Dispute Boards and Compromissory Clauses: A Strategic Approach To Contractual Conflict Resolution

In most contracts, it is common to establish the election of a jurisdiction for the resolution of disputes through judicial processes, meaning that the parties determine which jurisdiction (city) should be elected to resolve any potential disputes involving the relevant contract. Although this is a traditional approach, there are alternative methods of conflict resolution that may be more effective, depending on the specific case, among them the so-called “Dispute Resolution Boards“.

This method of conflict resolution is particularly used in Civil Construction contracts and involves the constitution of a committee that monitors the execution of a specific project in accordance with the provisions established in the contract, and it constitutes an independent and impartial body whose objective is to resolve disputes that may arise. This committee is composed of one or more independent professionals who are qualified and have experience and technical knowledge in the field related to the contract.

In this sense, the peculiarity of Dispute Boards, which sets them apart from other dispute resolution methods, is that the committee is formed before any controversy arises between the contracting parties (a procedure completely contrary to mediation, conciliation and arbitration, for example), because it is already assumed that disagreements may arise, given the scale and nature of the business, considering that complex engineering projects may include large infrastructure works and encompass multiple disciplines, as well as involve a wide range of information and technical details, not to mention the external and environmental factors, making it challenging to anticipate all the risks that could result in disputes between the contracting parties.

There are three types of Dispute Boards:

  1. Dispute Adjudication Boards (DABs): Commonly used in construction and engineering contracts, DABs consist of a panel of experts that is convened to resolve disputes in real-time as they arise during the project’s execution, with a decision-making function. DAB decisions are usually binding until reviewed through arbitration or litigation.
  2. Dispute Review Boards (DRBs): DRBs are often used in long-term contracts and complex projects, and usually issue non-binding recommendations or opinions, providing the parties with a basis for negotiation or subsequent arbitration if necessary. In this case, parties are not obliged to comply with or accept the recommendations issued.

III) Combined Dispute Board (CDB): CDBs, as the name suggests, use a hybrid procedure that combines the procedures of DABs and DRBs, that is, both non-binding recommendations and binding decisions can be issued, depending on the case.

In order to ensure the use of this form of conflict resolution, it is essential to include a compromissory clause in the contract, which stipulates that the parties agree to submit any dispute to the Dispute Board before seeking judicial litigation. This clause usually outlines terms such as (i) procedures for convening the Dispute Board; (ii) the deadline for dispute resolution, and (iii) the consequences of non-compliance with Dispute Board decisions.

The main advantage of Dispute Boards, regardless of the type established by the parties, is the efficient prevention of conflicts, avoiding long downtimes, delays in the completion of the project involved, quickly and less costly, as it does not involve attorney fees and court costs or arbitration chamber costs. Furthermore, even though decisions and recommendations are issued with high quality and are technically solid due to the qualified professionals that compose the dispute boards, it is an informal and simplified mechanism.

However, it is important for the contracting parties to be aware, when adopting this type of dispute resolution method in the contract, that although Dispute Adjudication Boards (DABs) are binding and the parties are required to comply with their decisions, it is possible for one or both parties to appeal to an arbitration tribunal, within a time frame specified in the contract, for a review of the decision, which may undermine the intended advantages.

In this sense, the presence of qualified professionals in contract drafting, especially in drafting solid and comprehensive compromissory clauses, is a vital element for the success of projects in various industries and construction, ensuring that contracts meet the needs and objectives of all parties involved, but also mitigating the risks of costly and prolonged litigation.

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