Dispute resolution boards - prevention is better than a cure

By Sergio Capelli and Shaun Gallagher.

Key Points:
If used appropriately there are many advantages to be gained from using a DRB through the life of a project.

Resolving disputes in the construction industry has traditionally been an expensive and complex exercise. Dispute Resolution Boards (DRB) are emerging as an alternative way of dealing with disputes, if not preventing them from escalating in the first place. They are becoming increasingly common on large infrastructure projects, such as the Sydney Desalination project, Port Botany Expansion in Sydney and the Gateway upgrade in Brisbane.

In part three of our series on dispute resolution trends and options, we look at the effectiveness of DRBs as an alternative to the well-established risks of following the fraught path down the road of litigation and arbitration (we previously looked at managing dispute risk and the current landscape for mature dispute resolution).

What is a DRB?

A DRB is a committee established at the outset of a project by the contract as the means for dealing with disputes. A DRB functions to assist in avoiding disputes, and if disputes arise, to resolve them efficiently and cost-effectively.

A common approach involves a DRB comprising three members:

• a member selected by the principal, subject to approval by the contractor;
• a member selected by the contractor, subject to approval by the principal; and
• the final member, who is selected by the other DRB members, subject to the approval of both the principal and the contractor.

Once appointed, members of the DRB do not act as advocates or representatives of the parties who nominated them. They participate as independent and impartial members.

A key feature of the DRB approach to dispute resolution is that the DRB is formed at the start of the project with the DRB members becoming involved in the project from the outset, gaining an understanding of the stakeholders' expectations for the project, attending the site regularly to inspect progress and having seen the evolution of issues that arise during the course of the project. When a disagreement arises the DRB are already familiar with the issues and should have gained the trust and respect of key stakeholders, enabling them to quickly address problems in a cost-effective and practical manner.

Another key feature of the DRB approach is that the members are generally very senior players in the industry with extensive experience, encouraging the parties to observe their decisions.

Effect of DRB decisions

When establishing a DRB, a decision needs to be made on what legal effect the DRB's determination of a dispute will have. There are three models which are used:

1. Decisions of the DRB are not binding

The DRB's role is advisory only and its decisions are not binding on the parties. This model is common in the USA.

Issues relevant to this model include:

• the DRB will be less effective if it has no real authority over the parties;
• the cost of retaining a DRB can be high. Accordingly it is preferable to minimise the need for further dispute resolution processes; and
• a favourable adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the "SOP Act") will be of more use to a contractor than a non-binding DRB decision as the contractor must be paid the determined amount. As a result, contractors are likely to circumvent the DRB by utilising the SOP Act.

2. Decisions of the DRB are final and binding up to a certain value

The DRB's decision is final and binding on the parties where the payment to be made pursuant to the decision is less than a certain value (eg. $5 million). This model has not been widely adopted.

Issues relevant to this model include:

• the relationship between the parties and the DRB may be overly formal, as the parties will attempt to protect their positions;
• the parties may be more inclined to involve lawyers in the dispute and proceedings will be more heavily contested as there will be no avenues of appeal from the DRB's decision. This would defeat the purpose of the DRB process as a quick and cheap procedure for resolving disputes; and
• setting a particular dollar value below which decisions will be binding may encourage the parties to manipulate the value of claims to suit their intentions and run minor claims in order to establish a precedent that may be binding on larger claims.

3. Decisions of the DRB are binding unless appealed

The DRB's decision is binding unless appealed. Both parties are immediately required to give effect to it, including paying any amounts determined to be payable. However, both parties have a limited period of time to dispute the decision and refer it to arbitration or litigation. This model is adopted in the internationally used FIDIC (International Federation of Consulting Engineers) contracts.

Issues relevant to this model include:

• the DRB will have authority over the parties but the process will not become overly formal and the proceedings too heavily contested because the parties still have the right to appeal the DRB's decision;
• all decisions of the DRB have the same effect regardless of dollar value and accordingly there is less chance of distorting behaviour;
• the contractor is likely to pursue claims under the DRB process rather than under the SOP Act to maintain a favourable relationship with the principal and obtain immediate payment of any favourable determination of the DRB;
• from the principal's perspective, the DRB process is clearly preferable to the process under the SOP Act;
• experience has shown that even where decisions of the DRB are not finally binding and can be appealed, they tend to be observed by the parties. Parties respect the DRB process and there is a strong risk of an adverse cost order where arbitration or litigation is unsuccessfully pursued in the face of three respectable expert opinions; and
• this approach enables the parties to resolve disputes in a predictable framework and concentrate (at least temporarily) on the construction process itself instead of on their financial relations.

What are the downsides and can they be overcome?

A lack of familiarity of the DRB model tends to cause parties to stick with a mechanism that is already understood by the market. Parties, particularly on small-scale projects, are often reluctant to incur the ongoing costs of running a DRB. In their early optimism at the outset of a project, parties often believe that their project will be one of the ones that remains trouble-free and in times of tight budgets cannot justify indulging in the old saying of "prevention is better than a cure".

The DRB process requires the involvement of respected industry participants to gain the confidence of the industry. If used appropriately there are many advantages to be gained from using a DRB through the life of a project. The use of DRBs is becoming a viable alternative to minimise the harmful impact of disputes on major projects.

For further information, please contact Sergio Capelli.