Focus: Resurgence of dispute review boards
7 June 2011
In brief: Proponents of some recent landmark Australian infrastructure projects, such as the Gateway Upgrade in Queensland, the Harvey Dam in Western Australia, and the desalination plants in Adelaide and Sydney, have chosen to administer their contracts using dispute review boards, reflecting their success in avoiding disputes, or preventing disputes from escalating while construction works are in progress. Partner Brian Millar , Lawyer Michael Tollman and Law Graduate Tom Tian report on a growing trend.
- What are DRBs?
- How do DRBs differ from other dispute resolution mechanisms?
- Advantages of DRBs
- Contractual considerations
How does it affect you?
- Dispute review boards (DRBs) have the potential to save time and money, and preserve relationships, by avoiding disputes escalating to arbitration or litigation.
- DRB members are commonly chosen from among the leading experts in their fields. They monitor potential disputes and scrutinise the parties' conduct, including intervening, if required, while the works are in progress.
- Large-scale public projects that are complex, high-risk or high-profile, involving multiple parties or stakeholders with differing expectations and objectives, have the most potential to benefit from the DRB process.
- Contracts need to provide for a DRB regime tailored to the specific project and the parties' commercial interests.
DRBs are neutral, independent boards commonly comprising three members possessing expertise and skills in the relevant type of project. DRBs have been most frequently employed on lengthy and large-scale public construction projects involving multiple parties or stakeholders with differing expectations and objectives.
DRBs monitor the progress of works and attempt to identify issues early to prevent disputes from arising. DRBs can also hear and resolve formal disputes. Their decisions are usually binding unless appealed within a specific timeframe. The precise procedures and costs associated with the establishment and function of each DRB are determined by the particular contract.
Typically, DRBs are established shortly after execution of the contract, and are provided with plans and specifications to familiarise them with the works. The parties choose the DRB's level of involvement in the course of the project. Some parties have the DRB actively involved in the administration of the contract, reviewing practical completion authorisations, defect notices, requests for extensions of time, and payment claims and schedules in response. Other parties may limit the DRB's involvement to instances where issues may arise.
The DRBs' avoidance strategy sets them apart from other forms of dispute resolution that only come into play after a dispute has crystallised. Another key feature is that DRBs use neutral third persons to facilitate this process.
The success of DRBs in effectively avoiding and preventing the escalation of disputes has led to a dramatic growth in their use in many international construction projects. Standard-form contracts used for many international projects require the inclusion of a DRB process as a precursor to litigation or arbitral proceedings. Institutions providing contracts that use DRBs include:
- the International Federation of Consulting Engineers (FIDC), which produces a series of standard-form construction contracts that are widely used around the world;
- the World Bank (compulsory on all funded projects with an estimated construction value in excess of US $50 million);
- international financing institutions and multilateral development banks (through master bidding documents); and
- the International Chamber of Commerce and the American Arbitration Association.
In Australia, the use of DRBs is also becoming more popular. Since 1987, there have been 28 contracts utilising DRBs, with values ranging between $22 million and $1.7 billion; 22 of these are current or have been completed since 2006.
DRBs are usually involved in the project from the beginning, and regularly attend the work site and hear from the parties throughout the construction process. As the DRB is already familiar with the parties' expectations and the project, it can often quickly and cheaply resolve issues that arise, before they escalate and have a negative impact on the project.
The indicative cost of DRBs is shown by the following statistics from the US. For projects valued at more than US $50 million, that have run for longer than two years and require the DRB to meet at least every quarter, the cost without formal hearings was less than 0.5 per cent of the contract value. In contrast, arbitration costs can be as high as 5.9 per cent of the contract.1
DRBs encourage the lodgment of more realistic payment claims and are likely to result in less flat-out rejections by the parties, who realise that their conduct may be scrutinised by a panel of respected experts they have appointed. Issues that might otherwise ruin trust in relationships can be identified early and potentially prevented. This is particularly the case where both the principal and contractor have an equal say in nominating the members of the DRB and appropriate persons are chosen.
The DRB is entirely a creation of the contract. Therefore, it is up to the parties to decide how it is to be constituted and how it will operate. DRBs are suitable for a wide range of contracts, including construct only, design and construct, operations and maintenance, and semi or hybrid alliances.
The board members are usually chosen from senior people in the industry who have the right skills and experience. It is important that the board is seen as impartial and that it be respected, so that its recommendations are accepted. The most common form of DRB consists of three members:
- one chosen by the principal, with no objection by the contractor;
- one chosen by the contractor, with no objection by the principal; and
- a chairman chosen by the other DRB members, with no objection by the principal or contractor.
The contract must also set out the DRB's level of involvement during the construction process. This usually provides for regular site visits and meetings with the parties, which allow the DRB to keep up to date with issues as they arise. The more frequently the DRB is required to monitor the project, the greater the cost to the parties, though this potentially allows the DRB to identify issues earlier and resolve them faster. The parties might also decide to set up an ad-hoc DRB that only meets when there is potential for a dispute.
The splitting of costs for running the DRB is also up to the parties. There are several options, though the most common one involves the cost being shared equally.
DRBs usually intervene before a dispute has arisen. The DRB might make suggestions to the parties or provide opinions. The contract must detail the nature and procedure for any early intervention, including whether the DRB may intervene of its own accord or only at the request of the parties.
There should also be clear procedures setting out how the parties are to communicate with the DRB: eg prohibiting private discussions, to ensure transparency and guard against allegations of impropriety. The contract can also provide that communications made during the DRB process are without prejudice and privileged, so the parties can partake in the process without risk of compromising their positions.
The DRB framework usually has a formal dispute hearing process. There is no official structure for a hearing by a DRB, and the parties are free to decide any rules or procedures that must be followed. The formality of this hearing, the scope of what the DRB may consider and the effect of the DRB's decision must all be specified in the contract. Determinations by the DRB are usually binding unless appealed within a short time and are often required as a precondition to the ability to commence formal proceedings.
We expect the use of DRBs on large construction projects in Australia will continue to increase as the industry continues to seek to minimise the significant impact of disputes on major projects.
- Leighton O'BrienPartner,
Ph: +61 2 9230 4205
- Nick Rudge Partner,
Ph: +61 3 9613 8544
- Anthony ArrowPartner,
Ph: +61 3 9613 8723
- Dan YoungPartner,
Ph: +61 7 3334 3143
- Ren NiemannPartner,
Ph: +61 7 3334 3005
- Michael HollingdalePartner,
Ph: +61 8 9488 3708