1 SYNOPSIS

The concept of contractual dispute resolution has its origin in the United States during the 1970s. Contracting agencies, both public and private had become aware that the incidence of dispute and litigation costs in the price of infrastructure procurement had reached a level that something had to be done. Major construction projects were taking longer to complete and involved significantly greater cost. The first project that employed the use of contractual dispute resolution was a tunnel construction project on the US Federal highway system located in the State of Colorado on the I-70 crossing of the Continental Divide. Parties entered tripartite agreements with three experienced construction and engineering professionals that made up the first Dispute Resolution Board (DRB). The DRB met frequently with the Parties and gave informal assistance to avoid disputes and where that was not possible made non-binding recommendations concerning disputed issues that were referred to it by one of the Parties. The experiment was successful and the Parties could set aside all differences without having to resort to litigation.

The process grew in the United States where DRBs have been used in all 50 states and are now mandatory under public infrastructure construction procurement in two major jurisdictions, Florida and California. More than 2,700 Dispute Boards have been recorded through 2014 and referral success rates vary between 75 and 90%. The first Dispute Board outside the United States was used on the el Cajon hydroelectric plant in Honduras in 1981. Interest in the DRB process grew internationally and in 1995 the World Bank and other multilateral development banks mandated their use on all projects that exceeded US$50 million in value. The International Federation of Consulting Engineers (FIDIC) published a supplement to its standard form of contract for Construction and Engineering Works in 1996 that included for the use of a Dispute Adjudication Board (DAB) that followed on with the FIDIC philosophy that the contractual body would render decisions that were binding on the Parties.

2 THE EISENHOWER TUNNEL

From 1956 to 1986, America built the world’s largest public work, the National System of Interstate and Defense Highways. At 3,357 meters, the four-lane Eisenhower Tunnel is the highest point in the entire interstate system The tunnel contracts were administered by the Colorado State Department of Transport (CDoT). The contract value for the civil engineering works was about US$15 million, and the works were completed by Weaver Construction Company.

The eastbound bore was constructed first, starting in 1975 and is named for Edwin C. Johnson, a state governor and US Senator that lobbied for an Interstate Highway to be built across Colorado. The westbound bore, a second contract is named after Dwight D. Eisenhower, the US President for whom the Interstate highway system is also named. The second bore was awarded in 1979.

Significant adverse ground conditions were encountered in the eastbound tunnel. The Project was finished late and the ensuing litigation lasted years. At the time in the US, the costs of litigation connected to public and private construction was estimated to be in the order of 25 to 30% of the total value of the Country’s infrastructure. It was necessary for users of public works contracts to find a better way to deal with disputed issues arising out construction related projects.

In 1972 the U.S. National Committee on Tunneling Technology sponsored a study of contracting practices throughout the world to develop recommendations for improved contracting methods in the United States. The study concluded that contracting practices in the United States formed a serious barrier to the containment of rapidly escalating construction costs and contract disputes. John Matthews1, a practicing engineering consultant in the United States was instrumental in the success of the Committee to develop the concept of contractual dispute resolution by employing a third party neutral as a part of the Contract. The purpose of the neutral was to render assistance to the contracting parties to put aside their disputes. The third-party neutral was initially named a "Dispute Review Board" (DRB) and it was that concept which was used in the Eisenhower Tunnel, the second bore.

When disputes were referred to the DRB, it issued reasoned recommendations that were non-binding on the Parties. The Eisenhower DRB issued non-binding formal recommendations on a total of three disputes as well as informal assistance (dispute avoidance) on another nine disputes. All of the recommendations and informal assistance led to resolution and there was no post-contract litigation.2

The Eisenhower experience was considered a success and the DRB process was generally adopted by most contracting authorities across the US, and indeed has become mandatory in at least two jurisdictions in that country.

3 DISPUTE BOARD RULES

Dispute Board Rules have evolved both in the US and internationally since the inception of the practice.

US Practice

Individual contracting agencies in the US generally include the rules as part of the contract document. With practically no exception, the DRB provides assistance to the Parties with the stated aim to avoid disputes. The Boards are composed of tribunals of three persons or single members. When formal disputes are referred to the DRB the procedure normally involves exchanges of written submissions and oral hearings. The DRB will issue reasoned recommendations that are not binding on the Parties. American DRBs make extensive use of informal assistance as attempts to avoid formal disputes.

International Practice

The first use of the dispute board outside the US was on the El Cajon Hydroelectric Project in Honduras in 1981. The Project was valued at US$238 million and was financed by the World Bank. The Dispute Board was a DRB and it was based on the US model. The Board was constituted on that project during the execution of the works by recommendation of the Board of Experts that monitored the work on behalf of the international financing agency. The Dispute Board issued non-binding recommendations and it heard five disputes during the course of the Project. There was no post-project litigation.

In 1995 the World Bank mandated its borrowers to use of Dispute Boards on all construction work that exceeded US$50 million in value. By that time the IBRD and other multi-lateral financing agencies had adopted the contract conditions published by the International Federation of Civil Engineers (FIDIC) under their respective procurement rules. In conjunction with the Multilateral Development Banks (MDBs) FIDIC issued its 1996 Supplement to the 4th Edition of its Contract for Construction. That Supplement substituted the disputes clause under its 4th Edition Construction Form in its entirety to introduce the use of a Dispute Review Board.3 FIDIC maintained its long tradition of rendering an Engineer’s decision "binding on the parties." The 1996 Supplement simply transferred that authority to the Dispute Board.

As a consequence, the application of the dispute board process internationally diverged from that of the US whereby the DB decision was binding on the parties and under certain circumstances that decision could become final and binding, thus directly enforceable.

The ICC published Dispute Board Rules in 2003 that were revised in 2015. The ICC DB Rules are institutional in nature and in keeping with ICC goals they can be applied over a range of business applications, other than simply construction. The ICC Rules went a few steps further by introducing, at Party discretion, the possibility: (i) to adopt procedures whereby the DB would issue either non-binding recommendations or binding decisions; (ii) to allow the ICC to administer the process, and (iii) to submit DB decisions to the ICC for scrutiny before being released.

Other institutions like the Chartered Institute of Arbitrators of the UK have followed in ICC footsteps by publishing Rules that provide the Parties with alternatives to the Dispute Board Process. Notwithstanding, Parties must always choose between adopting a Board that makes non-binding recommendations or binding decisions

4 THE AMERICAN EXPERIENCE

The use of Dispute Boards grew rapidly in the United States. By 2014 the Dispute Resolution Board Foundation (DRBF)4 had registered in excess of 2,700 dispute boards representing about US$225 billion in construction costs that have been employed in all 50 state jurisdictions, mainly by the respective transport authorities. Approximately half have been employed by the Departments of Transport (DoT) of the states of Florida and California.

It is important to understand, that DB’s are put into place very early in US practice and that they meet regularly with the Parties during the construction period.

On the basis of a 10-year sampling of experience from 3,000 projects during a period from 2000 to 2009 both with and without dispute boards, the Florida DoT conducted a review of its experience with the procedure. Those results were published by the American Society of Civil Engineers5. The study examined three dimensions of DRB impact; (i) influence on project cost and schedule performance; (ii) effectiveness of DRB’s in preventing construction disputes, and (iii) costs of DB implementation.

Projects that used dispute boards registered reductions is costs and schedule extensions of about 7% and 13% respectively and when compared to projects that did not employ dispute boards the results improved to 12% and 30% respectively. In terms of dispute avoidance projects that used dispute boards enjoyed success rates of 97% in avoiding alternate, judicial methods of dispute resolution. The estimate in the cost savings of avoided judicial procedures is not available but the study considers that amount to be substantial. With regard to the cost of the DB process the study shows that the overall average cost on all projects is 0.3% of the total contract values.

Florida State DoT now mandates the use of dispute boards on all of its contracts, regardless of value. The California State DoT experience is similar and it also mandates the use of dispute boards on all of its contracts.

The resolution rate for disputes referred to DB’s in those jurisdictions is difficult to assess because there is no reliable information available concerning the numbers of disputes that have been referred to other judicial means of resolution and where settlement transactions have been made. The measure of ‘referral resolution rate’ may be made conservatively, i.e., based on the number of referrals that led directly to settlement. On that basis the resolution rate would vary between 72% in California to about 86% in Florida.

This author considers that the ‘success rate’ of dispute boards is considerably higher and must be in the order of magnitude registered in the 2013 Florida study. As will be demonstrated by statistical information reported below, for about half the completed projects reported there were no formal referrals lodged by either party. It should be clear that in those cases the dispute boards were able to assist parties to resolve disputed issues thus avoiding formal referral procedures.

For the purposes of this article the experiences of the two mandatory jurisdictions may be summarized as follows

California

By the end of 2014 about 798 DBs have been reported in the DRBF data base for contracts having a value of about US$42.8 billion. Of those contracts, 731 contracts were completed and there were 1,191 formal referrals made, 859 (or about 72% recommendations) led directly to settlement, and the remaining 332 were under some form of consideration whereby parties were either continuing amicable settlement discussions or referrals to arbitration had been made.6

No formal referrals were made in 400 of the completed Projects, and this author considers that the DBs were influential to avoid having to issue formal recommendations.

The DRB Foundation is conducting interviews with Employers in order to expand its statistical information to the point that so-called success rates can be quantified. Preliminary information available by courtesy of the California Transport Authority (Caltrans) is indicative of the influence of DB decisions in resolving disputes and avoiding the necessity for parties to resort to other forms of resolution. Those preliminary statistics show for 1,017 DB recommendations:

• 49% of recommendations are favourable to the Contractor,

• 36% of recommendations are favourable to the Employer, and

• 15% of recommendations are partially favourable (split) to the parties.

The results go on to report the acceptance rates for unfavourable recommendations.

• The Employer has accepted about 61% of recommendations that are unfavourable;

• The Contractor accepts about 46% of recommendations that are unfavourable, and

• The parties are evenly divided on acceptance rates for split recommendations,

Florida

By the end of 2014 about 845 DBs have been reported in the DRBF data base for contracts having a value of about US$25.8 billion. Of those contracts, 806 were completed and there were only 529 formal referrals made, 451 (or about 86%) recommendations led directly to settlement, and the remaining 78 issues were under some form of consideration whereby parties were either continuing amicable settlement discussions or referrals to arbitration had been made.

No formal referrals were made during construction in 450 of the completed Projects, and the author considers that the DBs were influential to avoid having to issue formal recommendations.

5 THE AUSTRALIAN EXPERIENCE

Both DRBs and DABs are used in Australia depending on the conditions of the contract that are adopted by the Parties. There is a definite for the use of DRBs as opposed to DABs, mainly because Australian contracting authorities are reluctant to embrace the FIDIC forms of contract conditions.7

By the end of 2014 about 56 DBs have been reported in the DRBF database for contracts having a value of about US$21.4 billion. Of those contracts, 27 were completed and there were only six formal referrals made. Five (or about 83%) recommendations led directly to settlement and for the remaining two issues, the recommendations were under some form of consideration whereby parties were either continuing amicable settlement discussions or referrals to arbitration had been made.

Although the numbers of applications are less, the Australian experience appears very much similar to that of the US Florida sample.

6 THE INTERNATIONAL EXPERIENCE

The FIDIC contract form is the most widely used outside of the United States and other similar jurisdictions like Europe or Australia.

The Employer, the Engineer and the Contractor that are employed on a contract, may, and often do have different cultural origins. The introduction of the Dispute board as a contract dispute resolution neutral will often add one or three different cultural origins. The multi-cultural environment coupled with a dispute board that renders binding decisions does not gender the confidence necessary to ensure smooth and effective use of dispute boards.

More often than not, the constitution of the DAB under FIDIC contracts carried out in developing countries is left either until the end of the construction period or under slightly better circumstances until after the differences between the parties have crystallized into rigid position. Under these circumstances the DB process is often penalized.

Indeed, there are no statistics currently available whereby the success rate of the procedure can even be estimated. It is the author’s experience that under multi-cultural environments the DAB is nonetheless effective. However the endemic behavior of parties to delay the constitution of the DB drives the process away from dispute avoidance to dispute adjudication that has the unavoidable effect to increase the time and cost of contractual dispute resolution.

7 COMPARING THE INTERNATIONAL EXPERIENCE TO THE AMERICAN EXPERIENCE

There is considerable ongoing discussion as to which of the adjudication procedures, binding decisions (DAB) or non-binding recommendations (DRB). There are merits to both approaches.

In the mind of the author, the DRB process as adopted in the US is successful for at least four reasons; (i) the Boards are constituted early in the project, (ii) the Boards meet often with the parties thereby gaining their confidence, (iii) the procedure is carried out in a mono-cultural ambient and finally (iv) parties know that if the disputes are escalated to litigation DRB recommendations are seldom overturned by the courts or in arbitration.

By contrast the international experience, based mainly on DAB procedures, flows mainly from the use of FIDIC contract forms. In the mind of the author the process is successful even in consideration of the fact that; (i) standing dispute board panels are not usually put into place early in the project and often after disputes have crystallized, (ii) the ambient is multi-cultural where the nationalities of the parties, the engineer and the DAB are mostly different, and (iii) there is little or no jurisprudence to guide parties to resolve their differences. Contracting parties seem to be comfortable with the binding decisions laid down by DABs. This author expends significant effort with the parties on its Boards to avail themselves of non-binding advice. The parties opt for binding decisions by nearly a 2:1 ratio.

There is little data available for International boards that would allow a comparison of ‘referral resolution rates’ or ‘success rates’ with US boards. That notwithstanding if such data could be compiled the ‘rates’ should be comparable.

8 CONCLUSION

The dispute board process, whether DRB or DAB, has evolved over the last 40 years since its inception into an effective tool for resolving disputes at the contract level and avoiding that they escalate into costly and time consuming alternative forms of judicial procedures such as arbitration or administrative courts. The success of dispute boards largely depends on their being constituted at the outset of the construction work in such a way the board gains the confidence of the contracting parties.

Their use is cost effective. At an average cost of less than 0.5% of the contract value it is about one-fifth the cost of contractor’s all risk insurance against physical damage to the works. The DB may be considered as insurance against litigation damages that may easily outstrip any physical damage to the work.

NOTES

1
Founder of the Dispute Resolution Board Foundation.

2
DRBF Dispute Board Data Base http://www.drb.org/database_intro.htm

3
FIDIC introduced the acronym "DAB" with its 1999 Contract Suite in order to distinguish boards that issue "decisions" that are binding on the contract parties from boards that issue "recommendations" that are not binding on the contract parties (DRB).

4
One may Access the DRBF website at the following link: www.drb.org

5
Duzgun Agdas and Ralph D. Ellis; "Analysis of Construction Dispute Boards"; ASCE Journal of Legal Affairs & Dispute Resolution in Engineering and Construction; Vol 5 No. 3, August 2013.

6
There are no statistics concerning post contract settlement negotiations but the DRBF continue with its investigations with the Parties to shed further light on the quantification of dispute avoidance.

7
Finlay, Ronald A; "Australian Approach to Dispute Boards"; Dispute Resolution Board Foundation; Singapore; June 2014.