2008 DRBF International Conference, Cape Town, 2 – 4 May

Day One – Morning Session

DISPUTE AVOIDANCE: WHAT DOES THE DB PROCESS OFFER?

By Gordon Jaynes

There is no avoiding disagreements in commercial activity, especially if the activity involves

risks of unforeseeable circumstances. But it is possible to avoid those disagreements
becoming disputes that lead to arbitration or litigation.

Dispute avoidance should be the goal of every Dispute Board. It is a requirement for Dispute
Boards established under the MDB Harmonised Edition of FIDIC’s Conditions of Contract
for Construction, and is foreseen as a Dispute Board activity in Article 15 of the ICC Dispute
Board Rules.

The DB process offers something which no other dispute resolution technique offers. It puts
expert assistance in place before any disagreements have arisen, and empowers the DB to
assist the contract parties to avoid future disagreements escalating into formal disputes.

The benefits which flow from dispute avoidance are clear: focus is maintained on successful
completion of the contract; personal relationships are protected from the animosities which
can arise from protracted and expensive arbitration or litigation, and the persons can devote
their energies to progressing the work under the contract; cordial corporate commercial
relationships are preserved for future work together; and the costs, delay, and uncertainty of
outcome in arbitration and litigation are avoided.

For the Multinational Development Banks, another valuable aspect of the DB process is its
remarkable record of resolving disputes amicably by the time performance of the contract is
complete. Such an outcome avoids the banks having to keep their financial books open on the
contract.

DBs have been is use for decades, but initially they featured only in the USA, and only in
construction projects. The appearance of the DB on the international scene is comparatively
recent. There are two forces which are accelerating the use of the DB process. The first is the
adoption of the DB process by FIDIC, and most recently, through FIDIC, by the Multilateral
Development Banks. The second is the decision of the ICC to offer the DB process
worldwide on any long term or complex business contract relationships.

This morning our first two speakers each reflect one of these two forces. Mr. Beaumont is
managing the creation of a new port in Madagascar, and the port construction contract (being
performed by one of the sponsors of this Conference, Daiho Corporation) receives some
financing from The World Bank, and thus is required to have a DB. The new port is related to
a major mineral development in Madagascar, which Mr. Beaumont will explain.

Ms Meilhac is a key person at the ICC for its DB process. The ICC Dispute Board Rules
foresee three kinds of DBs, including one which is unique, the Combined Dispute Board or
“CDB,” which has been chosen for use under the new ICC Model Turnkey Contract for
Major Projects. We are fortunate indeed to have these two speakers.
AfDB Seminar, 13 March 2008

OUT OF A TUNNEL AND INTO AFRICA

© DRB Foundation, 2008

We begin with the story of a tool used in the construction of a tunnel in the United
States of America, and how that tool came to be used in Africa.

The tool is not mechanical, it is human, and it is created in the contracts for building
projects. The first contract for which the tool was created was a large highway tunnel
in the USA, decades ago. Today, the tool is in use throughout the World. Importantly,
it is in use by all of the major multilateral development banks, including yours.

What is the purpose of the tool? It is to avoid lengthy and costly disputes among the
project participants, and to promote amicable solutions to project problems, without
resorting to arbitration or litigation.

What is the design of the tool?

How is the tool used?

Are there any risks in using the tool?

These are the questions which we will address today. Also we shall explore some
Frequently Asked Questions regarding the tool and its use.

The tool has acquired various names during its years of use but the name we shall use
today is that now used by the African Development Bank – “Dispute Board.”

So, what is the design of the tool? The design purpose of the tool is to replace the
Engineer as the decision maker on disputes between the Contract Parties, such
decision being binding unless and until revised in arbitration.

Details of the design of the tool: These are shown in the bidding document “MDB
Harmonised Edition of the FIDIC Conditions for Construction”. To understand the
design, and to be alert to the differences between the design used by the African
Development Bank, and other similar dispute boards, present and past, it is necessary
review a brief history.

The MDB Harmonised Edition is an achievement which resulted from the Rome
Declaration on Harmonization, made in 2003 by the heads of multilateral and bilateral
development institutions, including the African Development Bank. (“MDB” being an
abbreviation for “Multilateral Development Bank”.)

The February 2007 “Report on Progress by Heads of Procurement” of the MDBs, on

the harmonisation of public procurement policies and practices of public International
Financial Institutions says “the wide use of [the MDB Edition] continues to be a
success. FIDIC has requested MDB authorisation for promotion of the harmonised

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document in projects funded bilaterally. Authorisation has also been requested for the
translation of the document in local languages. Both these authorisations have been
conditionally granted, and negotiations with FIDIC continue in this regard.”

(It will not surprise you at the African Development Bank to learn that an unofficial
translation into Japanese has been made by Japan’s FIDIC Member Association,
perhaps in part to facilitate that Association’s discussions with Japan’s Bank for
International Cooperation regarding that Bank’s adoption of the MDB Edition for use
on JBIC’s bilateral projects.)

The MDB Harmonised Edition is based on FIDIC’s 1999 Edition of its “Conditions
for Construction” which succeeded the older Fourth Edition of FIDIC’s “Conditions
of Contract for Works of Civil Engineering Construction.” The MDB Harmonized
Edition is the result of much work by the Heads of Procurement of the MDBs and by
FIDIC.

Harmony? What is the “harmony” sought by this process of “harmonisation”? First, it

is to integrate the amendments made by the various MDBs to the standard FIDIC
Conditions for contracts where the design of the Works is supplied by the Employer.
To quote FIDIC’s explanation:

“These additional clauses [added by the MDBs to the standard FIDIC Conditions] in
many cases have standard wording which has to be repeated whenever procurement
documents are being prepared for a new project. Furthermore, the provisions in bid
documents, including the additional clauses contained in the Particular Conditions,
varied between the MDBs, and this created inefficiencies and uncertainties among the
users of the documents, and increased the possibilities for disputes.

“It is believed the modified, or harmonised document, will simplify use of the FIDIC
Conditions of Contract not only for the MDBs and their borrowers, but also for others
involved with project procurement, such as consulting Engineers, contractors and
contract specialists working on MDB financed projects.”

It also obviously would facilitate co-financing of a project by more than one MDB.

By modifying the 1999 Edition to integrate various Particular Conditions (or

Conditions of Particular Application) customarily required or recommended by the
MDBs in their Standard Bidding Document, “Procurement of Works”, the MDB
Edition significantly reduced the total number of pages required for that Standard
Bidding Document. In fact, the MDB Edition foresees only a couple of Particular
Conditions. Some of those reductions are achieved by use of what are now called the
“Contract Data” sheets.

That is the history of the MDB Heads of Procurement effort to orchestrate “harmony”
into their Conditions of Contract for construction projects.

What about the history of the tool itself, the Dispute Board?

Its first general use of a similar Board by an MDB appeared in The World Bank’s
January 1995 edition of its “Procurement of Works” Standard Bidding Document.
This occurred because of the results of a trial use by that Bank on the El Cajon
Hydroelectric Project in Honduras, Latin America’s tallest concrete arch dam.

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(A “One Person Can Cause Change” footnote”: The use of a Dispute Board on El
Cajon arose from it being recommended by a member of the project Board of Experts
required by The World Bank to be retained by the Employer for overview and advice
on the design and construction of the dam. One the experts, the late Al Mathews, was
a famous tunnel and mining engineer who had developed the Dispute Board concept
for use on the Eisenhower Tunnel in the USA, where it proved great success in
resolving disputes amicably despite severe problems in constructing that tunnel. It
was clear to Al that El Cajon also was a project which would have many engineering
challenges and opportunities for disputes. So he persuaded the Parties and the Bank to
take the Dispute Board tool from the Eisenhower Tunnel and use it on the El Cajon
dam. Al’s initiative marked a turning point for the handling of disputes on
international construction projects. Decades later, use of that tool also travelled from
the Eisenhower Tunnel to Africa.)

All disputes which arose on the El Cajon project were resolved amicably by the time
construction was complete. Indeed, the contract parties and The World Bank were so
pleased with that Dispute Board that the Board was kept in place until the end of the
contract’s then-“Maintenance Period,” one year after substantial completion of
construction.

Also, subsequent study by The World Bank indicated that the tool was showing that
its use could achieve avoidance (or amicable resolution of) differences, avoid the cost
and delay of arbitration, and enable The World Bank to close its book on a loan
shortly after completion of construction.

So, from January 2005, The World Bank required its Borrowers to use a Dispute
Board on contracts whose estimated value (including contingencies) was more than
the equivalent of USD 50 million. If estimated value were between the equivalent
amounts of USD 10 and 50 million, the Borrower was given the option to use either a
Dispute Board or a Dispute Expert; in other words, a Board of 3 experts or a single
expert. If the estimated value was an amount equivalent to USD 10 million or less, the
Engineer could still be used in the former role of deciding disputes but only if the
Engineer was an independent consultant and not part of the Employer’s organisation.

After January 2005, other MDBs began to use the tool, too. As time passed, The
World Bank revised its design of the tool. It substituted the use for dispute resolution
of an “Adjudicator” instead of the Engineer for contracts with an estimated value of
USD 10 million or less. Perhaps as a result of pressures from constructors’ groups or
from FIDIC or both, the immediate effect of a Dispute Board or Dispute Expert
determination of a dispute was changed. Originally, the determination was binding
only if neither party objected in writing within 14 days; subsequently, the tool design
was changed to make the determination immediately binding.

What about FIDIC? Meanwhile, FIDIC gradually adopted the use of the tool in its
Conditions of Contract. First use was in the Conditions for Design-Build and Turnkey
contracts (the “Orange Book”, nicknamed for the colour of its cover). That occurred
in 2005, after The World Bank adoption of the tool. Then in 2006, FIDIC published a
Supplement to the “Red Book”, or “Conditions of Contract for Use in Works of Civil
Engineering Construction, 4th Edition” and this included substitute text for use of a
Dispute Board instead of the Engineer to make decisions on disputes. Later it
introduced the same option for use with the “Yellow Book”, or “Conditions of
Contract for Electrical and Mechanical Works.”

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Then came FIDIC’s 1999 revisions to the major sets of Conditions: a new “Red
Book,” entitled “Conditions of Contract for Construction”; a new “Yellow Book,”
entitled “Conditions of Contract for Plant and Design-Build” (accompanied by
discontinuance of the “Orange Book”), and the new “Silver Book,” entitled “EPC
Turnkey Conditions,” with “EPC” standing for “Engineer, Procure, and Construct.”

The Dispute Board tool also features in the FIDIC Conditions for Dredging Contracts
and so-called Smaller Contracts, then the MDB Edition, and most recently in the
Conditions for Design Build Operate contracts.

Well, this look back into history took longer than I thought it would, and like some of
our history lessons while in school, perhaps longer than you may have wished!

MDB Edition’s design of the Dispute Board, it made its first public appearance in
2005, on the website of The World Bank. A revised version was published in 2006.
That is the version we are using today. It is available electronically from FIDIC’s
Bookshop at www.fidic.org/bookshop. As further discussions are continuing between
the MDBs and FIDIC, the document is not yet available from FIDIC in hard copy. For
convenient reference the other contact data for FIDIC’s Bookshop are: telephone =
+41 (22) 799 4905; fax = 4901; address = World Trade Center II, Geneva Airport, 29
route de Pre-Bois, Cointrin, CH-1215 Geneva 15, Switzerland.

(The electronic version of the MDB Edition includes a table with line by line
comparison with the 1999 Edition, which is a useful table if you are familiar with the
1999 Edition, but no yet familiar with the MDB Edition.)

The design of the tool: This is contained in a combination of: Clause 20, the Appendix
and Annex to the Conditions, and the relevant parts of the Contract Data sheets.

The design is that by a date set forth in the Contract Data, the Employer and the
Contractor (“the Parties”) shall agree upon the composition of a Dispute Board
(referred to as a “DB”) to serve them. Its service will be to assist the Parties to avoid
disputes and where disputes cannot be avoided, to decide any dispute by use of a
written decision which is immediately contractually binding on the Parties, although
the Parties retain the right after such decision to refer the dispute to arbitration after
the stipulated minimum time for amicable settlement negotiations.

The criteria for the DB members are: “fluent in the language for communication
defined in the Contract”, a “professional experienced in the type of construction
involved in the Works and with the interpretation of contractual documents”. In
addition, the DB member must meet the requirements of the agreement which each
member signs with the Parties. Typically, the “professional” is an engineer specialised
in a discipline relevant to the Works to be constructed, but some are contract experts
such as Quantity Surveyors. Much debate has occurred about use of lawyers as DB
members. The late Al Mathews was noted for having said “Being a lawyer is not
necessarily a disqualification from serving on a Dispute

The number of DB members is either one or three, whichever is stipulated in the

Contract Data. In other words, the Employer decides the number of DB members
prior to issuing the Invitation to Bid. Broadly, the size, complexity, and estimated
Contract Price of the Contract control the Employer’s selection of one person or three
people. Each DB member signs an Agreement with both Parties covering the terms of
service on the DB.

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The choice of each DB member is agreed by both Parties. There is a “default”
mechanism to avoid any failure to agree upon a full DB to “blocking” the
establishment of the DB.

There is a mechanism for replacement of any DB member who becomes unable to

continue serving, but neither Party can terminate the service of any DB member
without the agreement of the other Party. By agreement, the Parties can terminate the
DB entirely on terms set forth in the Agreements with the DB members. Those
Agreements also enable a DB member to resign, but no DB member should be
encouraged to resign, nor should the DB member seek to or agree to resign, for other
than bona fide reasons such as debilitating injury or sustained ill health.

The use of the tool: The DB serves from the outset of the contract. Its first task is to
study the Parties’ Contract. It establishes with the Parties a programme of regular Site
visits, preferably with the initial visit at or close to the start of construction at Site.
The Site visits are established pursuant to the Annex, “Procedural Rules,” to the MDB
Edition of the Conditions, which provide that intervals between Site visits shall be not
less than every 140 days.

Site visits: These are attended by the Site representatives of the Parties and the
Engineer. Typically the Site visit commences with a tour of the Works so that the DB
can see for itself the progress of construction. The tour of the Works typically is
followed by a meeting with the same people to further brief the DB on progress and to
discuss any pending or potential problems. It is important to note that the MDB
Edition contains a specific goal that at the Site visits, the DAB shall “as far as
reasonable…endeavour to prevent potential problems or claims from becoming
disputes.”

Before leaving the Site, the DB is required to prepare a written report of its visit and
supply copies to the Parties and the Engineer. Experience suggests that it is helpful for
the DB to review the report in draft with the Parties and the Engineer, especially if all
do not share a common first language. This assures that all concerned understand the
entire contents of the Site visit report.

The DB also can be summoned to the Site at any time on short notice (not more than
28 days) by either Party for an unscheduled visit. This is to enable availability of the
DB in the event of an unforeseen or urgent problem.
Between Site visits, the DB typically receives written reports of the Contractor and
the Engineer on progress of construction, including any problems being encountered.

If any disagreement among the Parties and the Engineer develops into a formal
dispute, either Party can make a written referral of the dispute to the DB for decision.
The DB is to make its decision within 84 days after receipt of the written referral,
unless some other period is proposed by the DB and agreed by the Parties. The DB is
empowered to hold a hearing on the dispute, and typically does unless the Parties
agree that the decision should be made on documents only.

DB hearings: They are informal, and very different from lawyer-controlled arbitration
hearings. Under the MDB Edition, the Annex, “Procedural Rules” are brief – just over
one page – and simple but sufficient. They give the DB wide latitude and almost total
authority in running hearings. Do not try to clutter up the conduct of hearings by
seeking to add more detailed procedural rules. Assure that the persons responsible for

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the day-to-day execution of the Contract are present and speak for the Parties and the
Engineer. Don’t use “hired guns”!

DB decision: The Parties are obliged to give effect to the DB decision immediately. If
neither Party objects to the DB decision within 28 days it becomes final and binding.
If either Party (or conceivably both Parties) object within those 28 days, the dispute
can be referred to arbitration following a compulsory minimum period 56 days for
attempted amicable settlement. If the dispute is referred to arbitration, the DB
decision is admissible in evidence in the arbitration.

That, in outline, is how the DB tool is used.

Is it a good tool?

Experience indicates that the answer is an emphatic “Yes.”

The success in the use of a DB minimising the number of disputes, and in assisting the
Parties to resolve disputes amicably, without going to arbitration, is what has led the
MDBs to adopt the tool.

The design of the tool has built into it the components for amicable resolution of
disagreements. The DB is comprised of experienced professionals all of whom are
agreed by the Parties as suitable for assisting in avoiding and resolving conflict
amicably. The DB is part of the project team, but is independent from the Parties and
the Engineer, and is objective. It visits the Site regularly and, between Site visits, is
kept informed of progress and problems by receipt and study of written monthly
reports. Its duties include effort to prevent disputes.

Are there risks in using the tool? As with a physical tool, risk doe not arise from the
tool itself. The tool is well designed and works well as long as it is used properly.
Risks arise from human misuse of the tool. Experience shows that there are some
“Dos and Don’ts” for successful use of the DB tool:

1. Establish the DB on time. The time of entry of every construction contract is a busy
time, and as soon as an Award is made, many actions by each become urgent.
Attending to the tool for future dispute resolution may not seem urgent. Also, it may
seem that delaying establishment of the DB will save money. Too often one hears the
suggestion “We’re getting along fine. Let’s not set up the Dispute Board until we find
that we have a problem on which we need help.” This is akin to suggesting that there
is no need to buy automobile insurance until you see that you are in danger of an
accident.

There is much to be said for making the establishment of the DB a condition

precedent to the first drawdown under the loan agreement with the MDB.

2. Don’t try to “save” money by establishing a “cheap” DB. Ah! The subject of
money! This is something that interests everyone!

The Appendix to the MDB Edition establishes a monthly retainer fee and a daily fee.
The retainer fee is for being available on 28 days notice, becoming and remaining
conversant with the project, maintaining files, all office and overhead expense, and all
other services performed except those covered by the daily fee. The daily fee is
payable for Site visits, hearings, reading submissions in preparation for hearings, and
preparing decisions. The MDB Harmonised Edition does not stipulate or recommend

6
any particular amounts for fees, although it does have a “fail safe” provision that if the
Parties do not agree the fees, they shall be determined by the appointing authority or
entity named in the Contract Data.

In earlier DB provisions under MDBs’ SBD “Procurement of Works” it has been

stipulated that unless the Parties otherwise agree, the monthly retainer fee shall be
three times the daily fee and the daily fee shall be the same as the daily fee for
arbitrators under the rules of the International Center for Settlement of Investment
Disputes, or “ICSID.”

In recent years, the ICSID rates have escalated to the current rate of USD3000 per day.
Some quick calculations will show that this rate creates a significant cost for a DB on,
say, a three year contract, if that daily rate is trebled for a monthly retainer, and if a
DB has, say, three or four Site visits per year. A three person DB would generate
USD9000 per month, or USD108,000 in retainers. If that DB makes three Site visits
of say 7 days per visit (including the maximum 2 days travel time in each direction)
the daily fees will be a further USD189,000 per year. Over a three year period the fees
will have reached a total of USD891,000, to which must be added the cost of probably
several thousand USD in air fares, even though the DB is reimbursed only air fares
less than First Class.

Under the MDB Harmonised Edition, the cost of the DB is shared equally between the
Parties. Payment of those costs typically is made by the Contractor, who then includes
one half of each payment on the monthly progress payment invoice, for
reimbursement by the Employer. (It should be understood of course that as the use of
the DB is foreseen in the Invitation to Bid, it is likely that the unit rates and prices bid
by the Contractor will include some allowance for the estimated cost of the
Contractor’s one half of the cost of the DB, so ultimately the predominant portion of
the cost of the DB will be borne by the Employer.)

While the cost of such a DB is still a bargain compared to the cost of arbitrating
disputes over the Engineer’s determinations on the Contractor’s claims, it appears that
the Parties nevertheless are motivated to try to “save” on the cost of the DB, and
sometimes seek to do so by one or more of the following “economies.”

False “economies”

(i) defer the establishment of the DB until after disagreements arise;

(ii) decrease the frequency of the Site visits;
(iii) reduce the daily fee to the lowest possible amount, thus also reducing the retainer;
(iv) eliminate the retainer entirely.

In soccer, (i) and (ii) would be called “scoring an own goal”: deferring establishment
ignores the fact that once disagreements begin, it becomes difficult or impossible to
agree on much of anything, and like decreasing frequency of Site visits, frustrates the
primary purpose of having a DB which is to prevent disputes arising.

As for (ii), this adage comes to mind: “If you pay peanuts, you get monkeys.” Top
quality professionals will not serve for “cut rate” fees. If you find that you need the
services of a surgeon, do you shop for the cheapest you can find?

Eliminate the retainer? That removes the contractual consideration for having the DB
member available at such short notice, and for the member’s remaining conversant

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with the progress of the project, as well as compensation for indirect costs of the
member’s service.

Alternatives

So, what approaches can be taken to reduce costs (without impairing the DB’s
purpose) on those contracts where the cost of the DB can be estimated to be likely to
reach a high percentage of total Contract Price? One possibility is to reduce the
retainer fee by reducing the multiplier from three to two, or in some smaller value
contracts, perhaps one. This enables keeping a Retainer Fee, even if it is small, while
still using a daily rate that is enough to attract top talent.

Another possible economy is to have a single DB serve more than one of the contracts
on a project. For example, one DB served all three joint venture contracts for the giant
multipurpose Xiaolangdi dam project on the Yellow River in China; in Romania, a
single DB has been used to serve more than one contract for construction of
contiguous sectors of a large highway project. Multi-contract service enables the cost
of a DB to be “spread” and thus reduce the percentage of its cost to be allocated to
any one contract. It also helps avoid inconsistent decisions by separate DBs serving a
single project. Of course for this approach to cost reduction to work properly the
contracts’ separate Works must not be too distant from each other geographically.

3. Remember that no DB member is “your” member. Each DB member should be

independent and impartial between the Parties. The design of the DB tool foresees
each Party nominating a member for the other Party’s approval, but that does not
mean that an approved member is the advocate of the Party who nominated that
member!

4. Be sensitive to the DB member’s obligation to be independent and impartial. Part

of the persuasive power of the DB comes from the independence and impartiality of
its members, and from their being so seen. It follows that neither Party, nor the
Engineer, should be seen to socialise separately and privately with the DB or its
members, whether on Site or elsewhere. Even if totally innocent, such activity can be
misconstrued.

Each DB member’s Agreement contains strict undertakings relating to the Parties and
the Engineer regarding having financial interests in them, past relationships with them,
and other employment with them during and after service on the DB. Also, the MDB
Edition restricts the DB from consulting with the Party on any matter without the
agreement of the other Party.

That Agreement also has an undertaking by the Parties, for themselves and their
personnel, not to “request advice from or consultation with the Member regarding the
Contract, otherwise than in the normal course of the DB’s activities”.

These aspects of the Agreement should be respected by the Parties and the Engineer
as well as the DB.

5. Remember that the DB is part of the project team. The DB is not an outsider.
Professionals who accept assignments to serve on DBs want the project to succeed.
Help them by being prompt in supply of regular reports of progress, including
Programmes used for project management. When the DB comes for a Site visit, assure
that the persons responsible for construction of the project are available to the DB

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throughout the Site visit. Keep meetings with the DB informal and restricted to
persons whose involvement with the construction is daily and direct. Higher
management are welcome to attend, but DB members want to get information from
the people who are generating it: to use an old tunnelling term, the DB wants to talk
with the people who are “working at the face.” This is true both at Site visits and in
presentations to the DB in any hearing on a dispute.

What can the African Development Bank do to help its borrowers and aid recipients
make successful use of the Dispute Board?

One step has been suggested already, which is to assure prompt establishment of the
DB by making it a condition precedent to first drawdown of money from the Bank.
This truly would help the beneficiaries of the Bank help themselves.

Another step is to establish Bank training programs for the staff of the borrowers and
aid recipients, so that they understand the Dispute Board tool and how to use it
successfully. The technique of offering training for trainers would be ideal for this
purpose. Experienced trainers are available from the ranks of the DRB Foundation
membership to assist the Bank in training. (The Foundation is a Worldwide not-for-
profit organisation devoted to the promotion of successful use of Dispute Boards.
More information about the Foundation is available at www.drb.org.)

A third step is to encourage borrowers and aid recipients to join the Foundation. A
special membership rate is available to developing countries. Membership benefits
include receipt of the Foundation’s quarterly “Forum” magazine which assists
members in remaining current on Dispute Board developments Worldwide. Members
also receive discounted rates for attendance at the annual DRBF International
Conferences.

A fourth step is to be sure that borrowers and aid recipients know of, and are
encouraged to obtain and use, FIDIC’s “Supplement” to its FIDIC Contracts Guide;
that Supplement offers guidance in use of the MDB Harmonised Edition, and is
available electronically from the FIDIC Bookshop mentioned earlier today. The
Supplement contains the entire text of the MDB Harmonised Edition, so purchasers of
the Supplement need not procure a separate copy of the MDB Harmonised Edition.

A fifth step is to liaise with the African Members Associations of FIDIC. Like other
Member Associations, they surely will be developing training programs for members
of their national associations of consulting engineers who want to serve on Dispute
Boards. Participation of AfDB Procurement staff in such training would be of
immense help to the FIDIC member associations. FIDIC’s African Member
Associations have a regional body, “FIDIC Group of African Member Associations”
which is known as “FIDIC GAMA” and its details are at www.fidic.org/gama. Its
Secretariat is at the South African Association of Consulting Engineers,
www.saace.co.za

With some hesitation because of not wishing to breach etiquette, there is another step
which you could take: If you feel today has been helpful, consider having the DRBF
and its members play a regular role in your future internal training and briefings of
Bank staff on DBs, including new developments on Dispute Boards and their
successful use.

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Whether or not that last step is taken, we wish to thank you for inviting us to meet
with you today. It has been both enjoyable and a much-appreciated honour, and we
thank you for your attention and participation.

END

This paper has been presented by DRBF Members Gordon L. Jaynes and James
C.Perry. If the reader has any questions, they can be contacted at GLJ4law@aol.com
and Jperry@ps-consulting.fr.

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Jim and Dick:

Please add, modify, delete:

FREQUENTLY ASKED QUESTIONS

One of the founders of the DRB Foundation and an active Dispute Board member is
Mr. Robert Smith, who is both an engineer and a lawyer, practicing with the USA
firm Akerman Senterfitt Wickwire Gavin. He has developed the concept of using
FAQs as a means of exploring the use of Dispute Boards in fora such as this seminar.

Here are some FAQs for our use today:

Why is a Dispute Board preferable to an arbitration as a means of dispute resolution?

What are the Parties supposed to do during the Amicable Settlement which the MDB
Edition requires if a Party is dissatisfied with the DB decision and has given notice of
intention to refer the dispute to arbitration? (Clause 20.5)

Who should attend a hearing of the DB on a dispute which has been referred to the
DB for decision?

What professions should be the source of DB members?

How does a Party locate a suitable candidate for service on a DB?

Are there any nationality restrictions in selection of DB members?

What institutions provide the service of acting as an Appointing Authority for DB

members when Parties fail to appoint them?

What is the role of the Engineer in dealing with the DB?

The procedure under Clause 20 for the submission and substantiation of a claim, and
for the determination of the Engineer is lengthy. So is the procedure for proceeding
with a dispute on which a Party does not accept the DB’s decision. Why is the time
allowed for the DB to decide the dispute so short – only 84 days?

Dispute Boards also are required in other forms of FIDIC Conditions such as those for
Plant and Design-Build or EPC Turnkey: are those Dispute Boards the same as the
DB for the MDB Harmonised Edition?

11
The World Bank 2008 Fiduciary Forum
Procurement: Friday, 28 March 2008
1045 – 1215 hours, PR Parallel Session 6, “Dispute Resolution Clauses of Works
Contracts.”

A DAM GOOD THING

© Gordon L. Jaynes
Glj4law@aol.com

“The world requires at least ten years to understand a new idea, however important
or simple it may be.” -- Sir Ronald Ross

Sir Ronald was a 19th century English physician. While a junior “Doctor” and not yet
a “Sir” he worked for the Indian Medical Service in a field hospital in Secunderabad.
At that time, it long had been thought that the worldwide killer disease, malaria, was
transmitted by “noxious effluvium,” or bad air. Dr. Ross thought not. He was drawn
to the hypothesis that mosquitoes propagated the disease.

In 1894, he began experimental investigation and in 1897, confirmed that malaria was
transmitted by the Anopheles mosquito. But his findings were not generally accepted
until after 1903. Then, largely for his work on malaria, he was awarded the Nobel
Prize for Medicine in 1904, ten years after his investigation had begun.

Even after that recognition, there were doubters that such a tiny insect could be the
carrier of the dreadful disease and despite the deaths of many workers on the
construction of the Panama Canal over a period of more than a year and a half, it was
not until the Autumn of 1905 that the Canal project physicians overcame disbelievers
and got funding to rid the Canal area of mosquitoes. The much-publicised success of
thereby stemming malaria in the Canal Zone finally led to general acceptance,
worldwide, that it was the mosquito, not bad air, transmitted the disease.

Ross was right: no matter how important or simple it may be, it seems to take about
10 years for the world to understand a new idea. In the case of the “new idea” we are
exploring today – Dispute Boards -- it took almost exactly 10 years for The World
Bank to “sell” the Dispute Board to all of its colleague Multilateral Development
Banks – and there are still some “foot draggers” among them!

That story begins more than two decades ago when what I have called a “dam good
thing” happened: The World Bank experimented with the use of the Dispute Board
concept on the contract for the construction of Latin America’s highest concrete high
arch dam, El Cajon, in Honduras.

The use of the Board was a success, which was good for the dam, good for the
Contract Parties, good for the Bank, and eventually good for the international
construction industry: all disputes on El Cajon were resolved amicably by the time
construction was complete. There was no resort to arbitration. Indeed, the Parties

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arranged for the Board to be available during a one year period after construction, just
in case any disputes arose during what used to be called the “Maintenance Period”
(now called the “Defects Liability Period”) for the dam.

After that experience, the Bank studied further the use of the Dispute Board as a tool
for amicable settlement of disputes, and after due consideration introduced the tool
permanently into the January 1995 edition of its Standard Bidding Document
“Procurement of Works.”

Just over 10 years later, in May 2005, the Bank introduced the new “FIDIC MDB
Harmonised Edition of the Conditions for Construction” as part of the Bank’s SBD
“Procurement of Works and User’s Guide.” That introduction was the culmination of
much effort by the Heads of Procurement of the Multilateral Development Banks (or
“MDB”) and International Financial Institutions to establish “harmonised” Conditions
of Contract, as part of the overall “harmonisation” of their procurement practices,
pursuant to the 2003 Rome Declaration on Harmonisation.

The current edition of the FIDIC MDB Harmonised Edition was published in March
2006 and is available on line at www.fidic.org/bookshop as part of the contents of the
“Supplement” to The FIDIC Contracts Guide.

I have been given half of this session this morning to lay the groundwork for
discussion during the rest of the session. As I have been advised that not everyone
here will be familiar with Dispute Boards, during part of my time the focus will be on
what a Dispute Board is and how it works. In the rest of my time, suggestions will be
offered for improvement in the MDBs’ promotion of Dispute Boards.

Although Dispute Boards have developed in various forms since their inception, my
presentation addresses only the form found in the form established by the MDBs.

What is the Dispute Board?

It is an entity created pursuant to Clause 20 of the MDB Conditions, at or near the

start of a Works contract for the purpose of dispute prevention and, for any dispute
which cannot be prevented, making a decision on that dispute. It can be one person or
three persons, depending upon the complexity of the Works and the amount of the
Contract Price. The number of persons is to be stated in the Contract Data sheets
which form part of the Invitation to Bid. The Board serves for the life of the Works
contract.

What are “ persons” ?

The individuals are required to be “professionals “experienced in the type of

construction involved in the Works and with the interpretation of contractual
documents.” They must be “fluent in the language for communication defined in the
Contract.” Also, they must undertake to abide by (and be liable for failure to fulfill)
various commitments made in the Agreement which they sign to govern their service
to the Parties to the Works contract. (These commitments primarily relate to
maintenance of independence from, and impartiality toward, the Parties and the
Engineer engaged by the Employer to supervise the construction of the Works.)

What is the definition of “professionals”?

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The MDB Conditions do not define the term. Generally DB members have been
senior engineers with strong experience in the engineering disciplines involved in the
contract Works. However, other professions serve, too: architects, contract specialists
(for example, UK Chartered Surveyors, and some lawyers (although they typically
also are qualified as engineers or their law practices have been devoted to the
engineering and construction industry). Because of the powers the Parties are
conferring on them the DB members are apt to be prominent in their profession.

How are DB Members selected?

For a three person DB, each Party to the Works contract – the Employer and the
Contractor – nominates one candidate for the approval of the other Party. The first
two agreed Members propose a third person for the Parties’ approval. The approved
third person serves as Chairman. For a one person DB, selection is by agreement of
the Parties.

The MDB Conditions include provisions regarding selection in the event there is a
failure to nominate or an inability to agree, and provisions regarding replacement of a
DB Member in the event of death or disability, or resignation. Neither Party to the
Works contract can terminate a DB Member’s contract without the prior agreement of
the other Party.

How does the DB operate?

At or near the start of construction on Site, it makes the first of its regularly scheduled
Site visits. These visits are to be at intervals of not more than 140 days. For a large or
complex project, a visit every 3, or perhaps 4, months would be normal. The DB also
can be summoned to the Site by either Party for an unscheduled visit at the time of
“critical construction events.” This is intended to cater to an event which either Party
considers may give rise to a dispute, and in circumstances where progress of
construction may impede the DB’s ability to assess the event if assessment is deferred
until the DB’s next scheduled Site visit.

Between regular Site visits, the DB receives the typical monthly reports of progress,
including statistics, charts, photos, key correspondence and Minutes of Meetings
relating to the Works’ progress, technical problems, claims, Variations, and any
revisions to the Programme. The DB is obliged to become and remain familiar with
the Contract Documents and the progress of the Works. It is common also for the DB
to receive copies of the typical monthly report of the Engineer to the Employer,
although information confidential between the Engineer and the Employer may be
omitted.

During regular Site visits, the DB is accompanied by representatives of the Parties to

the Works contract and the Engineer. Typically, a visit begins with a “tour” of the Site
which is followed by an informal meeting at which the progress of the Works is
discussed, during which the DB will explore whether there are any disagreements
among the Works contract participants, and if there are, will seek details, and try to
assist toward amicable resolution of the disagreements. The MDB Conditions include
the express duty of the DB “to endeavour to prevent potential problems or claims
from becoming disputes.”
Claims are processed by the Engineer, who is obliged to make a timely determination
of each. If either Party is dissatisfied with that determination, and if the DB cannot

3
prevent the matter from becoming a dispute, the dissatisfied Party can refer the
dispute in writing to the DB, which is obliged to produce a written decision.

How does the DB process a dispute which is referred to it?

The MDB Edition requirements are set forth on less than one page. The DB has full
power to establish the procedure to be applied in deciding a dispute, including making
decisions on its own jurisdiction, and according provisional relief such as interim or
conservatory measures. It can open up, review or revise actions of the Engineer
relevant to the dispute. It can conduct any hearing on the dispute as it sees fit, not
being bound by any rules or procedures other than those contained in the Works
contract and that one page of Procedural Rules.

Under those Procedural Rules, the DB must “act fairly and impartially as between the
Parties, giving each a reasonable opportunity of putting his case and responding to the
other’s case” and must “adopt procedures suitable to the dispute, avoiding
unnecessary delay or expense.”

Typically a DB will require each Party to make written submissions to the DB

regarding the dispute, and more often than not, the DB will hold a hearing (especially
if either Party has requested one). At the hearing, the DB will wish to hear from those
persons engaged in the day-to-day construction of the Works, and the DB likely will
be inquisitorial. The hearing will be informal compared to an arbitral hearing where
lawyers conduct the proceedings.

The DB is required to endeavour to reach a unanimous conclusion, but if it cannot, the

decision is made by majority. The majority may require the minority to prepare a
written report for submission to the Parties, along with the written decision of the
majority. Written decisions are required to be “reasoned” and must be delivered
within 84 days after the DB receives the written reference to it of the dispute.

The decision is immediately binding on the Parties and they must “promptly give
effect to it unless and until it shall be revised in an amicable settlement or an arbitral
award” pursuant to the Works contract.

What are the steps to obtain such revision?

Either Party and give notice of dissatisfaction with the DB decision and if that is done
within 28 days of receipt of the decision, even though the decision is binding and
must be given effect in the interim, the Parties are obliged to attempt amicable
settlement before the commencement of arbitration. The minimum duration for such
attempts is 56 days. Thereafter either Party is free to commence arbitration. Of course,
even after commencement of arbitration the Parties have the power to settle amicably.

Why do the MDBs want their borrowers and aid recipients to use DBs?

Broadly, because of the success of DBs in avoiding disputes, and when disputes are
unavoidable, issuing decisions which lead to amicable resolution without arbitration.
According to statistical analysis of records assembled by the Dispute Resolution
Board Foundation, or “DRBF,” some $90 billion of construction disputes have been
resolved by DBs.(www.drb.org)

What is the cost of a DB?

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First, the cost is shared equally between the Parties. Of course, it can be argued that
because the Bidders know there will be a DB, and that half of its cost will be met by
the Contractor, Bidders may include some amount for that in the Contract rates and
prices which it bids.

Obviously, the amount varies between a one person DB and a three person DB. Cost
also varies with the length of the Contract Programme. The DRBF statistical analysis
indicates that cost ranges from 0.05 to 0.24% of the final Contract Price, with an
average of 0.15%. However, it should be noted that the DRBF statistical analysis
includes a large number of domestic USA DBs, which tend to be less expensive than
international ones, in part because of higher travel costs of international work.

The major cost arises from the fees paid to the DB members. The MDB DB members
receive a monthly retainer fee plus a daily fee for Site visits, study of written
submissions of the Parties regarding disputes, hearings on disputes, and private
meetings for preparation of the written decisions on disputes.

Arbitration

The MDB Edition prescribes arbitration as the ultimate method of final settlement of
disputes. For domestic contractors, arbitration is to be under the laws of the
Employer’s country. For foreign contractors, international arbitration administered by
the institution named in the Contract Data, conducted in accordance with the
arbitration rules of that institution or the UNCITRAL Rules, at the choice of the
named institution.

For those unfamiliar with international arbitration, UNCITRAL is the acronym for the
United Nations Commission on International Trade Law. Examples of popular
institutions for administration of international arbitration are the International
Chamber of Commerce International Court of Arbitration, the London International
Court of Arbitration, the Amercian Arbitration Association, and the Swedish Chamber
of Commerce.

Two important points should be noted. First, international arbitration of international

construction contracts has become a lengthy and very expensive process, and in many
cases the expense includes having to pay the costs of the winning party. It is quite
possible for the expenses of a losing party to exceed the amount originally in dispute.

Second, under the MDB Edition, the written decision of the DB is stipulated as
admissible in evidence in any arbitration. Experience suggests that the burden of proof
on the party challenging the DB decision is heavy indeed.

Turning from our review of the DB and its role in dispute resolution under MDB-
financed Works contracts

What problems have arisen in use of DBs for MDB-financed contracts?

1. Lack of training: Especially among borrowers and aid recipients, there is seldom
full understanding of the DB and how to use it successfully. This is a problem on
which the MDBs could have enormous beneficial influence by financing the provision
of expert training. A valuable approach would be to include in the contract a sum for
training to be used for training at the outset of the contract and before substantial

5
construction work is under way. Skilled trainers are available from among the persons
listed in the FIDIC President’s List of Approved DB Members.

Another MDB activity which would be helpful is collaboration with FIDIC’s program
of establishing national Lists of approved DB members for FIDIC’s Member
Associations throughout the world.

2. Misguided efforts to “economise” on DBs: For DBs to function properly, it is

crucial that they be established at the outset of a contract and make regular Site visits
at intervals matching the pace of construction. Past errors of borrowers and aid
recipients include:

(i) asking the Contractor to defer DB establishment until disputes arise, so avoiding
the cost of DB member fees and travel expense until there are disputes to resolve;

(ii) reducing frequency of Site visits (e.g., once a year) or eliminating Site visits, also
to reducing the cost of DB member fees and travel expense;

(iii) eliminating the monthly retainer fee for DB members, and ignoring the fact that
without a retainer fee the DB members will be reluctant to agree to availability on
only 28 days notice;

(iv) seeking to pay the lowest possible fee to DB members. The quip that “if you pay
peanuts, you get monkeys” is applicable. Although the MDB Edition does not contain
guidance on the amount of reasonable fees for DB members, The World Bank has
indicated in earlier editions of the “Procurement of Works” SBD that unless the
Parties agree otherwise, the daily fee should be the same as the daily fee for
arbitrators under the procedures of the International Center for Settlement of
Investment Disputes (“ICSID”), currently $3000 per day, and the monthly retainer
should be three times the daily fee.

(v) seeking to install on the DB persons partial to the borrower or aid recipient, to
avoid having to pay Contractors’ claims.

The elimination of all of the above misguided efforts can be assisted greatly if the
MDBs would

-- make the establishment of the DB a condition precedent to the first disbursement of

funds for payments to the Contractor for construction under the loan or aid agreement;

-- require their field offices to assist borrowers and aid recipients in establishing the
DB, and to remain informed about the progress of the DB.

Thank you for your attention, and thank you for past and future support of the use of
DBs to resolve disputes in contracts financed by you!

6
How do you find a suitable candidate for DB members?

If a dispute can go ultimately to arbitration, why not dispense with the DB and go
straight to arbitration?