In the first quarter of 2015, I attended contract management training related to the management of infrastructure projects structured according to the FIDIC Red and Yellow Book standards. Part of the training content comprised the role of Dispute Adjudication Boards (DABs).
While the training was underway, my employer was preparing to enter into a contract to construct and refurbish a new water and sewerage system. I found this training very educational, especially since the involvement of DABs seemed strange to most attendees. The contract we were preparing at the time required a permanent three-member DAB to be in place within 28 days after the commencement of construction works. It was the first time my employer would 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 nondisclosure, I will refer to as Arnold). As our chat progressed, I asked him to share his individual experiences related to DABs on the infrastructure projects he had worked on.
In this article, we profile Arnold’s personal experience on several 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 a project’s implementation. 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 until 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 its opinion when requested by both parties. If disputes referred to them by either contract party 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 question best suits the employer because he is usually the architect of all projects. The employer needs to answer several questions before engaging a DAB. These are:
- What is the employer’s experience with DABs? Is this something new? Is it purely a requirement of the financing agency and hence simply being “forced” on the employer?
- 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 make decisions likely to have significant financial implications and extension of time.
- What does the employer envisage to be the quality of the contract documents? Inconsistencies in contract documents are common and often cause disputes.
- What type of contractors is the employer likely to get into contract with? Certain contractors are known for spending most of the construction period on claims rather than on the physical construction works.
- 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?
- What is the quality of the supervising consultant (engineer) contracted to supervise the construction works on behalf of the employer? A good engineer should ideally be very proactive.
- What is the nature and size of the construction works, and what duration has been planned for them?
“That seems like a host of issues for an employer to consider?”
‘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 several cases in which the DAB had ruled in favour of the contractor.
The entity opted for arbitration and later commercial courts. Ten years later, the same agency reintroduced the use of DABs after it became clear that they were much cheaper in the long run.
I vividly recall one of the cases where the DAB ruled in favour of a contractor to the tune of €7m. The employer was not satisfied and opted for arbitration. The arbitrators’ decision also favoured the contractor. 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, the employer rejected one of the contractor’s claims for extension of time and related costs. The employer proceeded with arbitration, but the arbitrators decided that following all the required steps is mandatory before 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 shipwreck
In a certain hostile community, the same employer decided to try to retrieve a ship that had been intentionally wrecked and settled at the bottom of a river. Traffic flow above the surface of the water body was impossible.
A contract was prepared to achieve this, and a contractor was recruited. The contract was a re-measurement contract type. The first and second contractors who had attempted to retrieve the ship 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 increasingly difficult to remove. This resulted in larger quantities of measured works in accordance with the contract. The contractor claimed to recover his increased inputs to the assignment.
The engineer and contractor disagreed on the actual (realistic) quantities of measured work that the contractor had done, 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 many other claims were ruled in favour of contractors and after suffering huge costs, the employer has since reintroduced DABs on their projects.
After many other claims were ruled in favour of contractors and after suffering huge costs, the employer has since reintroduced DABs on their projects
The water company
An agency had seven construction works contracts. Each was supervised by the same consultant, and all these projects had a sole DAB member.
Three of the seven contracts (water treatment plants) were design and build contracts, the others were a re-measurement type of contract. During the 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 for 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, resulting in numerous disputes.
Unfortunately, the engineer’s behaviour 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 four projects (water and sewerage networks), which had already been designed by a previous engineer, the supervising engineer also delayed approving materials, measuring quantities, processing, and issuing interim payment certificates, yet there were numerous issues related to the quality of the design.
It turns out that under all seven contracts, the engineer declined to grant the contractors an extension of time, blaming the contractors for all the delays.
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 getting 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 strongly believe 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 recruitment process for a supervising engineer) that did not explicitly make it clear 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 arising disputes were against him.
A road project
A contractor filed a claim for an extension of time and costs resulting from what he termed extreme weather conditions.
In this case, the employer was unsure how to deal with such a claim. The engineer, on the other hand, determined 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 favoured 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 favoured 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 submitted a claim that 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 to maintain the same completion date. The contractor obliged, but on completion of the works, he put in a claim for:
- Delays in possession of that section of land.
- 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 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 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 six years after the site takeover, the decision was 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
- The supervising engineer (consultant) tends to feel that the DAB is taking over his responsibilities. The argument against this misconception is that the engineers would not be impartial in any case since they are usually recruited and paid by the employer.
- 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.
- 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 three months (84 days in FIDIC and 90 days under ICC Dispute Board Rules).
- Since the permanent DAB routinely visits 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 rather than trying to resolve them at arbitration or in a courtroom.
- 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 for unresolved disputes is curtailed. Sometimes, the parties are unaware that they are heading towards a dispute. The DAB has the potential to help avoid disputes.
- 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 judgment.
Conclusion
I have had a comprehensive insurance policy for my motor vehicle for the last seven years. When my annual premium fee is due for renewal, I am sometimes hesitant to pay up because I may not have had any accident claims 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 it. 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 employers and contractors embrace DABs because none of the contract parties can predict with utmost certainty whether a project will end without a dispute.
None of the contract parties can predict with utmost certainty whether a project will end without a dispute.