Rise of Dispute Boards in Latin America

Summary

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Dispute Boards (DBs) are a less well-known form of ADR[1] when compared to arbitration, or mediation. Latin America has seen a rise in DBs in the last 20 years. DBs are now standard practice in several countries. Challenges remain before DBs are recognised not just as a legal obligation for large construction contracts but as a useful tool for proper project management. Going forward there is the need for a paradigm change in the mindset of the contractual parties.

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Introduction

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Dispute Boards (DBs) are dispute resolution mechanisms ideally suited for contractual disputes on medium to large scale projects. A DB consists of a panel of experienced, impartial and independent professionals that provide informal and formal assistance to the contractual parties during the course of a project. Such assistance can be in the form of facilitation in the resolution of issues as they arise and before escalation into a dispute -a dispute avoidance role- and/or in the form of formulation of recommendations or provision of decisions related to a dispute formally referred to the DB -a dispute review or dispute adjudication role-.

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Regular site visits serve to familiarise the DB members with the project, its progress, challenges and more importantly, with the project teams. One of the great benefits of DBs is their confidentiality. Conflicts are resolved with the exclusive knowledge of the parties involved, except in some instances involving the public sector.

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The DB mechanism developed primarily on major construction projects, with the Eisenhower Tunnel, in Colorado, USA being the first example in the late 60s – early 70s., and thereafter from the 1980s, DBs developed worldwide.

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DBs are a practical and smart approach at dispute resolution in construction projects, given their proximity and flexibility to deal with early disagreements as well as with controversies, conflicts and claims of the contractual parties along the project life. They are no substitute to arbitration but if correctly organised, DBs and arbitration complement each other. Arbitration guarantees correction of eventual errors made by DBs, ratification and enforcement -if required- of DB decisions and treatment of disputes raised by a contractual party after the intervention of the DB.

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In practice, DBs work when the contractual parties regard DB members as experts they can trust and rely upon. In this context, DBs do bring value to the parties and to the project. On the contrary, DBs do not work when the contractual parties considered them as a contractual obligation imposed on them by either legislation or the financiers, and as merely the antechamber to arbitration.

Today there exist several institutions providing DB rules, such as FIDIC, ICC, ICE, CIARB, AAA, as well as DB clauses to be incorporated in standard construction contracts, such as the World Bank, FIDIC, NEC and JCT[2].

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Why are DBs relevant for Latin America?

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Latin America, a region going from Mexico to Chile and Argentina and including the Caribbean, has a population over 650 million. It is commonly known as “the Land of Opportunity”. Pre-COVID figures produced by the Inter-American Development Bank indicate the region’s infrastructure gap to be 150 billion USD/year[3]. This represents a challenge for Latin American nations and governments, for multilateral development agencies and for private finance. The role of private investment is crucial, as the required investment cannot come solely from public funds.

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There is plenty of local private capital in Latin American countries, but not enough and it is probably lacking state-of-the-art technology and managerial skills to meet the challenges. This is where foreign direct investment (FDI) becomes relevant for the region. The benefits of FDI for the host country are numerous: technology transfer, market access, development of human capital and organisational skills.

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Although most local financial markets are open to foreign investors enabling them to invest in local companies, what the region requires most is investment in infrastructure, first and in greenfield productive capacity, second. This is because quality infrastructure, including road connectivity, airport connections and ports, is always a key consideration for companies looking at a country as a potential investment destination. The perception of the quality of Latin America’s infrastructure services is, on average, behind all other regions of the world except sub-Saharan Africa.

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In 2021, FDI in Latin America rose by 56% to 134 billion USD, sustained by strong inflows in traditional target sectors (manufacturing, financial and insurance services, mining and power generation -including renewable sources-) and pushed up by record high investments in information and communication services across the region. Infrastructure investment represents about 30%.

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The challenge for governments is therefore to attract FDI in general and FDI for infrastructure in particular. Most of the flows for infrastructure have gone to electricity & gas, road and telecom sectors. Foreign financing of infrastructure is in part provided by multilateral development institutions; however, the bulk comes from private financial sources.

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Attracting infrastructure FDI requires a general legal framework including bilateral investment treaties, double taxation treaties with investment provisions and solid enforcement agencies and institutions. These provide a strong legal background and reduce uncertainty for foreign investors. It also requires -at project level- promotional contractual modalities: privatisations, concessions, leases, BOT (Build-Operate-Transfer) or BOO (Build-Own-Operate) agreements and PPPs (Public Private Partnerships).

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One of the features of those treaties is an enriched[COS1]? dispute resolution system — which is eventually and constantly developing itself, through the incentive of UNCITRAL[4] and several international organisations. While most disputes go to arbitration, an increasing number of national ADR chambers defend the idea that DBs can be a feasible component of the legal toolbox that can help attract investors. The DB mechanism reduces the risks and costs of the termination of parties’ contracts and thus contributes to attract FDI. Therefore, there is real value in promoting and implementing DBs in the Latin America.

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History of DBs in Latin America

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Thanks to the positive impact that DBs had in the USA, they were replicated internationally, Latin America was no exception.

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The first project with a DB in Latin America was the Hydropower plant El Cajon in Honduras back in 1981. Several other symbolic projects have benefited from DBs such as Sao Paulo Metro line n°4 (2003), the Rio 2016 Olympic and Paralympic Games, the Panama Canal Expansion, hydropower plants in Ecuador (Coca Codo Sinclair, 2009) and in Chile (Chacayes, 2012). A landmark project was the infrastructure for the Panamerican and Parapanamerican Games in Peru in 2019.

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Some DBs were put in place in the context of international funding from multilateral financial institutions or development agencies, such as the IFC, IADB, Millennium Challenge Corporation, Eximbank of China. Another driver was the need to improve control of public works.

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Contracts for construction work are regulated according to countries’ jurisdiction practice: the governing law of the contract, mostly for private parties, or the dispute resolution approach embedded in the country’s legislation, in contracts with public entities. This is true for Latin American countries. There are universally accepted principles of construction law, a lex constructionis, such as widely accepted standard form contracts, an increasing use of arbitration to resolve international construction disputes and more recently, the use of DBs as a regular feature of international construction and infrastructure contracts, not just as a dispute resolution mechanism but as a useful tool for dispute avoidance.

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Private construction projects can incorporate the DB concept as part of commercial contracts; this is the case for mining, oil & gas and (private) power sectors. For infrastructure projects involving public procurement processes and counterparties, DBs must adapt to Latin American legal systems, i.e. to administrative contracts. These are civil law jurisdictions. According to civil law doctrine, the ultimate role of the administrative contract is to guarantee that the public interest is protected. The parties to administrative contracts may only engage in activities that are expressly and previously authorised by existing legislation or regulation. In administrative contracts, the public administration has immanent, and often unilateral, powers: contracts can be modified, penalties imposed on the contractor without judicial intervention.

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As a result, several legal issues arise from the use of DBs in projects involving administrative contracts. For instance, to what extent a DB may decide on a matter that is reserved to the ordinary national courts, or to what extent a DB may deviate from the basic solution or approach provided by specific legislation in a determined matter subject to its resolution under national law, or whether the public entity has to comply with, and enforce a recommendation or decision adopted by a DB, and finally, whether a DB recommendation or decision may be amended, clarified, or simply reversed by a national court.

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Almost all Latin American ADR centres have drafted and published various regulations on the subject, such as, by way of example: the Construction Industry Arbitration Centre (in Mexico and in Peru); the Pontifical Catholic University of Peru; The Chamber of the Construction Industry of Chile. All this in addition to international well-known DB rules, as mentioned earlier in this article.

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There is growing interest in and proliferation of DBs in the region. This article does not intend to make a country-by-country review. The landscape of DB use is patchy in Latin America. Different names are employed for DB mechanisms: “Technical Panels” in Chile, “Dispute Prevention and Resolution Committees” in Brazil, “Dispute Boards as part of the Court of Arbitration for Engineering” in Argentina, “Panel of Experts (or “Amicable Composition”) in Colombia, “Controversies Resolution Board” in Honduras, “Dispute Resolution Board” in Peru, etc. Contract thresholds for rendering DBs mandatory vary from country to country. The use of standard contracts is not generalised yet, although the FIDIC form of contract, the World Bank’s and to a lesser extent, NEC contract models are now well recognised.

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The approach at public infrastructure procurement is not homogeneous in the region and varies from conventional contracts for public works (straightforward construction contracts, design & build, EPC, …) to more sophisticated BOTs, BOO or PPP arrangements.

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About PPPs

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PPPs provide the public sector with an alternative to conventional public financing. While conceptually, PPPs are very appealing, they present several areas of attention, as they go well beyond the construction phase to include the operation and maintenance of the infrastructure. After ten years (2010 – 2020) of progress, sixteen countries in Latin America have created PPP-dedicated agencies which provide technical support and oversee private participation in infrastructure, demonstrating political support for private investment in infrastructure[5]. Top countries using this approach are Brazil, Colombia, Chile, Peru and Honduras. Because of their complexity, the potential sources of disagreements in PPPs are many. DBs have to adapt to such situation, probably by migrating from a standing DB during design and construction phase to a DB on an ad-hoc basis during the O&M period.

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Challenges

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To pursue with the progress of DBs in Latin America and the Caribbean, I propose four considerations.

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·????Continue to match both DB procedures with applicable and evolutive national legislations. This is important since countries have their own legal frameworks as well as their legal traditions and because infrastructure procurement approaches are country specific.

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·????Enhance the promotion and diffusion of the DB concept to all stakeholders, highlighting its unique value in dispute avoidance rather than just be perceived as a necessary step before arbitration. Dispel the misconception that DBs are generally expensive. This is simply not true as available data confirms the opposite. This calls for a cultural change or mindset leap of the contractual parties.

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·????Develop more training programmes for future DB practitioners both at local and international levels. This is a clear challenge for institutions such as construction federations / associations, professional bodies, chambers of commerce, ICC, FIDIC, ADR centres, …. as well as for academia.

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·????Consider ESG (environmental, social and corporate governance) issues as part of the agenda of both owners and contractors. Besides local legislation, explicit clauses are increasingly included in large construction contracts. This is a recognition that ESG aspects (for instance, sustainability, inclusion, climate change / net zero) are potential sources of conflict, and as such, DBs will be confronted to dealing with them. This concerns reporting, independent audits, targets and compliance.

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Conclusion

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Dispute boards are ultimately trust mechanisms. They convey trust from the DB practitioners to the parties: expertise, experience, impartiality, independence and confidentiality. The need of legal tools in Latin American countries’ legal systems as enablers for expanding the use of DBs is recognised. Besides training and information on DBs, the key success factor is the need for a mindset leap in the contractual parties, making them conscious of the benefits of DBs. One of such benefits is of course, attracting more investment to Latin America.

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by César ORTIZ SOTELO

Founding Partner

HALLCROSS PARTNERS

Accredited mediator CEDR (London) and CMAP (Paris)

Member of the Dispute Resolution Board Foundation

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The author would like to give his special thanks to pioneer Latin American DB practitioners Marcela Radovic and Jaime Gray for their encouragement and advice.

This article was first published in the April 2023 issue of "Juriste International" de l'Union Internationale des Avocats

[1] ADR: Alternative Dispute Resolution refers to ways of resolving disputes between parties that do not involve going to court.

[2] FIDIC: International Federation of Consulting Engineers, ICC?: International Chamber of Commerce, ICE?: UK’s Institution of Civil Engineers, CIARB?: UK’s Chartered Institute of Arbitrators, AAA?: American Arbitration Association, NEC?: UK’s New Engineering Contract and ?JCT?: UK’s Joint Contracts Tribunal

[3] IDB study estimates big GDP impacts from low infrastructure investments in Latin America. April 15, 2019

[4] UNCITRAL: United Nations Commission on International Trade Law

[5] https://www.infrapppworld.com/report/latin-america-caribbean-ppp-market-2019

?[COS1]By "enriched" I mean a more robust system that includes, in addition to arbitration, mediation and disputes boards. We may write alternatively, "a more robust dispute resolution system"