Transnational Construction Arbitration

Renato Nazzini

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CHAPTER 13 Dispute boards

Nicholas Gould Christina Lockwood

Introduction

What is a dispute board?

13.1 A dispute board is an independent and impartial person or panel of three or more persons appointed by the parties to a contract to avoid and resolve disagreements that may arise in the course of the contract as quickly and sensibly as possible. 13.2 Dispute boards are ideally set up at the commencement of a project, and remain in existence for its duration. In contrast to other forms of dispute resolution (such as arbitration, adjudication or litigation in court) dispute boards become part of the project team and act in ‘real time’, rather than dealing with events that happened in the distant past. Dispute boards are different from the other forms of dispute resolution because they provide a continuing forum for discussion of any issues that might become contentious, and thus avoid disputes or resolve them as soon as they arise.

Legal basis for dispute boards

13.3 Dispute boards (DBs) are created by contract. The basis for the DB’s decisions is grounded in the law of the country in which the contract is executed, or the country agreed on by the parties. The law of the relevant country ultimately governs the execution of the DB’s decision. For example, the FIDIC contracts state: ‘The Contract shall be governed by the law of the country (or other jurisdiction) stated in the Appendix to Tender.’ The common law and the civil law are the world’s major legal systems that govern contracts – and dispute boards.

Common law

13.4 The common law constitutes the basis of most English-speaking and/or British Commonwealth countries, including: England and Wales, the Republic of Ireland, Northern Ireland, India, Hong Kong, Canada (except Quebec), the USA (except Louisiana), Australia, New Zealand, Sri Lanka, Malaysia, Pakistan, Singapore, Malta, Israel and South Africa.1

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13.5 Common law has developed by custom and practice before there were any written laws. During the reign of Henry II in 1154, a unified system of law was introduced, which was ‘common’ to England. The King’s central court sent judges all over the country to hear and resolve disputes on an ad hoc basis, in accordance with their interpretation of the local customs. The judges returned to London and discussed their cases and decisions with the other judges, and then recorded their decisions. This is how the system of precedent developed in England: the idea that like cases should be treated alike – a system of ‘common law’ where judges make consistent decisions.2 A judge is bound to follow the decision of an earlier judge and to adopt the earlier judge’s interpretation of the law and apply the same legal principles if the two cases have similar facts. The use of precedent provides predictability, fairness and efficiency in the law. 13.6 In most common law countries, in addition to court decisions, there are statutes that modify the common law. In other words, the various court decisions form the basis of contract law, but are further ‘codified’ by the legislature of the particular (common law) country.

Civil law

13.7 The world today is divided into some 185 countries that make up the United Nations organisation of sovereign nation-states. The overwhelming majority of these countries consider themselves code law countries and pattern their legal systems after those of western Europe. The civil law developed out of the Roman law of Justinian’s Corpus Juris Civilis and is based on written codes and statutes. The civil law is the predominant legal system in the world today in force in various forms in about 150 countries. Local compilations of legal principles and customary law were codified over time in order to achieve certainty of law and uniformity. The ‘civil codes’ started with the Napoleonic Code in 1804. Countries with comprehensive codes that are regarded as typical of civil law systems are France, Spain, Italy, Germany, Austria, Greece and Latin America.3 Even Japan and China have adopted modern Western-style codes and in the Middle East there is a mixture of code law concepts and Islamic law. 13.8 In civil law countries legislation is the primary source of law and judgments are based on the provisions of codes and statutes. Courts have to reason on the basis of the rules and principles of the code, often drawing analogies from statutory provisions to fill any gaps in the understanding of the statute and to achieve coherence.

Adjudication and dispute boards in England

Demand for amicable dispute resolution

13.9 The first case in England to legitimise dispute boards was The Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd,4 when the House of Lords held that the contractual dispute resolution mechanisms chosen by competent commercial parties should

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not be interfered with. The House of Lords held that the whole dispute resolution clause was binding on the parties ‘unless it broke down’. The Channel Tunnel contract (a modified version of the FIDIC Red Book, 3rd Edition) used a version of the contemporary dispute board ‘panel’. This panel was governed by contractual language very similar to current dispute adjudication boards under FIDIC contracts. 13.10 The House of Lords decision in the case of The Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd makes clear that dispute adjudication board’s decisions should be given effect until revised in arbitration, and that the courts should not involve themselves in the dispute board process. The intent of such contractual clauses is to make the dispute adjudication board’s decision binding without further ado, and allow the project as a whole to proceed as quickly as possible and without the delay of lengthy arbitration or other proceedings.5 13.11 Since the Channel Tunnel case, dispute boards have become an increasingly common method of resolving contractual disputes during the lifetime of a contract. In the last 25 years, there has been an increasing demand for less adversarial dispute resolution methods such as mediation and dispute boards. Conflict is an inevitable part of life. It cannot be eliminated, but the way we deal with conflict can be transformed. 13.12 Dispute boards have deep roots in arbitration. However, dispute board members are not arbitrators. Arbitrators listen to the evidence presented to them; whereas dispute board members have a broader-based function: that of inquisitor and dispute avoider. Dispute board members do listen to evidence presented to them, but also work with the parties in order to avoid disputes and to find out the relevant facts about an emerging dispute. 13.13 Much like arbitration, dispute boards may benefit from pre-existing procedural rules or frameworks, which can be easily referenced and incorporated into a contract.6 13.14 Dispute boards are now an internationally recognised concept and are frequently included by default, for example by the use of standard FIDIC contracts, or by imposition of the development banks by virtue of their procurement procedure.7 13.15 In contrast to other forms of dispute resolution (such as arbitration, adjudication or litigation in court) dispute boards become part of the project team and act in ‘real time’, rather than dealing with events that happened in the distant past. The dispute board can positively influence the contracting parties and avoid disputes by keeping the communication between the parties alive and productive.

English adjudication enforcement

13.16 In the case of Macob Civil Engineering v Morrison Construction Ltd 8 the High Court of Justice of England and Wales held that an adjudicator’s decision remained binding and could therefore be enforced, notwithstanding that one party challenged its validity. The court provided that summary judgment would be the normal way to

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enforce an adjudicator’s decision. Macob Civil Engineering – the claimant – applied to enforce an adjudicator’s decision and Morrison Construction Ltd – the defendant – contended that the decision was in breach of the rules of natural justice and served an arbitration notice. The defendant applied for a stay under Section 59 of the Arbitration Act 1996 on the basis that the dispute had to be determined by arbitration before the court could enforce the decision. 13.17 Dyson J confirmed that the decision of an adjudicator was enforceable summarily regardless of any procedural irregularity, error or breach of natural justice. The judge adopted a purposive approach to the construction of the word ‘decision’, refusing to accept that the word should be qualified: a decision whose validity was challenged was still a decision within the meaning of the Housing Grants, Construction and Regeneration Act 1996. Therefore, the decision was enforceable and binding until the challenge was finally determined. 13.18 The case of Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd 9 shows that even when an adjudicator gets things wrong, his or her decision can still be upheld by the courts. Bouygues (UK) Ltd, the claimant, and Dahl-Jensen (UK) Ltd, the defendant, both issued notices to adjudicate that were referred to the same adjudicator and it was agreed that Bouygues’s claim should be treated as a counterclaim to that of the defendant. 13.19 The adjudicator decided that the defendant was entitled to a further £208,000, which the claimant disputed. Dyson J had to consider whether the adjudicator’s error in not allowing for the retention in his calculations was sufficient to allow Bouygues to resist enforcement of the adjudicator’s decision. Dyson J had previously decided in Macob Civil Engineering v Morrison Construction that: ‘Decisions of adjudicators are binding and are to be complied with until the dispute is finally resolved.’ 13.20 Dyson J held that the adjudicator had the jurisdiction to answer the question put forward and that the adjudicator’s decision was binding on the parties and subject to summary judgment. The claimant launched an appeal against this judgment, but the Court of Appeal held that when an adjudicator makes an error in calculating an amount payable to a party, the effect of which is to pay monies that are not due under the contract, that decision would not be void, provided the adjudicator had answered the issue that has been asked of him in which case a mistake in answering that issue did not prevent the decision being enforceable. 13.21 Both judgments were given when adjudication was still a relatively new process. Interestingly, for statutory adjudication the ‘doctrine of unreviewable error of an adjudicator within jurisdiction’ is now known in the Technology and Construction Court (TCC). In the case of Urang Commercial Ltd v Century Investments Ltd,10 Edwards-Stuart J referred to Bouygues v Dahl-Jensen and Macob Civil Engineering Ltd v Morrison Construction Ltd when stating that ‘it is now firmly established that an error of law or fact made by an adjudicator when deciding an issue referred to him is no defence to an application to enforce the award’.11

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Types of dispute boards

13.22 There are several established types of dispute boards and within those types the powers granted to the dispute board can vary widely. The main types of dispute board are dispute review boards (DRBs) and dispute adjudication boards (DABs), collectively referred to as dispute boards or DBs. DBs comprise one or three (sometimes five) independent and impartial members who assist the parties of substantial projects in resolving disagreements arising in the course of the contract.12

DRBs

13.23 Dispute review boards originate in the construction industry in the USA, and are still found predominantly in the USA. DRBs make non-binding recommendations about disputes arising during a project. The board takes in all the facts of a dispute and makes recommendations on the basis of those facts and its own expertise. A DRB could also be considered a flexible and informal advisory panel, who might be asked for general advice on any particular matter before issuing a recommendation.

DABs

13.24 As adjudication developed in the 1990s, the World Bank and FIDIC opted for a binding dispute resolution process, so the dispute adjudication board was born. DABs issue decisions that must be implemented immediately and are binding on the parties unless revised by an amicable settlement or arbitration. 13.25 The World Bank and a number of other multilateral development banks (MDBs) have for many years adopted the FIDIC Conditions of Contract for Construction, First Edition 1999 as part of their standard bidding documents, that their borrowers or aid recipients had to follow, but they included additional clauses that were specific to and varied between the MDBs. This created inefficiencies and uncertainties amongst the users of the documents. The MDBs recognised this and together with FIDIC harmonised their tender documents including their DB provisions on an international basis. 13.26 A special MDB harmonised edition of the FIDIC 1999 Conditions of Contract for Construction for MDB financed contracts was released in May 2005 (the MDB Harmonised Construction Contract). The third amended version of the MDB Harmonised Construction Contract was published by FIDIC in June 2010, which is the standard set of contract conditions adopted by the leading development banks.13

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13.27 The MDB Harmonised Construction Contract was not intended to replace the standard FIDIC Conditions of Contract for Construction, First Edition 1999, which is still available to all users.

DRB or DAB

13.28 The dispute board rules of the Chartered Institute of Arbitrators (the CIArb Rules) are based on two types of dispute board: dispute review boards (DRBs) and dispute adjudication boards (DABs).14 It is up to the parties to elect which alternative they favour and incorporate the corresponding dispute board clause into their contract. The parties should then adapt the chosen clause to suit their needs and verify that it is enforceable under applicable law. The only difference arising from the parties’ choice of a DRB or a DAB under the CIArb Rules is that DRBs issue non-binding recommendations, whereas DABs issue binding decisions.

CDBs

13.29 The International Chamber of Commerce (the ICC) gives parties a choice between three alternative types of dispute board, each distinguished by the type of conclusion it issues upon a formal referral: DRBs, DABs and Combined Dispute Boards (CDBs).15 The CDB procedure is a hybrid between the DRB and DAB. CDBs may prove useful for those parties who cannot decide if they need a DRB or a DAB, but the combination of DRBs and DABs into a CDB could make the dispute board procedure somewhat cumbersome. 13.30 CDBs issue recommendations with respect to disputes, but they may instead issue a (temporarily binding) decision if one party requests this and no other party objects thereto. Such decision must be implemented immediately. If one party objects to the CDB issuing a binding decision, the CDB shall decide whether to issue a recommendation or decision. This leads to a period of uncertainty as to what type of determination (binding decision or non-binding recommendation) the CDB will issue.

Pro et contra

Benefits of dispute boards

13.31 Claim avoidance is clearly one of the positive attributes of dispute boards. Disputes are costly in time, money and reputation. The key characteristic that sets DBs apart from other non-court dispute procedures is that its establishment at the start of a project enables the board members to monitor the project’s progress and be available as soon as the seeds of a dispute are sown. The early intervention of the DB before parties

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become entrenched in their positions may avoid the dispute altogether or lead to an early resolution while the project continues. 13.32 The revised Dispute Board Rules of the International Chamber of Commerce in force as from 1 October 2015 (the ICC Rules) emphasise the importance of dispute avoidance and spell out the three basic functions of dispute boards: (1) If the DB perceives a potential disagreement, the DB may encourage the parties to overcome it on their own.16 (2) If the parties are unable to avoid a disagreement, the DB may provide informal assistance in order to resolve it, by having a conversation with the parties or by giving any other form of assistance.17 (3) If a party formally refers a disagreement to the DB for a conclusion, the disagreement becomes a formal dispute and the DB shall issue a recommendation or decision, as the case may be.18 13.33 The CIArb Rules spell out the importance of dispute avoidance and informal advice in Article 12:

Article 12

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