Part 1 – An overview
In this continuing series about different forms of dispute resolution commonly found in International construction contracts, this article in Part 1 seeks to give a general overview about the nature of Dispute Review Boards. In Part 2, we will examine the use and success of Dispute Review Boards in construction projects in China.
Now, more than ever, the global construction industry is under enormous financial pressure. A lack of adequate cash flow towards the contractor and professional team is a major reason that construction projects fail in tough economic times. As a result of this initial cash flow problem, there is even harder cash flow for the sub-contractors and specialist sub-contractors further down the supply chain and their ongoing projects grind to a halt.
Despite the tough time undergone by global construction industry, there will still be much activity in the Chinese domestic market in the near future. In total, spending in the Chinese construction industry will grow 9.7% annually until 2010, with non-residential buildings and infrastructure remaining the most significant sectors.
Furthermore, Chinese construction companies sphere of influence on the international construction stage continues to grow. Increasingly these companies will become exposed to the growing risks of contractual disputes in international construction projects where the need for flexible, less adversarial dispute resolution procedures, other than court proceeding and arbitration, to facilitate smooth project flow is becoming ever more prevalent.
How does DRB operate
Dispute Review Boards (also known as Dispute Resolution Boards and Dispute Adjudication Boards) are essentially an adjudication panel, which gives recommendations on how disputes which arise in the course of a project (typically a construction project) should be resolved. Originating in the United States in major civil construction projects, the Dispute Review Board ("DRB") has now been recognised internationally in the field of plant construction. DRBs can work for long-term contracts and also medium or even small size projects. They can be used for small projects that are under US$10 million in costs. The main characteristics are as follows: -
- The board is usually appointed at the outset of the project and stays in close touch with it, adjudicating disputes as and when they arise. Although the DRB process is dictated by the provisions of the construction contract, it is generally an express requirement that the DRB visit the site at regular intervals, particularly:
"…at times of critical construction events."
- The board usually consists of a panel of 3 technical experts, 1 nominated by each party and the chairman nominated by the other 2 panellists. The chairman however will only be eligible to serve if acceptable to the parties. For the Board to function properly, panellists nominated must have from the parties’ confidence in their expertise, integrity and neutrality.
- Generally, the non-binding recommendations of the panel will have a temporary binding effect until a certain time passes (normally completion of the contract), when the parties may seek a legal or arbitral award. In consequence, one of the additional benefits of using the DRB is that of deterrence, in that often, faced with the prospect of a panel's interim binding decision, the parties may be spurred on to reach a resolution of a dispute themselves, without the need for subsequent expensive Court or arbitration proceedings which might otherwise follow.
- The cost of the DRB is usually equally shared by the owner and contractor.
- The procedure for the DRB is obviously dictated by the provisions of the contract. Different procedures are adopted in many of the standard form contracts. By way of example, DRBs are incorporated in the bidding documents used by the World Bank for use in major infrastructure projects over a certain financial threshold. They also form an integral part of the dispute resolution procedure in several of the FIDIC conditions of contract – commonly used in the construction industry - for example the Orange Book (Conditions of Contract for Design, Build and Turnkey) and the recent 2008 Gold Book (Conditions of Contract for Design, Build and Operate Projects). The procedure under both the World Bank standard bidding conditions and the FIDIC contracts is that if the parties to a dispute do not object to a recommendation or decision, it becomes binding. If they are not satisfied, they can proceed to arbitration, litigation or another form of dispute settlement.
Different forms of DRB
The DRB is an inherently flexible system and can be adapted according to the particular requirements of the parties’ general willingness, and approach towards and reaching compromises.
There are 3 basic variations that can be used and they can be assessed in a descending order of DRB strength.
- The first is in the nature of a pre-arbitration and deciding panel. The DRB decision will be binding, pending a court decision, and must be implemented by the parties immediately. Although at first glance this appears a somewhat aggressive way to settle a dispute, it would still be typically less adversarial than courtroom or arbitration proceedings.
- The second is in the nature of a formal advisory panel. The DRB's recommendation is designed to be an aid to the parties in their decision making process. As such, it is not binding.
- Finally, the DRB can take the form of a flexible and formal advisory panel. Here, parties refer their dispute to the DRB to seek general advice on matters of principle. Initially, the DRB will merely discuss the matter with the parties on site. After that, if substantial differences still exist, it will issue a non-binding written statement in the manner of a formal advisory panel, as described above. It is this final of the 3 variations of system that is perhaps the most convenient and satisfactory system for the parties. The initial discussion aids the parties in solving their differences and maintaining an amicable relationship.
DRB as binding/non-binding decision maker
If the DRB issues a non-binding recommendation, whilst it will aid the maintenance of an amicable relationship between the parties and consequently assist them in resolving their dispute together, it may only be considered as an advice. This may have a limited importance in subsequent court proceedings. At the other end of the spectrum, a binding decision with no opportunity to appeal would appear to be overly prescriptive, particularly if it leaves the losing party with no recourse. As such, a middle course providing a semi-binding recommendation (pending agreement between the parties or legal proceedings) is perhaps the most effective use of DRB’s powers.
DRB track record
From the latest information available on the Dispute Resolution Board Foundation website, the total number of projects with DRBs has risen from only 5 in 1982 to 1,338 in 1985 with an increase in value of all projects in US$ from 0.4 billion to 95 billion over the same time span. Through the end of 2006, some more updated statistics show how it was estimated that DRBs had been planned or used in over 2,000 global projects with a combined construction value of over US$100 billion.
Other than the flexibility that the DRB system offers, as described above, what other explanations are there for this phenomenal growth in popularity? The Dispute Resolution Board Foundation website points to several factors. The presence of a DRB does not encourage contractor claims and disputes. On construction projects with DRBs, the average number of disputes taken to the DRB has been only 1.2% per project. By some considerable distance, this is less than the average number of disputes taken to court or arbitration on projects that do not have DRBs. The same website also points out the relatively cheap dispute resolution process that DRBs offer. DRB costs range from 0.05% of final construction contract cost, for relatively dispute-free projects, to a maximum of 0.25% for difficult projects with disputes. However, it is important to remember that regular site visits mean that the cost of DRBs is possibly disproportionate to the benefit that can be brought to a small-scale project.
Many international construction projects those that have used DRB’s speak positively of their value adding to the out turn of the project particularly given that:
"according to virtually all surveys and commentary, party satisfaction with DRBs is high. Those who have used the process on one project tend to use it repeatedly."
DRBs, with their technically expert personnel, often international composition, low cost outlays, flexible ability to issue both non-binding and binding decisions (with the incidental benefits aiding dispute resolution) are likely to become of growing importance and will become increasingly familiar to the Chinese construction industry.