ICC Paris, 8 January 2018

In his opening remarks, Aladin Masri (President and co-founder of YPCP) said a few words about YPCP and emphasised the need for practitioners to be aware of and acquainted with the different procedural stages in a construction dispute.

The panel, moderated by Maria Hauser-Morel (Counsel in the Eastern European Team of the ICC Court Secretariat) was composed of Alina Leoveanu (Manager of the ICC International Centre for ADR; ICC YAF Co-Chair), Valentine Chessa (Partner at CastaldiPartners, Paris; Board member and Events Co-Director for Europe of ArbitralWomen), Matthias Scherer (Partner at Lalive, Geneva) and Anthony Charlton (Partner and Head of International Arbitration at Deloitte Forensic, Paris).

Maria Hauser-Morel opened the debate by asking the panellists what grounds most commonly trigger a construction dispute.

Matthias Scherer underlined that construction projects are long-term projects and therefore allow much room for error, with the constraint of very reduced margins (i.e. 5% in average) and substantial amounts of money at stake. Valentine Chessa pointed out that one of the recurrent issues in the Italian construction market is that employers award projects on tight budgets and contractors often undervalue their bids in order to win the project. Recalling recent statistics, Anthony Charlton, highlighted that 60% of construction projects are completed late and 31% exceed budget. He noted that many construction projects have in fact a margin as low as 2% and that some contractors operate with negative margins, hoping to obtain variations at a later stage of the project and to profit from those variations. He also emphasised that, while the construction industry has been slow to adopt technology advances, it is likely that it will heavily invest to benefit from costs, time, efficiency improvements and provision of project data that technology now affords, especially as new advances in construction systems appear on the market every day.

Dispute Boards and pre-arbitration settlements

Maria Hauser-Morel asked the panellists whether their clients were aware of the importance of inserting a multi-tier dispute resolution clause during contractual negotiations. Valentine Chessa replied that when drafting contracts, clients mainly consider how to quickly solve (potential) disputes and preferably avoid litigation and/or arbitration, but do not entirely understand the real purpose, or advantages, of a multi-tier dispute resolution clause. The speaker and the moderator both explained this by the fact that lawyers are often involved too late in the proceedings. Matthias Scherer added that dispute resolution clauses included in FIDIC contracts are extremely elaborate and may represent an additional source of disputes.

Chris Seppälä (Partner at White & Case, Paris; FIDIC Observer at the ICC Court), who was in the audience, emphasised that it is for the project’s owner – and not for the contractor – to finance the project but that the owner often underestimates the financial weight of the works. This underestimation often leads to a shift of the project’s financial costs, resulting in the contractor financing the project. The focus of the FIDIC dispute settlement mechanism hence allows the contractor to receive the funds he is entitled to and for the works to continue.

The discussion then turned to the initial stages of a construction dispute. Alina Leoveanu provided an overview on Dispute Boards from the ICC International Centre for ADR’s perspective. Under the ICC Dispute Board Rules, the Centre can (i) provide for appointments of Dispute Board members, (ii) decide the challenges filed against Dispute Board members, (iii) review the DB decisions, and (iv) fix the fees of DB members.1 She also noted that, today, lawyers are more involved in pre-arbitration stages and that the goal of the Centre is to allow projects to continue and parties to avoid disputes, or possibly settle before arbitration is initiated.

Maria Hauser-Morel underlined that this also depends on the parties’ legal background, as for instance Eastern European state entities are rarely willing to pay for procedural costs unless there is a judge or arbitrator’s decision. Anthony Charlton noted that he is rarely consulted at the pre-arbitration stage, but admitted that an expert’s involvement at this stage would be useful to assist parties to precisely identify and quantify their claims – and thereby assess the opportunity for commencing a dispute. Gaëlle Fihol (Partner at Betto Seraglini, Paris) from the audience added that, in her experience, Dispute Adjudication Boards (‘DAB’) have helped the parties to decide – and eliminate – some of the claims, especially in large and complex construction disputes involving a number of different claims.

Maria Hauser-Morel then moved on to discuss what happens after a DB decision. Valentine Chessa recalled the long debate generated by the Persero saga regarding the enforcement of DAB decisions that are binding but not final. Matthias Scherer noted the discrepancy of technical know-how between the DAB members and the arbitrator, and how the DAB decision may be difficult to enforce by an arbitrator without the assistance of an expert. In his view, this problem should not exist: a simple review issued by a Dispute Review Board (‘DRB’) should be sufficient to resolve the matter between the parties, without the dispute having to escalate to a formal arbitration process. Today, the issue seems to have come to an end with new Clause 21 of the FIDIC standard form of contracts (the second edition of the Rainbow Suite – Red, Yellow and Silver Books), which introduces a new Dispute Adjudication/Avoidance Board (‘DAAB’). As a result, sub-clause 21.7 ‘Failure to comply with DAAB’s decision’ now refers to ‘any decision of the DAAB whether binding or final and binding’.

The moderator then asked the panellists about their experience with pre-arbitral settlement negotiations, and whether clients approached them with a real intent to settle or merely in the frame of a mandatory procedural step. Matthias Scherer noted that he had been involved very late in the settlement process, and Anthony Charlton added that clients almost never involve experts at this stage. Alina Leoveanu reminded the audience that the ICC International Centre for ADR also administers settlement negotiations, but admitted that parties rarely take the negotiation step seriously and often only comply because it is mandatory under the contract. She however emphasised that, in cases where settlement negotiations are seriously considered by the parties, the results are paying off and the parties’ contractual relationship is being restored. Chris Seppälä stressed the fact that mandatory negotiations represent a cooling-off period, and offer the parties a valid opportunity to settle the case and avoid the dispute. This is all the more relevant to those parties, like state entities, who would never otherwise spontaneously propose a settlement negotiation and take the risk of appearing weak in front of their opponent. He also underlined that, in the new FIDIC Rainbow Suite, the cooling-off period is reduced from 56 to 28 days. The moderator concluded by stating that, although it is relatively rare for a party to an arbitration to raise the inadmissibility of a claim on the basis that the mandatory settlement negotiations have not been seriously conducted, it is always better to properly document the effort in order to avoid potential admissibility objections or issues at the enforcement stage.

Selecting counsel, arbitrators and experts

The conversation then focused on external counsel and their role. The panellists all agreed on the importance of engaging lawyers who are experts in the field of construction, especially if the engineers involved in the project are not available, but, above all, so that everyone can speak and understand the same technical language. The moderator however noted that in small cases, parties tend to not be represented by external counsel, and it often works. Matthias Scherer reminded that state parties often have peculiar and lengthy procurement procedures in order to appoint an external counsel and are, in the alternative, represented by the state advocates.

Maria Hauser-Morel discussed the importance of appointing arbitrators experienced in construction disputes. Matthias Scherer referred to ICSID cases in the construction area, noting the scarcity of arbitrators who are both well versed in jurisdictional aspects (an expert in investment law) and able to understand the merits (a construction lawyer). He added that, when acting as counsel, he does not find it easy to find competent arbitrators willing and able to take on technical construction disputes. Anthony Charlton stressed the importance of appointing arbitrators who understand the experts’ technical language, which is not always the case. In this respect, he reported that his clients have sometimes involved him in the selection of counsel and arbitrators.

Mr Charlton stressed that a good expert ensured the reasonableness of the analysis and result, especially when faced with a document which is unfavourable to its client’s position. He also stressed the benefits of joint experts’ meetings and expert conferencing, which often reveal common grounds and allow for some parts of the dispute to be disposed of, thus reducing the time and costs of the arbitration. As reminded by Ms Leoveanu, ICC can also assist the parties in the appointment of experts and administer expert determination procedures.

ICC Dispute Board Rules are available in different languages at https://iccwbo.org/dispute-resolution-services/dispute-boards/rules/ .