Many parties to major construction and engineering contracts look for a means of obtaining interim binding decisions on disputes, so that work can progress pending final resolution by arbitration or litigation. In large and complex international construction projects it is becoming increasingly common to achieve this by establishing a dispute board, comprising of a panel of impartial and qualified decision makers, ready to determine disputes as and when they arise.
In this newsletter we explain what dispute boards are, how they operate, and the possible advantages and disadvantages of using them.
Common features of dispute boards
Typically the dispute board will be established at the outset of the project and will comprise of three or five board members with expertise in different areas relevant to the project. The board members are selected by both the contractor and the employer, who share the costs equally.
The dispute board will be kept informed of construction progress and developments on a regular basis. Its members will commonly make periodic visits to site (typically every 3 months). During those site visits, if agreed by the parties, the board can informally assist the parties in resolving disagreements before they escalate into disputes. Where disputes do arise, the dispute board will review the relevant documentation, hear oral submissions if necessary, and make a determination within a relatively short period of time.
Recommendations, Decisions and the notice of dissatisfaction
Depending on the choice of rules adopted by the parties, the dispute board will have the jurisdiction to make either non-binding 'Recommendations' or interim binding 'Decisions'.
A Recommendation will not be binding at the time that it is issued; however it will become binding after a fixed period if neither party has issued a notice recording its dissatisfaction with it.
A Decision will be binding on the parties as soon as it is issued and the parties will be contractually bound to comply with it. Even if a party issues a notice recording its dissatisfaction with the Decision, it must still comply with it until the matter is referred to arbitration or litigation.
If a party is dissatisfied with the dispute board’s determination (whether a Decision or Recommendation), it can object to it by serving a notice of dissatisfaction on the other party. This notice is a pre-condition to arbitration or litigation. The notice sets out why the party is dissatisfied with the determination and should be served within the prescribed time period, or else the right to challenge the determination at a later time may be lost.
The FIDIC standard forms provide for disputes to be referred to a Dispute Adjudication Board as the first stage in the dispute resolution procedure under the contract. The Dispute Adjudication Board issues interim binding Decisions, that will become final and binding after 28 days if no notice of dissatisfaction is issued.
The ICC has published its own set of Dispute Board Rules which offer a choice of three different kinds of dispute boards: Dispute Review Boards which issue Recommendations; Dispute Adjudication Boards which issue interim binding Decisions; and Combined Dispute Boards that will normally issue Recommendations, but can issue Decisions if requested by the parties. Notices of dissatisfaction must be given within 30 days of the determination.
The parties can select dispute board members with the technical skills and experience appropriate for the project in question. As the dispute board is appointed and paid by both parties, it brings an element of objectivity and neutrality to the project.
It is a consensual process, so the parties are usually more willing to cooperate to resolve disputes at an early stage. If a party is unhappy with the board's determination, it can preserve its right to refer the dispute to arbitration or litigation by serving a notice of dissatisfaction. In the meantime, the parties can remain focused on the project.
The confidential and less formal procedure may itself preserve good site relationships.
If the dispute board is appointed at the outset of the project, and is updated by regular reports and site visits, it will have direct knowledge of the issues as they arise and will be able step in at any time to make a determination as required. It may also be able to avoid a pattern of unmeritorious disputes by making an early determination on an issue that may recur throughout the course of the project.
Some see dispute boards as an unnecessary additional expense. Dispute board members are usually paid a monthly retainer as well as a daily fee for time spent visiting site and determining disputes. This may amount to a relatively high project cost that the parties may feel is wasted if disputes are eventually referred to arbitration or litigation. This cost could be reduced if the dispute board is only formed when a disputes arises, however the advantage of having a board both immediately available and with prior knowledge of the project will then be lost.
Dispute board decisions cannot be enforced in the same way as arbitration awards or court judgments. If a party does not comply with the decision then the only remedy is an action for breach of contract (through local courts or arbitration), which may be costly and time consuming to pursue.
Further, although the board's determination may be persuasive (for example the ICC Dispute Board Rules provide that determinations are admissible in later proceedings) they will not be binding precedents for similar issues that are later referred to arbitration or litigation.
If used and operated properly, there are many advantages to be gained by using dispute boards as the first stage of dispute resolution on international construction and engineering projects. However, it would be unrealistic to expect the dispute board to be able to bring all disputes to a conclusion. Where the financial implications are substantial, contracting parties will want to preserve their rights to refer disputes for final determination by arbitration or litigation.