REUTERS | Brendan Mc

Cranes on the horizon: construction arbitration abroad

This post is the latest in a series covering issues that frequently arise in international arbitration, each with a specific regional focus. It addresses issues in Brazil, where the use of dispute boards is common as part of a tiered dispute resolution mechanism.

Dispute boards in Brazil

It is common in many construction contracts for dispute boards to be used as part of a tiered dispute resolution mechanism. Dispute Adjudication Boards (DAB) are part of the dispute resolution mechanism in the FIDIC suite of contracts and have been used successfully across many large projects and megaprojects.

The use of dispute boards, while fairly recent, is on the rise in Latin America. To take Brazil as an example, following in the footsteps of the 2012 London Olympics, the Rio 2016 Olympic Games implemented dispute avoidance and resolution provisions in 35 of the key contracts as part of the Games. Consistent with a growth in this practice, in 2016, the Brazilian Federal Courts Council (Conselho da Justiça Federal) issued advice that recommended the use of dispute boards in construction and infrastructure contracts as an efficient means of avoiding and resolving disputes and recognised the provisionally binding nature of the dispute boards’ decisions.

São Paulo Dispute Board Act

The drive to increase the use of dispute boards in Brazil was advanced when, on 23 February 2018, the City of São Paulo enacted Municipal Law No. 16,873/2018, regulated by the Decree No. 60,067/2021 (the São Paulo Dispute Board Act, or SPDBA), which recognises and regulates the creation of dispute boards for the prevention and resolution of disputes in public works contracts entered into by the City of São Paulo.

The SPDBA applies to all public works contracts with a value ​​equal to or greater than BRL 200 million (about £29 million). Article 2 of the SPDBA provides that the parties have the freedom to choose among a Dispute Review Board (DRB), which has the ability to issue non-binding recommendations, a DAB, which has the ability to issue contractually binding decisions (subject to a possible final determination of the dispute by the court) or a combined Dispute Board, which can issue recommendations or decisions.

Whichever option the parties choose:

  • The Board shall be composed of three members, preferably two engineers and one lawyer (article 6, SPDBA).
  • All members of the Board shall be jointly appointed by the contracting parties (article 6, SPDBA).
  • Each member must be both impartial and independent and must sign a declaration to that effect and disclose in writing, to the parties and the other members, any facts and circumstances whose nature may lead to the questioning of their independence by the other party as well as any circumstances that may give rise to reasonable doubts as to their impartiality (article 7, SPDBA).

Finally, the SPDBA allows the parties to decide whether the Board’s proceedings shall be governed by the rules of specialised institutions, such as arbitral institutions that already have specific regulations for dispute board procedures, or be bespoke, as long as the chosen rules comply with the SPDBA  (article 3, SPDBA).

The SPDBA affords flexibility in the process. This appears to have driven the popularity and success of the initiative.

Interim binding nature of dispute boards

The interim binding nature of dispute boards has been tested in the courts. In July 2018, the São Paulo Court of Appeal overruled a trial court’s decision that stayed the effects of a decision rendered by a DAB in a dispute between Companhia do Metropolitano de São Paulo (Metrô) and Consórcio TC Linha 4 Amarela (Consórcio).

The dispute board had ordered Metrô to pay approximately BRL 10 million to Consórcio as compensation for the extra costs Consórcio incurred in removing dangerous waste from one of the construction sites of Line 4 of the São Paulo Metro. Metrô had disputed this and tried to prevent the payment by claiming interim relief. The São Paulo Court of Appeal held that the dispute board’s decision was well grounded and that the legal requirements for granting interim relief in this case were not met. Moreover, the São Paulo Court of Appeal reaffirmed the court’s longstanding protection of alternative dispute resolution mechanisms, recognising that state courts can only interfere in dispute board decisions in very limited circumstances.

This was a landmark decision because it was the first time that the São Paulo Court of Appeal dealt with a dispute board’s decision in a dispute involving the state. In doing so, the São Paulo Court of Appeal also reinforced the principle that the government can rely on alternative dispute resolution mechanisms to settle their disputes with private entities.

Dispute boards can enhance public confidence in both the probity and competence of the execution of public projects. The recommendations or decisions of a dispute board can alleviate concerns about corruption in the construction industry, maintain essential cash flow to the supply chain and help break deadlock so as to keep projects on track.

Brazilian New Public Procurement Act

These developments, while limited to the Olympics and to the city of São Paulo respectively, signal a trend in Brazil. São Paulo is the most populous city in Brazil as well as its financial centre, with constant investment in public works. How it chooses to deal with construction projects and disputes will doubtless have an impact on the entire country.

In fact, this has already started. The Brazilian New Public Procurement Act (Law No. 14,133/21), which was published on 1 April 2021, introduces a new regime for private parties to bid and enter into contracts with state entities. It implements an important simplification and rationalisation of public procurement legislation by consolidating provisions previously outlined in Law No. 8,666/93 and other disparate laws such as the Law of the Differentiated Contracting Regime and the Auction Law.

The types of transactions covered by the new law include:

  • Sales and concession of rights to use assets, purchase, lease, concession and permission to use public goods.
  • Provision of services, including specialised technician and professional services.
  • Architectural and engineering works and services.
  • Hiring of information and communication technology.

A remarkable novelty within the Act is a chapter exclusively dedicated to dispute resolution (sections 151 to 154), which includes, for the very first time in a federal statute, dispute boards as a suggested alternative dispute resolution method.

In addition, there are currently two bills dealing with dispute boards being discussed in the Brazilian Federal Congress:

  • Bill No. 9,883/18, proposed by the House of Representatives, which provides for the use of dispute boards in administrative contracts at national level.
  • Bill No. 206/18, proposed by the Senate, which regulates the adoption of dispute boards in ongoing administrative contracts entered into by the federal government.

The use of dispute boards is gaining traction in São Paulo and Brazil more generally and may herald a regional trend across other Latin American states.

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