Ex tempore contracting.

Author:Verstein, Andrew
Position:II. Locating Ex Tempore Contracting A. Construction 2. Ex Tempore & Dispute Boards through Conclusion, with footnotes and tables, p. 1896-1932
  1. Ex Tempore & Dispute Boards

The construction industry had long accepted substantial back-end costs by way of the logic of the ex ante / ex post dichotomy. Yet remarkable strides have been made through the use of a new contracting technology: neutral expert panels called dispute boards. (131) These boards promise a third way of addressing contractual specification, through ex tempore contracting.

Dispute boards are panels of neutral experts, typically three, chosen by the parties and convened at the start of a construction project. (132) Thereafter, the board visits frequently during the life of the construction project, often at least three times per year. (133) During their visits they ferret out potential conflicts and budding disputes even when projects are going well. They write opinions concerning quality, responsibility, and remedy. These opinions are contractually binding on the parties, though either party may reject the board's decision upon proper notice. (134) Board decisions are not adjudicatory judgments, subject to execution. (135) Rather, the parties have agreed that an unchallenged opinion board decision becomes a part of the contract, binding and available in any subsequent adjudication. (136)

Formal recommendations are timely, available within a few weeks of the board's meeting with the parties, which itself promises to be at most a few months after conflict arises. (137) Boards can make informal recommendations even faster, perhaps contemporaneously with their visit to the site. (138)

Dispute boards exemplify ex tempore contracting because of their distinctive function in determining contractual responsibilities on an ongoing basis. Dispute boards allow parties to draft an apparently incomplete contract without suffering for long the ills of incompleteness. Yet they need not pay for this obligational clarity in advance of it being necessary, say, by specifying how precisely a golden eagle discovery will change the plan. If an eagle is found, the parties do not have to pause the construction project for protracted litigation, nor reluctantly continue the project with judicial intervention pending. They need not wait until costly adjudication, nor perform in the shadow of obligational uncertainty, nor draft complete contracts ex ante. They can have a dispute board determination right away. These determinations may be informed by hindsight, in that they may impose more efficient or desirable allocations than the parties might have written had they set their minds to it at contract formation.

The dispute board clause converts seemingly vague terms, such as "equitable," "reasonably anticipated," or "workmanlike quality," into interim terms, which have no fixed meaning at drafting but have a determined meaning around performance, prior to adjudication. They answer questions like whether an owner has a duty to mitigate damages, and whether its actions satisfy that duty. (139) They specify duties, as might the parties or a court. (140)

The parties can provide that the project deadline may be extended due to unforeseeable delays, but not due to those that are reasonably foreseeable. (141) They can adopt this drafting strategy, rather than an ex ante schedule of results for each conceivable cause for delay and rather than costly ambiguity and litigation, because a dispute board is available to immediately give content to the apparently vague clause. (142) The contract can excuse delayed construction when there is an "area-wide shortage" of materials, leaving the board to specify the geographic and conceptual size of the "area." (143) The parties need not specify the contractual implications of an unanticipated conflict between the proposed location of a project and an existing electrical power line because they can trust that either they or a neutral third party will update the plan in a timely fashion. (144)

Dispute resolution boards can address countless other contingencies, without anticipating them at contract formation. The parties can learn whether unexpected changes in port security policies excuse a contractor from late delivery. (145) The parties need not specify which emergency repairs will entitle the contractor to additional compensation, (146) nor how the contract will apportion the cost of damage by third parties, (147) leaving it to the dispute board to rapidly evaluate the repairs presented.

The parties can give the owner the right to modify the project as its needs change, so long as the contractor is reasonably compensated for any additional work or expenses. (148) They can do this without extensive ex ante description of what changes will result in what fees for the contractor, and they can still avoid inefficient litigation and holdups. (149) Likewise, the contract can give the contractor some ability to initiate changes, like substituting an alternative infrastructure system for the propriety system mentioned in the contract. (150) These allowances give long-term contracts the flexibility they need to remain rational as the world changes.

Unlike with a court, the parties choose the composition of the dispute board (151) and can use that as an opportunity to select its interpretative methodology from among the many options. Some boards exhibit formalist preferences, with the agency attempting to divine the appropriate determination on the basis of the written contract. (152) Other agents are inclined to evaluate extensive implied duties. Chern describes one construction contract that required the use of local labor whenever possible. The contractor alleged an implied right to have the owner help find local labor and forgive the obligation to whatever degree the owner was competing with the contractor by hiring from the same labor pool for other matters. (153) There was no textual basis for this claim, but the dispute board found the question to be a reasonable one. (154)

In contracts in which relationships matter and formal proceedings risk crowding out relational cooperation, parties may select a dispute board that is inclined to help the contractual relationship. In one dispute, a board determined that the contractor was not entitled to avoid penalties for its late completion, but the board also suggested that the department consider allowing thirty to thirty-two days of additional credit to the contractor. (155) Why? "To partner normally suggest [sic] both parties conceding to somewhere around mid-point." (156) So the entitlement goes to the owner, but a suggestion to split the baby also goes in the record.

Other parties wish for boards to err in favor of the contractor, so as to encourage other contractors to make quick, low bids. One Canadian court expressed a government policy to ratify board-determined awards even when fresh litigation would surely yield a lower award to the contractor. The court justified the bias by asserting that it encourages contractors to feel safe in offering quick, low bids. (157) The benefit of so many methodologies is that the parties have great freedom to select whatever they like, but there is a risk that one or both parties will fail to appreciate the consequences of selecting a particular board. (158)

Dispute boards' effectiveness no doubt comes from many causes in addition to their role in ex tempore contracting. They may help parties to mediate emotional disputes. (159) Their opinion can serve to preserve contemporaneous evidence for later judicial verification. (160) Periodic board reports help the parties gauge one another's commitment to the project. (161) But boards are not just mediators or expert witnesses, though by wearing these hats they may serve an ex tempore contracting function. The board's frequent site visits allow the board to hear updates and complaints from the parties involved in day-to-day operations. Industry expertise allows the board to credibly respond to queries without the delay necessary to obtain technical advice.

Boards frequently decline to use their expert industry knowledge to resolve matters when independent legal grounds exist for a decision, (162) even going so far as to cite judicial authority for their views. (163) Parties frequently concede the more technically complicated factual questions, such as whether a project has all of its ADA tiles or traffic signals have achieved "full actuation," (164) leaving the board to situate those factual questions into the context of the contract. (165) When boards make technical evaluations, (166) they often do so to reach legal or contractual matters. (167)

The dispute board's predilection for determining contract duties, rather than simply making technical assessments, is consistent with what other scholars have noted about construction disputes: they are overwhelmingly contractual in nature. (168) One study of government construction contracts found that nearly one-third of all disputes between 1980 and 2004 concerned either contract interpretation or modification of the contract to accommodate unexpected problems and additional work. (169) Relatively few turn on factual disputes on highly technical matters, such as a claim that the owner furnished problematic equipment or that the finished project was of unacceptable quality. (170)

This procedure can have dramatic results. Dispute boards are lauded as remarkably effective in swiftly preventing, reducing, or eliminating conflict. (171) One paper noting a marked decline in disputes and litigation from 1980 to 2004 among U.S. government-sponsored projects, particularly contract disputes, attributes the decline in part to increasing use of dispute board-type procedures. (172) Dispute boards are able to resolve 98 percent of potential disputes without subsequent mediation, arbitration, or litigation. (173)

Dispute resolution costs are widely believed to be far lower with a dispute board in place. (174) One study of the Big Dig (175) found that the cost of dispute board procedures averaged about...

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