October 09, 2020 Dispute Resolution Magazine

Dispute Boards: An Approach to the Efficient Resolution of Conflicts in the Construction Sector

Albert Bates Jr. and R. Zachary Torres-Fowler
Dispute Boards: An Approach to the Efficient Resolution of Conflicts in the Construction Sector

Dispute Boards: An Approach to the Efficient Resolution of Conflicts in the Construction Sector

Imagine a complicated engineering and construction project that has lasted years and has already cost hundreds of millions of dollars. During the project, the contractor submitted dozens of claims for additional time and money – all of which the project’s owner has rejected. Amid mounting costs, claims from various subcontractors and suppliers boiling to the surface, and the threat of liquidated damages or even termination of the project, the contractor proceeds without receiving any relief from the owner. Although the parties have tried to resolve their disputes through negotiation and even mediation, they have not been able to reach an acceptable settlement. The contractor says it has incurred significant costs to perform the work and feels it is essentially funding the owner’s changes to the project. The owner, however, says the disputed issues are the contractor’s, not the owner’s risk. Accordingly, without a dispute resolution mechanism in place to resolve these disputes in real time, the costs continue to mount, and the prospect of a lengthy, expensive, and protracted arbitration or litigation looms.

As stakeholders in the construction community know all too well, this scenario is not an uncommon one. Indeed, complex infrastructure and other construction mega-projects, whether domestic or international, are often lengthy, highly technical, and involve multi-tiered commercial relationships in which parties have millions, if not billions, of dollars at stake. These complexities mean that construction projects almost inevitably give rise to disputes, sometimes even over the smallest of details. As a result, over the past several decades, the construction industry has developed a unique dispute resolution approach known as a dispute board to quickly and efficiently resolve disputes and avoid or minimize the need to resort to formal litigation or arbitration.

“Dispute board” is a generic term that describes a panel of three independent and impartial individuals such as lawyers, engineers, and other experts who are selected by the contracting parties to resolve project-level disputes before the commencement of more formal dispute resolution processes such as arbitration or litigation. Dispute boards attempt to facilitate the resolution of disputes by mediating issues that arise during an extended project or adjudicating more contentious disputes. 

This article introduces this approach by summarizing the advantages and disadvantages of dispute boards, discussing some key variables and features parties should consider when deciding to utilize a dispute board, and exploring how other industries might adopt this useful and efficient dispute resolution tool.

Advantages and disadvantages

On high-value construction projects of significant durations, dispute boards can be a cost-effective method for resolving project disputes without souring project-level relationships or disrupting the progress of the work.

A readily available panel of experts who are well versed in the nuances of a specific project can moderate the parties’ positions and facilitate compromise. Parties are often less willing to take extreme positions before a dispute board because the board’s members, with their relevant backgrounds and familiarity with the project, can be expected to parse through many of the technical issues presented by the parties. Moreover, because dispute boards are often engaged for the duration of the project, a party that decides to take an extreme position before the dispute board may risk losing credibility in the long run.

The dispute board members’ knowledge and understanding of the project also often give parties confidence that the dispute board will fairly and carefully address their concerns. In doing so, parties may be more willing to accept the dispute board’s decisions, even ones that are unfavorable. Indeed, statistics suggest that dispute board decisions are rarely challenged in subsequent litigation or arbitration.

Dispute boards also save time. By ensuring that contentious disputes, many of which involve significant cost and time ramifications, can be resolved in real time, a dispute board limits the risk that a contractor, subcontractor, or supplier will suffer the severe cash flow limitations that can come with protracted disputes. Specifically, during construction disputes, when an owner believes it has been wronged by a contractor, the owner commonly withholds payment from the contractors to protect itself from loss. Because contractors often rely on the cash flows generated by the project payment process to finance their efforts, any withholding of money could force the contractor to fund the project on its own. Further, when the value of the withholding is substantial, protracted disputes can jeopardize not only the project but the financial health of the contractor and its subcontractors as well.

Dispute boards can save money, too. Because dispute boards offer a less formal process that does not necessarily require the direct involvement of outside attorneys and experts (though many parties do consult with attorneys and experts behind the scenes), the cost of resolving a dispute is often less than it would be in conventional arbitration or litigation. This is especially helpful for low-value disputes that might not be worth litigating or taking to arbitration. Although parties usually present a number of disputes to a dispute board at a time, the cost of doing so can be relatively low when compared to more conventional dispute resolution proceedings, meaning that dispute boards can limit the need to aggregate large numbers of claims until they reach a value that would justify arbitration or litigation.

That said, dispute boards are not without their drawbacks. 

For one, dispute boards can be significant cost centers. Although they are intended to save the project money, they do not, in and of themselves, generate revenue. Standing dispute boards, panels that are engaged for the duration of a project, often require the contracting parties to pay the fees and expenses for three professional engineers and/or attorneys to travel to the project site on a periodic basis and oversee complex technical disputes. Over time, these fees and expenses can add up. As a result, while the overall costs of a dispute board are typically less than an arbitral tribunal in a formal arbitration proceeding, they are not inconsequential and may not be justified for smaller, more routine projects.

Further, some practitioners believe that there is a risk that the dispute board members, especially engineers who lack formal legal training, may disregard the requirements of a contract in favor of their own sense of equity and judgment. In doing so, there is a risk that a dispute board could deny a party the benefit of their bargain by ignoring specific contractual terms.  

Finally, and possibly most problematically, dispute board decisions, whether binding or not, are relatively easy to ignore and difficult to collect. For example, even if a dispute board issues a binding determination, construction contracts often allow either party to challenge the determination within a set period of time and take the dispute to arbitration or litigation. Moreover, binding dispute board determinations, even if not challenged, cannot be enforced by an arbitral tribunal or court like an arbitration award under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). As a result, some observers view dispute boards as an additional and costly step in the process of ultimately obtaining a binding and enforceable decision.

Features

Depending on the preferences of the parties and the unique issues raised by a particular project, dispute boards can take a variety of forms. While there are too many variables to describe here, the two most significant factors parties should consider when deciding to implement a dispute board are whether the dispute board should be a standing or ad hoc board and what the board’s role should be. 

Standing vs. ad hoc dispute boards

A standing board is appointed at the outset of a project, meets with the parties at regular intervals, and disbands at the end of the project or when the final project-level disputes have been resolved by the board. By contrast, an ad hoc dispute board is appointed only after the parties refer a formal dispute for resolution.

The current trend among dispute board rules favors standing boards. For example, in 2017, the International Federation of Consulting Engineers (FIDIC), an influential international organization best known for producing a series of widely used standard form engineering and construction contracts, recommends that dispute boards be appointed as standing boards. While more costly than ad hoc boards, standing dispute boards have the ability to remain engaged for the duration of the project, which ensures that the dispute board members can familiarize themselves with the parties, the intricacies of the project, and the issues most likely to give rise to disputes early on. This feature is thought to be the principal advantage of a standing board.

The dispute board’s role

Most dispute boards fall within one of three types: a dispute review board, which issues non-binding recommendations concerning project disputes, a dispute adjudication board, which provides interim binding determinations for project disputes, and a hybrid combined dispute board that can offer both informal counseling to the parties and formal recommendations or decisions regarding disputes. The differences between these dispute boards primarily hinge on what role the parties believe the dispute board should fill – formal dispute adjudicator, mediator, or both.

Historically, dispute boards filled the role of an interim dispute adjudicator, where the board’s principal purpose was to issue formal decisions or recommendations on the merits of the dispute. As explained below, formal dispute board decisions can take one of two forms: nonbinding recommendations or interim binding determinations.)

Under the dispute review board (DRB) format, the model more commonly followed by US rules and projects, after hearing the parties’ respective cases, the dispute board will issue a nonbinding recommendation concerning its assessment of the merits of the dispute. Although the parties are not obligated to follow the recommendation, in concept the decision may facilitate some form of settlement between the parties. Under the dispute adjudication board (DAB) model, following a DAB hearing, the board is entitled to issue an interim binding determination on the merits. When such a decision is issued, the parties are obligated to comply with the determination. If the losing party disagrees with the decision, it may issue a notice of dissatisfaction at which point the dispute would have to be formally resolved by litigation or arbitration. In the interim period, however, before a final judgment or arbitration award is issued, the parties are still obligated to comply with the DAB’s decision.

The current trend among dispute boards, however, has been to shift their focus away from dispute adjudication to early dispute identification and avoidance through combined dispute boards. Indeed, FIDIC’s most recent 2017 update to several of its standard form construction contracts call for the use of a combined dispute board model, called a DAAB. According to FIDIC, the combined dispute board model allows the board to involve itself with the project early and often and enable those boards to identify and resolve disputes without the need for any formal recommendation or decision. Early dispute avoidance is intended to empower dispute boards to seek out and facilitate discussions about issues that the dispute board’s members or parties sense are ripe grounds for dispute. In theory, the process should promote open communications and foster a more cooperative environment than would be the case with an adversarial process. However, given that the combined dispute board model is something of a new development, time will tell whether this format bears fruit in practice. 

Use of dispute boards outside the construction industry

Dispute boards are successful in the construction industry because of the unique features of construction disputes. The lengthy duration of construction projects, complexities of the underlying engineering disputes, number of claims and disputes, and, at least in some circumstances, cultural differences between parties on international projects, all mean that construction projects commonly generate disputes that retain features not common to most business relationships.

A number of industries and businesses, however, have experimented with the standing dispute board model, including maritime construction, financial services, joint ventures, and corporate governance agreements. In these cases, parties typically enter into long-term financial relationships where disputes are likely to arise and could risk jeopardizing the underlying venture.

Separately, although the construction industry has moved away from the use of ad hoc dispute boards, ad hoc dispute boards may be the most promising area for growth for dispute boards outside the construction industry. Specifically, the ad hoc dispute board model could create a platform for the parties to test their positions before a neutral body of subject matter experts. In doing so, the dispute board might provide the parties an unvarnished assessment of their cases before the parties incur the expense and effort of pursuing their claims through arbitration or litigation. Although this form of procedure is not uncommon to some mediation practices, a formalized dispute board proceeding might help focus the parties’ efforts on resolving the specific issues in dispute and avoid failed mediation attempts because the parties fail to clearly stake out their positions.

Much more could be said about dispute boards and their work inside and outside the construction industry, but we hope this brief overview encourages readers to consider this model as one more option beyond mediation, litigation, and arbitration. While they may not be appropriate for all industries or business situations, dispute boards are an underappreciated dispute resolution tool that is worth serious consideration both inside and outside the construction industry.

Download the PDF

    Entity:
    Topic:

    Albert Bates Jr.

    Albert Bates Jr., a partner in the Construction Practice Group at Troutman Pepper in Pittsburgh, represents clients on major US and international construction projects, with particular experience in power generation, energy, infrastructure, and heavy industrial process facilities. He also regularly acts as an arbitrator in large US and international construction disputes. He can be reached at Albert.Bates@Troutman.com.

    R. Zachary Torres-Fowler

    R. Zachary Torres-Fowler is an associate in the Construction Practice Group at Troutman Pepper in Philadelphia and New York City. He concentrates his practice in construction-related disputes and specializes in complex domestic and international arbitration proceedings. He can be reached at Zach.Torres-Fowler@Troutman.com.