International Arbitration
Managing Risk in High Growth – High Risk Markets
New Wave ADR ‐ Looking at Mediation and/or Dispute Review Boards as a Route to Resolve Disputes in Emerging Markets ? Garry Crossley – Navigant Consulting
Sheraton New York Hotel and Towers ‐ 10 September 2008
Dispute Review Boards
Introduction
• Initiated in USA during 1960’s.
• Termed Dispute Review Boards (“DRB”).
• First large International Project to incorporate an official DRB ‐ Cajon Hydropower Station in Honduras.
• Use steadily increasing, according to The Dispute Resolution Board Foundation (“DRBF”) published findings ‐ number of projects utilising DRBs has grown from five in 1982 to 1,338 in 2005.
• Sharp rise noticeable from mid 1990’s, coinciding with the World Bank revising its Standard Bidding Document Procurement of Works, which are mandatory for use on projects financed in whole or in part by the World Bank.
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Dispute Review Boards
Introduction (Cont’d)
PROJECTS WITH DRBs
1,600
1,400
1,200
1,000
800
600
400
200
‐
1982
Source www.drb.org
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1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Dispute Review Boards
Introduction (Cont’d)
• Section XIII Disputes Settlement Procedures revised section 67.1 of FIDIC Part 1 to make it mandatory that disputes are referred in first instance to a body other then the Engineer, as opposed to what was the traditional contractual position.
• In 1996 FIDIC followed up by introduction of Dispute Adjudication Board (DAB) in to its Orange Book, This was subsequently developed and extended to all other FIDIC major works forms; i.e. Red, Yellow and Silver Books.
• Whilst DAB is standard for Red Book, it is optional for other two.
• From 2004 ICC published ICC Dispute Board Rules.
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Dispute Review Boards
Composition, Operation and Character
• Both DAB/DRB formed in consensual manner, each party puts forward a member for approval by other party. Two approved members put forward a third member for approval by both parties. Note ‐ under ICC rules all board members are to be appointed jointly by the parties.
• Rational behind DAB/DRB concept is to obtain high degree of party “buy in”, to that extent could be said that DAB/DRB is fundamentally an amicable consensual procedure.
• All members should be competent, independent and impartial. They should also have no financial interests in the project. In an international context, it is considered desirable that DRB/DAB members are not of same nationalities as parties. They should be appointed at outset, and have regular on site meetings and visits in order to familiarise themselves with scope, parties and developing issues. They submit site visit reports and may give opinions as to issues before a formal request for a decision/recommendation is made.
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Dispute Review Boards
Composition, Operation and Character (Cont’d)
• Initially, main difference between DRB and DAB was immediately binding character of DAB, which made Decisions as opposed to Recommendations made by DRB. • Note ‐ under ICC rules parties have a choice whether to appoint DRB, DAB or Combined Dispute Board (CDB). CDB appointment supposes making of
recommendations, but if one party requests a decision and the other party does not object, a binding ruling is possible.
• DAB decision is effective and contractually binding unless and/or until it is revised by arbitration.
• DRB Recommendation ‐ implementation is conditional upon a party not expressing “dissatisfaction”. If no party expresses a protest within stipulated time, recommendations become contractually binding.
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Dispute Review Boards
Composition, Operation and Character (Cont’d)
•
World Bank has subsequently evolved its attitude and since 2000 it has required parties to follow DRB recommendations unless and until they are reviewed and/or revised by subsequent arbitral proceedings.
•
Consequently, except for some minor divergences such as tie limits etc; the DAB/DRB procedures at present are the same.
• Only area where there is still significant departure is that World Bank does not permit appointment of the Engineer as a single Dispute Review Expert, even if Engineer is independent from Employer. Under some FIDC frameworks there is still an option to appoint Engineer to perform decision making provided parties agree to it.
• DAB/DRB is not quasi‐judicial body and its approach is expected to be inquisitorial not adversarial; i.e. DAB/DRB can conduct its own investigations.
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Dispute Review Boards
Trends
• All indicators show the growing application of DAB/DRB as a preferred method of alternative dispute resolution.
• World Bank has given immediate binding effect to DRB recommendations.
• Important to remember that World Bank includes International Bank for Reconstruction and Development and International Development Association.
• European Bank for Reconstruction and Development has also adopted DAB/DRB approach, although indirectly. In its tender documents EBRD specifies acceptable forms of contract for the works that it finances as FIDIC, World Bank Contracts and NEC3.
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Dispute Review Boards
Trends (Cont’d)
• Asian Development Bank’s Procurement guidelines require that in case of “works contracts, supply and installation contracts and turnkey contracts, the dispute settlement provisions shall also include mechanisms such as dispute review boards or adjudicators, which are designed to permit speedier settlement.”.
• From 2004, ICC published its own procedures and standard clauses which parties may co‐opt in to their contracts.
• Nonetheless, according to DRBF databases the value of projects that applied DAB/DRB methodology was in range of $95 Billion in 2005, nearly double that of $49.6 Billion in 1996.
•
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At the same time, number of settled disputes rose from 390 in 1996 to 1,571 in 2005.
Dispute Review Boards
Trends (Cont’d)
CONTRACT VALUE OF ALL PROJECTS, US $ Billion
100.0
95.0
90.0
85.0
80.0
75.0
70.0
65.0
60.0
55.0
50.0
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
‐
1996
Source www.drb.org
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1998
2000
2002
2004
Dispute Review Boards
Trends (Cont’d)
DISPUTES SETTLED ON COMPLETED PROJECTS
1,800
1,600
1,400
1,200
1,000
800
600
400
200
‐
1982
Source www.drb.org
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1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Dispute Review Boards
Trends (Cont’d)
• Recently, March 2008, Beijing Arbitration Commission held training on DAB/DRB. This was in response to Chinese government’s impending publication of standard Documents on Construction Bidding (coming in to force 1 May 2008) that recommend DAB/DRB as ADR method to parties entering in to construction contracts. The procedure is not mandatory but it has received a strong recommendation by the government. www.bjac.com.cn/en/news/view.asp?id+320
• According to DRBF database in 2005, 25 projects in India with combined value of $1.12 Billion applied DAB/DRB procedures.
• Of the UAE and BRIC countries, only Russia does not seem to have a representation with DRBF.
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Dispute Review Boards
Effectiveness
• DRBF catalogued 1532 projects for 2005 with combined value of over $97 Billion. 1080 were completed and 452 on going.
• In 906 instances there were no disputes heard. • On remaining 626 examples a total of 1,860 disputes were heard, which is an average of approximately 3 disputes per project. 1,718 were settled.
• 52 were referred to another body. On the basis of DRBF data that amounts to 2.79% of total number of disputes. This data is available on http://www.drb.org/databaseintro.htm
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Dispute Review Boards
Effectiveness (Cont’d)
• A study by World Bank of 59 contracts with DAB/DRB method provisions identified that in 17 instances no formal referrals were made. May indicate that in approximately 30% of cases, the mere existence of DAB/DRB and its regular site visits contributed to mitigation of disputes before any formal dispute procedure developed.
• Remaining 42 cases developed 303 disputes. In 6 contracts all the disputes were resolved by DRB.
• DRB made 250 recommendations at the time of the study. 127 cases were implemented without objection. 123 cases were taken to arbitration.
• In 86% of these, subsequent arbitral awards were reasonably consistent with DRB recommendations (Source: NIC Uttarakhand State Unit official website ‐
www.gov.ua.nic.in/arc/Report%20Part%20IV/dispute.pdf .
• DRBF records show that costs of utilising DAB/DRB range from 0.05% to 0.25% of the cost of the works
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Dispute Review Boards
Issues
• Competence of board members.
• Familiarity with projects.
• Familiarity with parties.
• Conciliatory nature; i.e. buy‐in by the parties.
• Contemporaneous action.
• On site settlement.
• In practice DAB/DRB are not created at the outset as envisaged.
• Practical difficulty in managing and co‐ordinating workloads of three highly experienced and qualified professionals.
• Potential difficulties at appointment, as consents are required.
• Potential difficulties with removal or substitution of DAB/DRB members.
• Availability of members.
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