DRBs in Underground Construction: Past, Present and Future

Past

It is generally accepted that the first Dispute Review Board (DRB) for an underground project was established for the Second Bore of the Eisenhower Tunnel, which carries Interstate 70 under the Continental Divide, in 1976. The use of DRBs on underground projects has increased a great deal in the past 40 years, both geographically and numerically.

One of the drivers for this increased utilization can be explained by Plato’s proverb “necessity is the mother of invention.” Stated simply, the number and complexity of construction disputes on large public infrastructure projects escalated in the 1970s and 1980s (the root cause was the use of contract conditions that failed to acknowledge and apply the principles of proper risk allocation, which resulted in onerous contract conditions being imposed on contractors. As a result, construction industry leaders were keen to find faster, less expensive and less contentious alternatives to arbitration and litigation.

This was the necessity. As a result, a number of processes such as step negotiations, mini-trials, mediation and DRBs came into broader use as viable Alternative Dispute Resolution (“ADR”) methods. The DRB was the invention. The underground industry increasingly recognized DRBs as being a particularly good “fit” for underground construction contracts due to the real-time nature of the process and the involvement of mutually selected experts as board members.

As projects were completed, anecdotal evidence of the high resolution rate (95%) and reduced transaction costs was shared within the industry and a generally favorable view of the process evolved. This good news tended to spread fast, stimulating further use.

In this same timeframe, decision-makers for owners and contractors developed a broader and deeper understanding of the benefits of rational allocation of construction risks. This thinking led to increased use of Geotechnical Baseline Reports (“GBRs”), which complemented the Dispute Adjudication Board (DAB) process. These were also the formative years of partnering, which became recognized as a valuable tool for preventing disputes.

In addition to being a dispute resolution forum generally considered to be faster and less expensive than other ADR methods, there is a second important benefit of having a DRB on a project. Without question, the availability of a DRB (sometimes coupled with the DRB’s gentle prodding) may lead to a negotiated settlement between the parties without any DRB hearing. This sometimes occurs as a result of discussions at a periodic DRB meeting. The DRB often requests a list of pending issues between the parties and will ask the parties about the status of particular items. Sometimes the response is “we settled that yesterday.” Other times it may be “well, we’ve put that one to the side and haven’t discussed it for a long time.”

This is at least a reminder to the parties that there may be a dormant item on the issues list. More importantly, this gives the DRB an opportunity to ask the parties to report back on the status of resolution at the next DRB meeting. In the same discussion, the DRB may ask the parties for a two-minute summary of their respective positions, not for purposes of making any recommendation but just for general familiarization. On occasion this short dialog may result in one or both of the parties stating that they had not previously understood the issue. This in turn often leads to the DRB suggesting that the parties sit down to discuss the issue prior to the next DRB meeting. While there is no statistical data validating the value of this process, there are plenty of word-of-mouth reports that the dialogue has led to settlement, and therefore prevented a dispute from being referred to the DRB

Present

DRBs for underground construction are now in the mainstream and will continue to successfully be used in underground construction contracts. The DRB process has evolved to the point where practices and procedures have become more standardized. The Practices and Procedures Manual of the Dispute Resolution Board Foundation (http://www.drb.org) is being updated to incorporate current best practices as well as lessons learned, and is certainly a useful reference for anyone involved or about to be involved in an underground project.

Over time, several widely used standard form contracts included the DRB process as either an option or a requirement to be implemented when bilateral negotiations reach an impasse. The decision to include DRB provisions in contracts is made in a number of ways. For example, the Consensus Documents published by Associated General Contractors of America includes the Dispute Review Board as one of the ADR options in a dropdown menu for selection by contract drafters. Decisions to integrate the DRB process into a contract’s dispute resolution process are made at various levels – agency (such as a state department of transportation) or program (metropolitan transit agencies). The process is also specified on a contract-specific basis.

Looking Ahead

There is a challenge on the horizon that will need to be addressed by participants in the process. We are seeing more and more contracts awarded at well above $500 million and sometimes over $1 billion. For example, The “Tunnel Update” in the February 2017 issue of TBM: Tunnel Business Magazine states the contract values for 11 underground contracts. Excluding an outlier contract sum of $16 million, the average contract price is $712 million, and the range of contract sums is $101 million to $1.5 billion. Four of the 10 have award contract prices at or exceeding $1 billion.

As contract values have increased over time, so have the sums of claims for additional compensation. This points out a significant concern – are some disputes simply not suitable for the DRB process because the stakes are so high? For example, assume a $20 million claim for additional compensation is presented to a DRB by a contractor. Given this significant sum, it is likely that the DRB pre-hearing and hearing process will become more formalized and could look and feel more like an arbitration. This will result in increased transaction costs and a longer time to resolution. Next, say the DRB issues a non-binding recommendation for settlement at $15 million. What is the likelihood that a board of elected or appointed public officials will accept the recommendation to settle the matter? Will they consider the stakes to be so high that they are willing to pay the transaction costs of arbitration or litigation to give them “cover” from criticism? The question becomes whether there is a DRB recommendation for settlement sum at which the DRB recommendation may be disregarded and be perceived as an unnecessary step in the dispute resolution process.

There is no perfect or complete answer. However, if the major hurdle in a disputed claim relates to entitlement under the contract, bifurcation (first hearing and deciding merit only and then if there is a finding of merit, hearing and deciding quantum) could be considered. It is not unusual for the parties to make a good faith effort to negotiate quantum, (sometimes with guidelines from the DRB) after the responsibility of a party is established by a DRB recommendation.

Another possible means of addressing this concern is setting a jurisdictional limit (say $500,000) on claims that may be presented to a DRB, but this too is imperfect and can be subject to gaming. For example, claims could be submitted in increments seeking sums which do not exceed the jurisdictional limitation. Or, if a party sought to avoid the DRB in favor of the process specified for claims above the jurisdictional limit for DRBs, it could conceivably apply high, but at least plausible, values for markups and adders to the claimed direct costs to build a claim sum exceeding the threshold.

An open item requiring creative thinking by users and practitioners is the mother of multi-million dollar claims – at what sum does the DRB no longer “fit”?

Another matter of concern still arising from time to time is the timeline for selection of board members and organizing the DRB. A well-written DRB clause in the contract will set out the deadline for appointing a DRB, usually measured from either the date of Notice of Award or Notice to Proceed and usually a duration on the order of 30 to 60 months. It is not unusual for these dates to be exceeded. This is understandable, as contract performance is in the “honeymoon phase” and claims and disputes are not immediate concerns. The parties have significant tasks to get the job off on the right foot, such as mobilizing, developing the schedule, and establishing contract procedures. Delays of this sort seem to be even more prevalent on design-build contracts where significant work on the site may not take place for a year or more after Notice to Proceed. As understandable as all of this may be, there is ample anecdotal evidence and credible tales of the benefit of having the DRB join the project in the honeymoon phase to familiarize the parties with its role and functions.

An adjunct to the traditional “formal” DRB hearing has been used increasingly with considerable success – an informal hearing resulting in an advisory opinion (sometimes called “DRB lite”). This process is voluntary and is used only when both parties agree and is not a necessary prerequisite to using the regular DRB process. When the parties haven’t been able to resolve an issue after good faith efforts, and if that issue is relatively simple (such as a matter of conflicting language within the contract documents) it is a good candidate for the informal hearing/advisory opinion process.

Typically, the DRB asks each party to prepare a short statement (say no more than three pages) identifying the issue, explaining their view of the issue under the contract and perhaps attaching no more than a handful of key documents. Normally, these statements are submitted to the DRB and exchanged between the parties three to five days prior to a regular DRB meeting. The DRB will give each party an equal amount of time (this can be as short as 15 minutes or as long as several hours), to state their position followed by an opportunity to briefly rebut the other party’s position. At that point the DRB may ask questions and then conclude the informal hearing after which they will meet in private to formulate their advisory opinion, which will be given orally.

The advisory opinion is generally provided the same day as the DRB meeting, or perhaps the following morning. There is no prejudice to either party for using this process. All of the rights and responsibilities of the parties under the DRB specification remain in full force and effect. Sometimes the review of the opposing party’s brief position paper sufficiently enlightens or explains the issue to the other party such that they will come into the DRB meeting saying they have settled the issue. Other times the advisory opinion, which is the opinion of three experts, will result in breaking the impasse.

The DRB process is well-established as an effective dispute resolution method and is likely to enjoy widespread use in the future. Contracting parties should adhere to the “If it isn’t broke, don’t fix it” principle when preparing the contract documents setting out the process and procedures.

Bob Smith is a partner with the firm Akerman, based in Madison, Wisconsin. He has over 30 years of experience in the prevention and resolution of disputes in the construction industry, and he is a past president of the American College of Construction Lawyers.