Dispute boards – who needs them?
Bill Barton, Director, Barton Legal
THE construction industry is sadly known for regularly being plagued by high-value disputes that leave one party shouldering the burden. But despite the recurrence of disputes, there is strangely little confidence in early negotiation or the implementation of procedures that could settle tension before it boils over.
As the global economy faces higher hurdles ahead, construction companies and employers should not overlook the benefits of early negotiations. Dispute boards, as the name suggests, offer a sounding board for disputes as well as early resolutions from experts in the field, so that a project doesn’t have to grind to a halt when a dispute arises but can continue more smoothly. They can even soften the financial blow, yet they are still an unpopular choice within the sector.
What is a dispute board?
The first dispute board (DB) was used during construction of the second bore of the Eisenhower Tunnel for Interstate 70 in Colorado. In 1989, the American Society of Civil Engineers promoted the concept of a DB in the first edition of its manual Avoiding and Resolving Disputes During Construction. However, it was not until 1995 that the World Bank published a new edition of its standard bidding document – Procurement of Works – that provided the borrower with three options for the settlement of disputes, including the use of a three-person DB.
Of course, that process already existed within the more internationally recognised FIDIC contract, but with NEC seeking and taking on a more international role, this addition to NEC4 was welcomed. From this moment, the three-person DB was made mandatory for contracts in excess of $50m (USD) In 2004, the International Chamber of Commerce (ICC) introduced its DB rules, which allowed users to choose between a dispute review board, a dispute adjudication board and a combined dispute board (a hybrid allowing for non-binding recommendations in some cases and binding decisions in others).
It took another 10 years for the UK’s Chartered Institute of Arbitrators to publish its first edition of international dispute board rules. Thus in the UK, DBs are still not prevalent in the majority of contracts and it was not until the issue of NEC4 and the new option W3 that NEC introduced a dispute avoidance board (DAB). Of course, that process already existed within the more internationally recognised FIDIC contract, but with NEC seeking and taking on a more international role, this addition to NEC4 was welcomed.
Given it has been less than ten years since DBs became a valid option in the UK, it’s unsurprising that they are still uncommon. DBs are relatively new, exist only in a limited number of places, have had little promotion by UK industry groups, and are subject to the same misconceived mistrust that mediation was 20 years ago.
As they don’t produce an instant result or payment, unlike adjudication, there is less incentive for subcontractors to start promoting their use. Ignorance may be bliss, but the failure of parties to address issues and conflict in the contractual process at the earliest possible time, results in the crystallisation of more disputes and further costs.
Living in ignorance
Ignorance may be bliss, but the failure of parties to address issues and conflict in the contractual process at the earliest possible time, results in the crystallisation of more disputes and further costs.
As a solicitor, I have heard nearly all the jokes there are about solicitors – our fees, how we charge, how useless or useful we are – although the latter is quite rare. However, save for instances of negligence in the drafting or initial project advice, disputes are not caused by solicitors and, in fact, proper use of a solicitor at the outset of a project can ultimately reduce the costliness of disputes.
To successfully avoid the financial fallout of disputes, parties to a contract must spend more time discussing contract terms at the outset; in raising questions against tender information; and in preparing and agreeing detailed programmes. In order to do this effectively, both parties must be open and honest about the terms within the contract that impose obligations and liabilities on the contractor and in respect of which party has to give notices. In particular, parties need to discuss issues that are likely to cause delay, disruption or additional costs.
It is highly likely that disputes, to some degree or another, will occur during a project. Whether disputes are large or small, or obviously the fault of one party – even if neither party can agree which – they will occur. In any case, it is unrealistic to expect increasingly complex construction and engineering projects, with greater pressures on time, cost, material selection and quality, to reach completion without any disputes. But the financial impact of these disputes does not have to be extensive, and the parties involved do not have to brutally pit themselves against each other throughout a project timeline.
How dispute boards can be useful
Sadly, for the majority of construction projects in England and Wales, a dispute board is not relevant due to a small wrinkle in the NEC4 approach, which states that if the construction act applies to the project, then DBs are not enforced.
Over time and through exposure and use, the majority of the construction and engineering industry now realise that mediation is fantastic.This is understandable but shows a lack of true resolve to encourage parties to seek to resolve issues before they become a dispute. However, as stated above, the DB will not result in an immediate payment to a party and adjudication is now well established as the primary alternative dispute resolution method in the UK.
To adopt the DB into your contract will require careful drafting. As the law stands, you cannot prevent a party from its right to go to adjudication, but you can use a dispute board ahead of going to adjudication. So, let’s say you are in a position where you have sensibly adapted your contract and have provision for a DB. The DB is appointed at the start of the project and will normally consist of one or three members. You may need to form an agreement to clarify and define roles, duties and fees of a DB at the outset.
The intention of using a DB is that because it is involved from the start of a project and will normally carry out a site visit very soon after its appointment, it is available to support the parties in dealing with potential disputes as they arise. This is referred to as a standing dispute board. It will act impartially and, depending on whether appointed under NEC4, FIDIC or some other form, it can ask parties for more information and appropriate documentation ahead of the project beginning.
An ad hoc dispute board is one that is established only when needed by the parties, primarily used under FIDIC forms of contract. An ad hoc dispute board remit will expire when it issues a determination on the dispute that it was referred to for.
Why construction isn’t taking advantage of DBs
The use of DBs has been held back for a number of reasons. Contracts in the UK are constrained by the construction act, and those outside of the UK are likely to be unfamiliar of FIDIC. There is also the common issue that many believe DBs to be an added expense that will eat into profit. Others may be reluctant as they don’t want any third-party poking around the project site and asking for further information.
Many will ask, how can a meeting to discuss issues save time and money? Many years ago, mediation was viewed similarly in the UK. Many clients thought it showed weakness or a lack of determination and resolve to take matters on and to pursue claims, which meant that any settlement would be poor and unacceptable. Over time and through exposure and use, the majority of the construction and engineering industry now realise that mediation is fantastic.
It can help to bring disputes, large and small, to a forum where, with the help of trained professionals, common ground is found; compromise is explored; and acceptance of some degree is achieved. Most mediation resolves matters on the day. If not, it can create the momentum needed between the parties to help settlement occur over the following days or weeks. Like mediation, unless more parties start to use dispute boards, then they will not find out the true benefits for themselves.
How to use a DB effectively
Dispute boards comprise of experienced professionals. The composition of the panel is chosen by the parties to the contract, so the board can be shaped to suit a particular project. This means that parties could decide for this to comprise of two engineers and a lawyer or an engineer, an architect and a lawyer – whatever the perfect mix is for that contract. Recently, there has been an increase in fluid DBs, so that the chair can be switched in and out depending on the nature of the issue.
They are a positive influence on the contractual process but parties must identify the members of the board, and engage with them from the outset, for this influence to be ignited.For example, if you have two engineers, parties can bring in a lawyer if the issue is really about contract terms. Similarly, if the issue is about money, then parties can bring in a quantity surveyor as chair. The chair can be interchangeable to meet the specific expertise required for that issue.
A DB will assist parties to resolve an issue before it becomes a dispute. The DB will visit the site, usually at the very beginning, to better understand the location and scope of the works, and again if an issue between the parties will be assisted by such a further visit. The DB can ask the parties to provide reports and further materials to help them understand what the issue is. It can then make suggestions as to how an issue can be resolved and will provide a procedure for where that is not possible. In the event of a hearing, there will be a formal procedure and timetable to be agreed and an agenda for the hearing itself.
Parties must regard the DB as an important step and prepare as if it were a hearing or submission before the ultimate tribunal. To gain the full effect of DBs, parties have to fully engage because the determination of a DB is likely to be admissible in any subsequent proceedings. A DB is not a stop gap. The DB is there to save parties money and time, but it must be used thoroughly at every step to be effective. The determinations made by DBs are binding on the parties and there are consequences for noncompliance, so these should be taken seriously.
Promoting dispute boards
It is up to the industry as a whole, both in the UK and abroad, to change its perception of DBs. From my experience, they are a positive influence on the contractual process but parties must identify the members of the board, and engage with them from the outset, for this influence to be ignited. Litigation, in any form, is expensive, lengthy, and heavy on procedures and rules. It can be arduous, stressful and create uncertainty. So, why aren’t more parties doing more to resolve their differences earlier? The preconceptions around dispute boards must be put to bed in order to begin the process of a seismic shift within the construction sector.
A dispute board must be engaged with early, chosen for its range of useful expertise and properly utilised throughout a project. As a result, parties to a construction contract can prevent a large-scale dispute and financial eruption at a project finish. As financial troubles grow over the coming years, this process will be crucial for keeping construction companies afloat and supporting the construction sector’s growth.
Bill Barton, Director, Barton Legal