Dispute adjudication boards – are they necessary?

Sometime in the first quarter of 2015, I attended a contract management training related to the management of infrastructure projects which are structured to the FIDIC Red and Yellow Book standard. Part of the training content comprised the role of Dispute Adjudication Boards (DABs).

While the training was underway, my employer at the time was preparing to get into a contract to construct and refurbish a new water and sewerage system. I found this training to be very educative especially since the involvement of DABs seemed a bit strange to most of us – the attendants. The contract we were preparing at the time required a permanent 3 member DAB to be in place within 28 days after commencement of construction works. It was the first time my employer was going to manage a contract with a DAB.

About a year later, and with some practical DAB experience under my belt, I bumped into the trainer (whom for the purposes of nondisclosure, I will refer to as Arnold). As our chat progressed, I asked him to share with me his individual experiences related to DABs on the infrastructure projects he had worked on.

In this article, we profile Arnold’s personal experience on a number of projects and the lessons that could provide an answer to the question, Is it necessary to have Dispute Adjudication Boards on projects?

Arnold, what is a Dispute Adjudication Board (DAB)?

A Dispute Adjudication Board (DAB) is an independent body comprising an odd number of members (usually 3) designed to help resolve disputes arising during the implementation of a project. There are two distinct types of DABs; permanent and ad-hoc. A permanent DAB is normally set up at the beginning of the project and remains in existence to the end of the project. For the ad-hoc, the board is implemented once a dispute arises.

Under FIDIC conditions of contract, the DAB can give their opinion when requested by both parties, and in case disputes which are referred to them by either of the contract parties arise, they give decisions.

It all starts with a claim. A claim is a statement of entitlement or an assertion of a right by either contract party. When a claim is rejected, and the rejection is rejected, the claim becomes a dispute. Disputes can be about a rejected claim not being accepted but there is a lot more to a dispute than simply a claim which has been rejected.

It all starts with a claim. A claim is a statement of entitlement or an assertion of a right by either contract party. When a claim is rejected, and the rejection is rejected, the claim becomes a dispute. Disputes can be about a rejected claim not being accepted but there is a lot more to a dispute than simply a claim which has been rejected

Why should employers include DABs on projects?

This is a question best suited for the employer because he is usually the architect of all projects. In my opinion the employer needs to answer a number of questions before engaging a DAB. These are:

1. What is the employer’s past experience with DABs? Is this something new? Is it purely a requirement of the financing agency and hence simply being “forced” on the employer?

2. What is the experience of the employer’s full time personnel assigned to manage the day to day issues related to the project? It could be that the employer’s project implementation unit is inexperienced and needs the support of more experienced professionals on potential disputes that could arise. Some employers are too afraid to take decisions that are likely to have significant financial implications and extension of time.

3. What does the employer envisage to be the quality of the contract documents? Inconsistencies in contract documents are common and often cause disputes.

4. What type of contractors is the employer likely to get into contract with? Certain contractors are known for spending most of the construction period focusing on claims than on the physical construction works.

5. What is the type of construction work envisaged? Shall it be subject to variations? How does the employer intend to manage the risks associated with the project? What kind of payment is involved in correlation with the associated risks?

6. What is the quality of the supervising consultant (engineer) who has been contracted to supervise the construction works on behalf of the employer? A good engineer should ideally be very proactive.

7. What is the nature and size of the construction works and what duration has been planned for the construction works?

“That seems like a host of issues for an employer to take into consideration?”

 ‘Certainly and I will tell you why.’ Arnold replied.

An employer abolishes the use of DABs but later reverses the decision

An agency in Europe decided not to have any DABs on their projects because they were losing a number of cases in which the DAB had ruled in favour of the contractor.

The entity opted for arbitration and later commercial courts. 10 years later, the same agency reintroduced the use of DABs after it turned out that the costs of using a DAB were actually much cheaper in the long run.

I vividly recall one of the cases where the DAB ruled in favour of a contractor to a tune of €7m. The employer was not satisfied and opted for arbitration. The decision of the arbitrators turned out to be in favour of the contractor as well. The employer was eventually required to pay a total cost of €12m which comprised the contractor’s original €7m claim, accrued interest and the costs for the arbitrators.

On another project which had been running without a DAB, one of the contractor’s claims for extension of time and related costs was rejected by the employer. The employer proceeded with arbitration but the arbitrators decided that it is mandatory to follow all the required steps prior to arbitration. Therefore the parties were advised to appoint a DAB and only if they were not happy with the DAB’s decision would they proceed with the dispute to arbitration.

The ship wreck

In a certain hostile community, the same employer decided to make an effort to retrieve a ship that had been intentionally wrecked and settled at the bottom of a river in such a way that traffic flow above the surface of the water body was impossible.

To achieve this, a contract was prepared and a contractor recruited. The contract was a re-measurement contract type. The first and second contractor who had made an attempt to retrieve the ship had found the job too complicated and abandoned the work.

A third contractor picked up the spoils and managed to retrieve the ship. However, because many attempts had been made to retrieve the ship, it became more and more difficult to remove. This resulted in larger quantities of measured works in accordance with the contract. The contractor put in a claim to recover his increased inputs to the assignment.

The engineer and contractor disagreed on the actual (realistic) quantities of measured work that had been done by the contractor and since there was no DAB, the issue went to arbitration. At arbitration, it was decided in favour of the contractor that he was entitled to 70% of the original claim amount.

After a number of other claims that had been ruled in favour of contractors and after suffering huge costs therein, the employer has since re-introduced DABs on their projects.

After a number of other claims that had been ruled in favour of contractors and after suffering huge costs therein, the employer has since re-introduced DABs on their projects

The water company

An agency had 7 construction works contracts. Each supervised by the same consultant. All these projects had a sole DAB member.

3 of the 7 contracts (water treatment plants) were design and build contracts, the others were a re-measurement type of contract. During implementation of the design and build contracts, the contractor realised that the feasibility study on which the design was based had flaws. The contractors in accordance with their contracts made improved technical solutions and presented them to the engineer for approval. The engineer rejected the contractors’ proposals to alternative technical solutions since this was not provided for at the time of the tender.

Surprisingly the employer (the engineer’s boss) was in agreement with the alternative technical solutions being proposed by the contractor but the engineer still refused to give approval. This resulted in numerous disputes.

Unfortunately the behaviour of the engineer was such that he frequently put the employer in a very bad position. He also developed a perennial habit of delaying the approval of the contractor’s design and construction drawings.

For the other 4 projects (water and sewerage networks) which had already been designed by a previous engineer, the supervising engineer also delayed to approve materials, measurement of quantities, processing and issuing of interim payment certificates and yet there were numerous issues related to the quality of the design.

It turns out that under all 7 contracts, the engineer declined to grant the contractors an extension of time blaming all the delays on the contractor.

In total there were around 50 disputes. 49 were settled through the DAB’s decision and one under the water and sewerage network went to arbitration. In this case, the engineer did not want to follow the DAB’s decision which stated that if the contractor had executed the construction works in accordance with the specifications and drawings, he was entitled to payment of the actual value of the works measured.

Noticing that things were going out of hand, the employer terminated the contract with the engineer during the construction works. To date the entity is still in arbitration with the contractor but it is very likely that the arbitrators will rule in favour of the contractor as the DAB proposed earlier.

For this particular project, I hold a strong opinion that the engineer’s supervision team was not structured well enough to manage the construction works. It is likely that the engineer exploited a loophole (during an earlier competitive process to recruitment of a supervising engineer) which did not make it explicitly clear on how many key experts the engineer was required to propose as a minimum to adequately supervise the construction works.

In this case, the DAB protected the employer because the disputes that arose were against him.

A road project

A contractor put in a claim for an extension of time and costs resulting from what he termed as extreme weather conditions.

In this case the employer was not sure how to deal with such a claim. The engineer on the other hand gave a determination in favour of the contractor for an extension of time with costs and reasonable profit. The employer was not happy and rejected the claim thus forwarding it to the DAB.

The DAB decided that the contractor was entitled to an extension of time with no financial compensation as per the contract clauses (this risk was a shared risk in the contract).

The engineer was not happy because his decision had been overruled. Similarly, the contractor was not happy because the DAB’s decision was in favour of the employer. However, after internalising the DAB’s decision, the contractor did not proceed to arbitration. In this case, neither party proceeded to arbitration because the DAB’s decision was accepted by all the parties.

The engineer was not happy because his decision had been overruled. Similarly, the contractor was not happy because the DAB’s decision was in favour of the employer. However, after internalising the DAB’s decision, the contractor did not proceed to arbitration. In this case, neither party proceeded to arbitration because the DAB’s decision was accepted by all the parties

An analysis of the DAB’s decision

A design and build road contract was underway. The contractor put in a claim because the employer did not have the land available for a certain section of the road. Unfortunately the contractor did not substantiate the claim.

The employer finally purchased the land and decided to accelerate the works in order to maintain the same completion date. The contractor obliged but on completion of the works he put in a claim for:

1. Delays in possession of that section of land.
2. Additional costs resulting from the acceleration.

The engineer, acting on behalf of the employer produced a report on the matter and recommended an amount of money due to the contractor.

The employer was upset with the figures presented to him and asked the engineer to review his findings. The engineer reduced the amount due to the contractor by about 10 times. The contractor rejected the revised engineer’s determination and proceeded to the DAB.

The employer was upset with the figures presented to him and asked the engineer to review his findings. The engineer reduced the amount due to the contractor by about 10 times. The contractor rejected the revised engineer’s determination and proceeded to the DAB

During the DAB proceedings, it appeared that an agreement had been reached with the employer consenting to an amount due to the contractor. The DAB ruled in favour of the contractor (to an amount close to that in the engineer’s first report) but the employer decided to proceed to arbitration.

At arbitration, more than 6 years after the site takeover, the decision came back similar to what the DAB had initially determined. The employer is now required to pay the claim due to the contractor including accrued interest and the costs for arbitration.

Lessons learnt

1. The supervising engineer (consultant) tends to feel that the DAB is taking over his responsibilities. The argument against this misconception is the fact that in any case the engineers would not be impartial since they are usually recruited and paid by the employer.

2. The costs incurred to constitute and maintain the DAB should be looked at as insurance to the contract parties. DAB costs are far less than the legal fees that could arise if a dispute goes to arbitration.

3. Unlike certain scenarios where disputes can go unresolved for years on end, with the DAB the contract parties will usually have a decision in a maximum of 3 months (84 days in FIDIC and 90 days under ICC Dispute Board Rules).

4. Since the permanent DAB makes routine visits to the construction site(s) and keeps informed on the progress of construction activities, the contract parties have the chance to resolve most of the disputes that arise on site as opposed to trying to resolve them in a court room.

5. A permanent DAB benefits the construction project because the members will have institutional memory. This helps the contract parties resolve disputes quickly. Also, the potential of unresolved disputes is curtailed. Sometimes the parties are unaware that they are heading towards a dispute. The DAB has the potential to help in avoid disputes.

6. You can trust the DAB to give you a decision. It may not always be in your favour but at least you will have someone impartial to give some sort of judgement.

Conclusion

For the last 7 years, I have had a comprehensive insurance policy for my motor vehicle. When my annual premium fee is due for renewal, I am at times hesitant to pay up because I may not have had any accident claim during the past period.

Whenever I have suffered a loss, my insurance company has always been there to settle my claim; provided I am able to substantiate my claim. I have continued to renew my premium (DAB fees in case of a construction contract) because I am not certain when I could suffer a loss.

It is advisable that an employer and his contractor embrace DABs because none of the contract parties can predict with utmost certainty whether a project will end without a dispute.

No one can predict with utmost certainty whether a project will end without a dispute.

© The Builders’ Garage 2016. Permission to use this article or quotations from it is granted subject to appropriate credit being given to thebuildersgarage.com as the source.