On adjudication boards in construction matters

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Katalin Meier
Vischer, Basel
kmeier@vischer.com

Introduction

Construction matters are a specific kind of dispute: issues arise during ongoing construction and typically their resolution is postponed until after the project is completed. None of the parties wishes to risk delays or complications. This results in large and complex post-completion disputes, often with numerous items to be resolved by the mediator or arbitrator.

Dispute adjudication boards (DABs) serve as an ideal relief in such situations. They allow for the resolution of the disputes on a rolling basis at the same time as the construction is being carried out. Eventually, side issues can be filtered out and only the major disputes remain for the arbitrator (or, hopefully, none at all).^[1]

There are two types of DABs. First, there is a standing board that is established at the time of the execution of the construction agreement between the parties to undertake a specific project. Second, there is an ad hoc board that is established once an issue arises and needs to be decided. Each of those systems has advantages and disadvantages: while a standing board is established from the outset and thus provides for a quicker decision process, an ad hoc board allows a separate expert nomination for each dispute and those experts might be a better fit for the specific questions that are to be decided.

Typically, members of DABs are engineers or architects; they are major experts in their fields. In the case of a three-member DAB, one may opt for a chair with a legal background, who would ensure the feasibility and legal enforceability of the decision, and assist the parties and the other panel members in streamlining the decision-making process in an efficient and equitable way.

DABs are often confused with so-called early neutral evaluation boards. This is a process in which a third-party neutral examines the evidence, listens to the parties’ positions and presents their evaluation to the parties. However, such evaluation often requires extensive discovery of evidence and is ultimately more adversarial than the DAB process: adjudication boards are more likely to be made up of professionals such as engineers, rather than lawyers or judges. Thus, their approach tends to be more pragmatic and parties in general may have the impression that the adjudication board’s process is less adversarial. Early evaluations are therefore typically more suitable right after completion of the project, to help the parties to decide whether to take further proceedings (either through mediation or arbitration, more from a ‘business decision’ perspective).

Another important aspect of DABs is the possibility to transform their decision into a binding, formal judicial decision, which can later be enforced by either of the parties. Typically, the parties agree that if a decision is made by the DAB, and if no party objects after a specific period of time, the parties will be entitled to forward the decision to an arbitral panel which then would confirm the decision and make it ‘enforceable’.^[2] The idea behind this ‘confirmation’ process is to ensure that both parties have been heard equally and that the decision was rendered, after all, fairly. This is the main difference between DABs and mediation or conciliation, these being third-party facilitated negotiations, which at no time result in an enforceable judicial decision.

FIDIC and its dispute adjudication/avoidance board (DAAB) mechanism

FIDIC, the International Federation of Consulting Engineers, based in Geneva, is the global representative body for national associations of consulting engineers and represents more than one million engineering professionals and 40,000 firms in more than 100 countries worldwide.^[3] FIDIC publishes various standard contracts to be used for construction works, large-scale machinery supplies, infrastructure projects and consultancy services, among others, which are commonly referred to as the FIDIC Rainbow Suite. Each contract applies to a specific project-type and is characterised by an individual colour label. The contracts aim to distribute liabilities and risks among the relevant parties. The latest edition of the FIDIC Rainbow suite dates from 2017, and consists of:

• the Red Book for Building and Engineering Works Designed by the Employer;

• the Yellow Book for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor; and

• the Silver Book for EPC/Turnkey Projects.

Depending on who should bear the significant risk in a project (the employer or the contractor), the parties may opt for one or the other of these standard terms and conditions.

All these books contain mandatory multi-tier dispute resolution provisions, which include the use of the DAB mechanism. ‘Mandatory’ means that once such provisions are agreed upon, the parties may not unilaterally opt out from the use of such mechanisms. Whenever a dispute arises during the project, it will have to be resolved according to these stipulated mechanisms.

To give an example, there can be no direct recourse to arbitration until the pre-arbitration steps set forth in the respective sub-clauses have been exhausted (for instance, where none of the parties has issued a notice of dissatisfaction within a specific number of days from the receipt of a decision by the DAB).

According to the standard rules contained in the FIDIC Rainbow Suite contracts, the arbitration includes a full hearing on the merits of the dispute. The arbitrator is not bound by any prior determination of the DAB (nor by any other form of prior expert determination). On the other hand, if one of the parties misses the time limit for the notice of dissatisfaction, the DAB’s decision becomes final and binding. In that case, the arbitral panel has no discretion and must enforce the DAB’s decision.^[4]

The main concepts described herein are also an inherent part of the present 2017 edition of the FIDIC standard conditions contained in each of the books. Specifically, Sub-clauses 20 (on ‘claims’) and 21 (on ‘disputes and arbitration’) contain the described DAB standard mechanism. Sub-clause 20 includes both employer and contractor’s claims.

The 2017 edition of the Rainbow Suite contracts introduced standing DABs as the default rule and also contains new provisions for informal advice and opinions by such standing boards.

Further, the term DAB was changed to DAAB, referring to dispute adjudication ‘and avoidance’ boards. This refers to a new sub-clause, wherein the parties might request the standing DAAB for their opinion even before officially making the notice of a dispute to the board, that is, before starting the adjudication process.

The standing DAAB’s decision is, according to the 2017 edition, preliminarily binding. For pecuniary claims, the DAAB has discretion to ask the requesting party to pay a bond.

The 2017 edition further expressly confirms that starting the adjudication process with the DAAB suspends any time limitation to introduce a legal claim for judicial adjudication.

Advantages and disadvantages of using DAB mechanisms

The main advantages of using DAB mechanisms are: (1) cost and time efficiency; (2) greater flexibility and freedom; and (3) minimal acrimony as settlement discussions can take place in a less adversarial environment.

The main disadvantage of using such mechanisms is that multi-tier arbitration clauses are not easy to draft in an unequivocal way. On an international scale, if the parties have not drafted the multi-tier clause with clear language there is a risk that the clause may not be enforced by the courts. This was the major topic of a decision rendered by the Swiss Federal Supreme Court in 2011.^[5] A few years later, in 2014, the Court had the chance to analyse the DAB multi-tier clause of FIDIC and came to the conclusion that the pre-arbitration steps contained therein were clear, and even went further in holding that the FIDIC DAB pre-arbitration steps are mandatory in nature.^[6] The Court considered that any other approach would render the entire dispute resolution mechanism redundant.

Further disadvantage is that whenever parties agree on the DAAB procedure provided by FIDIC, emergency arbitration is, at the same time, impliedly excluded.^[7]

Conclusion

Although many international arbitration institutions provide model clauses for arbitration and mediation (ICC, LCIA, SCAI or JAMS)^[8] they do not have a model clause that includes adjudication boards. The FIDIC Rainbow Suite is therefore a very useful ‘one of a kind’ tool for those active in the construction industry. It provides the parties with a solid multi-tier dispute resolution clause, without running the risk that the clause might not be enforceable or creating additional unnecessary procedural delays during the dispute resolution process. This is all the more important because in the construction business, as in any other fast-moving business, justice delayed often means justice denied.

The author of the present article encourages parties to consider adding DAB mechanisms to their construction contracts, or at least to consider the advantages and disadvantages of such procedures. They might fit for one case and not for another. In any event, particular focus should be put on how such clauses are drafted and that there be an inherent logic behind each of the escalation steps contained in the dispute resolution clause. Also of major importance is setting clear time limitations for each of the steps, from the very first notice of claim to the rendering of a final award in the arbitration. Otherwise, the parties risk that the clause will not be regarded as ‘mandatory’ and hence not enforceable.