Dispute Boards in International Construction: How Do They Work and Are They Effective in Preventing Escalation to Arbitration?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

The international construction industry, responsible for some of the world's most ambitious and complex projects, is no stranger to disputes. The sheer scale, long durations, multiplicity of stakeholders, and inherent uncertainties in these endeavors mean that disagreements are almost inevitable. While international arbitration remains the ultimate forum for resolving many such disputes, there has been a significant and successful push towards earlier, project-level intervention to prevent conflicts from escalating. At the forefront of this movement are Dispute Boards (DBs), a proactive mechanism designed to manage disagreements in real-time, foster cooperation, and provide expert-driven resolutions, thereby minimizing the need for costly and time-consuming arbitration or litigation.

I. What are Dispute Boards and Why Were They Developed?

A Dispute Board is typically a panel of one or three impartial and experienced professionals appointed at or near the commencement of a construction project. Its members are chosen for their technical expertise, familiarity with construction contracts and law, and dispute resolution skills. The primary objectives of a DB are twofold:

  1. Dispute Avoidance: To help the contracting parties (usually the employer and the main contractor) identify potential areas of disagreement early, facilitate communication, and encourage collaborative problem-solving before issues harden into formal disputes.
  2. Dispute Resolution: To provide a swift and cost-effective mechanism for resolving disputes that do crystallize, offering recommendations or decisions that can guide the parties or, in some models, contractually bind them.

The modern concept of DBs originated in the United States during the 1970s, initially as Dispute Review Boards (DRBs) on large-scale infrastructure projects, particularly tunneling works, where unforeseen ground conditions often led to significant claims. Their success in managing these complex situations led to wider adoption.

Internationally, the use of DBs received a major impetus from Multilateral Development Banks (MDBs) like the World Bank, which, since the mid-1990s, began mandating or strongly recommending their use on large projects they financed. Simultaneously, influential industry contract forms, most notably those published by the International Federation of Consulting Engineers (FIDIC), began incorporating DB provisions as a standard feature (e.g., the 1995 FIDIC Orange Book, and more comprehensively in the 1999 FIDIC "Rainbow Suite" – Red, Yellow, and Silver Books). Leading arbitral institutions like the International Chamber of Commerce (ICC) also developed their own DB Rules (first in 2004, updated in 2015) to provide a framework for their operation.

II. Types of Dispute Boards: DRBs, DABs, and Combined Models

While the overarching aim is similar, DBs can take different forms, primarily distinguished by the nature of their output:

A. Dispute Review Boards (DRBs):
DRBs, the model that originated in the U.S., typically issue non-binding recommendations to the parties on how a dispute should be resolved.

  • Focus: While they adjudicate issues, their primary emphasis is often on dispute avoidance and facilitating agreement through expert guidance and a neutral perspective.
  • Outcome: The DRB's recommendation only becomes contractually binding if both parties accept it. If either party rejects the recommendation, they are free to pursue the matter further through arbitration or litigation as provided in the contract. However, the well-reasoned recommendation of respected experts often carries significant persuasive weight.
  • Process: Tends to be more informal and geared towards collaborative problem-solving.

B. Dispute Adjudication Boards (DABs):
DABs, prominently featured in the FIDIC 1999 suite of contracts, issue decisions that are contractually binding on the parties from the outset.

  • Focus: While dispute avoidance remains a function, DABs have a stronger adjudicative role.
  • Outcome: Parties are contractually obliged to "promptly give effect" to a DAB decision, meaning they must comply with it immediately, even if they disagree with it.
  • "Binding but Not Final": A key characteristic is that if a party is dissatisfied with a DAB decision, it can issue a "Notice of Dissatisfaction" (NOD) within a specified time (typically 28 days under FIDIC 1999). The issuance of an NOD prevents the DAB decision from becoming "final and binding" and allows the dissatisfied party to refer the dispute to arbitration for a de novo (fresh) review of the merits. However, critically, the DAB decision remains binding and must be complied with pending the final resolution in arbitration. This "comply now, argue later" principle is designed to maintain project cash flow and progress. Failure to comply with a binding DAB decision can itself be a separate ground for arbitration.

C. Combined Dispute Boards (CDBs) / Dispute Avoidance/Adjudication Boards (DAABs):
Recognizing the strengths of both models, combined or hybrid forms have emerged. These boards may have the flexibility to issue either non-binding recommendations or binding decisions, depending on the parties' agreement or the specific rules governing the DB.

  • Focus: Aims to integrate the proactive dispute avoidance functions (more typical of DRBs) with the robust decision-making capacity (of DABs).
  • FIDIC 2017 DAABs: The most recent FIDIC suite of contracts (2017 Red, Yellow, and Silver Books) replaced the 1999 DAB with a "Dispute Avoidance/Adjudication Board" (DAAB). This name change explicitly emphasizes the board's dual role, giving greater prominence to dispute avoidance. DAABs under FIDIC 2017 are intended to be standing boards, actively involved throughout the project lifecycle, and have slightly modified procedures for their decisions and subsequent recourse to arbitration.

III. Key Operational Features of Dispute Boards

Regardless of the specific type, most effective DBs share common operational characteristics:

  1. Appointment and Composition:
    • DBs typically consist of one or three members. Three-member boards are common for larger, more complex projects.
    • Members are usually appointed jointly by the employer and the contractor. Alternative methods include each party nominating one member, with these two then selecting a chairperson, or an appointing institution (like FIDIC, ICC, or a professional body) assisting if the parties cannot agree.
    • Impartiality, Independence, and Expertise: DB members are selected for their recognized expertise in the relevant technical fields (e.g., engineering disciplines specific to the project), construction contract law and practice, and dispute resolution skills. Crucially, they must be, and remain, impartial and independent of the contracting parties.
  2. Standing vs. Ad Hoc DBs:
    • Standing DBs: Appointed at or shortly after the commencement of the project and remain in place throughout its duration (or until all disputes are resolved). This is the strongly preferred model. A standing DB:
      • Conducts regular site visits (e.g., quarterly).
      • Holds regular meetings with the parties.
      • Stays abreast of project progress, issues, and potential areas of conflict.
      • Is able to intervene proactively to help avoid disputes or provide swift resolutions when they arise due to its ongoing familiarity with the project and the parties.
    • Ad Hoc DBs: Appointed only after a dispute has already arisen and been formally referred. They lack prior project knowledge and cannot play a proactive dispute avoidance role. While better than immediate arbitration, they are generally less effective than standing DBs.
  3. Process for Dispute Resolution:
    • Informal Assistance: Standing DBs can often provide informal, non-binding advice or opinions at the request of the parties to help them navigate potential disagreements or clarify contractual interpretations before they escalate into formal disputes.
    • Formal Referral: If a dispute cannot be resolved informally, either party can formally refer it to the DB. This typically involves written submissions from both sides, potentially an oral hearing (though not always required, especially for simpler issues), and then the DB issuing its reasoned recommendation or decision within a contractually specified timeframe (e.g., 84 days under FIDIC 1999).
  4. Costs: The fees and expenses of the DB members are customarily shared equally between the employer and the contractor. This shared cost encourages both parties to use the DB process constructively.

IV. How Dispute Boards Function to Prevent or Resolve Disputes

DBs employ several mechanisms to achieve their objectives:

  • Fostering Communication and Trust: The regular presence of a neutral, respected DB can improve communication channels between the parties and help build a more collaborative, less adversarial project environment.
  • Early Neutral Evaluation: By being involved from the project's outset, a standing DB can offer early neutral evaluations of emerging issues, helping parties understand the strengths and weaknesses of their respective positions before they become entrenched.
  • Proactive Intervention: A standing DB, through its regular site visits and meetings, can identify potential "hot spots" or brewing disagreements and encourage the parties to address them through dialogue or by seeking the DB's informal guidance.
  • Facilitating Joint Problem-Solving: Rather than just adjudicating, DBs can facilitate discussions and help parties explore mutually acceptable solutions, acting somewhat like mediators or conciliators in their informal capacity.
  • Swift Expert-Led Resolution: When a dispute is formally referred, the DB, composed of industry experts, can provide a much quicker resolution than would be possible through arbitration or litigation. This is vital for maintaining project momentum, as unresolved disputes can lead to significant delays and disruptions.
  • Reducing the "Temperature" of Conflicts: The DB process provides a structured, less formal, and less adversarial forum than arbitration for parties to air their grievances and have them considered by impartial experts. This can help de-escalate tensions.

V. The Effectiveness of Dispute Boards: Evidence and Benefits

The international experience with DBs has been overwhelmingly positive. Numerous studies and industry reports, including those from the Dispute Resolution Board Foundation (DRBF)—an international organization dedicated to promoting DBs—consistently show very high success rates.

  • Empirical Success: It is often cited that over 90% of disputes referred to DBs are resolved without further recourse to arbitration or litigation. Many more potential disputes are likely avoided altogether due to the DB's proactive presence. For example, a study of World Bank-funded projects found that out of hundreds of projects using DBs, very few disputes escalated to arbitration.
  • Key Benefits:
    • Speed: DBs typically resolve referred disputes in a matter of weeks or a few months, compared to years for arbitration.
    • Cost-Effectiveness: The costs associated with a DB process are generally a small fraction of the costs of a full-blown arbitration or litigation, especially when considering the potential savings from avoided escalation.
    • Preservation of Business Relationships: By resolving issues at the project level in a less adversarial manner, DBs help to maintain working relationships between the employer and contractor, which is crucial for the successful completion of the ongoing project and for future business opportunities.
    • Project Continuity: Real-time or near real-time dispute resolution minimizes disruptions to the project schedule and progress, preventing small issues from snowballing into major delays and cost overruns.
    • Expert-Led Decisions: Parties have their disputes decided (or recommended upon) by individuals with deep, practical understanding of the construction industry and the specific technical and contractual issues involved.
    • Reduced Formalism: DB procedures are generally less formal, less reliant on extensive legalistic pleadings, and more focused on the substantive issues than arbitration or court proceedings.

VI. The Status and Enforcement of Dispute Board Outcomes

The legal status and enforceability of DB outputs depend on the type of DB and the specific contractual provisions:

  • DRB Recommendations: These are not, in themselves, legally binding or directly enforceable. They become binding only if both parties formally accept them. If rejected, the dispute proceeds to the next stage (usually arbitration).
  • DAB/DAAB Decisions: Under widely used contracts like the FIDIC 1999 and 2017 forms, DAB/DAAB decisions are contractually binding on the parties as soon as they are issued. Parties are required to "promptly give effect" to them.
    • The "Binding but Not Final" Conundrum (Post-NOD): If a party issues a Notice of Dissatisfaction (NOD) against a DAB/DAAB decision, the decision remains binding and must be complied with, but it is not yet "final." The dissatisfied party can refer the underlying dispute to arbitration for a de novo review. This mechanism aims to ensure immediate compliance and cash flow (preventing a party from simply ignoring an adverse DB decision) while preserving the right to a final determination by an arbitral tribunal.
    • Enforcing Compliance with DAB/DAAB Decisions: If a party fails to comply with a binding DAB/DAAB decision, the other party can refer this failure to comply directly to arbitration. Under FIDIC 1999 Clause 20.7, if no NOD was issued against the DAB decision (making it "final and binding"), arbitration can be commenced to enforce it. If an NOD was issued, the prevailing view, supported by case law from jurisdictions like Singapore (e.g., the principles discussed in cases like CRW Joint Operation v. PGN), is that the party seeking compliance can request the arbitral tribunal (convened for the merits review under Clause 20.6) to issue an interim or partial award ordering immediate compliance with the DAB decision, pending the final outcome of the merits review. Institutional rules (like the ICC DB Rules) also provide mechanisms and procedures related to the status and effect of DB determinations.

VII. Considerations for U.S. Businesses Implementing Dispute Boards

For U.S. companies involved in international construction projects, or even large domestic ones, incorporating and effectively utilizing Dispute Boards can be a highly beneficial strategy:

  1. Contractual Foundation is Key: DBs are creatures of contract. The provisions establishing the DB, its type, powers, procedures, and the status of its outcomes must be clearly and comprehensively drafted, usually within the main construction contract or a separate tripartite DB agreement (between employer, contractor, and DB members). Referring to established institutional DB rules (e.g., ICC, AAA/ICDR, or FIDIC's own provisions) can provide a robust framework.
  2. Careful Selection of DB Members: The success of a DB heavily depends on the quality, experience, impartiality, and proactivity of its members. Parties should invest time and effort in selecting individuals who are not only technically proficient but also skilled in dispute resolution and trusted by both sides.
  3. Commitment to the Process: DBs are most effective when all parties (employer, contractor, and the DB members themselves) are genuinely committed to using the process constructively and in good faith. A DB should not be seen merely as a hurdle to clear before arbitration.
  4. Integration with Overall Dispute Resolution Strategy: Understand how the DB process interfaces with other potential dispute resolution steps, such as negotiation, mediation, or eventual arbitration. Ensure the contractual provisions create a coherent and workable escalation path.
  5. Training and Familiarity: Ensure project personnel are familiar with the DB process and are encouraged to use it proactively to address issues before they become formal disputes.

Conclusion

Dispute Boards have emerged as a cornerstone of modern dispute management in the international construction industry. Their proven ability to provide real-time, expert-driven intervention directly at the project level helps to avoid disagreements, resolve emerging disputes efficiently, maintain crucial working relationships, and significantly reduce the likelihood of parties resorting to costly, time-consuming, and often relationship-damaging arbitration or litigation.

While not a panacea, the high success rates and tangible benefits associated with DBs—particularly standing DBs or DAABs that emphasize proactive dispute avoidance—make them an invaluable tool. For U.S. companies and other stakeholders participating in large international (and increasingly, domestic) construction projects, the proactive and strategic incorporation of a well-structured Dispute Board process into their contractual frameworks represents a best-practice approach to fostering project success and effectively managing the inevitable challenges and disagreements that arise in this dynamic industry.