Dispute boards in Canada: Scalable and available!

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Canadian dispute boards work, and they work well. They have evolved over 50 years from technical decision-making bodies on tunnelling contracts to high-functioning engagement in dispute avoidance and dispute management

Duncan W. Glaholt provides experienced independent services as arbitrator, mediator, dispute board chair, and referee to the domestic and international construction industries. Glaholt ADR Inc. has experience in resolving disputes by mediation and arbitration in transportation, energy, industrial, mining, and other similar sectors of the construction industry, and under both institutional and ad hoc rules. Mr. Glaholt chairs a number of dispute boards and often acts as a referee and court-appointed claims monitor. Glaholt ADR has developed strategies for mid-project resets and the completion of troubled projects.

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The board’s work is confidential. Confidentiality is a part of a board’s contract with the parties. Board members are not compellable as witnesses. Their files do not become the property of the parties. This level of confidentiality ensures a free and uninhibited exchange of ideas as the project proceeds. Board members are granted access to relevant portions of the project database. They are expected (and contractually obliged) to stay current and up to date on all project documentation and developments. As the parties exchange claims/dispute-related correspondence, the dispute is usually copied. Board members meet regularly, usually virtually and monthly, to discuss recent correspondence and project reporting and to prepare agendas for discussion with the parties at in-person quarterly meetings. These meetings typically occur on site, either preceded or followed by a site tour in the company of representatives of both parties. If a dispute arises that cannot be settled by the parties or otherwise managed out of existence by the board, the contractual dispute resolution mechanism will usually require the board to conduct a summary hearing, followed by a reasoned recommendation or determination as a pre-condition to litigation or arbitration. For many boards, hearings are seen as a last resort. Modern boards are focused more on dispute avoidance than dispute adjudication.

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Published May 13, 2024

Who uses dispute boards? Currently, standing dispute boards are used on many infrastructure projects in Canada. One wonders why they are not used on all industrial construction projects of scale. Perhaps it is because of the cost of maintaining a standing board, or perhaps it is simply down to unfamiliarity with the evolved role of modern dispute boards and the role they play in successful project delivery. The cost of maintaining a standing dispute board over the life of a project is usually a small fraction of the cost of defection to positional bargaining and massive end-of-project arbitration or litigation. The cost and benefit of dispute boards can be readily scaled to suit virtually all major infrastructure and industrial projects, public and private. What do dispute boards cost? In terms of file maintenance, a basic rule of thumb would budget for each board member to spend approximately 20 hours a month staying current with the project, at whatever hourly rates are agreed. Dispute board access to the project database is usually insignificant. The recurrent cost of board maintenance is often built into the financial model from the outset. If a hearing is required, the board’s time is usually billed to the parties at agreed hourly rates. What do dispute boards do? The powers of a dispute board are limited to those granted in the agreement between the board members and the parties. Some parties can be reluctant to grant their board broad powers. They do not want a dispute board that is argumentative, or overly inquisitive or burdensome, or one that finds problems where there are none, or one that makes mountains out of molehills just to appear relevant and busy. Sophisticated participants in the infrastructure industry are more confident in their boards, granting wide-ranging powers including the ability to provide informal advice, mediate any issue or dispute at any time, or design and implement a dispute system to “fit the forum to the fuss,” as Frank Sanders used to say.

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“We are continuing to see significant interest and volume in going-private transactions, in particular from US and international private equity sponsors”

David Massé, Stikeman Elliott LLP

“We’re still in a period of uncertainty and unwelcome volatility. You do think differently in a market like this in terms of what might be viable or prudent”

Ramandeep Grewal, Stikeman Elliott LLP

If the future is important, co-operate

Canadian dispute boards at a glance

Source: xxxxx

Costs of dispute boards

CANADIAN DISPUTE boards have evolved alongside the construction industry they serve. While most readers will be familiar with construction dispute boards as they once were – lawyer-free sources of sage technical advice – not all readers will be familiar with modern dispute boards. Modern dispute boards are no longer necessarily lawyer-free, just lawyer-light. They are no longer purely technical; they now can assist in a broad range of pre-dispute commercial and technical situations. Modern dispute boards are as much about dispute avoidance and management as they are about dispute resolution. They focus on the causes of disputes to keep dysfunctional commercial behaviours from becoming normalized. Dispute boards fulfill a vital role in an infrastructure industry with a diverse range of interests involving newly formed joint ventures, members of which may come from different legal cultures. For some, a contract marks the beginning of a negotiation process. For others, it signals the end of negotiation. The complexity and duration of many infrastructure projects confront all participants with commercial, social, legal, regulatory, and physical challenges that even the most able contract drafters could not anticipate. When these challenges materialize, dispute boards are ideally placed to help the parties prevent (or mitigate) defection to positional bargaining. In practice, as dispute boards are creatures of contract, they come in many forms. Most are standing boards (created at the commencement of a project and kept in place until the end). Modern norms in the infrastructure industry seem to favour standing boards comprised of two party-appointed technical experts in the dominant technical nature of the project (geotechnical, structural, operation and maintenance, or process engineering, for example) and chaired by a legally trained board member (not necessarily, but usually, a lawyer). Once constituted, a standing board stays empanelled for the duration of the project, through commissioning and turnover, and often well into or through warranty performance. This continuity and consistency is particularly important on long projects, as key personnel come and go over the life cycle of many major projects.

Effectiveness of dispute boards

What are the risks of working with dispute boards? In short: none. Dispute boards are confidential. The files of dispute board members are not compellable in evidence. Current norms discourage even the minuting of regular board meetings to keep meetings informal and unselfconscious. Often the only written output from a dispute board throughout a project will be thoughtful agendas, to encourage repeat, high-value interaction, and any necessary reasoned recommendations or determinations. If a board becomes dysfunctional or a board member withdraws, the parties’ agreement with the board will usually provide a mechanism for replacement. Who needs a board – why can’t parties do this for themselves? There are several answers to this question. First, the parties are too self-involved and too immersed in their perspective on project delivery to even begin to do this for themselves. Second, by the time otherwise fully occupied project principals get around to dealing with an emergent dispute, it is often too far along to mitigate. Dysfunctional behaviours will have become normalized. Dispute avoidance and dispute mitigation must be made someone’s full-time job, and that full-time job is best handled by an independent board. Dispute boards are independent and impartial, comprised of people chosen by the parties for their expertise. Just the very creation and empowerment of a dispute board is a strong collaborative act. The parties are required to provide regular responses to the board’s agenda items and articulate positions to a board that is intimately familiar with the project agreement and all aspects of performance of that agreement. Board familiarity with both the contract and its performance gives the board a head start and prompts the parties to clarify, simplify, and focus their submissions in ways that would be impossible without the board’s involvement.

There is strong support in social research for the argument that boards succeed by creating and implementing a series of repeat, high-value interactions between the parties throughout a project. Research has shown that when two parties are blind to the other’s choices and engage in repeat, high-value interactions, they quickly learn that “tit-for-tat commencing with co-operation” is their most successful strategy (Robert Axelrod,“The Evolution of Cooperation,” New York: Basic Books, 1984; Robert Axelrod, Michael D. Cohen, Harnessing Complexity: Organizational Implications of a Scientific Frontier, New York: Basic Books, 2000). This insight is particularly important in the world of infrastructure development where complexity makes predictability difficult and the forces shaping the future of any given project do not add up in a simple, systemwide manner. Nonlinear interactions among the components in such a complex system mean that even a few small events can produce a big negative effect as impacts multiply rather than add. Dispute boards change all that. Dispute boards catalyze success. In the world of infrastructure projects, “success” means projects that are more likely to be on time, on budget, and profitable.

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19%

31%

42%

Preliminary results on April 15, 2023

Other

1 DB member

No information

3 DB members

Between 0% and 10% of the time

Between 11% and 20% of the time

Between 91% and 100% of the time

Between 81% and 90% of the time

Between 71% and 80% of the time

Between 61% and 70% of the time

Between 51% and 60% of the time

Between 41% and 50% of the time

Between 31% and 40% of the time

Between 21% and 30% of the time

51%

Source: King’s College London’s Centre of Construction Law & Dispute Resolution’s 2024 Dispute Board International Survey (preliminary results)

Costs of dispute boards

Between 0% and 0.5%

Between 0.5% and 1%

Between 1.5% and 2%

Between 2.0% and 2.5%

Between 2.5% and 3%

Between 3% and 3.5%

Between 3.5% and 4%

Between 4% and 4.5%

Between 4.5% and 5%

More than 5%

40%

35%

30%

25%

20%

15%

10%

Typical % that the total costs of the DB represented in respect to the total value of the project

*only individuals and entities considered

Source: King’s College London’s Centre of Construction Law & Dispute Resolution’s 2024 Dispute Board International Survey (preliminary results)

*only individuals and entities considered

How often was the DB’s decision referred to subsequent litigation or arbitration?

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If the future is important, co-operate

Canadian dispute boards at a glance

Published May 13, 2024

Effectiveness of dispute boards

Stikeman Elliott is a premier force in the space, drawing on the significant expertise of its specialist areas, including tax, competition, and foreign investment review in acting for strategic buyers, private equity sponsors, and targets in several of the most significant going-private transactions in Canada – in both friendly and hostile/unsolicited situations. In particular, the firm has the most active practice in Canada acting for private equity (PE) firms acquiring Canadian-listed entities. While targets tend to be focused on control over their value-maximization process, risk of leaks, impact on employees and other stakeholders, and deal certainty once the right partner is identified, major considerations for buyers in going-private transactions range from achieving success in auction processes while maintaining valuation discipline and allocation of regulatory and other transaction risks, through to covenants and termination fees and treatment of human capital. For example, there may be a management rollover that could add complexities and additional steps given Canadian rules regarding related-party transactions.

Given persisting economic instability, Massé agrees that the market for going-private transactions should continue to be strong for most of 2024. Specifically, Massé points again to the technology and mining sectors as areas ripe for this trend, “due to perceived undervaluation, the relative strength of the US dollar to the Canadian dollar, pressure for value catalysts from shareholder activists, and other drivers of consolidation specific to each sector. “As the central banks continue to evaluate the timing for a decrease in their benchmark lending

Source: Statistics Canada Canadian Survey on Business Conditions, first quarter 2024

of businesses expect rising interest rates and debt costs to be an issue

41%

of businesses expect cost-related obstacles over the next three months

73.6%

of businesses anticipate rising inflation as an obstacle

55.4%

Predicted growth beats 1% consensus estimate in Bloomberg survey and Bank of Canada’s forecast of 0.5%

This follows 1% growth between October and December

Industry-based numbers tracking a GDP increase of 3.5% annualized