Introduction In this continuing series about different forms of dispute resolution commonly found in International construction contracts, this article, being Part 2 of an earlier introductory article, seeks to examine the experience of Chinese companies using Dispute Review Boards ("DRB's") in construction projects in China.
In Part 1, the authors suggested that DRB's have growing International recognition with increasing popularity in global construction projects, and the authors of the article suggested that statistics tended to suggest that where DRB's are used on projects, the likelihood is those projects are less likely to have costly and destructive disputes between the parties which impact so negatively on the eventual out come for project participants.
In Part 2 of the article the authors intend to review whether such experiences have been shared by those using DRB's here in projects in China and regionally.
Practical examples of DRBs in Asia
Ertan Hydroelectric Project
Another very useful example of the successful use of DRBs in Asia can be seen in the Ertan Hydroelectric Project in China. The project consisted of a concrete dam and underground hydropower plant located on the Yalong River in the Szechuan Province of southwest China. Constructed between 1991-2000, the project cost about US$2 billion and was under the ownership of Chinese State Hydropower Organisation (EHDC).
2 separate Chinese/foreign joint ventures were used for the main civil works and in all comprised 5 European contractors and 2 Chinese contractors. The design was by the Chinese Design Institute and the joint ventures were supervised by a Chinese engineer while the employer was advised by international engineering firms. The contract provisions were modified FIDIC 4 conditions and a 3-person DRB was used for the 2 main civil contracts. The members were from the UK, Colombia and Sweden. The parties had each chosen 1 member and the members had chosen a chairperson. Specialist advisors could also be appointed if necessary. No restrictions existed on the scope of the disputes, and recommendations of the DRB were binding unless a party gave notice of a referral to arbitration within a specific time limit.
Though perhaps initially wary of the process, the parties gradually came to see that the DRB could help the smooth flow of the project by resolving difficult disputes. As confidence in this process grew, the DRB became more proactive and started to assist the project in a more informal capacity resolving potential disputes.
In total, 40 disputes were referred to the DRB and no arbitration took place. All of the disputes were resolved in amicable settlements between the parties either directly following publication of the recommendation or in final settlements following construction. It was felt that the use of the DRB in this project had been key to getting the parties' consent to final settlement.
Wanjiazhai Dam
Since then, there have been some, though not many, further examples of DRBs being employed in China and elsewhere in Asia. The hydro electric power sector has seen a number of projects built in which DRB's have been used in the contract documents. The construction of the Wanjiazhai Dam Lot II and III in Taiyuan in China between 1998 and 2002 had 12 disputes that were heard and resolved by a DRB. This project was worth US$200 million.
The Xiaolangdi Multipurpose Dam in Luoyang
According to a report published by the World Bank on stage 11 of the project dated 28th June 2004 , during the implementation of The Xiaolangdi Multipurpose Dam and Yellow River Diversion Project in Luoyang in China between 1995 and 2002, The project preparation anticipated the need for a DRB to resolve any disputes that arose between the international contractors and the owner. The DRB, consisted of consultants funded by the credit provider, and according to reports proved to be very effective in dealing with complex claims by the contractor and disputes between the contractor and the employer resulting from complex geological conditions, variations and delays and acceleration, which were, according to the Report of the World Bank, "finally solved through discussions on the basis of DRB recommendations and mediation leading to an amicable settlement of the disputes." On any basis this appears to be a notable achievement given the length of the project and the fact that it cost US$936 million.
Hong Kong International Airport
One of the shining examples of where a major project contemplated the use of DRB's in the array of available dispute resolution procedures during the life of the project is the construction of Hong Kong International Airport at Chek Lap Kok. This was an enormous infrastructure project and illustrated the workings of 3 different forms of Alternative Dispute Resolution in the context of the construction of the infrastructure, the underground line and the airport itself.
The final stage of the infrastructure project, the construction of the airport itself, had 4 layers of dispute resolution. The 1st, as with the other contracts, was referral to an engineer. The 2nd was an appeal to the project director. If the parties were not satisfied with this, then under the 3rd layer the parties had 10 days to consult a DRB. The 4th and final stage was to be arbitration.
The DRB used in this project was made up of 6 members in addition to a convenor. It would meet on site every 3 months and was available to intervene on any conflict before it developed into a dispute. The members had been carefully chosen to cover the range of expertise that might arise from the technical features of any dispute. In the event of dispute resolution, a panel of 1 or 3 members was chosen and this varied according to the nature and complexity of the dispute.
In the end, very few referrals were made to the DRB, which made 6 binding decisions with only 1 matter being taken to the 4th stage of arbitration. It seemed that the existence of the DRB alone had served to deter the referral of disputes and had also maybe encouraged the settlement of matters between the parties without the need for further recourse to 3rd party intervention. Some disputes were set aside until the opening of the airport. As of May 2001, some HK$6.3 billion remained outstanding, but with the assistance of mediators, settlements were largely reached.
Other Chinese projects that used DRB's
The Kunming Zhangjiuhe River Water Diversion and Water Supply Project, Kunming, Yunnan Province, which completed in March 2007 after about eight years construction, was the then largest urban water division project in China. During the drafting of the construction contracts, it appears the parties intended that disputes be resolved through DRB's.
Similarly in the Kuitun-Sailimu Hu Highway Project, Xinjiang Province, another Worldbank projects completed in August 2005, with each contract for works estimated to cost US$50 million or above, the World Bank prescribed provisions for a dispute review board in the contract documentation.
Finally, there is an example recorded in Ho Chi Minh City in Vietnam for the NLTN Basin Pumping Station. A project that is worth US$40 million, and in which construction began in 2004, suggests as of the latest data available from 2007, that no disputes had been recorded.
The current economic climate and the future of DRBs in China
Now, more than ever, the global construction industry is under enormous financial pressure. A lack of adequate cash flow towards the contractor and professional team is a major reason that construction projects fail in tough economic times. As a result of this initial cash flow problem, there is even harder cash flow for the sub-contractors and specialist sub-contractors further down the supply chain. If there is no money for materials, labour delays can ensue and ultimately, construction industry-related companies, large and small, can go insolvent and their ongoing projects grind to a halt.
Although the Chinese economy is perhaps not as robust as it has been in the last few years, China is still using half the world's concrete and a third of its steel for numerous ambitious construction projects. The Chinese government's 11th Five-Year Plan (2006-2010) planned to invest US$26 billion in the construction of 8 hydropower projects. The total investment for water conservation and hydropower projects has been estimated to exceed US$104 billion. There are also plans to build 4 major pipelines for oil and natural gas transport and to expand several key airports and build new sub-branch airports. In total, spending in the Chinese construction industry will grow 9.7% annually until 2010, with non-residential buildings and infrastructure remaining the most significant sectors.
Clearly, therefore, there will still be much activity in the Chinese construction industry in the near future, and consequently, there will be the need for dispute resolution procedures to facilitate smooth project flow. The type of projects outlined above lend themselves well to the DRB system of dispute resolution as can be seen, for example, in the successful Ertan Hydroelectric Project. As projects become more complex, there will be an increasing number of foreign companies and investors becoming involved in the Chinese construction industry. DRBs, with their technically expert personnel, often international composition, low cost outlays, flexible ability to issue both non-bnding and binding decisions and incidental benefit of dispute resolution are in a strong position to play a major role in the Chinese construction industry.
Although it is true that DRBs have not often been significantly used in China up to now, the fact that where they have been used and favourable outcomes achieved, the prospects for their being used more widely in China appear to be good. This and given the increasing use and familiarity of the FIDIC suite of construction contracts by Chinese Construction companies suggests in the coming years ahead that DRB's will become an ever increasing part of the construction dispute resolution landscape here in China.
Keith Brandt and Sam Morten
Hammonds