Best Practice Dispute Board Models
Dispute Boards* have become a popular method for avoiding costly disputes and managing cost and time risks on major construction projects. This is due to the success that projects with a Dispute Board have enjoyed in avoiding litigation and arbitration, and their improved performance against time and cost targets, relative to projects without one.
Even so, project owners continue to adjust the Dispute Board model in their never-ending quest for continuous improvement and better value for money. This article considers the merits of variant Dispute Board models that have emerged in the Australian market.
Optimising value for money for Owners
In striving to improve value for money, many people focus on cost first — not only at the tender box, but also when developing the specifications for a Dispute Board.
But a value for money assessment requires benefits to be assessed as well.
The most cited benefit of a Dispute Board is the avoidance of dispute-related costs, by avoiding disputes. The costs that parties incur engaging solicitors, barristers, programming consultants, quantum experts and the like to prosecute a dispute through a litigation or arbitration process can be enormous. Add to these the internal cost that disputing parties incur in terms of lost management time, and loss of goodwill — it’s no surprise that the avoidance of just one significant dispute will generate a return on investment (the cost of the Dispute Board) that even the most successful venture capitalist would applaud.
But costs avoided are often ignored or heavily discounted by overly optimistic project owners, who assume their projects will be completed without significant disputes. The statistics, of course, suggest otherwise. But optimism bias is a powerful force on major projects.
Other benefits associated with the use of Dispute Boards include:
Faster delivery times and minimisation of cost overruns, by helping overcome disagreements as to who is responsible for the cost and time impacts of adverse events, and consequent delay to the implementation of mitigation actions; and
Lower cost resolution of disputes that can’t be avoided.
There are others that are commonly cited, such as the ‘real-time’ dispute resolution, promoting communication and collaboration that can facilitate best-for-project solutions that minimise cost and time overruns, and the provision of a dispute process with integrity and procedural fairness. But these are sub-sets of the key benefits, or benefits that other dispute resolution methods also enjoy.
What does best practice look like?
According to the Dispute Resolution Board Foundation for Australia and New Zealand (Region 3), best practice is:
a 3-person Dispute Board, unless the project is low value and low risk;
the Dispute Board is empowered to engage in pro-active dispute avoidance via regular site visits and meetings with the parties;
the dispute avoidance function includes the ability to issue advisory opinions, if jointly requested by the parties;
the parties can refer disputes to the Dispute Board for a decision, which is interim binding;
appointment of DB members: each party nominates one DB member, for approval by the other party; the two DB members then nominate a third, for approval by both parties;
a Dispute Board Agreement that attaches:
Operating Procedures, that can be modified by agreement between the parties and the DB members; and
Rules for Decisions, that can be modified by agreement between the parties.
Common Variants
Common variants that have emerged in the Australian market include:
One-person Dispute Boards for high value or high risk projects
Avoidance role only, with all decisions to be outsourced
No avoidance role
Decisions not binding (“Recommendations” only)
Sydney Metro’s IDAR (Independent Dispute Avoidance and Resolution) Panel
Let’s consider the pros and cons of each.
One-person Dispute Boards for high value or high risk projects
One-person Dispute Avoidance Boards have recently been established by Transport for NSW on:
the $2.2 billion Coffs Harbour Bypass project;
the two D&C Contracts awarded for the $2.1 billion M1 Extension to Raymond Terrace.
The DAB Agreement contemplates both the dispute avoidance and decision-making functions, but there is no mention of the former within the D&C contract.
TfNSW (but not the contractor) can elect to by-pass the DAB for a decision and, instead, refer the dispute to an independent expert for a decision.
Pros and cons
Clearly, this model is driven by the owner’s desire to minimise the cost of a Dispute Board — paying the fees of one Dispute Board member will cost less than paying the fees of three.
But what are the downsides, and what impact do they have on the benefits associated with a 3-person Dispute Board?
The downsides are:
Lack of diversity of experience and attributes/capability on the Dispute Board. It’s hard for one person to:
cover full suite of desired experience: type of work/risks; project management experience; commercial experience; dispute resolution experience; legal experience; contract type experience; DB experience; and
have the full suite of desired attributes: people/communication skills; meeting skills; conduct of hearing skills; decision writing skills.
The Dispute Board may be less pro-active on dispute avoidance than if it had 3 members. But a single DB member with the confidence and ability to be pro-active and inquisitorial should largely overcome this.
Decisions made by one will carry less weight than a joint decision of three. It is more likely that a dissatisfied party will proceed to arbitration/litigation.
Greater risk of a bad decision. But the aggrieved party has option to overcome this by arbitration/litigation (albeit at significant extra cost).
The key issue for owners to consider is whether the additional benefits of a 3-person Dispute Board justify the additional costs. The additional costs are a ‘drop in the ocean’ for a multi-million dollar project, whereas the benefit of avoiding a dispute that proceeds to litigation or arbitration, or of better performance against time and cost objectives, are very significant indeed.
Avoidance role only
This variant engages the Dispute Board to perform the pro-active dispute avoidance role only. Issues that cannot be resolved amicably by the parties with the assistance of the Dispute Board are referred to another forum for a decision, commonly expert determination.
This variant also enables the parties to request a non-binding advisory opinion from the Dispute Board, which can assist the parties to resolve an issue.
This model was adopted on the Public Private Partnership (PPP) contract for the first Sydney Metro line — Sydney Metro Northwest — which was delivered on time and under budget.
Pros and cons
This variant preserves the feature of the Dispute Avoidance model that distinguishes it from all other forms of dispute resolution — being real-time, pro-active, inquisitive and pre-emptive dispute avoidance in a ‘without prejudice’ environment. ‘Without prejudice’ simply means things said during the dispute avoidance meetings can’t used in subsequent proceedings. The dispute avoidance function is, in my view, the most valuable feature of the Dispute Board model.
A concern of some past users of the Dispute Board model is that decisions by the Dispute Board can erode the future influence the Dispute Board has in avoiding disputes. This is because decisions tend to create a winner and a loser, with the loser subsequently devaluing the opinions and suggestions of the Dispute Board. By outsourcing the decision-making function to an independent expert, the Dispute Board will not be tainted by the decision. It therefore overcomes a legitimate concern that, if not addressed, can result in there being no Dispute Board at all.
The loss of the decision-making power can, however, reduce the Dispute Board’s ability to lower a party’s expectations and thereby encourage consensus.
Decisions of an independent expert, that comes to the issue cold, are likely to be less informed and lower quality than decisions of a Dispute Board that has a deep understanding of the background and circumstances that surround the issue in dispute.
But the decision-making process itself is likely to be slightly cheaper as it will be conducted by a single independent expert, rather than three people.
This model also avoids the concerns that lawyers often express about arbitrators or others who determine disputes being involved in mediation or other attempts to consensually resolve a dispute before the determination is made. In particular, it can adversely affect self determination; allow a party to ‘poison the well’ by saying things to the determiner that the other party hasn’t had an opportunity to respond to; result in an apprehension of bias (how can the determiner forget/ignore what he/she learned during ‘without prejudice’ discussions); and reduce the candour of the parties during the without prejudice discussions.
On balance, because the avoidance only model preserves, and potentially enhances, the most valuable feature of the Dispute Board model, it can, in my view, be considered best practice.
Advisory opinions - who can request
As mentioned above, current best practice is that any advisory opinions must be jointly requested by the parties.
Some Dispute Board specifications allow either party to request an advisory opinion. This approach can raise issues such as who pays for the advisory opinion if the other party doesn’t want one. The weight of a non-binding advisory opinion in driving consensus is also questionable in these circumstances.
The dispute avoidance process is otherwise wholly consensual, and depends on all parties believing there is value in the process for it to work. For this reason, it is suggested that the requirement for advisory opinions to be jointly requested is preferable.
Decisions only, no avoidance
This variant has been adopted by the Queensland Department of Transport and Main Roads in its new Transport Infrastructure Contract suite. The suite provides two alternatives:
Alternative 1: A single person Issue Resolution Advisor can be engaged for a specific dispute (Alt 1A) or at contract commencement (Alt 1B). Either way, the dispute is only referred to the IRA after a formal notice of dispute has been given. The model is therefore akin to a one-person, decisions only DAB.
Alternative 2: A 3-person Dispute Resolution Board is engaged. The contract contemplates routine DRB meetings and site visits, but the pro-forma DRB Agreement doesn’t contain the usual (or any) operating procedures for such meetings. Nor does it contemplate advisory opinions. Decisions of the DRB are only binding on the parties if they involve a payment of less than $500,000 and are not rejected by either party within a short period after the decision is made. However, in such cases the DRB’s decision can be admitted in any subsequent dispute proceedings.
Pros and cons
The decisions only model, without the dispute avoidance function, renders the model little different, in substance, to an expert determination process.
The parties lose the significant benefits of real-time, proactive, inquisitive dispute avoidance.
An IRA or DRB that is only engaged to assist that parties to attempt to consensually resolve a dispute after a formal notice of dispute has been issued will typically find that, by that time, it’s too late because the parties’ respective positions on the issues have ‘hardened’ so much that amicable resolution is no longer possible.
Sydney Metro’s IDAR panel
Each Sydney Metro line has been, or is being, delivered under multiple contract packages. As such, Sydney Metro has created an Independent Dispute Avoidance and Resolution (IDAR) panel that can be engaged as part of the dispute resolution process under any one or more of the delivery contracts for each new metro line. Collectively, the IDAR panel members (which number more than three) have a very broad range of capabilities and experience.
Recent delivery contracts, such as the Stations, Systems, Trains, Operations and Maintenance (SSTOM) PPP contract for the Western Sydney Airport line, contemplates that Sydney Metro will arrange Project Briefings for the IDAR panel member, and that IDAR panel member may also attend Senior Project Group and other working group meetings under each delivery contract.
The IDAR panel has a dispute avoidance role only. It doesn’t have any decision-making function. Rather, disputes that require a decision are referred to expert determination.
However, unlike the earlier Dispute Board model adopted on the first Sydney Metro line (mentioned above), the SSTOM PPP contract requires a party to give a formal notice of dispute (or a formal notice of potential issue) before the parties can call on a member of the IDAR panel to assist them to consensually resolve the dispute. It also requires both parties to agree to this on an issue-by-issue basis, at the relevant time.
Whether the project briefing process, and the ability to attend Senior Project Group and other working group meetings will provide sufficient opportunity for IDAR panel members to pro-actively deploy pre-emptive and inquisitive dispute avoidance techniques remains to be seen. Such meetings won’t be chaired by an IDAR panel member. Consequently, IDAR panel members are unlikely to be able to conduct the dispute avoidance function in the way that is possible at a dedicated dispute avoidance meeting that they chair.
Conclusion
The ‘best practice’ Dispute Board model championed by the Dispute Resolution Board Foundation has proven itself to be highly successful, particularly in Australia. It is tried and tested, both in Australia and around the globe.
But is it so perfect that there’s no room for further improvement?
The quest of project owners and other industry participants for continuous improvement and better value for money is admirable and should be pursued.
In doing so, we must consider not only the cost impact of changes, but also their impact on the benefits of the model, especially the benefits of a pro-active, pre-emptive, inquisitive approach to dispute avoidance that can identify and resolve issues well before they escalate to a point where a formal notice of dispute (or equivalent) is issued.
* Dispute Boards are also commonly referred to by other names, including Dispute Resolution Boards (DRBs), Dispute Avoidance Boards (DABs) and Dispute Avoidance and Adjudication Boards (DAABs). This article uses the term Dispute Boards to cover the field.
