Dispute Avoidance Boards for WA
I recently visited Perth to discuss the use of Dispute Avoidance Boards on Western Australian infrastructure and construction projects. Below is an edited version of a presentation I delivered while I was there. My presentation was at the back end of a panel discussion about various alternative dispute resolution methods, including mediation, adjudication, expert determination, and arbitration.
Proactive, not reactive
All of the dispute resolution processes discussed so far are reactive in nature. They only apply after the issue has escalated to a point where one party has formally notified the other party that they are in dispute. They don’t help the parties to proactively resolve their issues before they become a formally notified dispute.
The best practice standing dispute board model fundamentally differs from these other ADR processes because of its two primary functions. In addition to the dispute resolution function, which is similar in nature to expert determination, standing dispute boards have a dispute avoidance function, that proactively assists the parties to amicably resolve issues before they escalate into disputes.
The proactive approach enables the parties to “nip issues in the bud” before they become disputes.
Contractual in nature
Like mediation and expert determination, dispute boards are entirely contractual in nature.
Being a contractual process, the parties can tailor it to suit their needs. Consequently, dispute boards have taken different forms and different names over the years. For example, some have one function but not the other: avoidance only, with no decision-making, or decision-making only with no avoidance. The legal effect of dispute board decisions is another source of variants that I’ll come to shortly.
Other names include Dispute Resolution Boards (DRBs), Dispute Adjudication Boards, Dispute Avoidance Boards (DABs), and Dispute Avoidance and Adjudication Boards (DAABs), being the term used under the current editions of the FIDIC Contract.
Don’t read too much into the name on the tin – it’s what’s inside the tin that counts.
Dispute Avoidance Boards is the name that has gained the most currency in Australia because it emphasises the pro-active avoidance function, which is seen as its most distinguishing and important feature in the Australian context. I’ll use that term, or dispute boards for short.
Three-person v one-person
Dispute Avoidance Boards usually comprise 3 individuals who are selected for the role based on their experience, capabilities, availability, and independence.
One-person dispute boards are also increasingly common, although finding a single individual with all the skills and experience needed to successfully exercise both the avoidance and the decision-making functions and also deal with both technical and legal aspects can be difficult.
Establish when the construction contract is signed
Critically, the best practice is to establish the dispute board at the same time as the relevant construction contract is signed or very soon thereafter.
Like mediators and expert determiners, dispute board members are appointed under a separate agreement – called a Dispute Avoidance Board Agreement – between the parties to the construction contract and the members of the dispute board.
Ideally, a draft of the proposed DAB Agreement should be issued to tenderers for the construction contract during the tender process for that contract, with details on the proposed process for selecting dispute board members.
Unfortunately, it’s not uncommon, particularly outside Australia, on projects that use the FIDIC forms of contract, for the parties to fail to adopt best practices and instead wait until the first formal notice of dispute is issued before they establish the dispute board.
This, of course, is too late because it denies the dispute board the opportunity to exercise the all-important dispute avoidance function. By the time a formal notice of dispute has been issued, positions are often too entrenched for a mediation to succeed.
Dispute avoidance function
As I’ve already mentioned, best practice dispute boards have two functions: a dispute avoidance function and a dispute resolution function.
The dispute avoidance function involves regular dispute board meetings at the construction site during which the parties brief the dispute board on emerging issues, and the dispute board then proceeds to facilitate a structured discussion to assist the parties in better understanding the other’s interests and position in respect of an issue and to explore potential options for an amicable resolution of the issue.
Because this function is about assisting the contract parties to consensually resolve their issues, I think of it as being akin to ‘pro-active mediation’.
Like mediation, all dispute board meetings are held on a ‘without prejudice’ basis to enable full and frank discussion of issues and potential solutions, without fear that things said or concessions made will be used against a party in any subsequent dispute resolution proceedings.
The dispute board is given a copy of the construction contract before the first meeting and is copied in on progress reports, important minutes of meetings and contractual correspondence between meetings so that it can remain abreast of project developments.
As mentioned earlier, dispute board meetings generally occur at the construction site and are preceded by an inspection of the site. They are also usually scheduled to occur on the same day that senior off-site representatives of the parties are scheduled to meet at the site, to ensure the right people are in the room to approve any agreed resolution.
A good dispute board will take an inquisitorial approach at these meetings to flush out and unpack issues that may delay completion or result in increased costs.
Best practice dispute board agreements also allow the contract parties to request a non-binding written advisory opinion from the dispute board on a particular issue, such as whether an event that has occurred entitles the contractor to an extension of time or an increase to the contract price under the construction contract.
These non-binding advisory opinions can assist the contract parties to amicably resolve an issue, or provide justification for the resolution reached. This option is also quicker and less costly than proceeding through the dispute board’s dispute resolution function.
Importantly, at all times through the dispute avoidance function, the contract parties are in control. No outcomes are reached without the agreement of the contract parties.
Dispute resolution function
The dispute resolution function is generally triggered when the parties have been unable to resolve an issue and one of the parties issues a formal notice of dispute in respect of the issue under the construction contract in order to progress it.
The formal notice of dispute then triggers the dispute board’s dispute resolution function. The process thereafter is similar to an expert determination process, involving:
written submissions by the contract parties and the joint development of a statement of agreed facts;
a short conference at which each party can present its submissions to the dispute board, and the dispute board can ask questions; and
a written decision by the dispute board, with reasons.
Unlike an expert determination, the dispute board doesn’t come to the dispute cold. It will be familiar with the project and its challenges from the exercise of its dispute avoidance function and will, therefore, be in a position to hit the ground running and make quicker and better-informed decisions than an independent expert typically might.
Importantly, and similar to expert determination, the dispute board is to make its decision based on the terms of the contract, the written submissions, the conference, and the board’s own experience. It’s not permitted to depart from the contractually agreed risk allocation, even if it considers it to be harsh or inappropriate.
The legal effect of these decisions is up to the parties and is recorded in the DAB Agreement when the DAB is established. There are three basic options:
The decision is interim binding, i.e. it is binding on the contract parties unless and until it is overturned by subsequent arbitration or litigation; or
The decision is final and binding, i.e. it can’t be taken any further; or
The decision is a non-binding recommendation only.
In Australia, DAB decisions are usually interim binding, with either party having the right to issue a notice of dissatisfaction within a specified period after receiving the DAB’s decision.
If a notice of dissatisfaction is issued, the dispute is referred to the next step in the contractual dispute resolution process, which is typically arbitration. If neither party issues a notice of dissatisfaction within the required time, the decision becomes final and binding.
The FIDIC contracts also adopt the interim binding approach. The non-binding option is common in the United States of America. The final and binding option is the least common.
Many disputes largely revolve around questions of merit or entitlement, rather than quantum. Once the entitlement issue has been resolved, the parties can often reach agreement on the quantum.
Accordingly, it is best practice for the dispute board to suggest that the parties initially refer the entitlement question to the dispute board for a decision, and to only refer the quantum issue to the dispute board if the need to do so subsequently arises.
As mentioned earlier, the DAB dispute resolution process is wholly contractual in nature, just like expert determination. As such, it’s important that your DAB Agreement documents the decision-making process in a way that is legally enforceable.
I suggest you start with the DRBF’s tried and tested template Australian DAB Agreement, which can be downloaded from the DRBF’s website. It has recently been updated to reflect best practices, and so is a better starting point than other DAB Agreements that I see in the Australian market that are usually based on an earlier version of the DRBF template and/or have been adjusted in a manner that departs from best practice.
Cost/benefit analysis
Finally, a few remarks on the costs and benefits of a Dispute Avoidance Board.
Some owners balk at the cost of regular DAB meetings for a project that they hope will be dispute-free in any event. Why pay for something that may not be needed? Alternatively, they back themselves to proactively identify and resolve emerging issues without the assistance and associated cost of an independent facilitator.
I suggest to such owners that they ought to view the dispute board as a form of insurance – insurance against the cost of disputes, and against the cost of project delays.
Experience tells us that the likelihood of significant disputes on major construction projects is high – significantly higher that the likelihood of other events that parties commonly insure against.
Experience also tells us that the cost of litigating or arbitrating these disputes can be massive, as our panelists have observed.
Australian Dispute Boards have proven to be a very effective form of ‘insurance’ against these costs.
Alternatively, I encourage project owners to think of the cost of a dispute board as an ‘investment’ in the success of the project.
Dispute Avoidance Boards have now been used on 117 Australian projects with an aggregate value exceeding A$75 billion (in dollars of the day).
Not one of these projects has seen a dispute progress to a litigation judgment or arbitral award. That’s right, not one.
Across these 117 projects, there have been around 30 formal decisions issued by the board, with most of these contained to a handful of projects that requested several decisions.
All other issues across this group of 117 projects were resolved amicably, with the dispute board’s assistance. I doubt there is another group of projects anywhere in the world that can claim an equivalent success rate on the avoidance and amicable resolution of disputes.
A three-person DAB in Australia tends to cost between $150k and $250k per annum. On a $100m project, that equates to between 0.15% and 0.25% of the project cost.
The cost of the Dispute Avoidance Board tends to be the same regardless of project size, so on a billion-dollar project, you can put another zero immediately after the decimal point on those numbers. A one-person DAB will be about one-third of these amounts.
When you compare these costs against the massive legal costs and management time that can expended on litigation and arbitration, the cost is insignificant.
When you couple this with the superior time and cost outcomes of projects with Dispute Avoidance Boards compared to those without them, the business case for investing in a best practice Dispute Avoidance Board on a major project, say $100m plus, is compelling.
