A QUICK VIEW ON DISPUTE BOARDS IN CONSTRUCTION CONTRACTS

This paper will often take less than twenty minutes of your time.

Disputes concerning construction contracts of significant economic value are usually entrusted to a board of arbitrators and not to civil courts because of the greater speed of arbitration over the extent of the ordinary proceedings. However, even arbitration takes time to prepare the case and allow the arbitrators to decide who is right and who is wrong. Due to this, especially in construction contracts, a completely different logic is evolving: to avoid dispute and to resolve it through a stable body (composed of lawyers, engineers, geologists, etc.) the contract must have provisions that addresses and resolve issues as they occur, allowing, however, the continuance of the works. In this context, therefore, arbitration and the ordinary proceeding would only be used if said board cannot resolve the dispute. Civil law professor Giovanni Iudicca, from Università Bocconi di Milano addresses the matter in brief and clear words.

 “(…) There are innumerous sources of disagreement as changes in the regulatory framework, oscillations of the exchange rates, ambiguous technical rules, etc. (…) consequently slowing down or even completely stopping the commencement, continuation or completion of the works, pushing up the cost of the project realization and compromising further collaboration opportunities between the Parties, thereby damaging their business relationships(…)”. However, arbitration is often being very expensive and does not always guarantee a quick solution to the dispute. It is very common discussions postponed on procedural grounds. “More specifically related to the characteristics of construction contracts are the difficulties inherent in the mainly technical nature of the issues which the Parties discuss. Moreover, the considerable typical duration of these contracts implies that the arbitrators must examine a high amount of documentary evidence to get a complete picture of the relevant circumstances, not to mention that the dispute very often originates from events dating back, implying complications resulting from assessment activities carried out at a considerable distance of time from the events to analyze(…)” professor Iudicca says.

But there are other ways in (trying to) solving those disputes. Here comes the dispute boards. There are two main types of dispute boards: the Dispute Review Board (DRB) and the Dispute Adjudication Board (DAB). The differences comes as follows: the result of the DRB´s activity is a non-binding recommendation, with which the losing party may comply spontaneously or otherwise resort to arbitration. Under the ICC rules, the recommendation becomes binding if neither party sends a written notice of dissatisfaction to the other party and the DRB within thirty days. In the DAB type, the decision is binding on the parties, however, it could be appealed (usually referred to arbitration).

The ICC Rules also provide for a third type of Dispute Board, the Combined Board of Disputes (CBD). The CBD generally issues a recommendation but may issue a decision if one of the parties so requests and the other does not object. In the event of objection, the Board shall decide whether to issue a recommendation or a decision, taking into account, in making that choice, whether a decision may facilitate the performance of the contract, avoid injury to either party, prevent termination of the contract or whether it is necessary to preserve the evidence.

A Dispute Board is not always and is not necessarily organized from the beginning and for the duration of the contract, but can also be configured only after the start of a dispute (the latter type is called ad hoc DB). It really depends on the size of the works and the likelihood of disputes. The solution provided by a stable Board is provided in the rules of the ICC. As regards the FIDIC general conditions, it is necessary to distinguish between different types. So the FIDIC Red Book (relating to the Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer) foresees, in Sub-Clause 20.2, that “The Parties shall jointly appoint a DAB by the date stated in the Appendix to Tender”, which makes it likely that the DAB will be appointed before the commencement of works.

 To appoint a panel only after the onset of a dispute is the practice adopted in the framework of other FIDIC contractual conditions, in particular those of the Yellow Book (regarding the Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed by the Contractor) and those of the Silver Book (relating to the Conditions of Contract for EPC/Turnkey Projects). Sub-Clause 20.2 of both models provides that “The Parties shall jointly appoint a DAB by the date 28 days after a Party gives notice to the other Party of its intention to refer a dispute to a DAB in accordance with Sub-Clause 20.4”.

And how to enforce a binding DRB recommendation or a DAB decision? We know that only arbitration is enforceable in law and will be considered by a judicial court. Members of the Dispute Board do not act as Arbitrators. Determinations made by Dispute Boards cannot be considered an arbitral award, although they may become contractually binding on the Parties. The binding nature of the determination is based on the autonomy of the Parties and must be considered of a contractual nature. The resources available to the Parties in case of non-compliance will therefore be available in the event of non-compliance by applying contractual sanctions. As regards non-compliance with a decision issued by the DAB, FIDIC's conditions offer the opportunity to propose a request for arbitration, while the ICC Rules, in respect of non-compliance with a binding recommendation or a decision, provide that the Party concerned may refer to arbitration or, in the absence of an arbitration clause, before an ordinary court.

Have that said, in spite by some legal limitations on the Dispute Boards - including legal limitations when contracting with public entities - they are an effective tool for the Parties in good faith and should be considered in constructing contracts.