Recent Developments: domestic and internationalby Nicholas Gould
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1. Gould, N. (2002) “Caution from the Courts” 6 th Adjudication Update, Fenwick Elliott, Savoy, 4 November.
2. TCC, HHJ Havery QC, 25 June 2004.
3. TCC, HHJ Thornton QC, 11 June 2004.
4. [2003] TCLR 5.
5. [2004] EWHC 1285 (TCC).
6. 12 May 2004, TCC, HHJ Toulmin CMG, QC.
7. [1998] 1 WLR 727.
8. 5 April 2004, TCC, HHJ Toulmin CMG QC.
9. [2002] BLR 312.
10. Clause 66(2)(c).
11. Clause 66A(2)(b).
12. Clause 66B (1)(a).
13. [1999] 1 AC 266 HL: [1998] 2 WLR 860: 1998 2 AER 778; 83 BLR 1; (1998) CILL 1386.
14. Clause 66D(3). 15. Clause 66D(4). | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dispute BoardsThe use of the term “Dispute Boards” or occasionally “Disputes Boards” (collectively DBs) is relatively new. It is used to describe a dispute resolution procedure which is normally established at the outset of a project and remains in place throughout the project’s duration. It may comprise one or three members who become acquainted with the contract, the project and the individuals involved with the project in order to provide informal assistance, provide recommendations about how disputes should be resolved and provide binding decisions. The one-person or three-person DBs are remunerated throughout the project, most usually by way of a monthly retainer, which is then supplemented with a daily fee for travelling to the site, attending site visits and dealing with issues that arise between the parties by way of reading documents and attending hearings and producing written recommendations or decisions if and as appropriate. The term has more recently come into use because of the increased globalisation of adjudication during the course of projects, coupled with the increased use of Dispute Review Boards (DRBs), which originally developed in the domestic US major projects market. DRBs were apparently first used in the USA in 1975 on the Eisenhower Tunnel. The use of DRBs has steadily grown in the US, but they have also been used internationally. However, DRBs predominantly remain the providence of domestic US construction projects. As adjudication developed, the World Bank and FIDIC opted for a binding dispute resolution process during the course of projects, and so the Dispute Adjudication Board (DAB) was borne from the DRB system; the DRB provides a recommendation that is not binding on the parties. The important distinction then between DRBs and DABs is that the function of a DRB is to make a recommendation which the parties voluntarily accept (or reject), while the function of a DAB is to issue written decisions that bind the parties and must be implemented immediately during the course of the project. The DRB process is said to assist in developing amicable settlement procedures between the parties, such that the parties can accept or reject the DRB’s recommendation. Genton, adopting the terminology of the International Chamber of Commerce (ICC) describes the DAB approach “as a kind of pre-arbitration requiring the immediate implementation of a decision”.16 He goes on to state that:
Building upon this distinction, the ICC has developed three new alternative approaches:
Genton suggests that the third stage of a CDB would be the referral of a dispute leading to a binding decision, which would need to be implemented immediately. The ICC’s approach is that the DB decides (if either party requests a decision) whether to issue a recommendation or immediately binding decision at the second stage of the process. According to the ICC the essential difference is that the parties are required to comply with a decision immediately, whereas the parties must comply with a recommendation but only if the employer and contractor express no dissatisfaction within the time limit. The combined procedure seems at first glance to be a somewhat cumbersome approach, attempting to build upon the benefits of the DRB and DAB without following a clear pathway. Nonetheless, it may prove useful for those parties that cannot decide whether they need a DRB or a DAB . At the other end of the spectrum, a DB could be considered as a flexible and informal advisory panel. In other words, before issuing a recommendation, the DB might be asked for general advice on any particular matter. The DB will then look at documents and/or visit the site as appropriate and, most usually, provide an informal oral recommendation which the parties may then choose to adopt. If the parties were not satisfied, the DB would proceed to the issue of a formal, albeit non-binding, written recommendation after following the formal procedure of exchange of documents and a hearing. As the DB and CDB are relatively new concepts, it is more informative to consider development of DRBs before then considering the development and practice of DABs. Dispute Review BoardA DRB usually comprises a panel of three impartial professionals who are employed by the employer and contractor to assist in avoiding disputes and resolving disputes that may arise in respect of a project. The panel should ideally have some specialist knowledge in respect of the type of project. In order to be effective, therefore, the panel needs to be implemented on or around the outset of the project in order that the panel can follow the progress of the project and deal with issues as they arise. Most frequently, DRB provisions are included within the contract, or may be incorporated later by variation or change order. There will also need to be a tripartite agreement between the DRB members and the employer and contractor dealing with the remuneration of the panel as well as establishing the procedural rules and applicable terms such as confidentiality and the rights and obligation of the DRB members and the employer and contractor. The key factor that distinguishes DRBs from other dispute resolution processes is that a DRB follows the progress of the project and makes recommendations about disagreements or disputes. While the DRB procedure is formal and will involve exchange of written positions, evidence and a hearing, the written recommendation of the DRB is non-binding. The parties are therefore not obliged to comply with the recommendation. A fundamental point then about DRBs is that the panel must have the respect of the employer and the contractor and must reach reasoned recommendations that the parties can understand and respect in order that the parties will comply with the recommendation. DRBs initially developed in the USA . According to the Dispute Review Board Foundation (DRBF) the first documented use of an informal DRB process was on the Boundary Dam and Underground Powerhouse project north of Spokane, Washington during the 1960s. Problems occurred during the course of the project, and the contractor and employer agreed to appoint two professionals each to a four-member “Joint Consulting Board”, in order that that Board could provide non-binding suggestions. The DRBF reported that as a result the recommendations of the Joint Consulting Board were followed, and these included several administrative procedural changes and the settlement of a variety of claims and also an improvement in relationships between the parties. The project was also completed without litigation. Subsequently the US National Committee and Tunnelling Technology Standing Sub-committee No. 4 conducted a study and made recommendations for improving contractual methods in the United States.18 Further studies were carried out, and the first official use of a DRB was made by the Colorado Department of Highways on the second bore tunnel of the Eisenhower Tunnel Project. This was as a result of the financial disaster encountered in respect of the first tunnel between 1968 and 1974. The DRB was required to make non-binding recommendations about disputes that arose during the project. The Board was constituted at the commencement of the project and followed the duration of the project. The project was extremely successful. And as a result the use of DRBs began to spread for large civil engineering projects in the USA . The DRBF has catalogued 1,062 projects representing more than US$77.7 billion worth of project work. The December 2003 schedule shows that there were 340 contracts comprising DRBs in 2003. Of those projects, 1,261 recommendations were given by the DRBs and only 28 matters went beyond the DRB process. In other words, only 2.2% of those disputes referred to the DRB progressed to arbitration or litigation. A more positive way of looking at this is that DRBs have a success rate of more than 97.8%. The DRBF has reported a considerable rise in the number of projects using DRBs: Dispute Resolution Board Foundation, December 2003
The DRBF has produced the following statistics, updated to December 2003: Contracts Complete and Under Construction
DRBs are now widely used on a range of civil engineering projects in the USA . Their use is no longer limited to the mega projects, and three man, or indeed one man DRBs are being used on smaller projects. Dispute Adjudication BoardThe DAB has developed in parallel with DRBs. The key developments might be considered as follows:
The introduction in the 1970s of the limited contractual adjudication procedure is perhaps now of limited historical interest. In the UK, the HGCRA was clearly a major turning point. However, it can certainly no longer be considered merely a domestic UK turning point; it also represents a major international turning point in the area of construction dispute resolution. On the international arena, FIDIC led the way by the introduction of DABs in its 1999 suite of contracts. The FIDIC Conditions of Contract typically comprise:
FIDIC DAB (Clause 20) Clause 20 of the FIDIC form deals with claims, disputes and arbitration. Emphasis is placed upon the contractor to make its claims during the course of the works and for disputes to be resolved during the course of the works. Clause 20.1 requires a contractor seeking an extension of time or any additional payment to give notice to the engineer “as soon as practicable, and not later than 28 days after the event or circumstance giving rise to the claim”. Some have suggested that the contractor will lose its right to bring a claim for time and/or money if the claim is not brought within the timescale.19 Under UK law this seems unlikely given that timescales in construction contracts are generally directory rather than mandatory,20 and also because clause 20.1 does not go on to clearly state that the contractor will lose its right in the event of a failure to notify within a strict timescale.21 Nonetheless, a contractor would be well advised to notify in writing any requests for extensions of time or money claims during the course of the works and within a period of 28 days from the event or circumstances giving rise to the claim. The benefit then of the DAB is that it should be constituted at the commencement of the contract, so that the members of it will visit the site regularly and be familiar not just with the project but with the individual personalities involved in the project. They should therefore be in the position to issue binding decisions within the period of 84 days from the written notification of a dispute pursuant to clause 20.4. The DAB is appointed in accordance with clause 20.2. It could comprise individuals that have been named in the contract. However, if the members of the DAB have not been identified in the contract then the parties are to jointly appoint a DAB “by the date 28 days after the Commencement Date”. The DAB may comprise either one or three suitably qualified individuals. The appendix to the FIDIC contract should identify whether the DAB is to comprise one or three people. The appendix does not provide a default number, but Clause 20.2 states that the parties are to agree if the appendix does not deal with the matter. If the parties cannot agree, then the appointing body named in the appendix will decide if the panel is to comprise of one or three members.22 The default appointing authority is the President of FIDIC or a person appointed by the President of FIDIC. The appointing authority is obliged to consult with both parties before making its final and conclusive determination. On most major projects a DAB will comprise three persons. If that is the case, then each party is to nominate one member for approval by the other. The parties are then to mutually agree upon a third member who is to become the chairman. In practice, parties may propose a member for approval, or more commonly propose three potential members allowing the other party to select one. Once two members have been selected, it is then more common for those members to identify and agree upon (with the agreement of the parties) a third member. That third person might become the chairman, although, once again with the agreement of all concerned, one of the initially proposed members could be the chairman. The terms of remuneration for each of the individual members of the DAB must be agreed between the parties. This is because each party will be responsible for paying 50% of the remuneration in respect of each member of the DAB . Clause 20.2 states that a member can only be terminated by mutual agreement of both parties. The employer or contractor acting alone cannot terminate the DAB or a single member of the DAB once the DAB has been constituted. Once constituted the principle obligation of the DAB is to make binding decisions. However, the parties may jointly agree to refer a matter to the DAB simply for an advisory opinion. If the parties do agree to terminate the appointment of an individual member of the DAB, then they should replace that person by agreement or if the parties cannot agree by nomination of the appointing entity. The parties might also need to replace a member if the member declines to act, resigns, becomes disabled or dies. By virtue of clause 20.3 the parties have agreed that the appointing entity named in the appendix (the FIDIC President or his nominee by default) may appoint members to the DAB if the parties fail to agree within 28 days after the Commencement Date, or fail to agree the identity of a third member, or fail to agree on a replacement member within 42 days after the date on which the sole member declined or became unable to act. Clause 20.4 deals with referring a dispute to the DAB . The first paragraph of clause 20.4 states:
The parties are therefore obliged contractually to refer any dispute whatsoever that arises in connection with or out of the contract including the opening up and reviewing of notices and certificates. If the DAB comprises three members then the DAB is deemed to have received the notice of dispute when it is received by the chairman alone. This means that the parties can simply direct all of their correspondence to the chairman, but with copies to the other members, as well as providing a copy to the other party and engineer.23 Both the employer and the contractor are obliged to provide additional information and further access to the site and its facilities as the DAB may require, in order for the DAB to make its decision. The contractor, notwithstanding that a dispute has been referred to the DAB, is to continue to proceed with the works in accordance with the contract (unless abandoned, repudiated or terminated). Both parties are contractually obliged to properly comply with every decision of the DAB . DAB decisions are therefore immediately mandatory, unless or until revised by an arbitral award, litigation or settlement. The DAB is obliged to provide its written decision within 84 days after receipt of the reference. The DAB must provide a reasoned award which must be issued pursuant to clause 20.4 of the contract. The FIDIC contract, at clause 20.4, expressly states that the DAB is not acting in an arbitral capacity. The purpose of this express reference is to make it clear that the written decision of the DAB is not to be treated as an arbitrator’s award, and so cannot be said to be immediately finally conclusive. Neither will the DAB ’s decision enjoy the status of an arbitrator’s award in respect of enforcement. It will, however, be enforceable under the contract and depending upon the local law it may be possible to enforce payment required by a DAB ’s decision in the local court without recourse to the merits of the decision or a stay of litigation because of the existence of the arbitration clause. If either party is dissatisfied with the decision of the DAB then either party may give notice of its dissatisfaction to the other party. However, this must be done within 28 days after receipt of the DAB ’s decision. If the DAB does not render its decision within 84 days of receipt of the reference then either party may simply serve a notice of dissatisfaction. A notice of dissatisfaction must set out the dispute and reasons for the dissatisfaction. Matters that are the subject of a notice of dissatisfaction which are not resolved amicably in accordance with clause 20.5 may then be referred to international arbitration pursuant to clause 20.6. The crucial point about the notice of dissatisfaction is that the decision of the DAB becomes final and binding upon both parties unless a written notice of dissatisfaction is served within 28 days of receipt of the DAB ’s decision. If either party is not satisfied with the DAB ’s decision then it is crucial for that party to serve a written notice of dissatisfaction. In the absence of such a notice the parties have clearly agreed by contract that they will accept the DAB ’s decision as being final and binding upon them. In light of the House of Lords’ decision in Beaufort Developments v Gilbert Ash (NI) Limited it is highly likely that a court will find that the parties are bound by such a clause and that a failure to serve a notice of dissatisfaction would result in either party’s inability to raise a dispute in connection with the same subject matter of any DAB decision that has become final and conclusive.24 Clause 20.5 requires the parties to attempt to settle their dispute amicably before commencing arbitration. There is a 56-day cooling off period after the issue of the notice of dissatisfaction. Either party may not commence arbitration (unless the other party agrees) until after the 56th day after the date on which the notice of dissatisfaction was “given”. The final method of dispute resolution is international arbitration pursuant to clause 20.6. The applicable rules are the ICC rules, and disputes are referred to a panel of three arbitrators. FIDIC General Conditions of Dispute Adjudication AgreementThe appendix to the FIDIC form provides a tripartite General Conditions of Dispute Adjudication Agreement. It is tripartite in the sense that it is entered into between the employer, contractor and the sole member or three members of the DAB . The Agreement takes effect on the latest of:
The distinction between the last two bullet points refers to the Dispute Adjudication Agreement appended to the FIDIC form, or alternatively provides for the parties to enter into an effective dispute adjudication agreement even if it is not in the form attached to the FIDIC contract. The engagement of a member from the DAB is a personal appointment. If a member wishes to resign then a member must give at least 70-days notice. Members warrant that he or she is and shall remain impartial and independent of the Employer, contractor and Engineer. A member is required to promptly disclose anything which might impact upon their impartiality or independence.25 The general obligations of a member of the DAB are quite extensive. Clause 4 requires that a member shall:
By contrast, and pursuant to clause 5, the Employer and Contractor are obliged not to request a member to breach any of the obligations set out above. Neither is the Employer nor the Contractor able to appoint a member as arbitrator under the Contract or call a member as a witness to give evidence concerning any dispute arising under the Contract. Further, the Employer and Contractor grant immunity upon the member of the DAB for any claims for anything done or omitted to be done in the purported discharge of the member’s functions unless those acts or omissions have been carried out by the member in bad faith. An indemnity is provided, jointly and severally, by the Employer and Contractor in that regard. Clause 6 deals with payment. There are two main elements to payment. The first is the retainer fee, which is paid on a monthly basis in consideration for the member being available for site visits and hearings, becoming conversant with the project and providing general services. The second aspect of the fee comprises a daily fee for payment travelling to and from the site (a maximum of 2 days travelling in each direction) as well as for each day spent working on site, the hearings, preparing decisions and reading submissions. Reasonable expenses together with taxes properly levied are then to be paid in addition. The retainer fee is paid from the last day of the month in which the DAB becomes effective until the last day of the month in which the taking over certificate is issued for the whole of the works. After that date, the retainer fee is reduced by 50% until the DAB is terminated or a member resigns. It is therefore highly likely that each of the three members of the DAB will receive a different retainer fee and claim a different hourly rate. Each member submits their invoices for the monthly retainer and airfares quarterly in advance. Invoices for daily fees and other expenses are then submitted at the conclusion of a site visit or hearing. The Contractor is to pay each of the members’ invoices in full within 56 calendar days from receipt. From a practicable perspective it is often sensible for the two “wing” members of the DAB to submit their invoices to the chairman who then submits those invoices together with his or her invoice in one go to the Contractor. This means that the chairman can remain the single point of contact for any issues arising in respect of the DAB ’s charges and that the final date for payment for all of the members will be on the same date, thus allowing the Chairman to take up the issue of late payment for the DAB if necessary. If the Contractor does not pay then the Employer is obliged to pay the amount due. If a member has not received payment within 70 days from receipt of invoice by the Contractor then that member may:
The Employer or Contractor may, acting jointly, terminate the DAB by giving 42 days’ notice. 26 If a member fails to comply with the Dispute Adjudication Agreement, or the Employer or Contractor fail to comply with it then those affected may terminate the tripartite Agreement. If a member breaches the Agreement then he or she will not be entitled to any further fees. Any disputes arising under the tripartite Agreement are to be dealt with by ICC arbitration comprising a single arbitrator.27 FIDIC Procedural Rules The annex to the General Conditions of the Dispute Adjudication Agreement sets out procedural rules for the DAB . The DAB is to visit the site “at intervals of not more than 140 days” and should visit the site during critical construction events. Consecutive visits should not be less than 70 days.28 The timing and the agenda for each site visit should be agreed between the DAB and the parties.29 In practice the DAB sets out the agenda, the chairman puts it to the parties and, unless an objection is received from either of the parties, the Board then proceeds upon that basis. At the conclusion of the site visit, the DAB is to prepare a report setting out its activities during the site visit and identifying those individuals who attended the site visit.30 Annex clause 4 requires the parties to furnish the DAB with a complete copy of the Contract, Progress Reports, Variation Certificates and other documents which are “pertinent to the performance of the Contract”, or communications between the DAB Employer and/or Contractor shall be copied to the other party and all the members of the DAB . Annex clause 7 states that the DAB has the power to act inquisitorially. Further, the DAB is to establish the procedure before deciding a dispute and may refuse admission to the hearings and proceed in the absence of any party who has received notice of the hearing. The DAB may also decide upon its own jurisdiction, conduct any hearings as it thinks fit, take the initiative and ascertain the facts, make use of its own specialist knowledge, decide upon the payment of interest if any, provide provisional or interim relief, open up, review and revise any certificate, decision, determination, instruction, opinion or valuation of the Engineer.31 Once a hearing has been concluded the DAB shall meet in private in order to discuss and prepare its decision.32 Decisions should be reached unanimously, but if this “proves impossible”, then a decision may be made by the majority. In practice, a single decision is usually issued by the DAB : a majority decision and a further section where the minority member sets out his or her written report. If a member fails to attend the hearing then the other two members may proceed to a unanimous decision unless the Employer and Contractor agree otherwise or the absent member is the chairman and he instructs the other members not to proceed. The Contractor and Employer could of course ask the other two members to proceed and make a unanimous decision.33 FIDIC Dispute Adjudication Agreement The appendices to the FIDIC Form of Contract contain two Dispute Adjudication Agreements. The first is for use on a one-person DAB, and the second for use on a three-person DAB . The Dispute Adjudication Agreements are for all intents and purposes the same for a one or three-person DAB, except that where a three-person DAB applies then those three persons are to act jointly as the DAB . The terms of the General Conditions of Dispute Adjudication Agreement are incorporated by reference in clause 4 of the Dispute Adjudication Agreements. The retainer fee and daily fee of each member are set out in both the Dispute Adjudication Agreements. The Employer and Contractor bind themselves jointly and severally to pay the DAB member in accordance with the General Conditions of the Dispute Adjudication Agreement. Details of the specific FIDIC contract between the Employer and Contractor also need to be recorded, as it is from this document that the Employer and Contractor agree to be bound by the DAB and it is also from this document that the DAB obtains its jurisdiction in respect of the project. The move towards legislation for international adjudicationThe legislation that has been introduced in the UK, and other jurisdictions introducing adjudication, has merely dealt with the domestic position. However, it has been radically suggested that adjudication legislation could be provided by a two-part statute.34 The first part of the Bill would deal with the domestic territorial position, whilst the second part could provide for adjudication in respect of a construction contract anywhere in the world. This follows the concept of international arbitration. Most arbitration acts provide for domestic arbitration in the country of origin, whilst also supporting, recognising and enforcing international arbitration. In other words, the international adjudication section of the Bill would provide an adjudication procedure together with the ability of a local court to support the process in terms of nominating adjudicators by default, or identifying or nominating a body by default and enforcing decisions. Parties anywhere in the world could choose the adjudication procedure of another jurisdiction. An International Adjudication Bill might include the following aspects:
The advantages of such an approach would mean that international projects could make use of adjudication procedures in a country supported by a competent court system, which is not always the case in some developing countries where considerable construction projects are being carried out. Further, the parties could choose an adjudication system that appears to be more effective than others, or adopt a system whose procedurals appear to suit their project or their needs to a greater extent than their domestic adjudication process, if any. |
16. Pierre N. Genton (2003) Dispute Boards.
17. Para. 7-029.
18. 1972.
19. Seppala, Christopher (2003) “Claims of the Contractor”, a paper given at: The Resolution of Disputes under International Construction Contracts, ICC, Paris, 6-7 February. 20.Temloc v Errill Properties (1987) 22 BLR 30, CA. 21. Bremer Handelsgesellschaft mbH v Vanden Avenue-Izegem PVBA (1978) 2 Lloyd's Rep 109, HL.
22. Clause 20.3.
23. Clause 20.4 and Procedural Rule 4.
24. [1999] 1 AC 266 HL: [1998] 2 WLR 860: 1998 2 AER 778; 83 BLR 1; (1998) CILL 1386
25. Clause 3, Warranty.
26. Clause 7, Termination.
27. Clause 9, Disputes.
28. Annex, Procedural Rule 1. 29. Annex, Procedural Rule 2.
30. Annex, Procedural Rule 3.
31. Annex, Procedural Rule 8. 32. Annex, Procedural Rule 9(a).
33. Clause 9(c).
34. Robert Fenwick Elliott. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||