March 20, 2016

Duels, Litigation, Arbitration, or Dispute Review Boards: The Better Choice in Complex Construction Projects

In eighteenth and nineteenth century America, dueling was a popular way to resolve disputes. Men, hoping to defend their honor, turned to dueling to even the score. It was a method of alternate dispute resolution that was often not intended to be a fight to the death, but to first blood. Interestingly, the majority of duels in the south were fought by lawyers and politicians. The law profession was awash with lawyers who were in keen competition to attract their next case. Retaining one’s reputation and honor was critical and a duel was a quick way to accomplish that goal.

Although there was almost 100 percent certainty that one or both men would be wounded or killed, less than 20 percent of duels ended in death. Yet, the aggrieved man could be the one killed or maimed in the effort to vindicate his honor.

Dueling had its proponents. Some thought that the threat of a duel encouraged civility and served as a deterrent to rude and disruptive behavior.

While it’s true that it may be better to have one person take the hit for an entire clan or company unless your last name is Hamilton, dueling eventually fell into disfavor. Now, the prevailing form of dispute resolution, while perhaps less bloody, has enormous costs of its own with results that may be no less arbitrary or damaging to the parties. We think we have a better way. What if we nip the dispute in the bud before we get to the dueling point or arbitration/litigation and the spilling of blood or the scourge of litigation? Here is how to do it:

What is a Dispute Review Board and How Does it Work?

Problems, disagreements, and claims arise in most large and complex construction projects. Regardless of the project delivery method – design-build, design-bid-build, construction manager at risk, construction manager not at risk, and integrated project delivery systems – projects experience disputes that often delay and increase the cost of the project nonetheless.

Why wait until the dispute ripens into a claim before addressing the issue? You shouldn’t. A well-implemented dispute review board (a.k.a. Dispute Resolution Board, Dispute Board, Dispute Avoidance Board, or DRB) offer an excellent opportunity to minimize disputes and mitigate adverse impacts to projects.

What’s the difference between mediation, arbitration and a DRB? Good question; easy answer. A DRB – convened at the very beginning of the project – conducts regular meetings and visits to the project site which allow the DRB to discuss, observe, and monitor construction, progress, and potential disputes. At these meetings, the DRB members become familiar with many of the facts and acquaint themselves with the job site personnel. If a dispute is submitted to them subsequently, the panelists have a great deal of knowledge about the circumstances of the problem to aid them in reaching their conclusions. DRBs also have the wonderful effect of encouraging open, honest, and frank communications among or between the parties during the project, which in turn, encourages resolution of disputes before they become formal claims.

That’s it – real time discussion of the dispute with highly qualified people who know the particular project from day one and can provide recommendations on how to resolve the dispute.

When a dispute cannot be resolved by the parties through negotiation, either party may submit the dispute to the DRB for a formal non binding recommendation. Project personnel for each party present their side of the dispute to the DRB – in an informal setting usually without lawyers. The parties also have the option to contact in advance to make a DRB recommendation binding under certain circumstances

How to Form a DRB

A DRB is formed by contract – between the owner and the contractor. Both the Dispute Resolution Board Foundation (www.drb.org), and ConsensusDocs (www.consensusdocs.org) have sample provisions. The DRBF Practices and Procedures contains a set of guide specifications for use in contracts. The factors that should be addressed in the contract include the following: (i) qualifications of DRB members; (ii) ethics requirements (neutrality); (iii) selection process for DRB members; (iv) timing of selection of DRB members; (v) payment of DRB members; (vi) timing of site visits; (vii) method of referral of disputes to the DRB; (viii) prehearing submissions; (ix) hearing procedures; (x) DRB recommendations; (xi) admissibility of DRB recommendations in future proceedings; (xii) informal or advisory opinions; and (xiii) clarification and reconsideration. The Project Finance Committee of the ABA, Business Law Section will be publishing its own sample provisions in the near future. A discussion of appropriate provisions to be agreed upon by the parties and the agreement to be executed among the DRB member and the parties is beyond the scope of this article.

Generally, a DRB panel consists of three members, although smaller projects (costing less than $10 million) may have a single panelist. There are different ways to select a panel: (1) the parties meet and jointly agree on all three members of the DRB; (2) each party nominates a board member and the two board members then nominate a third member. All three should be approved by both parties. Typically the third member serves as chair and all three members of the DRB become neutral upon appointment; and/or (3) each party proposes a list of three to five members. Each party selects from the other party’s list, and the two DRB members then select the chair subject to approval by both parties.

The characteristic that distinguishes DRBs from almost every other form of ADR is regular meetings and site visits that take place during the performance of the work. Depending upon what the parties decide, DRBs visit the project monthly, four times a year, or at some other agreed interval.

During the meetings, the DRB and parties discuss the progress of the work since the last meeting, difficulties encountered, schedule status, and potential claims and disputes. The DRB members visit the site to observe the construction, with emphasis on the areas of potential disputes. Conversations that take place during these monthly meetings are often deemed confidential settlement negotiations to encourage an open exchange of information and ideas from all participants, so an optimal plan forward can be agreed upon. At its regular periodic meetings, a DRB may be requested to offer informal oral “advisory” opinions. All affected stakeholders should be invited to attend these monthly meetings, including major subcontractors and tenants.

The regular meetings and site visits serve several important purposes. The DRB can observe the construction as a whole and in particular, the construction giving rise to the dispute. As a result of obtaining information in real time, DRB can facilitate or determine the resolution of a potential dispute.

The DRB have the opportunity to meet the job site personnel in an informal, nonadversarial setting when there are no disputes. This knowledge of the individuals, gained during the site visits, assists the DRB in evaluating the subsequent presentations to the DRB by the parties. And with all due respect to our readers, the DRB often hears about the disputes before the attorneys have the chance to frame the claims and coach the witnesses.

The presence of the DRB often encourages settlement and resolution of disputes even before formal presentation to the DRB. The parties openly discuss potential claims with each other at each DRB meeting. The DRB facilitates nonadversial discussions – which facilities negotiation and resolution of the issues. In addition, a knowledgeable and well-regarded DRB usually develops the respect of the parties during the site visits. If so, the parties may be reluctant to present frivolous claims and are more likely to value and adopt the recommendations of the DRB.

Don’t try to save dollars by eliminating the DRB’s regular meetings and site visits. If you do, the DRB simply becomes a nonbinding arbitration panel. If your DRB operates as designed, your disputes may never need a formal DRB hearing. The written recommendation of the DRB may be binding or nonbinding. The trend in the United States is for written recommendations of the DRB to be nonbinding. The contract may provide that written DRB recommendations are admissible as reports of jointly selected experts, or that the recommendations are inadmissible in subsequent arbitration or litigation proceedings. Our preference is for nonbinding, admissible recommendations.

What’s in This for Methe Owner/Developer?

Owners implement DRBs: (i) to avoid claims, particularly massive claims at the end of jobs asserting difficulties from the early project stages, (ii) to minimize impacts on the project schedule due to unforeseen conditions or unanticipated late changes in the scope of the work, and (iii) to maintain predictability over the use of available funds. The use of a DRB also helps to attract and increase competition because some international infrastructure contractors are hesitant to bid on a project that does not have a DRB. A public owner must ensure that the DRB is within the boundaries of best construction practices and that it would be a prudent expenditure of public dollars.

The following are some DRB attributes that are attractive to owners:

  • Effect Future Behavior: Unlike mediation, arbitration, conciliation, litigation, standing neutral, and early case evaluation services, DRBs offer the opportunity to impact future behavior on a project. Neither mediation nor arbitration offers the parties this benefit, because these processes evaluate past behavior.
  • Elicit Cooperation: DRBs can convert into arbitration panels, either binding or nonbinding, and so, are more effective than traditional partnering programs in eliciting cooperation among the parties and resolving the disputes.
  • All Stakeholders Can Participate: Stakeholders who are not direct parties to the construction contract (i.e., subcontractors, tenants, and lenders) can participate in DRB meetings, which enables consensus to be reached with all interested parties in a single forum to benefit the project.
  • Validation of Owners’ Decision: In the context of a hierarchical bureaucracy (which can impose oversight by elected officials, administrative supervisors, auditors, outside funding agencies and boards) a DRB offers independent, neutral, and competent validation of decisions by the owner’s staff to pay for extra work during the progress of the project. An owner’s representative that has considered the input of a DRB is less likely to be accused of unnecessarily folding to a contractor’s demands.
  • Projects Are More Collegial: Projects with DRBs have a job-site ambiance that is more collegial and less adversarial than traditional projects. No owner wants to have the job that the contractor hates to work on.
  • No Surprise Claims: Surprise claims are almost eliminated. Job conditions are discussed regularly, and a contractor’s failure to raise a significant job condition at DRB meetings can lead to a waiver or abandonment of claims arising from prior impacts it failed to disclose to the owner.

Panel Selection

Panelists are selected for their personal and professional qualities. They must be sufficiently experienced in the type of work required by the contract so that they bring value to the table as trusted mentors and technical resources for the project team (usually engineers, and sometimes construction lawyers). They should also possess the interest, training, and temperament to facilitate a project with humor and calm professionalism. Prospective panelists should commit to be available to convene on the schedule that the project demands, and should not be so busy that meetings are delayed or postponed to accommodate panelists’ schedules. Facilitative skills are valuable for the regular meetings, and in the event that a formal hearing is needed, administrative management skills will be crucial for DRB members.

The DRB works well only when the parties trust the panel. It is critical that panelists maintain actual and the appearance of impartiality and neutrality. Ex parte communications are strictly prohibited, including written, electronic, and verbal communications. Similarly, and as distinguished from a mediation process, private caucuses with a single party are prohibited.

The DRB members must be objective, impartial, neutral, and without conflicts of interest. Prior to selection, prospective panelists disclose past and current relationships that could give rise to a perceived conflict of interests, or that could indicate a lack of neutrality with regards to members of the project team. These disclosures are similar to those made by prospective mediators or arbitrators. The disclosure must be updated on a regular basis if there is any change.

DRB Hearings

Either party may refer a dispute to the DRB at any time. The parties then submit short, concise position papers and relevant documents. No discovery is permitted, although the DRB members have the right to request information they believe is necessary for resolution of the dispute.

The hearings are dramatically different than hearings in arbitration and litigation. They are informal and nonadversarial – much more like a mediation presentation than an arbitration hearing. The presentations are made by the persons involved in the actual construction. The witnesses are not sworn. Openness, candor, and full disclosure are encouraged. Typically, lawyers are not allowed to make presentations, except to address legal issues. While cross-examination is not permitted, the parties may suggest questions to be asked, and the DRB members are allowed to ask questions. Even without cross-examination, the DRB can evaluate credibility because they know the witnesses and the facts from the meetings and site visits.

Findings and Recommendations

Written Findings/Recommendations

Unlike an arbitration panel or court, the DRB does not issue a decision, verdict, or award. Instead, it provides written findings and recommendations that include an analysis to support its conclusions. The findings and recommendations are not binding.

The DRB must persuade the parties that its conclusions should be accepted. The parties typically use the findings and recommendations as a basis to negotiate a final resolution of the dispute. However, some contracts provide that the findings and recommendations become final if not rejected in a timely manner.

DRB findings and recommendations are generally admissible in a subsequent court or arbitration proceeding. Good arguments can be made for both approaches.

The admissibility of DRB’s findings and recommendations in a later proceeding provides a major impetus for the parties to accept them, despite being nonbinding. However, admissible findings and recommendations may cause the parties to treat the DRB hearing more like an arbitration or litigation, and therefore to seek discovery and other legal protections. In addition, the admission of the DRB findings and recommendations may have an undue influence on a court or jury, who are likely to accept the DRB’s findings and recommendations because they come from experts in the industry selected by the parties before the dispute, even though the findings and recommendations are based on unsworn testimony and hearsay that is not subject to cross-examination or other procedural safeguards. Keep in mind that DRB findings and recommendations should be based on law and should enforce the contract provisions.

Oral Recommendations

We recommend including an informal or advisory DRB process in the DRB specifications. In this process, the parties typically provide the DRB with concise position papers and documents shortly before a regularly scheduled DRB meeting. Abbreviated oral presentations are made at the meeting. Quantum is usually not addressed unless that is a sticking point.

The DRB deliberates after the presentations and provides an immediate verbal advisory recommendation. The advisory recommendation does not preclude the parties from subsequently pursuing the dispute through the formal DRB process. This informal advisory process provides the parties with a far faster and less expensive method to resolve their disputes, particularly small disputes, and have it occur in real time.

Cost of the Dispute Review Board

The cost of the DRB depends on the frequency of the meetings and the length of the project. While the compensation of a DRB varies from project to project, fees in the neighborhood of $2,000 per day per member are not uncommon. A DRB holding no formal hearings might cost approximately $40,000 to $75,000 per year. On smaller projects, half-day meetings may be sufficient, at a lower cost.

Each panelist is individually engaged by contract at an hourly or daily rate. Sometimes the cost of regular meetings is shared between the owner and contractor, but often the owner pays all costs of regular meetings, and splits only the costs of dispute hearings, should any be needed. Another option is to include an allowance in the contract for the DRB costs. The engagement should provide that panelists may not be called to testify in any subsequent arbitration or litigation proceeding.

Removal or Termination of a DRB Member

The effectiveness of a DRB depends upon its ability to persuade the parties to accept its recommendations. If a party does not trust a DRB member, that party is unlikely to be persuaded by the DRB or that member. However, one party’s dissatisfaction with a DRB would allow that party to change the composition of the DRB just because that party was unhappy with the findings and recommendations of a DRB member or any other reason – leading to abuse of the process.

In addition, the new DRB member would not have the benefit of prior site visits, thereby defeating one of the main advantages of the DRB. The dismissal of a member without a substituted appointment, however, could cause serious prejudice.

The DRB Foundation recommends that a party may not terminate a panel member without the consent of both parties. If one party objects to a member and the DRB concludes that the member is a detriment to the DRB process, that member should resign. If the DRB, however, determines that the DRB member is impartial and one party still objects to the member, then the DRB has lost much of its effectiveness and, the entire DRB should offer its resignation – even though this solution is less than adequate.

Duels or Dispute Review Boards

Duels were a crude form of dispute resolution that sought to make the stakes of a dispute so high that people would curb their behavior to avoid disputes. Litigation has similar attributes. But disputes in large scale construction projects are inevitable. The use of DRBs is very likely to resolve most, if not all of, a project’s disputes in real time before the disputes are brought in arbitration or litigation, and to preserve everyone’s honor.

Additional Resources

For other materials on this topic, please refer to the following. 

The Business Lawyer

An Overview of the General Counsel’s Decision Making on Dispute-Resolution Strategies in Complex Business Transactions
By E. Norman Veasey and Grover C. Brown
Vol. 70 No. 2 Spring 2015 

Business Law Today

The Conundrum of the Arbitration vs. Litigation Decision
By E. Norman Veasey
Vol. 25 No. 4 December 2015 

Business Law Section Program Library

Avoiding a Train Wreck: Best Practices for Muli-Tracked Litigation, Mediation, & Arbitration (PDF) (Audio)
Presented by: Dispute Resolution, Business and Corporate Litigation, Corporate Counsel, Judges Initiative
Location: 2015 Annual Meeting

The Essential Components of a Successful Corporate Dispute Resolution Program, and How to Ensure an Efficient and Effective Arbitration Process Using the AAA’s New Commercial Rules (PDF) (Audio)
Presented by: Dispute Resolution
Location: 2014 Spring Meeting