FIDIC MDB Conference Brussels

Putting Your Money Where Your Mouth IsORPractising What Your Preach

The Funding (or not) of DABs by International Banks

Murray Armes25 June 2012

©2012 Murray Armes

DISPUTE AVOIDANCE

• FIDIC Contracts are unique

• Provision for dispute avoidance

• The Dispute Board is the vehicle for dispute avoidance

• Dispute avoidance is worthwhile

• Disputes are costly in money, time and reputations

• MDB Contract provides for a Standing Board

• The MDB Contract promotes dispute avoidance

©2012 Murray Armes

WHY USE A DAB?

• DB costs 0.05%-0.26% of the construction costs

• About 99% of disputes referred are resolved in <90 days, average cost about 0.02% of the value of the dispute

• 98% of referred disputes end with the DB

• Of the 2% remaining, half are subsequently upheld

• Of the 1% of decisions upset by arbitration/courts,

most due to procedural irregularity, not the substance• Plus savings in management time, legal costs and

reputation©2012 Murray Armes

WHY ARE DABs SOMETIMES NOT USED?

• Previous adverse decisions

• Forum in which Contractor disputes can be dealt with

• Lack of education/training

• Unrealistically optimistic expectations for no disputes

• Another layer of dispute resolution

• Cost

• Lack of funding

©2012 Murray Armes

FUNDING THE DAB

• Development Banks fund projects in developing countries

• Borrower may not have access to other funding

• Borrower may not have access to foreign currency

• Borrower may be unable to pay for a DAB…….

• ….unless the funds are available from the bank

• Cost of the DAB could be included in the funding

©2012 Murray Armes

FUNDING POLICY

• Banks encourage use of DABs (MDB Contract)

• But there is no consistent funding policy• JICA funds DBs and encourages others to do so

(JICA Dispute Board Manual 2012)• ADB is keen to have more training (DRBF Training in Africa)

• Many banks do not provide funding for training or for the formation of the DAB

• Some banks will not fund “litigation”(EU IPA Implementing Rules Article 34, 3(d))

• The EU instead promotes mediation (EU Statutory Instrument 2011 No 1133, The Cross-Border Mediation (EU Directive) Regulations 2011)

©2012 Murray Armes

REACTIVE vs PROACTIVE AVOIDANCE

• Mediation takes place after a dispute has crystallised and parties have taken up positions

• Mediation is reactive

• The MDB Contract allows the DAB to avoid disputes

• The DAB process is proactive

• The DAB deals with issues before they become disputes

• Dispute avoidance is very cost effective

©2012 Murray Armes

CONSEQUENCES OF NOT FUNDING THE DB - 1

(1) Where a “standing” Board is required, the parties delay establishing the Board until after a dispute has arisen which they are unable to resolve by negotiation. The intended dispute prevention role of the Board is lost;

(2) A “standing” Board is established timeously but to “save money” the Board is allowed to visit only once per year, proactive dispute avoidance is diminshed;

(3) Board members are selected by price competition with little or no evaluation of other facets of a Board member’s suitability for the particular project leading possibly to a poor quality board and at worst a dysfunctional board;

(4) A single board member is appointed for a complex job. The benefits of having a board of several members with varied experience are lost;

©2012 Murray Armes

CONSEQUENCES OF NOT FUNDING THE DB - 2

(1) In an effort to “save money” an “ad hoc” Board is agreed even though its use on the type of project involved is contrary to FIDIC guidance, the opportunities for dispute avoidance are lost;

(2) To “save money” the party receiving the financing seldom (if at all) appears at Site during the Board Site visits, the opportunities for dispute avoidance are diminished or at worst lost;

(3) Provisions regarding implementation of Board decisions are not developed in a way which will avoid future difficulties of enforcement under the law applicable to the contract;

(4) Lacking the financing to pay any sums awarded by a Board, all decisions favourable to the Contractor are not honoured and are referred to arbitration in order to postpone any actual payment for as long as possible.

©2012 Murray Armes

CONSEQUENCES OF NOT TRAINING

• Borrower does not understand the role of the DB

• Borrower does not understand how the DB is to be used

• Borrower does not understand the dispute avoidance role

• Borrower unable to guide tenderers

• Borrower unable to promote advantages (better tenders)

• Funders can benefit from training…..

• .....and to help educate the Borrowers

©2012 Murray Armes

THE ROLE OF THE DAB - 1

• FIDIC Procedural Rules allows DB to take steps to avoid disputes by:(1) Monitoring the project(2) Regular site visits(3) Meetings with the parties(4) Reviews of issues(5) Assistance in resolving issues(6) Informal opinions

• Use of “mediation” skills

• Facilitating solutions

• None of this is “litigation”….. ….it is project management!©2012 Murray Armes

THE ROLE OF THE DAB - 2

• DB role traditionally carried out by the Engineer

• The Engineer has traditionally been financed

• The DB takes on the decision making role of

the engineer

• But only after applying PM procedures to avoid disputes

• Only if avoidance is not possible is a dispute referred

©2012 Murray Armes

THE ROLE OF THE DAB - 3

• Majority of DB roles are PM procedures

• If a dispute is referred role changes

• DB Decision is required for access to arbitration

• The DAB is a portal between Project Management and the

first steps to arbitration

©2012 Murray Armes

AN APPROACH TO FUNDING

• Training to be funded

• DAB Retainer costs to be funded

• DAB site visit costs to be funded

• DAB informal opinions to be funded

• ….none of this is “litigation”!

• Banks to provide guidelines on how to estimate DB costs (JICA Dispute Board Manual 2012)

©2012 Murray Armes

THE FUTURE - 1

• Funding for adjudication procedure?

• The JICA DB Manual guidance on estimating DB costs

• More DABs to be established

• Pool of trained, experienced DB members• Dispute Avoidance = LESS WASTED COST + BETTER TENDERS +

MORE SUCCESSFUL PROJECTS

• DABs are mandatory in the MDB Contract

• Banks use the MDB Contract

• Value of DABs is recognised but not all banks will fund them…….©2012 Murray Armes

THE FUTURE

........BUT WHY NOT?

©2012 Murray Armes