1. © PHJ Chapman 2006 DISPUTE RESOLUTION BOARD FOUNDATION 6 th INTERNATIONAL CONFERENCE 6/7 th May 2006 Budapest Dispute Boards – A new force to be reckoned with in international construction. A brief overview Peter Chapman dispute-resolution@PeterHJChapman.com

2. © PHJ Chapman 2006 methods of dispute resolution in construction Recognised methods of dispute resolution in construction  Party negotiation (with or w/o facilitation)  Mediation/Conciliation  Adjudication  Dispute Boards (early and ‘real-time’ dispute avoidance/resolution)  Arbitration  Litigation

3. © PHJ Chapman 2006 Dispute Boards – a new force Job site ‘adjudication plus’ process Members independent and impartial Appointed from the start Part of the construction process Not an ‘add-on’ or ex post facto device Real-time influence on the project

4. © PHJ Chapman 2006 Dispute Boards – a new force Publishes decisions – coercive Jurisdiction by contract and maybe under statute Construction industry but others also Long shadow, omnipresence – influences behaviour Dispute AVOIDANCE

5. © PHJ Chapman 2006 Dispute Boards International Adjudication 3 principal areas of activity:-  Contracts developed for International Projects financed by World Bank (WB) or other Multilateral Development Banks  Contracts developed by the International Federation of Consulting Engineers (FIDIC)  International Chamber of Commerce (ICC)

6. © PHJ Chapman 2006 Some history of the DB process  WB promoted a Dispute Board on El Cajon hydro project in Honduras in 1980  DB resulted in successful settlement of disputes – WB grew to favour this approach  1995 – WB Standard Bidding Document published that used modified FIDIC conditions – deleted the usual provision of the “Engineer” deciding disputes, giving this task to a Dispute Review Board (DRB), similar to those being used at the time in USA

7. © PHJ Chapman 2006 History (cont’d)  Disputes (that could not be settled by the parties themselves) to be submitted to DRB for a written “recommendation” which, if no objections within 14 days, became final and binding  In case of objections, parties free to negotiate or, ultimately, “appeal”

8. © PHJ Chapman 2006 History (cont’d)  WB required all borrowers of >US$50m to establish a three-man DRB by contract  Borrowers of between US$10m - $50m could use a one-man board or Dispute Review Expert (DRE)  Other development fund banks, followed this example  WB retained these provisions until 2000

9. © PHJ Chapman 2006 FIDIC –International Federation of Consulting Engineers  Known as publishers of model forms used for construction internationally  1995 – Design-Build Turnkey form published with a Dispute Adjudication Board (DAB) – (3 man or 1 man board) empowered to decide disputes referred by either party  NB “Decisions” were made interim binding i.e., coercive, not merely persuasive

10. © PHJ Chapman 2006 FIDIC (cont’d)  1999 – Three major FIDIC model forms published, all involving DABs/DREs: –Red Book: Conditions for Construction – standing DAB (3 man or 1 man) –Yellow Book: Plant & Design Build – ad hoc DAB –Silver Book: Engineer Procure & Construct (Turnkey) – ad hoc DAB

11. © PHJ Chapman 2006 FIDIC (cont’d)  Standing Dispute Boards, from the outset, brings the benefit of dispute avoidance by their routine operations  Ad-hoc boards formed only when disputes arise – (apparently) justified by the “design & manufacture” element not giving rise to so many disputes

12. © PHJ Chapman 2006 World Bank makes changes  2000 – New edition of Procurement of Works which makes the “recommendations” of the DRB or DRE coercive unless modified by the award of an arbitrator  2005 – WB (on behalf of all development banks) engaged FIDIC to draft and publish a harmonised set of conditions for use in connection with all projects funded by the World Bank and other lending institutions. Determinations by the DB are coercive.

13. © PHJ Chapman 2006 ICC – International Chamber of Commerce  2002 – Task Force prepared draft rules for Dispute Boards.  Choice of 3 types available for users of ICC documents:- –World Bank “old” style DRB – recommendations being persuasive only –FIDIC / WB “new” style DAB – decisions interim binding

14. © PHJ Chapman 2006 ICC (cont’d)  Combined Dispute Board (CDB)– issues recommendations (persuasive, not immediately binding) BUT if requested by either party or if the CDB itself believes that a coercive decision is essential for the good performance of the project the CDB can issue a decision that is immediately binding.

15. © PHJ Chapman 2006 Europe  Significant procurement of EU/ EIB / EBRD / WB funded works utilising the 1999 FIDIC forms of contract and thus requiring the establishment of DABs  Traditional procurement  Build and Construct  Concession Contracts

16. © PHJ Chapman 2006 Dispute Boards – a new force Average 50% of all legal costs in construction industry are dispute related In 10% projects 10% of total project costs was legal cost. Plus hidden costs such as commercial injuries, reputation, executive time and lost opportunities. A better way for the future?

17. © PHJ Chapman 2006 Dispute Boards – a new force Early resolution makes good sense for all parties as it creates CERTAINTY Dispute board unique in providing a forum for regular, real-time, senior-level discussions of matters of concern to parties or supervisors leading to the avoidance of disputes. Development of trust and confidence in the members of the dispute board vital to success.

18. © PHJ Chapman 2006 Dispute Boards – a new force One, three or more members All members acceptable to both parties Default mechanisms – FIDIC, ICE lists Balanced board, technical/legal Multi-contract boards, wider panels, specialist boards, standing ‘industry’ boards.

19. © PHJ Chapman 2006 Dispute Boards – a new force Routine visits ensure a forum for discussion, ensures board is conversant with the project and can thereby act with alacrity, confidence and full background knowledge No need to recreate historical events – the DB has ‘looked down the hole’ and has the contemporaneous information it needs The magic of the dispute board comes from its early involvement and by its stimulation of project communication

20. © PHJ Chapman 2006 Dispute Boards – a new force Do they work? 98% of referred disputes end with the DB Of the 2% remaining, half of the ‘appeals’ uphold the DB decision. Of the 1% upset by the arbitrator/courts, almost always due to procedural irregularity, not on the substance of the decision PLUS dispute avoidance value

21. © PHJ Chapman 2006 Dispute Boards – a new force Reality prevails – self imposed reality checks by parties ‘Duals of Egos’ reduced Fewer spurious claims advanced Less acrimonious correspondence exchanged Attitudes remain more positive Behaviour controlled

22. © PHJ Chapman 2006 Dispute Boards – a new force Swings and roundabouts pragmatism Fantasies do not turn into expectations Cash-flow benefits and final cost certainty. Programmes can be adjusted and agreed Face saving dispute settlement that has spin- off value throughout contract/project Prevents a blame culture developing

23. © PHJ Chapman 2006 Dispute Boards – a new force Misconceptions: Why pay? – may not be needed. Insurance policy, dispute avoidance, less than 0.2% of project cost on a medium size contract. Why encourage claims – quite the reverse. Issues settled, many DB contracts with no formal disputes referred

24. © PHJ Chapman 2006 Dispute Boards – a new force But it is not final – no, but usually it is. Don’t pay retainers – just compare the costs of bringing an arbitral tribunal up to speed and that of retaining a dispute Board Many owners after reluctantly using a DB on a major project will thereafter encourage future use (Boston Central Artery, Ertan HEPP)

25. © PHJ Chapman 2006 Dispute Boards – a new force You know it makes sense!