Dispute Boards

Madrid, Spain 11 December 2007

Michael Polkinghorne
December 2007 White & Case LLP, Paris Telephone: (33-1) 55 04 58 00 Email: mpolkinghorne@whitecase.com

Organization of Presentation

A. B. C. D.

Introduction to FIDIC Types of Dispute Boards Three Internationally-Accepted Options for Dispute Boards Dispute Boards Distinguished from Arbitration

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International Construction Contracts

A.

Introduction To The FIDIC Contracts (1999 Edition)

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Introduction To The FIDIC Contracts (1999 Edition)

FIDIC

FIDIC stands for the Fdration Internationale des Ingnieurs-Conseils and is the French acronym for the international federation of national associations of independent consulting engineers. FIDIC was founded in Belgium in 1913. The objectives of forming the federation were (and I believe are today): to promote the professional interests of the member associations and to disseminate information of interest to members of its component national associations.

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Introduction To The FIDIC Contracts (1999 Edition)

The FIDIC Red Book

In 1957 FIDIC published the first edition of its Conditions of Contract for Works of Civil Engineering Construction, which came to be known as the Red Book.

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Introduction To The FIDIC Contracts (1999 Edition)

The FIDIC Yellow Book

In 1963, FIDIC published the first edition of its Conditions of Contract for Electrical and Mechanical Works suitable for use in contracts between an employer (owner) and contractor for the supply and erection of plant and machinery. As its covers were yellow, it came to be known as the Yellow Book.

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Introduction To The FIDIC Contracts (1999 Edition)

(Engineer hired, paid by and has contract with Employer

Employer Engineers Dual Role:

(1) Employers agent in some

Engineer

cases
(2) Duty to act impartially between

Employer and Contractor in other cases

Contractor

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Introduction To The FIDIC Contracts (1999 Edition)

The Current (1999) Red Book Basic Features

1. 2. 3. 4. 5. 6. 7.

Suitable for all civil works projects where main responsibility for design lies with Employer (or his Engineer). Some design may, of course, be carried out by Contractor. Administration of Contract and supervision by Engineer. Approval of work, payment and claims certified by Engineer. Work done is measured, payment according to Bill of Quantities. Option for payment on lump sum basis. Balanced / fair risk-sharing.
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A.

Introduction To The FIDIC Contracts (1999 Edition)

The Current (1999) Yellow Book Basic Features

1.
2.

Suitable for all types of projects where main responsibility for design lies with Contractor.
Recommended for the provision of electrical and/or mechanical plant, and for the design and execution of building or engineering works. Some design may be carried out by Employer or his Engineer. Employer provides Employers Requirements to which Contractor designs. Administration of Contract and supervision by Engineer.

3. 4. 5.

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Introduction To The FIDIC Contracts (1999 Edition)

continued

6. Approval of work, payment and claims certified by Engineer. 7. Lump sum Contract Price with payment usually based on schedule of payments. 8. More extensive testing procedures than for New Red Book, including Tests after Completion. 9. Balanced / fair risk-sharing.

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A.

Introduction To The FIDIC Contracts (1999 Edition)

Reasons for a New (1999) Contract for EPC Turnkey Projects (the Silver Book) 1. 2. Increased use of two-party approach, without Engineer. Increased sophistication, improved education and experience in developing countries hence reduced need for an intermediary like an Engineer.

3.
4.

Increase in privately-financed projects, like BOT, where customary for design and construction to be governed by an EPC Contract.
As a result of increase in privately-financed projects, increased emphasis on risk allocation.

5.

In privately-financed projects, desire of lenders to place majority of risk on Contractor.

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A.

Introduction To The FIDIC Contracts (1999 Edition)

The Silver (EPC / Turnkey) Book Basic Features

1. 2.

Responsibility for design lies solely with Contractor. Employer provides Employers Requirements to which Contractor designs Employers Requirements usually performance specification-type. Contractor carries out all engineering, procurement, construction providing a fully-equipped facility, ready for operation at the turn of a key No Engineer instead it is the Employer who may appoint an Employers Representative.

3.

4.

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A.

Introduction To The FIDIC Contracts (1999 Edition)

continued

5. 6. 7. 8.

Lump sum Contract Price with payment usually based on schedule of payments. Extensive testing Completion. procedures, including Tests after

Contractor takes majority of risks, Employer pays more to cover such risks. Final price and time of completion are intended to be more certain.

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A.

Introduction To The FIDIC Contracts (1999 Edition)

General Structure and Organization of the Red, Yellow and Silver Books

1. 2.

General Conditions, comprising clauses that are believed will apply generally to most contracts (previously called Part I), Guidance for the Preparation of Particular Conditions, which will supplement or modify the General Conditions (they also include as annexes seven forms of security or guarantee) (previously called Part II), and Form of Letter of Tender, Contract Agreement and Dispute Adjudication Agreement (the Red and Yellow Books also contain an Appendix to Tender form to be attached to the Letter of Tender).

3.

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A.

Introduction To The FIDIC Contracts (1999 Edition)

Sub-Clause 3.1 [Engineers Duties and Authority] and Sub-Clause 3.5 [Determinations] Of Red/Yellow Books
Except as otherwise stated in these Conditions:
(a)

whenever carrying out duties or exercising authority, specified in or implied by the Contract, the Engineer shall be deemed to act for the Employer; [Emphasis added] Whenever these Conditions provide that the Engineer shall proceed in accordance with this Sub-Clause 3.5 to agree or determine any matter, the Engineer shall consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances. [Emphasis added]

(b)

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A.

Introduction To The FIDIC Contracts (1999 Edition)

Typical Sequence of Principal Events During Contract for Construction

Issue of the Tender Documents

Submission of the Tender

Issue of the Letter of Acceptance

8.1 Commencement Date

10.1 Issue of Taking-Over Certificate Defects Notification Period3

11.9 Issue of Performance Certificate

8.2 Time For Completion1

Base Date

Delay attributable to the Contractor 28d 28d 11 Notifying of defects 9.1 Tests on2 Completion . . .

<21d

Tender Period 4.2 Issue of the Performance Security

Remedying of defects

4.2 Return of the Performance Security

1. The Time for Completion is to be stated (in the Appendix to Tender) as a number of days, to which is added any extensions of time under Sub-Clause 8.4.

2. In order to indicate the sequence of events, the above diagram is based upon the example of the Contractor failing to comply with Sub-Clause 8.2.
3. The Defects Notification Period is to be stated (in the Appendix to Tender) as a number of days, to which is added any extensions under Sub-Clause 11.3.

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B.

Types of Dispute Boards

B. Types of Dispute Boards

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B.

History of the DRB

The first DB was called a Dispute Review Board (DRB) and it made recommendations rather than decisions. Major developments regarding DRBs were as follows: 1975 1981 First Domestic DRB in U.S. (Eisenhower Tunnel). First international DRB (EL Cajon Dam, Honduras)

1995
1997

World Bank makes DRBs mandatory for all IBRD-financed projects over US$50m.
Asian Development Bank and EBRD adopt DRB approach.

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B.

History of the DRB

Subsequently, the Dispute Adjudication Board (DAB), which made decisions rather than recommendations, developed internationally, as follows:

1995
1998 1999 2000

FIDIC introduces DAB in its Orange Book

England introduces mandatory statutory adjudication; subsequently, parts of Australia, New Zealand and Singapore do the same FIDIC adopts DAB in all contracts for major works World Bank adopts DB recommendations as binding and requires parties to give effect to them unless and until revised by an arbitral award

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B.
1.

Types of Dispute Boards

Dispute Review Board (DRB):

A DRB issues Recommendations, a relatively consensual approach. If no party expresses dissatisfaction with a Recommendation within a stated time period, compliance is required.

If a party timely expresses dissatisfaction, that party may resort to arbitration, if so provided, or the courts. Pending a ruling by the arbitral tribunal or the court, the parties are not required to comply with the Recommendation.

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B.
2.

Types of Dispute Boards (contd)

Dispute Adjudication Board (DAB):

3.

A DAB issues Decisions, a less consensual approach. The parties must comply with a Decision as soon as they receive it. If a party expresses dissatisfaction with a Decision within a stated time period, it may submit the dispute to final resolution by arbitration, or the courts, but the parties meanwhile remain contractually bound to comply with the Decision.

Combined Dispute Board (CDB):

A CDB normally issues Recommendations but may issue a Decision if a party so requests and no other party objects.

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C.

Three Internationally-Accepted Options for Dispute Boards

C. Three Internationally-Accepted Options for Dispute Boards

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C.

FIDIC

I.

FIDIC [Fdration Internationale des IngnieursConseils]

FIDIC Clause 20 (Claims, Disputes and Arbitration) provides for a combination of a Dispute Adjudication Board (20.4), amicable settlement (20.5), and ICC arbitration (20.6), in that order.*

See Conditions of Contract for Construction (1st ed. 1999) (CONS), Conditions of Contract for Plant and Design-Build (1st ed. 1999) (P&DB), and Conditions of Contract for EPC/Turnkey Projects (1st ed. 1999) (EPCT).

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C.
1. Now recommended by World Bank.

FIDIC (contd)

FIDIC Clause 20: Dispute Adjudication Board or DAB

2.
3.

Constitution: 1 or 3 members, usually engineers, independent of parties, but all accepted by parties.
Permanent (Red Book) or Ad Hoc (Silver and Yellow Books).* Permanent DAB: maintains familiarity with project, visits site periodically, decides disputes that arise by (provisional) binding decisions.

Ad Hoc DAB: constituted for and decides an individual dispute by a (provisional) binding decision.
4. Experience to date: successfully used on major projects in U.S. and internationally.

Conditions of Contract for Construction Works (for Building and Engineering Works Designed by the Employer) (1999) (Red book); Conditions of Contract for Plant and DesignBuild For Electrical and Mechanical Works and for Building and Engineering Works Designed by the Contractor) (1999) (Yellow Book); Contract for EPC Turnkey Projects (1999) (Silver Book).

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C.

FIDIC (contd)

Typical Sequence of Dispute Events Envisaged in Clause 20

20.2 Parties appoint the DAB 20.4 A Party refers a dispute to the DAB 20.4 A Party may issue a notice of dissatisfaction 20.6 Parties initiate arbitration

8.1 Commencement Date of the Project

Parties present submissions to the DAB

Amicable Settlement

< 28d

< 84d

< 28d

< 56d

DAB gives its decision

Arbitrator(s) appointed

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C.

FIDIC (contd)

FIDIC Clause 20: Arbitration

The FIDIC Arbitration Clause provides for arbitration by 3 arbitrators according to the ICC Rules and (normally) in the language of the Contract.
Arbitrators may open up, review and revise any decisions of the DAB. Neither party is limited before the arbitrator(s) to the evidence or arguments previously put before the DAB.

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C.
II. World Bank

World Bank

For projects financed by the World Bank, the World Banks Standard Bidding Documents for Procurement of Works (SBDW) are mandatory in major works contracts (estimated to cost more than $10 million, including contingency allowance) unless otherwise agreed. Clause 20 of the SBDW (May 2006) is based on a special edition version of FIDIC Clause 20. SBDW Clause 20 provides for a combination of a Dispute Board (20(4)), amicable settlement (20(5)), and ICC arbitration (20(6)).

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C.
III.
a)

ICC

ICC
The ICC Dispute Board Documents, in force as from 1 September 2004, consist of:

b)

Standard ICC Dispute Board Clauses, which the parties can incorporate into their contracts and which provide for three types of Dispute Boards: a Dispute Review Board (DRB); a Dispute Adjudication Board (DAB); and a Combined Dispute Board (CDB);
ICC Dispute Board Rules, which govern the procedure before any Dispute Board (DRB, DAB or CDB); and ICC Model Dispute Board Member Agreement, which can be used as the model for the agreements to be entered into between each of the Dispute Board members and the parties.

ICC Dispute Boards can be established for any type of contract and are not limited to construction contracts.

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C.
Experience of DRBs to date:
1.

Our Experience

Internationally, the immediately binding decision feature of the DAB procedure seems to make it more effective than the DRB procedure. But there is still a need for the DB procedures to gain the confidence of parties around the world.

2.

3.

The experience and expertise of the members of the DAB or DRB is often essential to its success.

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C.

Current Problems with the DB

Internationally, DBs are still in their infancy and, inevitably, have given rise to some problems, including:
1.

Neglect of parties to put Permanent DAB/DRB in place at beginning of contract (lack of intimate knowledge of project, backlogs of disputes...)

2.

Difficulty or impossibility of enforcing internationally either binding or final and binding decisions of the DAB.

3.

Tinkering with the recommended language.

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C.
continued

Current Problems with the DB (contd)

4. Difficulty of finding qualified, experienced and independent members for DAB/DRB (and careful when limiting the class of candidates). 5. Difficulty to remove an unsatisfactory member of a Permanent DAB/DRB. 6. Because it is an expedited procedure, it may not be ideal for very large and/or very complex disputes. 7. Double-decker clauses having both Engineer and then DB decisions (or even vice versa) leading to delays.

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D.

The Dispute Board (DB)

D. Dispute Boards Distinguished from Arbitration

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D.

Dispute Boards Distinguished from Arbitration

Referral to a Dispute Board is similar to arbitration, but can be distinguished from arbitration in two principal ways:

While an arbitrator is chosen to exercise a judicial function and to resolve a dispute based upon submissions by the parties, a Dispute Board is chosen for its expertise in a certain subject matter and often does its own investigation or appreciation of the issue, with or without submissions by the parties. While arbitral awards can be judicially enforced, a Dispute Board determination, unless re-qualified as an arbitration, is in some jurisdictions not enforceable in court. The enforceability issue is governed by local law, and is unresolved in many jurisdictions.

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