By: Emanuel Cárdenas

Dispute boards (DB) have proven themselves to be an efficient dispute resolution method in construction contracts. Because such boards deal with disputes when they first arise, and are composed of experts who are conversant with the project, they allow controversies to be resolved swiftly and effectively.  They can be particularly effective in resolving disputes that arise in public construction projects.

As the Dispute Resolution Board Foundation defines it, the DB process is included in construction contracts to assist project participants in avoiding and resolving disputes. A DB is typically composed of a panel of three respected and impartial professionals who are experienced in the specific type of construction proposed and who assist in avoiding and resolving disputes.

In most cases, the requirement to use a DB to address disputes is incorporated in the bidding documents or in a contractual provision.  In the case of public construction contracts in Peru, regulation of DBs falls under two different types of regulation: one in Law N° 30225, the Public Procurement Law (PPL) and the other in Legislative Decree N° 1362, which regulates the promotion of private investment through public private partnerships and projects in assets (the PPP Law). While both laws regulate construction contracts (of different kinds), when it comes to DBs, each law sets out  different procedures and effects for a DB. In this article.], we aim to clarify these differences.

  1. DBs in construction contracts under the PPL

Law N° 30225 establishes that in cases where the DB is applicable,  all controversies that arise during the execution of the works may be submitted to the DB until the  employer’s takeover.

The regulations of the PPL, set out in article 243.1 of Supreme Decree N° 344-2018-EF, define the DB’s power in this way:

“The Dispute Board allows the parties to prevent and/or resolve efficiently controversies that arise from the commencement date until the issue of the Taking-Over Certificate of the Works.”

1.1 The competence of the DB

Under the PPL, the DB is competent to know and decide all controversies that arise during the execution of the works − even regarding the contract itself; if the contract is terminated, then the DB has oversight until the employer takes over.

The only limit established in the PPL regarding the competence of the DB is contained in  article 243.3, which states that it cannot be submitted to the DB any matters of compensatory damages that are not contained in the public procurement normative.

1.2 Optional and mandatory DB

The DB is optional in contracts that have not established this as a resolution dispute method and that are valued at an amount equal or greater than PEN5 million (at this writing, about US$1.48 million).

Meanwhile, a DB is mandatory for contracts valued at an amount greater than PEN20 million.

1.3 DB members

1.3.1 Number of members

The number of members of a dispute board may be either one or three, and is determined by agreement among the parties.  In case there is a lack of agreement, the DB will be composed of a sole member in contracts with an amount equal to or greater than PEN5 million but less than PEN40 million.

On the other hand, in contracts valued at PEN40 million or more, the DB will be composed of three members.

1.3.2 Administration of DBs

Article 244 establishes that all the DBs that exercises functions that fall under the scope of the PPL and its regulations should be administrated by a center that provides organizational and administrative services. The requirements that these centers have to meet are established in Directive N° 087-2016-OSCE/PRE.

Among the functions of such centers are the following: i) maintain a member register; ii) appoint the DB members in when parties are unable reach agreement; iii) resolve the recusal of the DB members; iv) supervise the DB members’ fulfillment of the principal ethics; v) inform OSCE (the entity that supervises the Public Procurement Law) about any ethics sanctions that are imposed on DB members; and vi) provide logistic support to the parties and the DB.

1.3.3 Appointment of DB members

If the DB is composed of a sole member, then this member must be an engineer or an architect with knowledge of the public procurement regulations and laws applicable to the contract. In case the DB is composed of three members, then the president of the DB has to meet the same requirements as a sole DB member; the other two members must be experts in construction disputes.

1.4 DB activities

The DB members have the following functions:

  1. Issue binding decisions
  2. Answer any queries by the parties regarding some contractual and/or technical aspect, which must have already been presented to the supervisor and project designer of the works
  3. Periodically visit the work site (the PPL does not set an amount of days between visits)
  4. Fulfill other duties which are established in the contract.

1.5 DB payment

The parties will pay in equal parts all the fees and expenses of the DB members according to the costs of the centers.

1.6 DB decisions

Decisions set forth by the DB are binding upon the parties immediately, and compliance with these decision is mandatory upon notification of the decision.

Article 250.2 states that no administrative, arbitral or judicial authority can block the requirement to comply with the DB’s decisions.

The parties are obliged to comply with the decision without delay, even if any of them has expressed disagreement with the decision or willingness to submit the controversy to arbitration.

Failure to comply with the DB decision gives the other party the right to terminate the contract.

Any of the parties that either partially or totally disagrees with the DB’s decision must notify the other party and the DB in a written communication with a Notice of Dissatisfaction (NOD) manifesting the reasons for the disagreement and the intent to submit the controversy to arbitration. If neither party exercises this right in the time established, then the decision becomes binding and the parties cannot object to it.

1.7 Arbitration and DBs

When the DB is established as a dispute resolution method in the contract, then submitting any controversy to the DB becomes a prerequisite to arbitration.

When the DB’s decision has been submitted to arbitration, the DB will not play a part in the arbitral process.

The party that does not agree with the DB’s decision must submit it to arbitration within 30 days of the date of issue of the DB’s decision.

In the cases where there is failure to constitute the DB, then the time to submit the controversy to arbitration starts when the center notifies the parties of the event.

  1. DB in construction contracts under the PPP Law

The PPP Law, unlike the PPL, does not establish that use of a DB is mandatory for some cases; it is regarded as an optional dispute resolution method in all cases, nor does the PPP Law limit the parties’ ability to submit a dispute to arbitration.

In PPP contracts, a DB will start either at the commencement date, when it already has been established in the contract as a dispute resolution method, or in the amicable settlement of a controversy, in which, by request of any of the parties, the dispute can be submitted to a DB. In both cases, the DB’s decision is binding and enforceable.

2.1 The competence of the DB

The DB under the PPP Law is competent to know and decide all the controversies in PPP contracts except those considered as international investment controversies; these are defined in Law N° 28933.

2.2 Optional DB

In PPP contracts with a CTI (total investment cost)[1] greater than 80,000 tax units[2] (UIT),  it can be stated that the controversies will be submitted to a DB.

Controversies can also be referred to a DB by request of any party in the amicable settlement stage of the dispute.

2.3 DB members

The DB can be composed of a sole member or by three experts who are appointed by the parties directly or by delegation to a center that administers alternative dispute resolution mechanisms.

The members of a DB have to exercise their activities impartially and independently, and they can be of different nationalities than those of the parties.

2.4 DB activities

The DB can be constituted on the commencement date, allowing it to answer queries from the parties and issue recommendations regarding subjects and/or matters requested by the parties.

2.5 DB decisions

The DB’s decision is binding on the parties immediately, and compliance by the parties is mandatory once they are notified of the decision.

2.6 Arbitration and DBs

The PP Law establishes that the DB’s decision will be considered as background, but it does not gives more details regarding the degree -if any- of importance of the DB’s decision in arbitration.

  1. Conclusions

DB historically has proven to have a significant impact on cost saving in disputes, by either preventing them or resolving them. The Peruvian legislative framework  – the PPL and the PPP Law – still lacks some procedural precision. Nevertheless,  the ability to include enforceable DBs in public construction contracts is a significant step towards dispute resolution efficiency in Peru.

[1] The PPP Law defines a CTI as the present value of the estimated investment flows in the identification of the project or in the last pre-investment study including the VAT. CTI does not include operation and maintenance costs. The discount rate to be used for the calculation of present value is the one defined by the Private Investment Promotion Agency,calculated according to the risk of the project.

[2] Amount equal to PEN336 million.