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IMPLEMENTATION OF DISPUTE BOARDS ON CONSTRUCTION CONTRACTS

20 July 2022

In his report, “Constructing the Team” published in July 1994, Sir Michael Latham made the following recommendation for provision in construction contracts:

While taking all possible steps to avoid conflict on site, providing for speedy dispute resolution if any conflict arises, by a pre-determined impartial adjudicator/ referee/ expert.”

Historically, construction disputes have been resolved via litigation. In more recent times, public sector contracts usually included litigation as the means of settling disputes whereas private sector contracts employed arbitration.

Cost, delay and uncertainty of the outcome lead to an erosion in user confidence in litigation and this led to the growing move to arbitration as the preferred means of dispute resolution.

Arbitration has been used as a means of resolving commercial disputes in the United Kingdom, since medieval times, though the first Arbitration Act was only enacted in 1698. A growing discontent with the process led to the enactment of the latest Arbitration Act in the United Kingdom in the 1996.

In South Africa, the current Act was enacted in 1965 and is subject to criticism and is long overdue for updating.

Arbitration has suffered the same fate as litigation, it is costly, time consuming and the outcome can also be unpredictable.

During the late 1980’s and early 1990’s the construction industry flirted briefly with Dispute Review Boards (DRB’s). In this process a panel of experts provides a non-binding recommendation on any matter or difference brought before them.

The results experienced on projects such as the Lesotho Highlands Project, phase 1 were promising. Approximately 60% of disputes were resolved by the expert panel and 60% of the remaining 40% were resolved after the panel’s intervention, via negotiation. Only 16% of disputes were eventually unresolved and had to be referred to arbitration. This process obviously suits the larger, well healed contractors who can afford to wait for their payment, but not the small subcontractors whose life blood is cash flow.

Following the Latham report, the UK Government was persuaded that primary legislation was required to give all parties to construction contracts a statutory right to have disputes resolved, in the first instance, by adjudication, which was designed to be a rapid and relatively inexpensive process.

This legislation, the Housing Grants, Construction and Regeneration Act, 1996, is now in force in the UK and parties to construction contracts are allowed to refer a dispute for adjudication at any time. Similar legislation has been adopted in parts of Australia, New Zealand, Singapore and Hong Kong.

South Africa attempted to introduce a “prompt payment act” in 2016 that would have provided, amongst other things, for statutory adjudication, but it was opposed by certain government institutions as being anti-competitive and has not been enacted.

South Africa, as in the rest of Africa, relies on the terms of the contract to provide for Adjudication as one of the phases in the (usually) stepped dispute resolution process.

The World Bank is also advocating that such procedures be used on projects it funds, where the FIDIC MDB Harmonised Edition Contract, (the Pink Book of 2010) is usually used (which provides for a standing Dispute Board {DB}).

Construction disputes are better served by mechanisms that are speedy, cost effective and binding. Such mechanisms should be conducted by an independent third party and should be undertaken by a person (or group of people) chosen by the parties and with the required legal/technical knowledge[1]. Such mechanisms should be able to hear any matter, should be capable of becoming final and enforceable, and should not interfere with the progress of the works[2].

It also recognised that small and emerging contractors are disadvantaged – even imperilled – in the event of a major dispute[3].

The Construction Industry Development Board (CIDB), again in South Africa, took the lead to officially introduce adjudication on construction contracts in South Africa and published a Procurement Practice Guide in 2003[4].

This document dealt, inter alia, with the implementation of adjudication and advocated that “adjudication should be applied to all categories of construction contracts, namely engineering and construction works, services and supplies, at both prime and subcontract level, and should be a mandatory requirement for the settlement of disputes prior to the completion of the contract.”[5]

In South Africa, the CIDB advocated four contract forms for use on public sector contracts. Two of these, (namely FIDIC and NEC) are international contracts and the other two are home grown South African Contracts (JBCC and the GCC). Initially, only the NEC contract made provision for Adjudication.

The first Edition “Rainbow Suit” of FIDIC, published in 1999 adopted adjudication as a means of resolving disputes, in the first instance and the second and third steps in the process remained as they had been in the previous editions of the FIDIC contracts, being, amicable settlement followed by arbitration.

As new versions of our local contract forms were published, these too, in keeping with the CIDB policy guideline, make provision for adjudication as a mandatory step in the dispute resolution process.

Mediation, and/or Amicable settlement are, currently a voluntary process that can be attempted by agreement between the Parties.

What is adjudication really? The Procurement Practice Guide of the CIDB defines adjudication as “… an accelerated and cost-effective form of dispute resolution that, unlike other means of resolving disputes that involve a third-party intermediary, results in an outcome that is a decision by a third party, which is binding on the parties in the dispute.”[6]

However, adjudication is often defined by reference to what it is not. Adjudication is not arbitration or litigation, nor is adjudication a decision by the engineer/project manager[7].

Adjudication is often described as being ”rough justice”, deciding “who should hold the money for now”? This promotes cash flow to the small players. Of course, the adjudicators decision is subject to review by (usually) an arbitrator, if one of the parties in the adjudication is sufficiently unhappy with the outcome of the adjudication.

Surprisingly few adjudicator’s decisions are subject to review by an arbitrator. Anecdotal evidence from the United Kingdom suggests that only around 3% of disputes are referred to arbitration after adjudication.

However, a large proportion of adjudicators decisions have to be enforced by a subsequent court action to force one of the Parties (usually the loser) to comply with the adjudicators ruling.

In South Africa, courts have followed the lead of courts elsewhere in the developed world (particularly the United Kingdom) and are recognising the need to enforce such decisions. Unfortunately, owing to backlogs and an overloaded court system, this can take as much as 9 months to achieve.

In the United Kingdom, enforcement applications are heard by the Construction and Technology courts, and this usually takes less than a month.          

We have a “kitchen sink approach” in South Africa to adjudications. A dispute on any topic relevant to a contract can be referred for adjudication.

By contrast, in New South Wales (NSW) in Australia, is quite narrow in its application of adjudication and is limited only to matters concerning payment[8].

In other jurisdictions (like Malasia) only disputes concerning certified payment may be referred to adjudication.

Adjudication may take the form of ad-hoc adjudication where the adjudicator is only appointed when a dispute arises and for a specific dispute. Ad-hoc adjudicators do not normally then become standing adjudicators to deal with subsequent disputes should these arise. Alternatively, a standing dispute board is appointed at the commencement of the contract.

The current market trend appears to be for standing rather than ad-hoc appointments. This is because there is a move towards dispute avoidance and the DB fulfils the role of a DAAB so needs to be available before a claim turns into a dispute.

In the 1999 FIDIC Rainbow suit, the Red book provided for standing DAB’s but the yellow and silver books made provision for ad-hoc adjudication. The 2017 FIDIC Rainbow suit, second edition, however calls for standing adjudicators for all the Contracts. The NEC3 and NEC 4 both call for standing adjudication.

In South Africa, the preference appears to be for ad-hoc adjudication. This may be for cost reasons as well as clients appear to be hedging their bets. If they get a bad decision from the first adjudicator, they can change adjudicators for subsequent disputes.

Standing DAB members charge a monthly retainer fee that is charged quarterly in advance. The standing DAB are usually required to conduct site visits and meet with the Parties and the Engineer. These are usually at not less than 70 day and not longer than 140-day intervals.

The DAB members charge a daily fee for travel time and the site visit as well as travel and accommodation costs for these visits which are charged in addition to the retainer fee. When disputes arise (in both ad-hoc and standing DAB’s) or when the DAB’s are asked to assist in resolving potential disputes (standing DAB’s) this time required to adjudicate the dispute is charged for either on a daily or an hourly fee basis.

So, who are the adjudicators and how can they be found?

The CIDB best practice guidelines provides that adjudicators are not usually practicing lawyers but rather senior engineering and construction industry persons with a sound knowledge of the technology of the industry, cost analysis and programming techniques. Competence in contract law and general legal rights will be a requirement for an adjudicator.

The FIDIC Red Book requirements for the adjudicator are pretty standard and state the following.

The Member shall:

(a) have no interest financial or otherwise in the Employer, the Contractor or the Engineer, nor any financial interest in the Contract except for payment under the Dispute Adjudication Agreement.

(b) not previously have been employed as a consultant or otherwise by the Employer, the Contractor or the Engineer, except in such circumstances as were disclosed in writing to the Employer and the Contractor before they signed the Dispute Adjudication Agreement.

(c) have disclosed in writing to the Employer, the Contractor and the Other Members (if any), before entering into the Dispute Adjudication Agreement and to his/her best knowledge and recollection, any professional or personal relationships with any director, officer or employee of the Employer, the Contractor or the Engineer, and any previous involvement in the overall project of which the Contract form’s part.

(d) not, for the duration of the Dispute Adjudication Agreement, be employed as a consultant or otherwise by the Employer, the Contractor or the Engineer, except as may be agreed in writing by the Employer, the Contractor and the Other Members (if any).

(e) comply with the annexed procedural rules and with Sub-Clause 20.4 of the Conditions of Contract.

(f) not give advice to the Employer, the Contractor, the Employer’s Personnel or the Contractor’s Personnel concerning the conduct of the Contract, other than in accordance with the annexed procedural rules.

(g) not while a Member enter into discussions or make any agreement with the Employer, the Contractor or the Engineer regarding employment by any of them, whether as a consultant or otherwise, after ceasing to act under the Dispute Adjudication Agreement;

(h) ensure his/her availability for all site visits and hearings as are necessary.

(i) become conversant with the Contract and with the progress of the Works (and of any other parts of the project of which the Contract form’s part) by studying all documents received which shall be maintained in a current working file;

(j)  treat the details of the Contract and all the DAB’ s activities and hearings as private and confidential, and not publish or disclose them without the prior written consent of the Employer, the Contractor, and the Other Members (if any); and

(k) be available to give advice and opinions, on any matter relevant to the Contract when requested by both the Employer and the Contractor, subject to the agreement of the Other Members (if any).

Generally, adjudicators belong to published panels of adjudicators and are restrained by codes of conduct.

The ICE-SA NEC Adjudicator panel requires that panellists comply with the following:

(a)  Before accepting any appointment as adjudicator, the Panel member shall carefully consider and ensure so far as possible that;

  • they are competent to handle the dispute with particular reference to the scope and specialisms required,
  • they are able to handle and to properly discharge their duty as an adjudicator within the required timescale having regard to holidays or other commitments and
  • that they know of no circumstances in which a reasonable person observing those circumstances would perceive a real possibility of them being biased, unless it relates to circumstances that they have disclosed to the parties and they have not objected.

(b)  Where the appointment is made by ICE-SA the Registered Person will be required to make a declaration to this effect. In the event of any doubt, the Registered Person should decline the appointment from whatever source.

Conduct

(c)  When and however appointed to act as adjudicator, the Panel member shall:

  • act promptly, conscientiously, diligently and with competence and take all reasonable and practicable steps to avoid unnecessary expense; and in particular,

  • maintain adequate records to support the fees and expenses they charge

  • apply a charging rate that is appropriate to their normal professional activities having regard to the scope and complexity of the matters in dispute,

  • inform the parties and carefully consider the cost and necessity before taking external advice,

  • assess expeditiously all submissions properly made to them in accordance with the relevant adjudication procedure,

  • inform the parties should it become apparent that they will not be able to discharge their duty within the time required,

  • inform the parties should they become aware of circumstances which a reasonable person observing those circumstances, might conclude that there was a real possibility that they were biased and

  • promptly give directions to, or request consent from, the parties for the conduct of the adjudication which allow the Registered Person to discharge their duty as adjudicator whilst allowing the adjudication to proceed fairly, expeditiously and economically.

There are adjudication service providers in many countries in Africa and they usually have a panel of potential adjudicators. Examples are the FIDIC Presidents List of Adjudicators, the Construction Adjudication Association of South Africa (CAASA), the above-mentioned ICE-SA panel of NEC Adjudicators and the Cairo Regional Centre for International Commercial Arbitration (CRCICA).

Some of these are closed lists and some are open. Where it is an open list it means that the list can be accessed, and an adjudicator chosen from the list. FIDIC and the ICE-SA list are open lists. Closed lists cannot be accessed, and a nomination fee has to be paid to get the information on a prospective adjudicator.

Some contracts have a panel of adjudicators named in the Contract Data and the adjudicator has to be chosen from these select few. Other contracts require that the adjudicator is chosen from a particular panel (like FIDIC or ICE-SA for example).

The adjudication starts in an ad hoc and a standing adjudicator scenario with the notice of a dispute. In some contracts this is a more formal process. However, it is required to be done, it is an important step since it is usually from this communication that the ambit of the dispute is defined and the jurisdiction of the adjudicator is determined.

In this notice, if it is an ad-hoc DAB, the claiming Party nominates someone from the named panel of adjudicators from the Contract Data or suggests a group of three prospective adjudicators for the selection by the responding party of the adjudicator that will preside over the matter (either from the panel prescribed in the Contract or just the preference of the claiming party).

If the responding Party is not happy with any of the suggested potential adjudicators and agreement cannot be reached, the adjudicator nominating body named in the Contract Data is approached to appoint an adjudicator.

Where a three-person DAB is called for, both Parties choose an adjudicator for the approval of the other Party. These two approved adjudicators and the Parties, agree on a third adjudicator who assumes the chair-persons role in the DAB and usually has the casting vote.

Some contracts (like the NEC) prescribe the number and timing of submissions from the Parties and others (like FIDIC) prescribe the duration of the whole process from the date of the referral by the claiming Party (that is the submission of the statement of claim) to the date when the adjudicator is obliged to give his decision.

Adjudicators often call for a case management meeting at the start of the process, shortly after or at the time of the formalisation of their appointment. In this meeting, the number and timing of submissions, the date and venue for any hearing (if required) and the date for the delivery of the adjudicators decision can be discussed and understood by all participants at this meeting.

Sometimes adjudicators need expert assistance to fulfil their function (like for example, appointing a forensic planner). Adjudicators are obliged to advise the Parties of their intention to appoint such an expert and the terms of service for this person.

Once the expert’s report has been received, the Parties must be given the opportunity to comment on the report produced by the expert.

Adjudicators are not arbitrators and the laws of evidence do not have to be observed in adjudications. The laws of natural justice do however apply, and adjudicators are well advised to make sure they give both parties equal opportunity to present their cases.

In South Africa for language skills and communication reasons, hearings are frowned upon. It can however be advisable to allow the Parties to make oral presentations so that they cannot complain that they didn’t have a chance to present their cases. In these circumstances a hearing would be advisable. This would also give the adjudicator the opportunity to explain the process to the Parties who are often inexperienced in these matters.

The golden rule of whether to call a hearing or not is, if there are disagreements of fact, call a hearing. If the issues are in principle, it can usually be handled on the papers, without a hearing.

The objective of an adjudicator is to give a decision that can be enforced. The adjudicator can give the wrong answer to the right question and this would be enforceable. However, if he gives the right answer to the wrong question (this is called the Bouygues effect) it would not be enforceable because that would be outside of his jurisdiction.

Quoted authorities have ventured the opinion that the most frequent challenges to the enforcement of an adjudicators award are where the adjudicator didn’t have jurisdiction.

The next most frequent challenge is that the laws of natural justice were not complied with. In South Africa, there have been challenges to the jurisdiction of an adjudicator because appointment procedures were not (allegedly) properly followed.

We have also experienced a Constitutional challenge because there is not an automatic right in the adjudication process to legal representation and to having a hearing. This challenge was unsuccessful.

Many adjudicators have had long careers and it can be difficult to comply with the warrantee requirements when being appointed.

The criteria for the assessment of bias is not that the adjudicator displayed bias in his conduct or expressly in his decision (for example) but that there was the perception of bias. This is why the candid disclosure of the potential adjudicators business relationships with either of the parties is so important.

The International Bar Association published a document in 2014 entitled  the “IBA Guidelines on Conflicts of Interest in International Arbitration”, which is a very useful document to determine whether there is a possibility that there could be a perception of bias.

At a recent webinar held in May this year organised by Pinsent Masons entitled “Dispute Boards in Africa” a discussion took place concerning Adjudicators fees.

The representative from the Cairo Regional Centre for International Commercial Arbitration (CRCICA) divulged that their fee scale ranged from US$800 to US$ 3 400.00 per day.

The latest versions of the FIDIC (2017 second edition) and the NEC (NEC4 2017) make provision for dispute avoidance procedures. This is carried out by an executive intervention or by adding a preliminary role for the DAB to provide an opinion prior to the dispute being declared and being referred to adjudication.

The Royal Institute of Chartered Surveyors (RICS) have introduced a low-value construction adjudication process.

With these developments, there was a concern that the industry was losing confidence in adjudication as a means of resolving disputes and that cheaper and more expedient means of addressing the differences between the Parties was being sought.

This however is not the case and the experience in the United Kingdom (in Particular) is that the demand for the intervention by a third party (like an adjudicator) is increasing.


[1] Adjudication of disputes in the construction industry by Marthinus J Maritz
[2] Adjudication of disputes in the construction industry by Marthinus J Maritz
[3] Adjudication of disputes in the construction industry by Marthinus J Maritz
[4] Adjudication of disputes in the construction industry by Marthinus J Maritz
[5] Adjudication of disputes in the construction industry by Marthinus J Maritz
[6] Adjudication of disputes in the construction industry by Marthinus J Maritz
[7] Adjudication of disputes in the construction industry by Marthinus J Maritz