FIDIC has made clear that it considers the use of a dispute board fundamental to a fair and balanced contract, which is the underlying philosophy of its forms.  Despite this, employers and contractors are often resistant to using dispute boards, and the dispute board provisions are often deleted when using the FIDIC forms.  In this two-part alert, we look at the reasons behind the resistance to dispute boards and what parties to FIDIC contracts might do to make the dispute board provisions work better for both them and their project.

Here we look at the development of the 2017 FIDIC dispute resolution provisions and whether they will address the issues experienced with dispute boards, which we discussed in Part One (available at reedsmith.com) of this alert, as well as considering what parties to FIDIC contracts might do in order to make the dispute board provisions work better for both of them and their project.

Will the FIDIC 2017 provisions help overcome resistance to the use of dispute boards?

A greater emphasis on dispute avoidance

The Red Book 1999 provided that the standing DAB may give advice and opinions “when requested by both the Employer and the Contractor” (sub-clause 20.2). This was an early foreshadowing of the dispute avoidance role later introduced in the Gold Book in 2008, and now a focus of the provisions in the 2017 Suite, marked with a name change from Dispute Adjudication Board (DAB) to Dispute Adjudication/Avoidance Board (DAAB).1 The 2017 Suite provides for a standing dispute board across the forms2 and, if the parties agree, they may request the DAAB to provide (non-binding) assistance and/or to informally discuss and attempt to resolve any disagreement that may have arisen. The DAAB may also invite the parties to request assistance in dispute avoidance, that is, the DAAB is expressly permitted (and perhaps thereby encouraged) to take on a more pro-active role in dispute avoidance.3 The idea is that the DAAB may give an opinion or advice that assists the parties to prevent the matter becoming a dispute.

Changes to address past problems

The 2017 Suite retains the core procedure set out in the 1999 editions, requiring the DAB to issue its decision within 84 days of a dispute being referred, and providing that the decision shall be immediately binding upon the parties who shall promptly give effect to it. However, the new provisions make it clear that:

  1. Payment following a DAAB decision should be made swiftly – immediately after the payer receives an invoice without any requirement for certification or notice.4
  2. The parties are required to act or make payment on the DAAB decision, regardless of whether a Notice of Dissatisfaction (NOD) is issued.  The DAAB decision is binding on both parties and the Employer is responsible for the Engineer’s compliance with the DAAB decision.5
  3. If the unsuccessful party does not comply with the DAAB decision, the failure to comply itself may be referred to arbitration.6
  4. If no DAAB is in place when the dispute arises, the parties do not have to follow the DAAB procedure.7 However, if the dispute reaches arbitration, the arbitral tribunal may take into account any non-cooperation in constituting the DAAB in awarding its costs.8

The new provisions offer comfort to a party that is successful in obtaining a favourable DAAB decision, that it will be able to have the decision summarily enforced by a Tribunal prior to final resolution of the dispute in arbitration, even where a NOD has been issued. This may be enough to encourage parties to try to resolve the dispute informally, perhaps with the DAAB’s assistance. Or, at the DAAB stage, it may encourage the parties to put their best case forward and, if unsuccessful in those proceedings, to comply with the DAAB decision, rather than incur additional costs of arbitration proceedings opposing enforcement. That said, there may still be issues for parties in jurisdictions where the relevant arbitration law in relation to enforcement requires, for example, that any award is a full and/or final award.

FIDIC considers the use of a DAB or DAAB important to the success of a project and, subject to conflicts of law, a fundamental part of any FIDIC contract, as a condition precedent to arbitration (see our recent alert on the recently released FIDIC Golden Principles 2019 at reedsmith.com). But, is simply adopting the DAAB provisions within the 2017 forms enough to guarantee ‘success’?

Making the DA(A)B work for both parties

Whichever FIDIC edition or form is being used, there are further points the parties can consider to ensure that they maximise the intended benefits of using a DAB or DAAB.

A Standing Board with a dispute avoidance role

Where a standing board is not provided for in the form being used, unless the project is small or low value, the parties may consider appointing a standing board. A standing board will have early and regular involvement, perhaps meeting on site shortly after project commencement, followed by monthly to quarterly visits. The presence of a standing board may have a positive impact on the parties’ behaviour and approach. Regular meetings with the board should lead to organic growth in the board’s knowledge of the progress of the project, as well as the personalities involved in it. This will also allow the parties to raise issues and have their say, without the need to refer the issues formally to the board. Potential problems may be diffused before they really begin and before the parties become entrenched in their positions. If the board is providing informal assistance as described in clause 21.3 of the 2017 Suite, both parties should be present at any such discussions, unless the parties agree otherwise. However, further consideration should be given before agreeing to allow individual access to the DAAB. Better delineation of the DAAB role and the parameters within which it may act may be necessary. The benefits of individual access and full disclosure, without prejudice offers and so on, during dispute avoidance need to be weighed up against the potential incompatibility with and risk of challenge should the matter then go on to adjudication.

If a dispute does arise in this scenario, there is no lead-in time for appointment of the board and less ramp up time required for the board to get to grips with the issues at hand. The board should be well aware of the background to the dispute and the context in which it has arisen, and the parties will know this when they argue their case. This may assist the parties to narrow and the Tribunal to identify the issues genuinely in dispute, as well as minimising the additional cost incurred by the standing board in relation to the adjudication process.

Choose and agree the right board members for the project and the parties

The identity of the board is likely to be critical to its success.  Unless the project is small or low value, three heads are usually better than one.9 For a standing board, the parties should seek to agree the DA(A)B members upfront. The parties should look for truly independent members who are knowledgeable in the area and with relevant skills, as well as the ability to commit to the project. Lawyers with detailed knowledge of how the relevant type of contract works (or should work) are good, but it may be equally (or more) important to have members who have relevant practical project experience. A combination of skillsets can work well and this may also help the board to be perceived as user-friendly and approachable. If the parties find it impossible to agree on a list of names for acceptable board members, they may be able to agree on certain criteria (for example, members with a common or civil law background depending on the governing law of the contract, members with particular technical or other expertise or qualifications; or avoiding members who are the same nationality as the parties). In any event, care should be taken with provisions that allow a professional body to make the appointments.  Parties should seek to ensure that the appointing entity or official nominated in the Contract Data is international with a “pool” of independent and experienced members, rather than a body local to the country of the employer or the project, which may not always be able to offer candidates who fulfil the required criteria.

An experienced and confident board may also be likely to take a pro-active and more involved approach.  If the board is able to build rapport and a proper relationship with the parties, as well as becoming immersed in the project, it may be able to seek to assist the parties to identify, discuss, and resolve issues before they become disputes. If disputes proceed, the parties may be much more likely to accept a decision from an independent, respected, and knowledgeable DA(A)B, particularly where that DA(A)B is clearly involved in the project and has a good working relationship with the parties. Even where a party does not agree with the DA(A)B’s decision, it may prefer to negotiate, meaning that arbitration becomes a last resort, to be used only where the unhappy party genuinely feels that an arbitration would produce a different result.

Accept and make provision for the (relatively small) cost of the DA(A)B and the commitment to using it properly

The direct costs of a dispute board generally range between 0.04 – 0.30 percent of the final construction costs.10 Whilst this may seem like a significant amount at the contract outset when there are no disputes on the horizon, the parties will know from experience that disputes are not uncommon. If the parties are committed to avoiding or resolving disputes during the project efficiently and economically (and have the resources to do so), rather than leaving to chance the prospect of potentially lengthy and costly arbitration proceedings, it may be considered a fairly small and sound investment to make.

Further specific amendments to the FIDIC provisions

In all projects the parties should consider whether there are necessary or appropriate amendments that should be made to the FIDIC provisions as a result of the particular parties, project or jurisdiction. For example, where compliance with DA(A)B decisions is likely to be an issue, particularly where the relevant jurisdiction may make enforcement of binding but not final DA(A)B decisions uncertain, consider adding provisions which seek to ensure compliance with DA(A)B decisions to avoid the need for recourse to arbitration, which is unlikely to assist. This might be by including provisions which allow the parties to “skip” or “leapfrog over” the DA(A)B step after an instance of non-compliance and go straight to negotiations and arbitration or by allowing termination of the contract, where a party fails to comply with the DA(A)B decision.

It is also possible to seek to amend the provisions to make compliance with a DA(A)B decision a condition precedent to issuing a valid NOD, with the effect that, if a party does not comply with a DA(A)B decision, any NOD issued will be invalid and the DA(A)B decision will become final and binding. This may perhaps avoid difficulties with summary enforcement in arbitration proceedings. Such a provision is likely, however, to face resistance, particularly given concerns as to whether it will be possible for a decision to be complied with prior to expiration of the 28 day period for issuing a NOD. Where the Employer is concerned that it may not be able to later recover payments made following DA(A)B decisions, consider whether there is any way of addressing this risk within the contractual provisions, perhaps through payment into an escrow account in the event of an Employer’s NOD.

Conclusion

Dispute boards exist as a result of the parties’ agreement. The parties need to be willing to resolve their disputes through their agreed dispute board process; and to have confidence in that process. Whilst this willingness and confidence may not always be there at the outset, if the FIDIC 2017 provisions are used and the factors set out above taken into account, the process should be a credible one. With a commitment to proper use of the provisions, the project culture and the parties’ mind sets and behaviour may begin to change to a focus on avoiding disputes and resolving issues before they really arise.  Practice makes perfect. Over the lifetime of a project, the number of issues which become full disputes going to the DA(A)B (and which then go on to time-consuming and costly arbitration) ought to diminish. If the procedure can continue to gain the confidence of parties around the world, even the most reluctant jurisdictions may be persuaded to try it.

However, where a party is resistant to the use of a DA(A)B, or to changes to the DA(A)B provisions which may make the DA(A)B provisions work fairly (for both parties), the other party must carefully consider whether there is any genuine benefit to proceeding with a DA(A)B. In any event, both parties should ensure that they know, invest in and understand the dispute resolution process to which they have committed and that they are prepared for the risks and disputes which may eventuate, and which may not be resolved prior to arbitration.