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Society of Construction Law

Society of Construction
Arbitrators
Tuesday 1 July 2008

Is it all necessary? Who benefits?


Provision for Multi-tier Dispute Resolution in
International Construction Contracts

Ellis Baker MA LL.M (Cantab).


Head of Construction and Engineering Practice Group
White & Case LLP, London.
A. How it was – the early FIDIC Contracts

FIDIC Red Book 1st Edition 1957: Clause 66 Settlement of disputes.

2 elements:

Engineer’s decision
Aribitration.

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How it was – the early FIDIC contracts

FIDIC Red Book 1st Edition 1957 Clause 66 Settlement of disputes –


First element:
Engineer’s decision
If any dispute or difference of any kind whatsoever shall arise between the
Employer or the Engineer and the Contractor in connection with or arising out
of the Contract or the carrying out of the Works … it shall be referred to and
settled by the Engineer …

Such decision in respect of every matter so referred shall be final and


binding upon the Employer and the Contractor until the completion of
the work …

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How it was – the early FIDIC contracts

FIDIC Red Book 1st Edition 1957 Clause 66 Settlement of disputes –


Second element:
Arbitration.

… either the Employer or the Contractor may within 90 days after receiving
notice of such decision … require that the matter shall be referred to an
arbitrator …

The award of the arbitrator shall be final and binding on the parties.

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How it was – the early FIDIC contracts

FIDIC Red Book 2nd edition 1969


3rd edition 1977

Clause 67 maintains 2 element approach.

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How it was – the early FIDIC Contracts

The arbitration element changes


Clause 66 1st edition Red Book
“such reference shall be deemed to be a submission to arbitration
within the meaning of the Arbitration Laws of the country to the Law
of which the Contract is subject”.
Clause 67 2nd and 3rd edition Red Book
“All disputes or differences in respect of which the decision (if any) of
the Engineer has not become final and binding as aforesaid shall be
finally settled under the Rules of Conciliation and Arbitration of the
International Chamber of Commerce by one or more arbitrators
appointed in accordance with the said Rules”.

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How it was – the early FIDIC Contracts

How the early FIDIC contracts worked Clauses 66/67

Engineer’s decision (first element)


All disputes or differences referred to Engineer (condition precedent).
Engineer’s decision due within 90 days.
Engineer’s decision final and binding pro tem, subject to arbitration.

Arbitration (second element)


Reference to arbitration by Employer or Contractor to be made within 90 days of
decision, failing which it became final and binding absolutely.
If no decision received from Engineer within 90 days, parties had further 90 days to
refer to arbitration.
References to arbitration finally settled (under ICC Rules 2nd and 3rd Edition) by one or
more arbitrator appointed under the Rules.

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Changes on the way – the late 80s and early 90s

FIDIC Red Book 4th edition 1987 (1988 reprint)


Clause 67
While the stages of engineer’s decision and reference to arbitration were
recognisably the same, Clause 67 had been significantly revised.
“The 4th Edition introduces fundamental changes to the disputes procedure”.
(Edward Corbett: FIDIC 4th A Practical Legal Guide, 1991).

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Changes on the way – the late 80s and early 90s

FIDIC Red Book 4th edition 1987 (1988 reprint)

Clause 67 amendments.

 Both reference to Engineer of dispute and Engineer’s decision “shall state


that it is made pursuant to this Clause” (to remove doubts as to whether
other communications were references or decisions).

 Time limits for Engineer’s decision and reference to arbitration reduced


from 90 days to 84 days.

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Changes on the way – the late 80s and early 90s

FIDIC Red Book 4th edition 1987 (1988 reprint)

Clause 67 amendments

 Major innovation
Introduction of Amicable Settlement stage
Sub-clause 67.2.

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Changes on the way – the late 80s and early 90s

FIDIC Red Book 4th edition 1987 (1988 reprint)

Sub-Clause 67.2
Amicable Settlement
Where notice of intention to commence arbitration as to a dispute has been
given in accordance with Sub-Clause 67.1, the parties shall attempt to settle
such dispute amicably before the commencement of arbitration. Provided that,
unless the parties otherwise agree, arbitration may be commenced on or after
the fifty-sixth day after the day on which notice of intention to commence
arbitration of such dispute was given, even if no attempt at amicable settlement
thereof has been made.

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Changes on the way – the late 80s and early 90s

FIDIC Red Book 4th edition 1987 (1988 reprint)


How the procedure worked

1. Reference to Engineer (84 days).


2. Reference to Arbitration (70 days).
3. Arbitration not to be commenced until Amicable Settlement attempted (or
56 days in default).
4. ICC arbitration.

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Changes on the way – the late 1980s and early 90s

FIDIC Amicable Settlement


Note that an early attempt to introduce amicable settlement (and expert
determination) in the FIDIC Yellow Book 2nd edition was regarded as
unsuccessful at the time of the 3rd edition:
“The provisions in the Second Edition of the E&M Conditions
enabling the parties to refer matters to an expert have
been removed as have the specific requirements for the parties to
attempt amicable settlement. It was considered that this last
provision was of little use since it merely enabled a party who
had no wish to settle matters amicably to delay the
commencement of arbitration”
Dan Graham, International Construction Law Review 1987.

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Changes on the way - the late 80s and early 90s

Not all FIDIC contracts changed at the same time.


FIDIC Yellow Book Conditions of Contract for Electrical and Mechanical Works 3 rd edition 1988.
Clause 50.1
If either party is dissatisfied with a decision or instruction of the Engineer as confirmed, reversed or
varied in accordance with Clause 2 he may refer the matter to arbitration pursuant to
Sub‑Clause 50.2.
Unless the dissatisfied party has notified the other party and the Engineer within 56 days of such
decision or instruction of his intention to refer the matter to arbitration, he shall be deemed to have
accepted the decision as final.
Reference to arbitration shall not relieve the Contractor of his obligation to proceed with the Works
in accordance with the Engineer’s decision or instruction, nor relieve the Employer of any of his
obligations under the Contract.
The Contractor shall in any such arbitration be at liberty to rely on reasons additional to the
reasons stated in the notice given under Sub‑Clause 2.7.

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Changes on the way – the late 80s and early 90s

FIDIC Yellow Book 3rd edition 1988


Clause 50.2
If at any time any question, dispute or difference shall arise between the Employer and
the Contractor in connection with or arising out of the Contract or the carrying out of the
Works either party shall be entitled to refer the matter to be finally settled by arbitration
in accordance with the Rules of Conciliation and Arbitration of the International
Chamber of Commerce by one or more arbitrators appointed in accordance with those
Rules, or by arbitration in accordance with such other rules as are specified in Part II.
The Arbitrator(s) shall have full power to open up, review and revise:
(a) any decision or instruction of the Engineer referred to arbitration pursuant
to Sub‑Clause 50.1, and
(b) any certificate of the Engineer related to the dispute.

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Changes on the way – the late 80s and early 90s

FIDIC Yellow Book 3rd edition 1988

Clause 50.4

Formal notice of arbitration must be given to the other party, and where
required to the appropriate arbitration body, no later than 84 days after the
issue of the Final Certificate of Payment.

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Changes on the way – the late 80s and early 90s

So in 1988 FIDIC forms offered different dispute resolution models.

Red Book Yellow Book


(3-stage) (2-stage)

Engineer’s decision
Engineer’s decision
(Reference to arbitration)

Amicable Settlement Arbitration

Arbitration

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New models of dispute resolution in the 1990s

Mega-projects: the Channel Tunnel


Clause 67 Settlement of disputes.
Any dispute or difference should:
1. “in the first place be referred in writing to and be settled by a Panel of three
persons (acting as independent experts but not as arbitrators)”.
2. Provided the decision is unanimous “Such unanimous decision shall be
final and binding upon the Contractor and the Employer unless the dispute
or difference has been referred to arbitration”.
3. All disputes or differences … shall be finally settled under the Rules of
Conciliation and Arbitration of the International Chamber of Commerce by
three arbitrators appointed under such Rules.

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New models of dispute resolution in the 1990s

Mega-projects: the Channel Tunnel


The Channel Tunnel Group v Balfour Beatty [1992] 56 BLR 1 Court of Appeal:
Neill LJ
“Evans J held that a stay should be refused because the time for arbitration
had not arrived; there has not yet been a decision by, or even a reference to,
the panel under clause 67(1)”.
“Many types of contract provide for some preliminary step to be taken before
there is an arbitration; I cannot see that this entitles a party to disregard the
arbitration procedure altogether and start an action at law, merely because the
preliminary step has not been taken”.

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New models of dispute resoltuion in the 1990s

Mega-projects: the Channel Tunnel

Channel Tunnel Group v Balfour Beatty [1993] BLR 22 House of Lords

“Those who make agreements for the resolution of disputes must show good
reasons for departing from them … having promised to take their complaints to
the experts and if necessary to the arbitrators, that is where the appellants
should go. The fact that the appellants now find their chosen method too slow
to suit their purpose is to my way of thinking quite beside the point”.
(per Lord Mustill).

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New models of dispute resolution in the 1990s

Mega-projects: Hong Kong International Airport 1992

Mass Transit Rail Corporation HK Government


Airport Core Programme
Building Works/Engineering
works
3-tier Structure 4-tier Structure
Decision of engineer Decision of architect/engineer
Mediation (condition precedent) Mediation
Arbitration Adjudication
Arbitration

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New models of dispute resolution in the 1990s

Mega-Projects: Hong Kong International Airport 1992

Provisional Airport Authority Contracts


4-tier Structure
Decision of engineer
Appeal to Project Director
Reference to Dispute Review Board (DRB)
Arbitration

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New models of dispute resolution in the 1990s

Beyond FIDIC: the ENAA Model Form

Engineering Advancement Association of Japan Model Form

International Contract for Power Plant Construction 1996

Clause 6.1(a) “If any dispute or difference of any kind whatsoever shall arise
between the Owner and the Contractor … the parties shall seeks to resolve
any such dispute or difference by mutual consultation”.

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New model of dispute resolution in the 1990s

Beyond FIDIC – the ENAA Model Form 1996


Clause 6.1(b)
“If the parties fail to solve such dispute or difference by mutual consultation,
then either party may give to the other party a notice that a dispute or
difference exists, specifying its nature, the point(s) in issue and its intention to
refer the dispute to arbitration. If the parties fail to resolve such dispute or
difference by further consultation within a period of thirty (30) days from the
date upon which such notice of dispute has been given, the dispute or
difference shall be referred to and finally settled by arbitration under the Rules
of Conciliation and Arbitration of the International Chamber of Commerce (ICC)
or any other rules as may be agreed”.

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New models of dispute resolution in the 1990s

Beyond FIDIC: the ENAA Model Form


Clause 6.2 “Notwithstanding the provisions of Clause 6.1 (Arbitration) above
save insofar as they relate to mutual consultation, either party may give a
notice to the other of its desire to refer to an Expert any dispute or difference”.
“… if either party is not satisfied with a decision by the Expert as provided in
the preceding paragraph … such dispute or difference may be referred to and
finally settled by arbitration”.

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Developments in SE Asia

Hong Kong SAR Private Edition 2006


41.1 (b) “Each party shall designate one of its own senior executives as
its representative … and the Designated Representatives
shall endeavour to settle disputes that arise during the
carrying out of the Works”.
(c) The Designated Representatives shall have the authority to
settle disputes and shall not be involved in the day to day
administration of the Contract.
41.2 If a dispute arises under or in connection with the Contract, the
Architect shall, at the request of either party, immediately
refer the dispute to the Designated Representatives.

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Developments in SE Asia

Hong Kong SAR Private Edition 2006

41.3 If the dispute is not resolved by the Designated Representatives


within 28 days … either party may … refer the dispute to
mediation.

41.4 If the dispute is not settled by mediation within 28 days … either


party may refer the dispute to arbitration.

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Developments in SE Asia

Singapore Institute of Architects (S/A)


Lump Sum Edition 2005

(Malaysia PAM Clauses 34 and 35 are in similar words).

Clause 37.1 Any dispute between the Employer and the Contractor …
shall be referred to the arbitration and final decision of a
person to be agreed by the parties …

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Developments in SE Asia

SIA Clause 38

Notwithstanding Clause 37(1), of the Conditions,

upon the agreement of both the Employer and the Contractor, the
Parties may refer their dispute … for mediation under the Mediation
Rules of the SIA.

For the avoidance of doubt, prior reference of the dispute to


mediation under this clause shall not be a condition precedent for its
reference to arbitration by either the Contractor or the Employer.

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The modern international construction and engineering forms

FIDIC Dispute Boards


FIDIC Orange Book 1995. Clause 20.
3 tier structure
Dispute between Employer and Contractor referred to Dispute Adjudication Board
(DAB).
DAB decision final and binding unless a party dissatisfied.
Amicable settlement.
Arbitration.
1996 Supplement to the 4th Edition of the Red Book
1997 Supplement to the 3rd Edition of the Yellow Book introduced similar model for
Clause 50.

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The modern international construction and engineering forms

FIDIC Dispute Boards.

The FIDIC Rainbow Suite 1999 developed the model.

Clause 20 Red Book, Yellow Book, Silver Book


3 tier structure
Dispute Adjudication Board
Amicable Settlement
Arbitration

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The modern international construction and engineering forms

FIDIC Rainbow Suite: Gold Book


Conditions of Contract for Design Build and Operate Projects introduces:
20.4 Avoidance of disputes.
“If at any time the Parties so agree, they may jointly refer a matter to the DAB
in writing with a request to provide assistance and/or informally discuss and
attempt to resolve any disagreement…
The Parties are not bound to act upon any advice given during such informal
meetings and the DAB shall not be bound in any future Dispute Resolution
process and decision by any views given during the informal assistance
process”

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The modern international construction and engineering forms

Institution of Chemical Engineers I Chem E International Edition 2007.


Red, Green, Burgundy Books.
Clause 44 Disputes
44.1 The Purchaser and the Contractor shall endeavour to avoid the escalation
of problems into disputes as defined in sub-clause 44.4 and to avoid disputes
both between themselves and with third parties including sub-contractors.

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The modern international construction and engineering forms

I Chem E International Editions 2007


Clause 44 Disputes.

44.4 “No matter shall constitute or give rise to a dispute unless it has
been referred to the Project Manager”
44.6 “The parties shall attempt in good faith to negotiate a settlement
of any dispute or difference”
44.7 “If a dispute cannot be resolved by negotiation the parties may
by agreement refer it to mediation”
45.1 “Any dispute which has not been settled shall be referred to and
finally resolved by arbitration.”

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The modern international construction and engineering forms

I Chem E International Editions 2007


Options: Dispute Review Board (DRB)

Clause 46 Any decision issued by the DRB shall be binding but


not final and the dispute shall be resolved by
agreement or by reference to an Expert or to
arbitration.
Clause 47 Reference to an Expert.
Once referred to an Expert, dispute ceases to be
referable to arbitration.
Findings are final, conclusive and binding.

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Comment and analysis

So, does multi-tier dispute resolution benefit the parties if so what


are the respective advantages and disadvantages of the
respective models?

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How it was – the early FIDIC Contracts

Key-features of early FIDIC Contract Clause 66/67

Simplicity - 2 stage procedure


Engineer (a condition precedent)
Arbitration.

Finality - Engineer’s decision binding pro tem


and after 90 days absolutely.
Arbitration tribunal’s decision final.

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Comment and analysis

Mega-projects: Hong Kong Airport: Airport Authority Contracts.

“there were few referrals. The DRB made six binding decisions, with only one
case being taken to arbitration. The relatively low number of referrals suggests
that the existence of the DRB deferred the referral of disputes and it may be
that it encouraged the settlement of matters between the parties without further
recourse to third party intervention”.
Keith Brandt
Chartered Institute of Arbitrators Conference,
Hong Kong 2002.

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Comment and analysis

Mega-projects: Hong Kong Airport

Hong Kong Government MTRC Airport Authority


154 disputes on 93 contracts. All claims resolved. 10 disputes

62 resolved prior to No claim went to mediation or 2 went to arbitration but settled


mediation. arbitration. during mediation.
62 resolved during mediation. 4 settled by negotiation.

8 resolved by or during 4 settled by structured


adjudication negotiation at HKIAC.
11 resolved by or during
arbitration
11 unresolved or awaiting (Dean Lewis, International
arbitration award. Construction Law Review
2002)
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Comment and analysis

FIDIC Amicable Dispute Settlement

“The addition of a new Clause 67.2 requiring an attempt at Amicable


Settlement could also have important consequences for the avoidance of
lengthy legal disputes… A Construction Contract can generate large quantities
of correspondence, numerous minor disputes and strong feelings between the
people concerned. A further opportunity to review and discuss their
differences, probably at Head Office rather than site level, may well encourage
the parties to settle their mutual claims and avoid the considerable costs of an
Arbitration.”
Brian Totterdill, Engineer
International Construction Law Review 1987

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Comment and analysis

FIDIC Amicable Settlement

Sub-Clause 20.5
“Despite the criticisms that have been levelled at Sub-Clause 20.5 (amicable
settlement of disputes) it can provide a valuable opportunity for the parties to
arrive at a negotiated resolution of the dispute before proceeding to a costly
formal determination through arbitration”.
Dale Bracken
International Construction Law Review 2006

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Comment and analysis

FIDIC Amicable Settlement


“The FIDIC provision for amicable settlement may be seen as strong
encouragement to get on with resolving the dispute, or at least with settling
some of the issues involved, well in advance of any arbitration hearing…
The FIDIC provision in Sub-Clause 67.2 is however very general, and
leaves to the parties the need to select a procedure and cost sharing basis.
Unfortunately, the parties may need to spend most of the limited time
available in discussing what they should do, rather than getting on with it.”
David Hollands, Engineer, New Zealand
International Construction Law Review 1989

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Comment and analysis

Dispute Boards
Dispute Review Boards.
“A DRB has certain psychological advantages over formal adversarial dispute
resolution: e.g. early venting of opinions and emotions before impartial experts, thus
defusing personal antagonisms at an early stage and not allowing them to fester; a
conciliatory atmosphere producing Recommendations that are not compulsory (but can
be ignored only at considerable risk); quick resolution of disputes so that the parties put
the disagreement(s) behind them promptly and retain focus on the principal goal of both
parties – the successful completion of the project”.
“The Dispute Review Board system does work!”
Gordon Jaynes
International Construction Law Review, 1993

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Comment and analysis

Dispute Boards
“the DRB procedure is now very popular in large-scale infrastructure projects,
two very high profile examples of its use being on the Channel Tunnel and
Hong Kong Airport projects …”
“The DRB is set up at the beginning of the project, and through regular site
visits, is involved from day one in the project. It therefore becomes an inherent
part of the project, and thus will be in a very good position to assist in the
speedy resolution of disputes as and when they arise”.
Rohan Shorland, Journal of the Chartered
Institute of Arbitrators 1999.

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Comment and analysis

Dispute Boards

“they … are in fact better than arbitration. Not only do they work well, but they
indeed work faster, cheaper and in a much less contentious manner than
arbitration tribunals”.

Alexis Mourre, International


Construction Law Review 2006.

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Comment and analysis

Dispute Boards

“DRBs are perceived as comparing favourably with both ad hoc mediation and
the UK statutory adjudication scheme”.

Keith Brandt, Solicitor, Hong Kong


Chartered Institute of Arbitrators
Conference, Hong Kong 2002.

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Comment and analysis

Dispute Boards
Examples of use cited by Brandt.
Channel Tunnel – UK
Channel Tunnel Rail Link – UK
Vasco da Gama Bridge over Tagus – Portugal
Athens Mass Rapid Transit – Greece
LHDA Dam and Transfer Gallery – Lesotho
Maeslant Water Barrier – Netherlands
Extran Hydro Development – PRC
Xiaolangdi Multipurpose Project – PRC
Longtan Hydro Development – PRC.

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Comment and analysis

Dispute Boards: Advantages


1. Legitimacy in choice by parties.
2. Regular visits give in-depth understanding of project.
3. DRB involved early, when memories and events fresh.
4. No opportunity for ambush as in adjudication.
5. Technical expertise of DRB personnel.
6. No obligation to produce compromise.
7. Non-binding nature of DRB decisions a virtue, less impression of
winner/loser.
8. DRB inhibits unmeritorious claims.
Keith Brandt, Hong Kong 2002.

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Comment and analysis

Dispute Boards: Why dispute boards succeed


1. Regular site meetings deal with complaints early.
2. Gives all parties a chance to have a say.
3. Parties on site unite ‘against’ DRB members as outsiders.
4. Most DRB members are non-lawyers and more user-friendly.
“Experience shows that dispute boards are successful, that is, they deal with
and finally dispose of virtually all the disputes that come before them. Broadly
it seems that something in the order of 97% of disputes referred to a dispute
board will not go beyond that procedure into arbitration or litigation”.
Dr Robert Gaitskell QC
ICC Conference, London 2004

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Comment and analysis

Dispute Boards: Disadvantages

1. Cost – warranted only on larger projects.


2. Cost disproportionate to benefit on all but largest projects.
3. Cost – Adjudication and mediation are cheaper.

Keith Brandt Hong Kong 2002

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Comment and analysis

Dispute Boards Costs

DB will “generally cost in the order of 0.2% of project costs”.

Dr R. Gaitskell, ICC Conference 2004.

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Comment and analysis

Dispute Boards

1995 World Bank makes DBs mandatory for all IBRD financed projects
over US $50 million.

1997 Asian Development Bank


European Bank for Reconstruction and Development follow
suit.

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Comment and analysis

Dispute Boards

ICC 3 types of Board – 2004

DRB – Recommendations.
DAB – Decisions.
DB – Hybrid – issues recommendations unless decisions requested.

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Comment and analysis

Dispute Boards: compared with Dispute Resolution Adviser

Unlike most forms of dispute resolution where a third party neutral or tribunal is
appointed once a dispute has arisen, the DRA is appointed at the
commencement of a project, generally well before any disagreements have
come to a head, thereby promoting dispute avoidance … the most significant
attribute of the DRA system is perhaps its ability to prevent disputes from
arising.

Andrzej Cierpicki, Asian Dispute Review 2008

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Comment and analysis

Dispute Resolution Adviser


DRA used on 60 projects since 1995
HK Govt Architectural Services Department study:
Average cost savings with DRA 2.2%
Average cost savings with other provision 1.7%
Increase in duration of project through EoT
with DRA 7.2%
with other provision 15.7%

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Comment and analysis

Med-Arb:
Glencot Development and Design Co v Ben Barrett & Son (Contractors) Ltd. [2001] 80
ConLR 14
A mediator “will or may have to listen to arguments and hear things which may be
completely irrelevant to the dispute in the adjudication but which might be prejudicial to
its determination.
… Mr Talbot was correct in making it clear to parties that what he might be doing was a
departure from adjudication and in getting their agreement to it. Such agreement was
essential. Of course an agreement in advance, even if a formal written agreement, may
not be effective in depriving a party of its right to question a later decision on the
grounds of apparent or actual bias”.
(per HH Judge Humphrey Lloyd QC.)

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Comment and analysis

Looking forward LONDON 2012


Olympic Delivery Authority
Independent Dispute Avoidance Panel (IDAP)
Chair: Dr Martin Barnes
10 construction professionals
Adjudication Panel: decides disputes not avoided by IDAP
Chair: Peter Chapman
11 adjudicators

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Conclusions

Is what all necessary?

The parties should have an opportunity to achieve settlement.

Amicable Settlement or Mediation or Non-binding DRB.

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Conclusions

Does the additional layer of a DB assist in avoidance of disputes?


Doubtful: periodic visits may not be enough to ensure genuine familiarity
with parties or project.
A worthwhile alternative for consideration:
The DRA offers real engagement with parties and project and its
capacity for dispute avoidance merits further study.

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Is it all Necessary? Who Benefits? #2613006


Who benefits?

Of course, the DR community benefits in one sense from multiple tiers of


professional involvement.

But multi-tier dispute resolution is only sustainable if it benefits the stake-


holders, the parties.

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Is it all Necessary? Who Benefits? #2613006


Conclusions

So, is it all necessary?


One large international projects it is necessary to provide sophisticated
mechanisms to try to prevent disputes from going to arbitration.
Mechanisms capable of doing this are necessary. If the mechanisms and the
professionals who operate them deliver that, the stake-holders are the real
beneficiaries.

WHITE & CASE LLP August 16, 2023 61

Is it all Necessary? Who Benefits? #2613006


Worldwide. For Our Clients.

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