of the S$17 million. The employer’s challenge to this award was unsuccessful, with the Court of Appeal stating that there was a ‘distinct contractual obligation on a paying party to comply promptly with a DAB decision.’
The issue of enforceability continues to be a major issue in certain jurisdictions, in particular where contracts with government bodies are categorised as administrative or public procurement contracts.
Referral to arbitration
The dispute resolution clause will typically provide that the arbitral tribunal looks at the dispute anew, regardless of the existence of a dispute board decision. The clause will be silent as to the weight, if any, that should be given to a decision, although the dispute board decision will likely be produced.
Dispute boards under FIDIC contracts
All FIDIC forms of contract contain provisions for dispute boards. As a result, much of the case law and guidance on dispute boards concerns the interpretation and application of the FIDIC dispute board provisions.
The FIDIC 2017 ‘rainbow suite’ editions all provide for standing boards. Such boards can provide informal assistance, as they could under the First Edition Red Book, but only if both parties agree. To emphasise the avoidance element, the boards have been renamed ‘dispute avoidance and adjudication boards’ (DAABs).
The dispute provisions are to be found in: (1) Clause 21 of the General Conditions; (2) the General Conditions of the DAAB Agreement incorporating the DAAB Procedural Rules; and (3) the DAA Agreement (the member’s agreement) – with (2) and (3) annexed to the General Conditions.
Particular features of dispute boards under FIDIC Contracts include the following.
Constituting the DAAB
A referral of a dispute to a DAAB is a prerequisite to arbitration or litigation. There is a stated exception to this where ‘there is no DAAB in place or no DAAB being constituted, whether by reason of the expiry of the DAAB’s appointment or otherwise.’ Although not express, this has been interpreted in the English courts as only offering a direct route to arbitration where the mechanism has failed, not simply because one party chooses not to use the procedure.
Parties have the option of a sole member or a three-person board, with the latter being the default position. The contract data allows parties to stipulate at tender stage the name of their proposed nominees to avoid the delay that often ensues when parties try to agree nominees later.
Clause 21 provides for the named body within the contract to appoint where parties cannot agree the dispute board members or delay in doing so. In those circumstances, this clause states that parties acknowledge they are deemed to have signed and are bound by the member’s agreement. This provides a route for the constitution of the board when one party refuses to participate in, or delays, their appointment.
Issuing a DAAB decision
The board has 84 days within which to issue a decision or recommendation on a dispute as so defined, or longer as agreed with the parties. A claim does not become a dispute, and therefore capable of referral to the board, until it has been made to the other party or the employer’s representative as appropriate and that party has rejected it or delayed in dealing with it.
As most countries do not have legislation that recognises the dispute board process, one must assume referral of a dispute to a dispute board will not interrupt the limitation period of a claim. The FIDIC 2017 Edition seeks to deal with this in Sub-Clause 21.4.1, where it provides that the reference of a dispute to a DAAB shall ‘unless prohibited by law be deemed to interrupt the running of any applicable statute of limitation or prescription period’. Given the consequences if this is unenforceable under the governing law of the contract, it may be inadvisable to rely on such a provision.
Parties can jointly request in writing that the board give assistance or informally discuss and attempt to resolve any issue or disagreement that may have arisen between them (informal assistance). Unless the parties agree otherwise, they must both be present at any discussions and are not bound by any advice that the DAAB may give. Similarly, the DAAB is not bound by any views expressed in this informal stage when making any future determination of a dispute.
In order to be valid, a board decision must be given in writing to both parties, must be reasoned and must state it is given under the particular FIDIC Sub-Clause (Sub-Clause 21.4).
Enforcing a DAAB decision
The decision is stated to be binding on both parties, and parties shall prompt comply with it whether or not the dissatisfied party has given a notice of dissatisfaction.
Sub-Clause 21.4 provides that a notice of dissatisfaction must be given within the period stated in the contract or, if no period is given, within 28 days after receiving the decision. Otherwise the board’s decision becomes final and binding on both parties. Following issue of a notice of dissatisfaction there is a period of amicable settlement (the default is 21 days) before arbitration can be commenced.
The Sub-Clause provides that a party may refer the non-compliance with a DAB decision directly to arbitration without following the dispute escalation provisions. This resolves the question as to whether a party must obtain a further DAB decision or undertake amicable settlement discussions before enforcing a decision. It gives the arbitral tribunal express power to order that the decision is enforced and provides that this can be done by interim or provisional measures or an award.
Concerns about enforceability of a decision that is binding but not final are addressed by expressly providing that such an interim or provisional measure or award is subject to an express term that the rights of parties as to the merits of the award are reserved until finally resolved by an arbitral award.
The dispute board decision and arbitration
When a dispute that has been the subject of a DAAB decision is referred to arbitration, the arbitrator has full power to ‘open up, review, revise any _… decision of the DAAB (other than a final and binding decision)’. It is, however, the Dispute that is referred to arbitration, not the decision of the DAAB. Neither party is limited to the arguments it puts before the arbitrator, to those it advanced before the DAAB or to its grounds for dissatisfaction as contained in the notice of dissatisfaction.
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