Introduction

Any large-scale and long-term project will almost certainly encounter its share of difficulties and disagreements. Although many disputes can be resolved easily at a project management level, this will depend on many factors including, but not limited to, the complexity of the issues, the amount of money involved and the negotiation or leadership skills of the project managers. If a disagreement intensifies, it can have devastating consequences on financial, economic, reputational and even political fronts.

It is therefore vital that potential conflicts, disagreements and disputes be effectively managed, especially to preserve the continuation of the project and the business relationship between parties. Dispute boards have been successful in resolving problems quickly while allowing projects to continue in parallel.

They have now gained worldwide recognition and are often a point of discussion at construction conferences. They have been praised by practitioners and organizations for their effectiveness in preventing escalation to arbitration. Records show that the dispute boards have been used in over 2,800 projects worldwide since 1975 and that about 85% to 98% of these matters have not progressed to arbitration or litigation.¹

Dispute boards have been used in many countries (however, 85% of recorded dispute board matters have been in the US) and are particularly evident in large-scale construction projects. Examples of such projects include the Panama Canal expansion project, the Ertan Hydroelectric Project, Uganda’s Owen Falls Extension Hydroelectric Project, the Channel Tunnel, the Hong-Kong Airport and the London Docklands Light Railway Project.

Despite this, dispute boards are still in their infancy and a number of open issues remain regarding their process, purpose and efficiency. As I was preparing this article, I enquired about the perception of dispute boards among my peers and made the following observations. First, relatively few arbitration practitioners, especially those without a background in construction matters, have had experience with dispute boards. Second, practitioners are generally very unfamiliar with the operations and functions of a dispute board. Third, many believe that dispute boards are specific to, and only relevant in, construction projects.

Overall, the functioning, purpose and benefits of dispute boards are still largely misunderstood by legal practitioners outside of the construction law sector.

This article is not intended to advocate for or against dispute boards, but rather to provide a general and practical overview of the following: (1) the definition and process of a dispute board, (2) the history of dispute boards, (3) the purpose(s) they may serve, especially in comparison to other dispute resolution mechanism, (4) how to increase the likelihood of success of a dispute board process, and (5) possible avenues to improve their effectiveness, focusing on the issue of enforcing dispute board decisions.

1. What are dispute boards and how do they function?

Although the application of dispute boards is varied, and there is no established definition, speaking generally they can be described as a dispute resolution method aimed at assisting parties to prevent or promptly resolve dispute(s) and in a non-contentious manner. Unlike arbitration or litigation, dispute boards can issue non-binding or binding recommendations or decisions, handed down by either a sole adjudicator or panel of adjudicators. The adjudicators are chosen by the parties for their particular skills in the relevant sector but should remain independent and impartial throughout the process. Dispute boards often consist of engineers, project or contract managers, or lawyers with a background in construction law.

A dispute board can act in two ways:

• On a permanent, standing, basis: the dispute board is established at the early stages of the project, occasionally before the contract has been executed, and remains in place for the duration of the venture; or
• On a non-permanent, ad hoc, basis: the board is only put in place after a dispute has already arisen.

Permanent dispute boards are particularly appropriate for large and complex projects, as they enable dispute board members to gain direct insights into the inner workings of the parties’ relationship. This, in turn, accelerates the resolution process of future disputes.

Where a permanent dispute board is in place, it will generally seek to prevent disputes through regular site visits and meetings with the parties to identify, and swiftly resolve, any disagreements before they escalate. Permanent dispute boards can also provide informal non-binding recommendations upon request by either party.

After a dispute arises, the board’s role will shift from dispute avoidance to dispute resolution. This entails more ‘advocacy’, with exchanges of submissions from both sides and (in certain cases) hearings. The similarity with arbitral proceedings sometimes causes an unfortunate distortion of the dispute board process, by making it much more contentious, lengthy and costly than it was initially designed to be.

On the other hand, ad hoc dispute boards have the advantage of generally being less costly than a permanent panel. They also allow for the selection of members with the relevant expertise for a particular matter.

Regardless of whether the board is permanent or ad hoc, its members will be required to familiarize themselves with the contract and the issues at hand. They should be provided with the relevant documentation (contract, project documents, claims if any, etc.) in order to reach a decision.

The dispute board members are paid by both parties in equal shares, normally based on a monthly retainer (although some parties will require that the dispute board be paid an hourly rate, especially in relation to ad hoc panels). Additional fees are also often required for site visits and hearings (if any).

Similar to arbitration, the parties to a contract are free to choose whether the dispute board process will be governed by institutional rules (i.e. through renowned institutions, such as the FIDIC, AAA, ICC, LCIA and HKIAC).

2. The history of dispute boards

First recorded dispute boards

Dispute boards developed in the construction field, initially as a dispute avoidance tool, rather than a dispute resolution device. They were implemented to promote a ‘work now, argue later’ approach, aimed at addressing situations where a contractor might be denied payment and run out of cash flow until the conclusion of an arbitral or court proceeding.

Although there certainly were previous occurrences of panels resembling dispute boards, the first dispute board (at that time, a dispute review board issuing non-binding decisions) is said to have been established in the 1960s in the US, for the Boundary Dam Project in Washington.

The popularity of dispute boards grew in the US in the 1970s with the publication of a report by the US National Committee on Tunneling Technology making the following observation (still very relevant today):

One of the most important objectives of this study is to minimize the adversary relationship between owner and contractor that is causing so much loss of time, particularly of top management personnel, and increasing the cost of projects.²

In recommending arbitration over litigation, the report stated that arbitral proceedings could ‘be improved by an organization of competent adequately paid, full-time arbitrators, appointed to serve for a term of several years, who could sit on consecutive days during the entire course of a hearing’.³ The report further recommended a form of ‘[n]onbinding arbitration’ to be ‘conducted by specially qualified and long-term employed arbitrators … provided for in the contract’ (which the report noted appeared to be already in use in Europe).⁴ Following this report, in the mid-1970s in the US, a dispute review board was established for the second bore of the Eisenhower Tunnel Project.⁵

At an international level, the first recorded dispute board was constituted in the early 1980s for the El Cajon Dam and Hydropower Project in Honduras – a US$ 238 million project funded by the World Bank.⁶ Dispute boards were recognized by the international community for their effectiveness in preventing the escalation of disputes following their involvement in the UK-France Channel Tunnel Project in the early 1990s.

In 1995, the World Bank adopted the Standard Bidding Documents for the Procurement of Works, making dispute review boards mandatory for all World Bank-financed projects over US$ 50 million (later reduced to US$ 10 million).⁷

Dispute boards in the FIDIC conditions of contract

The existence of dispute boards as dispute resolution tools became further apparent in 1995, after FIDIC included a dispute board mechanism as a clause in its general conditions of contract (known as the Orange Book). However, it was in the form of a dispute adjudication board that could only issue binding awards. The focus on binding awards was likely due to the fact that (i) prior to 1995, common practice under FIDIC contracts was the issuance of binding determinations by an ‘Engineer’, and (ii) public entities, as frequent users of FIDIC conditions of contract, are less inclined to act upon non-binding decisions, especially if there is a risk that acting upon such decisions may appear suspicious or tainted by fraud/corruption.

In 1999, FIDIC extended the dispute board clause to other model contracts. It was also around this time that dispute boards started gaining prominence outside of the US. With the second editions of the Yellow, Red and Silver Books (the Rainbow Suite) in 2017, FIDIC further emphasized dispute avoidance by renaming its dispute board the ‘Dispute Avoidance/Adjudication Board’ (DAAB), which is aimed at both preventing and settling disputes.

The main steps in the FIDIC DAAB process are as follows:

• At the tender stage, the parties choose a pool of candidates, among which the parties will further select the members of their DAAB.⁸
• At any stage in writing, each party can refer a dispute to the DAAB.⁹ The parties may also jointly request the DAAB to ‘provide assistance and/or informally discuss and attempt to resolve any issue or disagreement that may have arisen [between the parties]’.¹⁰
• Where a dispute is referred to the DAAB, the DAAB has 84 days from the date of referral to issue a decision, unless otherwise agreed by the parties. Such is binding on both parties from the moment it is issued and the parties must comply with it ‘promptly’, notwithstanding the issuance by either party of a Notice of Dissatisfaction (‘NOD’ – discussed further below).¹¹
• If a party wishes to challenge a DAAB’s decision through arbitration, it must issue a NOD within 28 days following the receipt of the DAAB’s decision.¹² Following the issuance of a NOD, a further 28 days’ cooling-off period is mandatory before referring the dispute to arbitration, during which the parties shall attempt to settle the differences amicably. However, a party may commence arbitration proceedings following the cooling-off period ‘even if no attempt at amicable settlement has been made’.¹³
• If neither party issues a NOD within the 28 day period, the decision of the DAAB is considered final and binding.¹⁴
• Failure to comply with a decision of the DAAB, whether or not a NOD was issued, entitles a party to initiate arbitration proceedings. The arbitral tribunal is empowered to order the enforcement of the DAAB’s decision ‘whether by an interim or provisional measure or an award’. However, if a NOD was indeed issued, the arbitral tribunal’s measure or award will be ‘subject to the express reservation that the rights of the [p]arties as to the merits of the [d]ispute are reserved until they are resolved by an award’.¹⁵

The ICC Dispute Board Rules

The ICC Dispute Board Rules were first published in 2004 and then revised in 2015.¹⁶

Among the specificities of the ICC Dispute Board Rules:

• They are not limited to construction projects and aim to extend the dispute board process beyond the construction field. One can think of any ongoing project or business relationship that would require either avoiding disputes or allowing disputes to be resolved swiftly while the project runs in parallel, such as complex IT projects, financial services or any contract requiring a high level of cooperation among the parties or a lump sum.
• Emphasis is placed on flexibility by allowing the parties to derogate from almost all the provisions of the rules and allowing the dispute board to play a role of dispute avoidance, dispute resolution or both. Hence the possibility for the parties to refer their differences, or disputes, to a Dispute Review Board (DRB), a Dispute Adjudication Board (DAB) or a Combined Dispute Board (CDB).

Under the ICC Rules, dispute boards thus provide three services, with a gradual approach from mere differences to intensified disputes:

• Avoidance of disagreements (Article 16): According to the ICC Dispute Board Rules, a ‘disagreement’ is a difference between the parties that has not been formally referred to the dispute board. In this context, when the dispute board becomes aware of any disagreement between the parties, and even if it has not been referred with such disagreement, the dispute board can encourage the parties to settle their differences.
• Informal assistance with disagreements (Article 17): The dispute board may provide informal assistance with disagreements, upon formal request by either party. A disagreement formally referred to the dispute board becomes a ‘dispute’.
• Issuing ‘conclusions’ upon formal referral by either party (Article 18): Conclusions are contractually binding if no party expresses dissatisfaction. Where a conclusion has become binding and a party does not comply with it, the conclusion can be referred directly to arbitration or to courts and the rules prevent the defaulting party from raising any issue on the merits as a defense to its failure to comply (i.e. it cannot re-argue the merits of the case). With this new provision, the ICC clarifies the issue of enforcement of dispute boards’ decisions and encourages compliance by the parties.

Article 15 of the ICC Dispute Board Rules also gives the dispute board power to grant provisional relief in the form of interim or conservatory measures. This brings the ICC Dispute Board Rules in line with its Arbitration Rules and will certainly limit more aggressive options like seeking provisional relief before courts or arbitral tribunals.

A further milestone in the ICC’s dispute board services, since September 2018, with the approval by the ICC Executive Board of three new appendices to the ICC Dispute Board Rules, any challenge brought by a party against a DAAB Member under the FIDIC 2017 suite of contract will be decided by the ICC and administered by the ICC International Centre for ADR.¹⁷

3. How dispute boards compare to other dispute resolution methods

Despite their growth in popularity, some call into question the very purpose of dispute boards in light of (i) the existence of other dispute resolution mechanisms that may work just as well, such as mediation and (ii) the idea that dispute boards, as a prerequisite to arbitration, require the parties to spend time and money on top of any future costs incurred in the arbitration procedure.

Mediation is indeed, in most situations, a highly efficient tool to help parties reach an agreement swiftly while preserving their relationship and the continuity of the project. Mediation seeks to design a solution that is acceptable to both parties and will often allow for more creative solutions than a simple monetary award. It is also arguably quicker than other adversarial methods (including dispute boards) and may also be cheaper. In that respect, parties will often be more comfortable conducting a mediation without, or with limited, legal assistance.

However, there are a few reasons why dispute boards can be preferred to mediation:

• Mediation is not designed to prevent disputes and typically takes place after a dispute has already developed. As mentioned above, dispute boards are equipped to target disagreements before they escalate (provided the dispute board acts on a permanent basis) by handling differences as they arise. A permanent dispute board also acquires knowledge and an understanding of the project that a mediator would likely not possess.
• Mediation does not offer a guaranteed settlement. This is particularly problematic in time sensitive cases, where resolutions may be drawn-out by the mediation process.
• Mediation may not be appropriate in complex cases relating to various disputes and claims.

Dispute boards also have some particular advantages over arbitration:

• Arbitration is designed to settle disputes that already exist, not to prevent them;
• Arbitrators lack direct experience in the project.
• Where a dispute is time sensitive, the dispute board process is (in most instances) faster than that of an arbitration.
• Dispute boards are usually cost effective. It has been estimated that the average costs of a dispute board is less than 0.5% of the contract price.¹⁸
• Dispute boards will typically take a less legalistic approach to dispute resolution compared with that of an arbitral tribunal. This serves to expedite matters, as the process is less likely to be subject to technical arguments on points of law.
• Where preserving the relationship is key to the continuation of the project, referring a disagreement to a dispute board will often be perceived as less ‘aggressive’ than commencing arbitration.

4. Conditions for a successful dispute board

The dispute board process has its limits, either inherent to the dispute board culture itself, or due to the conduct of the parties or their counsel. However, certain conditions will largely improve the success rate of dispute boards (or conversely, render them pointless).

1. In most circumstances, a permanent dispute board constituted at the outset of the project will produce better results. However, in practice, unless the contract requires the early establishment of a dispute board, parties generally remain reluctant to implement a dispute board at the early stages of a project and will often wait until a dispute arises to do so. This steers the process away from dispute avoidance and toward dispute adjudication, thereby increasing future time and costs spent on resolving difficulties.

2. It is highly advisable that dispute boards be able to issue recommendations or provide other forms of informal assistance to the parties in addition to binding decisions, insofar as the parties wish that the dispute board play a dispute avoidance role. However, as mentioned above, public bodies will often be reluctant to act upon a non-binding resolution and will prefer a decision that can be enforced. This is because enforcing a non-binding decision may raise questions about their impartiality and, in extreme cases, suspicions of corruption and dilapidation of public monies. In such situations, having the dispute board issue recommendations may be a waste of time and money.

3. A dispute board can only be as good as its members, so the panel must be carefully chosen in order to generate enough authority and confidence from the parties in the effectiveness of its operations.¹⁹ Members of the dispute board panel should be chosen considering their technical skills, legal skills (where appropriate), and cultural background.

4. The creation of, and referral of disagreements to, the dispute board should be made mandatory in the contract. It is reasonable to conclude that, if the purpose of dispute boards is to avoid arbitration, then referral to a dispute board must be a condition precedent to arbitration.

5. The parties involved must be willing to engage in the process in good faith. The process will not be effective if the parties have no intention to compromise or comply with any recommendation or decision issued by the board. Here again, there is a risk that the parties will lose time and money. The members of the dispute board will often play an important role in fostering cooperation by gaining the parties’ trust and promoting the benefits of the process.

6. In the same vein, the parties and their counsel should refrain from using the dispute board process as a mini-arbitration or mini-trial. Parties may do so for the purposes of evaluating their legal standing, or for leveraging a settlement with the other side. Although such approach may deliberately be adopted for strategic reasons, it is also the case that parties and their counsel can distort the process due to a mere misunderstanding of a dispute board’s purpose and functioning. In particular, external counsel are often accused – sometimes, rightly so – of complicating the process by multiplying claims, submissions or procedural objections as they would do in an arbitral hearing. This may result in the parties wishing to exclude external counsel from the dispute board process altogether.

7. In some instances, the parties can specify in the dispute resolution clause that, where one party has issued a notice of dissatisfaction, the arbitral tribunal cannot be informed of the particulars of the decision rendered by the dispute board. This is to ensure that the arbitral tribunal acts impartially and is not influenced by the conclusion drawn by the dispute board. However, this may be counterproductive when taking into account the time and money the parties have expanded in the dispute board proceedings. It also deprives arbitrators of the opportunity to use the experience and knowledge that dispute board members gained during the project.

5. The enforcement issue

Decisions, and a fortiori non-binding recommendations, of dispute boards cannot be enforced similarly to arbitral awards and, to date, no general mechanism exists for a dispute board’s decision to be converted into an arbitral award. A party who seeks to have the result of a dispute board enforced will thus have no choice but to refer the dispute to the court or to arbitration.

In many circumstances, especially in the absence of applicable rules governing the dispute board process, it remains unclear how arbitrators should consider a decision from a dispute board in a particular matter. For example, there are no guidelines in relation to whether arbitrators should:

• hear the entire dispute and decide on its merits again;
• rule only on the party’s failure to comply with the dispute board’s decision; or
• approve the dispute board’s decision to allow its enforcement.

Referring the dispute to arbitration does not necessarily resolve a situation where a party has refused to comply with the dispute board’s decision. It also raises a number of questions: how can a party obtain enforcement of the decision pending issuance of the arbitral award? Moreover, how does this help the ‘work now, argue later’ approach that dispute boards are supposed to promote?

It is unclear at which stage a dispute board decision may be referred to arbitration (or litigation). Absent a contractual clause or applicable dispute board rules providing guidance, the parties will not know whether the dispute board’s decision must be binding for it to be capable of being referred to arbitration, or whether a non-binding decision could also be referred.

These issues may seriously affect the efficiency and efficacy of the dispute board process. Parties should remember to take them into consideration when drafting their dispute resolution clause or choosing applicable procedural rules.

Conclusion

While dispute boards prove useful in accompanying the performance of a contract, solving problems efficiently and preventing the escalation of disputes, questions regarding their purpose and effectiveness remain. As dispute boards become more popular and potentially expand beyond the construction realm, one could wonder whether an equivalent to the New York Convention for dispute board procedures should be considered. Pending more clarity and a set of uniform rules, it is unlikely that dispute boards will reach their full potential.

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