Steve Bennett is a partner in the New York office of Jones Day and teaches commercial arbitration at Brooklyn Law School. Maya Elbert, a Jones Day summer associate, aided in preparing the article.

Resolving Disputes Beyond Arbitration and Litigation

Dispute review boards offer construction industry firms a collaborative method to address project conflicts.

by Steven C. Bennett

Construction industry companies may have an attractive alternative to litigation and conventional arbitration through the use of dispute review boards.

Typically composed of one or three impartial professionals with experience in relevant fields, such boards are set up by the parties at the outset of a contract to help settle their disputes, monitoring the project at issue throughout its duration. As a result, the board members can become familiar with the project and the parties before contentious issues arise, which may lead both to prevention of disputes and faster, more amicable resolution of conflicts.

Although the DRB process is generally non-binding, it may be advantageous to employ it before turning to more costly and adversarial methods.

The DRB process was first used in 1975 to resolve three disputes that arose during construction of the second bore of the Eisenhower Tunnel in Colorado, and its success in that instance helped it spread in use for underground, highway, heavy civil, process, and building construction. According to the Dispute Resolution Board Foundation, the number of disputes settled by DRBs rose from 23 in 1982 to more than 1,400 in 2004.

The three major concerns in a construction project are the scope, completion timeframe, and budget. Various disputes can arise during a construction project involving differences over bids, site conditions, change orders, overhead, delay and disruption, contractor defaults, and defective work.

Resolution of construction industry disputes by conventional arbitration or litigation, however, is often ineffective. First, the problems are often complex, and judges, juries, and arbitrators rarely have the experience and training to understand construction terms, procedures, and standards necessary to reach a clear and fair outcome.

Second, arbitration and litigation by their nature are used after a dispute arises, thus delaying resolution of the conflict and a project's progress. Those methods also can be time-consuming, creating additional unexpected costs.

Finally, arbitration and litigation do not facilitate dispute avoidance and informal resolution of disputes - a critical advantage when project parties must continue to deal with each other over an extended period of time.

The DRB process overcomes many of those hurdles for four primary reasons. First, members of a DRB panel can master the complexity of construction disputes, because they are generally chosen for their technical expertise, and include engineers, industry attorneys, and others with relevant experience.

Second, a DRB can promote prompt resolution of conflicts and prevent delays in construction progress, because the board monitors the project from its inception, becoming familiar with the parties, the scope of work, and potentially contentious issues. When problems occur, the DRB receives relevant information, conducts a hearing, and issues a recommendation.

Third, such early and informal resolution of conflicts is more cost and time-efficient than arbitration and litigation because it typically reduces uncertainty, leads to smoother contract payments, helps control budgets, and cuts down on post-project litigation.

Finally, the long-range project oversight by impartial, knowledgeable third parties in the DRB method may deter disputes by creating an atmosphere of open communication, cooperation, and trust. That atmosphere can reduce acrimony between parties, preventing them from taking extreme positions and allowing them to make concessions without losing face.

DRB recommendations may carry considerable weight with the parties, and are almost always accepted, because they are made by independent professionals with construction backgrounds and knowledge of the events as they occur.

Before agreeing to a DRB process, project parties should evaluate the potential for disputes and the relative costs of a DRB compared to other dispute resolution methods.

To determine the likelihood of disputes, the owner may consider: previous project >> dispute experiences; previous experiences with particular contractors likely to win the bid; the chance that new or inexperienced contractors might win the bid; the budget and size of the project; and the project's complexity. DRBs are especially effective for projects that are large, long term, unique, or complex.

DRB costs - usually split between the contracting parties - typically include fees and expenses of board members, as well as employee time for DRB meetings, document reviews, site visits, and hearings.

DRBs are most useful when they are implemented before a contract is awarded or at the latest before site work commences. Typically, procedures for operation of the DRB are incorporated into the contract as either "supplemental general provisions" or "special provisions," and these should permit both contractor and owner to refer issues to the board.

The board should be active, meeting periodically and making site visits on at least a quarterly basis. This helps the parties to develop confidence in the board and increases familiarity with the parties and the project. The board may provide other functions, such as advisory opinions, which are oral, informal, non-binding procedures, as opposed to a formal DRB hearing.

Formal hearings should be held at or near the job site, and whenever possible, the owner should arrange for hearing facilities. Multiple disputes can be heard at the same hearing. Typically, attorneys are allowed to attend the hearings, but they generally should not participate in the proceedings, unless such participation is approved in writing by both parties.

A DRB should conduct the hearing, then deliberate and prepare a recommendation in a professional, impartial, and expeditious manner. Although DRB recommendations normally are not legally binding, they may become binding if all parties agree to that approach.

The DRB process is not a substitute for settlement discussions between the parties. Any DRB-mediated dispute resolution should be preceded by good faith negotiations between the parties.