Spend little now for a big saving later

With major infrastructure projects on the drawing board, the provision of Dispute Boards in contracts could be a major attraction for global construction companies eyeing the Indian market. Shourav Lahiri, a partner in the international law firm Pinsent Masons LLP, considers why

The Indian Government’s projected US$ 500 billion of spending on infrastructure and the general downturn in the industry elsewhere is causing a number of global construction companies to consider bidding for projects in India.

Subject to funding being made available, and the will to push through projects, we are likely to see an increasing presence of international contractors in the Indian market.

This will pose significant challenges to both the Government and the international companies as they learn to work with each other and the international companies acclimatise to the new environment. These challenges bring with them the potential of differences and disputes which, if not nipped in the bud, can often escalate into expensive and time-consuming arbitrations or litigation.

Regardless of who is in the right, such escalated disputes will mar the perception of the construction industry. Therefore, any measures that minimise the prospects of such escalation should be in the serious contemplation of parties, particularly Government. One such measure is the use of Dispute Boards (DBs) on major infrastructure projects.

What is a Dispute Board?

In the construction industry, DBs are appointed by the parties at the time of entering into the contract and usually consist of a panel of three impartial reviewers with specialist experience, knowledge and skills relevant to the project in question.

The members of the DB are (or rather, should be) involved from the outset and become familiar with the contract documents, the parties and the project itself by way of regular site visits.

Before issues crystallise into differences, the DB can often assist the parties in reaching agreement on how to address these issues. Where a dispute has actually arisen, the DB can hear parties on the dispute and give its recommendation or decision.

‘Dispute board’ is a generic term which encompasses both Dispute Review Boards (DRBs) and Dispute Adjudication Boards (DABs). The key difference between the two is that a DRB gives only recommendations and will not be binding on the parties, whereas the DAB gives a decision which has ‘temporary finality’ (i.e. the parties will have to abide by the decision, until it is overturned by arbitration/litigation).

Dispute Review Boards (DRBs)

Both DRBs and DABs have their advantages. The fact that DRBs do not issue binding decisions means that DRB hearings tend to be short and informal processes in which parties do not usually require legal advice. This minimises cost.

Additionally, anecdotal evidence suggests that the recommendations of DRBs are usually adopted by the parties, notwithstanding the fact that they are not binding.

This stands to reason. The DRB is independent of the parties and is comprised of respected individuals with a high levels of expertise who are familiar with the both the contract and the factual background.

Taking a dispute to arbitration or litigation is a risky and expensive process in any situation and is, therefore, not something that is likely to be undertaken by a party who does not think it stands a realistic chance of winning. If a DRB has already found against a party, then, even if that party believes the DRB to be wrong, the risk that an arbitrator or judge might make the same decision is likely to dissuade the party from taking the issue further.

Dispute Adjudication Boards (DABs)

The DAB is, however, generally viewed as having ‘more teeth’ and it would be very unusual for one party to refuse to abide by its decision when it has expressly agreed in the contract that it would do just this. Further, the fact that a DAB decision has temporary finality can sometimes be useful in itself, as public bodies and Joint Ventures will not need to struggle to achieve the internal consensus or sign-off required to adopt a recommendation.

Such consensus is not required if the entity in question has already agreed that it will be bound by the DAB’s decision.

An advantage of DBs is that they can be seen as simply a part of the management rather than as an isolated dispute resolution procedure undertaken because negotiation has failed. The DB’s decisions on some issues may go in the favour of one party and on others, against that party. This ‘swings and roundabouts’ means the parties’ attitudes to the dispute are likely to be more relaxed and helps preserve on-site relationships.

Now for the not-so-good news. The primary one is cost. DB’s can be expensive, especially if a three person DB of eminent people is appointed for three to five years.

This dissuades most from agreeing to a DB or, in some cases, agreeing to setting up of a DB only if a dispute arises rather than maintaining its presence on site ‘just in case’ a dispute arises. However, on a large scale infrastructure project, the risk of cost and disruption associated with a major arbitration or litigation is often the best justification of this spend early on and during the project to obviate or minimise the prospect of that risk eventuating.

The author is thankful to Ms Nancy Hobbs of Pinsent Masons LLP for her assistance with this article. The author can be contacted at shourav.lahiri@pinsentmasons.com