UK: Keeping an Even Keel

Last Updated: 26 April 2010
Article by Peter Smith and Catherine Gates

This article first appeared in the March 2010 issue of www.portstrategy.com

Peter Smith and Catherine Gates discuss the worth of Dispute Adjudication Boards for port construction contracts.

The shipping market has been particularly badly hit by the economic downturn which in turn has affected the ports and terminals sector. Contractors and sub-contractors were already suffering from losses on fixed price contracts on which they were exposed to escalation in the costs of new materials. Insolvency has now also become a very real and recurring problem. Developers have fallen behind in paying contractors on time, or indeed at all.

We are seeing projects being pushed back or cancelled altogether. In the Middle East, port operator DP World is reviewing its development plans of Jebel Ali Terminal in Dubai because of the global economic downturn. Construction is likely to be delayed by one year.

In Africa, the developers of Morocco's Tanger-Med port are now delaying further expansion, in what was envisaged to be Tanger-Med II. The expansion plan includes two new terminals, TC3 and TC4 but TC4's launch has been delayed from 2012 to 2014 at the earliest. According to MEED (a Middle East business and contract news publication) there are $46.5bn worth of port development projects in the Middle East planned or under way, but at least a dozen schemes, with a combined value of $11.5bn, are facing delays.

In all, 87% of construction companies that were surveyed had had at least one contract cancelled or delayed in the first few months of 2009 and 35% reported five or more cancellations. Contractors faced with empty order books are forced to try to make as much money as they can from existing projects. This has led to a rise in disputes on projects involving the construction of ports and terminals throughout the world.

This increase has brought an extra emphasis on alternative methods of dispute resolution. Traditionally arbitration has been used in the industry to resolve contractual disputes. As many appreciate only too well, arbitration can however be costly and time consuming. Standard forms of contract therefore now often provide for the use of Dispute Adjudication Boards (DABs). These are becoming increasingly popular as they are a cheaper and quicker method of resolving disputes, and enable business relationships to be maintained.

Produced by the International Federation of Consulting Engineers, FIDIC is one of the most recognised international standard forms of construction contracts. Each contains clauses for dispute resolution and the industry trend has become more and more focused on adopting a preventative, or at least a cheaper approach to disputes. The drafters of FIDIC have responded to this trend in various FIDIC forms, by establishing a Dispute Adjudication Board.

The use of DABs and properly planned programming can prevent disputes arising altogether or resolve them before they escalate and become full blown expensive and lengthy arbitration claims. Because the board are often familiar with the project, they can resolve problems as soon as they arise. The overall advantages of DABs are that they are a quick, cheap and efficient way of resolving disputes as and when they arise. Moreover, the decision of the board is private and third parties will never know that a dispute has occurred. A construction company's reputation can therefore be left intact. DABs enable business relationships to be preserved as they are a less confrontational form of dispute resolution.

Unlike other forms of 'alternative dispute resolution' the DAB gives a decision that is binding and which must therefore be implemented. Notwithstanding this, one of the drawbacks of dispute adjudication boards is that they are a form of 'rough and ready' justice. Unlike in arbitration or litigation the board do not have time to properly consider all of the facts and conduct a full hearing. Therefore although the decision is quick, the decision may not necessarily be the right one.

It is important to understand how DABs work and why such mechanisms can be of benefit when negotiating new contracts. Typically there are two types of DAB, a "full term" or an "ad-hoc" and each have their advantages and disadvantages.

On a full term dispute adjudication board, the board, consisting of either one or three impartial members, is appointed at the start of a project, before the construction work begins. The member(s) play an integral part throughout the construction works and are regularly present at the construction site. An advantage of a full term DAB is that the board receives progress reports and will visit the site at regular intervals.

The purpose of these visits is to enable the board to become and remain acquainted with the progress of the works, and to be aware of any actual or potential problems. Any disagreements that occur between the parties can be solved in an informal way by the board before they develop into full blown disputes. If, however, the dispute does develop, the board will already be set up, be well acquainted with the project, and can therefore aim to resolve the dispute straight away. A downside to this however is the cost. The board will have to be remunerated for their time in acquainting themselves with the project, even if no disputes were ever to arise. Furthermore, the board will be chosen before work begins and when it is not clear what kind of expertise will be needed to resolve the dispute. The board may not therefore have the expertise to resolve the particular dispute that has emerged.

An "ad-hoc" dispute adjudication board can again consist of either one or three independent members. The contract will state that the member(s) will only be appointed if a dispute arises. When the DAB has issued its decision on that dispute, the member(s) appointment will expire. An ad-hoc DAB can thus be cheaper than a full term one because a project may run smoothly, without disputes, and thus the board will never have to be appointed. Unlike a full term DAB, no money would have been wasted acquainting a board with the project. However, the disadvantage is that were a dispute to materialise there will be no board in place to immediately deal with the problems. A board will have to be appointed and agreed by both parties.

This may prove difficult, even impossible, where the parties are already in conflict and an appointing entity may have to be used to choose the board. This further increases the time and also the cost.

Furthermore, unlike full term DABs, where the board are acquainted with the project and have their own contemporaneous observations, ad-hoc DABs are more formal and can resemble an arbitral tribunal needing records and witnesses. Nevertheless an ad-hoc DAB is usually cheaper than a full term DAB in the long run.

Disputes in this environment are inevitable but if you do find yourself involved in a dispute, dispute adjudication boards are a quick, relatively cheap, efficient solution and less of a strain on management's time than other more traditional forms of dispute resolution used in construction projects.

DABs are successful in the construction industry generally, and in the current economic climate where disputes are becoming more frequent, parties entering into new contracts or now finding themselves involved in a dispute in the ports and terminals sector should consider negotiating in a DAB clause or using one of the standard FIDIC contracts which incorporate DABs.

Guidance for parties when choosing a DAB

When choosing between a full term DAB or an ad-hoc DAB the parties should balance the advantages and disadvantages of each. The following factors should be considered:

  1. The size of the project, and/or its documentation. Larger projects are likely to have more disputes and in such situations a full term DAB may be more appropriate. In small contracts it is usually better to appoint an ad hoc board as and when the problems arise as this may be more cost efficient.
  2. Parties may not want to have to send progress reports on a regular basis and coordinate regular site visits. An ad-hoc board may therefore be more appropriate as it is less bureaucratic.
  3. The complexity of the project. In complex projects, where the likelihood of disagreement is high, a full term DAB may be more appropriate.
  4. FIDIC in its red book, which is the most commonly used standard contract for construction projects, recommends that a three member DAB is appropriate for a contract involving an average monthly Payment Certificate exceeding two million US Dollars.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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