Construction Law International - June 2021 - DAAB Update: The World Bank expands the role of the Dispute Avoidance/Adjudication Board

Geoffrey SmithFriday 25 June 2021

Geoffrey Smith

PS Consulting, Paris

This article sets out the background to the mechanism, describes the obligations borne by the contractor and explains the role of the DAAB and the steps following a DAAB finding of non-compliance by the contractor.

Background to the SEA/SH mechanism

Construction companies, employers and the engineers under FIDIC contracts tend to focus their attention on the design and construction of the works from the point of view of time, quality and price. The Multilateral Development Banks (MDB) (the ‘Framework’), which often finance the design and construction of infrastructure executed under FIDIC contracts, take a much wider view. For the MDB, the design, execution and completion of the infrastructure jointly represent only one element in a larger project, aimed at the development and wellbeing of the local, regional or even larger community. It is therefore understandable that the MDB attaches great importance to the environmental and social aspects of the overall development project and the works contracts that are intended to facilitate the development. The MDB seek to avoid or minimise the potentially negative impact of construction on the local community which the infrastructure is intended to serve.

The concerns of the MDB with respect to social issues are immediately evident to anyone who compares the Conditions of Contract for Construction for Building and Engineering Works designed by the Employer, Multilateral Development Bank Harmonised Edition, June 2010 (the Pink Book) with its parent, the FIDIC Red Book 1999.² While the Red Book 1999 contains 11 sub-clauses which address social aspects, the Pink Book contains 24 sub-clauses. The additional clauses cover matters such as forced labour, child labour, workers’ organisation, non-discrimination and equal opportunity but not SEA/SH. However, it is unusual for either of these, or the social aspects covered by the Red Book 1999, to be raised as issues in front of the DAAB.³

Unfortunately, incidents of SEA/SH have been encountered on projects financed by the World Bank, one of which led to the Bank cancelling a large road project at the end of 2015.⁴ This led to the appointment of an independent Global Gender-Based Violence Task Force⁵ to advise the Bank with respect to the prevention, mitigation and management of SEA/SH risks. In October 2017, the Standard Procurement Documents (SPD) published by the World Bank were initially modified to include provisions on sexual exploitation and abuse and gender-based violence.

In parallel, the World Bank had been developing an Environmental and Social Framework (the ‘Framework’), which came into effect on 1 October 2018.⁶ Under the Framework, borrowers are required to commit⁷ to achieving ten Environmental and Social Standards through the identification of environmental and social risks and the establishment of Environmental and Social Management Plans to manage and mitigate the impact of such risks.

Annex 3 of the Framework addresses the management of contractors and states:

‘The borrower will require that all contractors engaged on the project operate in a manner consistent with the requirements of the Environmental and Social Standards, including the specific requirements set out in the Environmental and Social Commitment Plan. The borrower will manage all contractors in an effective manner, including:

(a) Assessing the environmental and social risks and impacts associated with such contracts;

(b) Ascertaining that contractors engaged in connection with the project are legitimate and reliable enterprises, and have knowledge and skills to perform their project tasks in accordance with their contractual commitments;

(c) Incorporating all relevant aspects of the Environmental and Social Commitment Plan into tender documents;

(d) Contractually requiring contractors to apply the relevant aspects of the Environmental and Social Commitment Plan and the relevant management tools, and including appropriate and effective non-compliance remedies;

(e) Monitoring contractor compliance with their contractual commitments; and

(f) In the case of subcontracting, requiring contractors to have equivalent arrangements with their subcontractors.’”

(Emphasis added)

Soon after the Framework came into effect, the World Bank signed a licence agreement with FIDIC to replace the Pink Book with the FIDIC 2017 suite of contracts. With effect from July 2019, the use of the Pink Book was disbanded, and revised SPD were issued for use with the Red Book 2017.^,89 These SPD incorporated the Framework, as well as providing enhanced support for the use of the DAAB.¹⁰

The Particular Conditions imposed by the revised SPD include extensive obligations on the contractor with respect to environmental and social matters, such as requirements for an Environmental and Social Performance Security, for Management Strategies and Implementation Plans, a code of conduct to be signed by all workers and provision of worker training on SEA/SH prevention. However, the SPD issued in July 2019 did not impose a mechanism addressing non-compliance, the need for which had been identified under item (d) of Annex 3 of the Framework.

After extensive discussions with borrowers, contractors’ organisations, FIDIC and DAAB practitioners, the World Bank has now developed such a mechanism for use on projects for which the risk of SEA/SH is assessed by the Bank to be high. For such projects, the contract will impose obligations on the employer and the contractor to prevent, monitor and handle incidents of SEA/SH. In the event of a suspected non-compliance or an allegation, the employer must refer the matter to the DAAB for a decision on whether the contractor had failed to comply with any of its obligations. If the DAAB finds such a failure, the World Bank may disqualify the contractor and any defaulting subcontractor, from bidding for further World Bank-financed projects for a two-year period. The contract might also be terminated.

The new scheme came into effect on 1 January 2021 and a specific set of SPD has been published for use in relation to projects identified as being at high risk of SEA/SH.

The World Bank is currently in the process of identifying and selecting DAAB practitioners for borrowers and bidders to consider for such projects. Those selected will be provided with training by the Bank before taking up their roles.

The contractor’s SEA/SH obligations

The Special Provisions, which form Part B of the Particular Conditions, impose a series of obligations on the contractor (SEA/SH Prevention and Response Obligations) which were designed to reduce the risk of SEA/SH and improve the handling of any alleged incidents. However, several of the obligations relate to documents submitted by the successful bidder during the bid phase.

The relevant documents that the bidder must submit include the following:

Code of conduct for contractor’s personnel

The bidder is required to submit its code of conduct that will apply to contractor’s personnel (subcontractors as well as directly employed workers and supervisors). For this purpose, the bidding documents provide the base code of conduct, to which bidders may introduce additional requirements. Once finalised, the code of conduct becomes one of the documents forming part of the contract.

Management Strategies and Implementation Plans

The bidder must submit Management Strategies and Implementation Plans to show how it intends to manage the key environmental and social risks, including SEA/SH. These strategies and plans must detail the actions, materials, equipment, management processes and so on, that will be implemented by the contractor and its subcontractors. The Management Strategies and Implementation Plans will serve as the basis for further strategies and plans to be developed by the contractor (C-ESMP) during the execution of the works.

Construction schedule (Outline Works Programme)

The outline programme to be submitted with the bid, as part of the bidder’s technical proposal, must include the following key milestones prior to mobilisation:

• engineer’s non-objection to the contractor’s Management Strategies and Implementation Plans;
• constitution of the DAAB; and
• the holding of a so-called ‘SEA/SH conference’.

Key personnel schedule

The bidder’s schedule of key personnel must include an expert with relevant experience in addressing SEA/SH cases. After contract award, the contractor will be bound by this schedule.

SEA/SH declaration

Bidders are required to submit a declaration (using the form included in the bidding documents) accepting that, if awarded the contract, the World Bank may disqualify them (including any non-complaint subcontractor) from being awarded a World Bank-financed contract for a period of two years, following a DAAB decision confirming non-compliance with the SEA/SH Prevention and Response Obligations.

The SEA/SH Prevention and Response Obligations to be applied after award of the contract, are set out under the following sub-clauses of the Special Provisions:

2.7         SEA/SH Conference

4.1         Contractor’s general obligations

4.2         Environmental and social performance security

4.20       Progress reports

4.25       Code of conduct

5.1         Subcontractors

6.9         Contractor’s personnel

6.12       Key personnel

6.27       Contractor’s SEA/SH response mechanism; receipt of SEA/SH allegations; and contractor’s non-compliance

6.28       Training of contractor’s personnel           

SC 2.7 – SEA/SH conference

The contractor is required to participate in a ‘SEA/SH conference’ to be organised by the employer as soon as possible after the constitution of the DAAB and before mobilisation. The DAAB is to be constituted within 35 days of receipt of the employer’s Letter of Acceptance by drawing from a list of six candidates named in the contract. The list is composed of three candidates proposed by the employer in the bidding documents and three candidates proposed by the contractor in its bid. The list will be reviewed by World Bank before contract award.

The SEA/SH conference is to be attended by the employer, the engineer, the contractor and its subcontractors, the DAAB and other relevant persons. The purpose of the SEA/SH conference is to ensure that the SEA/SH obligations and remedies are fully understood.

SC 4.1 – Contractor’s general obligations

Appointment of the DAAB is one of the ‘conditions precedent’ to be satisfied before the commencement date can be fixed by the engineer. Once the commencement date is fixed, the time for completion begins to run but the contractor is not permitted to mobilise before obtaining a Notice of No-Objection from the engineer with respect to the measures that the contractor proposes for the management of the environmental and social risks, based, as a minimum, on the Management Strategies and Implementation Plans and code of conduct submitted with the bid and forming part of the contract. The Management Strategies and Implementation Plans must include processes to verify compliance of the contractor’s (and subcontractor’s) obligations with respect to the code of conduct under Sub-Clause 4.25. The contractor must also put in place its ‘SEA/SH response mechanism’ required by Sub-Clause 6.27.1 (see below) so that any allegations of SEA/SH can be properly recorded and promptly addressed.

When appropriate, the contractor is to submit for review by the engineer any additional Management Strategies and Implementation Plans that become necessary to manage the environmental and social risks associated with major activities and elements of the works. The contractor’s Environmental and Social Implementation Plan (C-ESMP), of which the Management Strategies and Implementation Plans are part, are to be updated not less than every six months and submitted to the engineer for review in accordance with the usual procedure for review of contractor’s documents.

SC 4.2 – ES performance security

The contractor is to provide an environmental and social performance security along with the usual performance security, within 28 days of receipt of the Letter of Acceptance. This is to be in the form of a ‘demand guarantee’, the text of which is provided in the contract. It is to be in the amount(s) and currency(ies) stated in the contract data (normally one to three per cent of the accepted contract amount). The sum of the performance security(ies) and environmental and social performance security(ies) is normally not to exceed ten per cent of the accepted contract amount.

SC 4.20 – Progress reports

Within its monthly reports, the contractor must include an environmental and social section, which is to follow a structure set out in Part D of the particular conditions and provide, inter alia, information with respect to SEA/SH training, the code of conduct, allegations of SEA/SH incidents, a statement of compliance or a list of issues and actions to be taken to achieve compliance.

In addition, the contractor must inform the engineer immediately of any allegation of SEA/SH. The type of allegation (sexual exploitation, abuse or harassment), gender and age of the person who experienced the alleged incident must be included in the information without disclosing the identity of those involved.

SC 4.25 – Code of conduct

The contractor must ensure that each member of the contractor’s personnel¹¹ is aware of the code of conduct including banned behaviour and the consequences of engaging in such behaviour. Instructions and documentation must be easily understood by the contractor’s personnel and the contractor must endeavour to obtain the person’s signature acknowledging receipt of such instructions and/or documentation.

Copies of the code of conduct must also be visibly displayed in various locations on the site and any associated areas, as well as in areas outside the site which are accessible to the local community and project-affected people. The posted code of conduct must be written in languages that can be understood by contractor’s personnel, employer’s personnel and the local community.

SC 5.1 – Subcontractors

The contractor must ensure that its subcontractors comply with the relevant environmental and social requirements and the SEA/SH Prevention and Response Obligations. All subcontracts must state that the subcontractor accepts that it may be disqualified by the World Bank from being awarded a World Bank-financed contract for a two-year period if the subcontractor is found to have failed to comply with its SEA/SH Prevention and Response Obligations.

In addition, when seeking a Notice of No-Objection from the engineer with respect to the proposed appointment of a subcontractor, the contractor must include a declaration from the subcontractor, in accordance with the form set out under Part E of the Particular Conditions, by which the subcontractor provides information with respect to its record related to SEA/SH.

SC 6.9 – Contractor’s personnel

Under Sub-Clause 6.9, the contractor is to take immediate action to remove (or cause to be removed) any person who undertakes behaviour which breaches the code of conduct.

SC 6.12 – Key personnel

The contractor must appoint natural persons named in the bid to the positions of key personnel, which include the expert with relevant experience in addressing SEA/SH cases. This person must be based at site for the duration of the works.

SC6.27 – Contractor’s SEA/SH response mechanism; receipt of SEA/SH allegations; and contractor’s non-compliance

Before the contractor’s personnel are mobilised, the contractor must put a mechanism in place for handling SEA/SH allegations from the contractor’s or employer’s personnel or any other person including third parties (SEA/SH Response Mechanism). The contractor’s personnel are to be informed of the mechanism at the time of engagement. Details of the mechanism, including how to submit an allegation or concern, and also measures protecting against reprisal, are to be displayed in locations easily accessible to the contractor’s personnel, employer’s personnel, and the affected communities, in languages they can comprehend.

The contractor must have a dedicated person in place with the necessary skills, experience and training to receive and review allegations or concerns which may be submitted in writing, in person or by phone, with appropriate provision for confidential treatment, or may be made anonymously.

The contractor must implement ethical and safe processes for investigating and addressing allegations and apply appropriate disciplinary measures in the case of the contractor’s personnel, which may include removal from site in accordance with Sub-Clause 6.9.

Following receipt by the contractor of an allegation, the employer and the engineer must be immediately informed and provided with details of the alleged incident, but without the names of the persons involved. The employer must then refer the matter to the DAAB for its decision with respect to potential non-compliance with the SEA/SH Prevention and Response Obligations (see below).

SC 6.28 Training of contractor’s personnel

The contractor must provide appropriate training to relevant contractor’s personnel on environmental and social aspects, including the prohibition of SEA/SH. In particular, training must be provided to supervisors.

The role of the DAAB

SEA/SH conference

As noted above, the DAAB is to participate in the SEA/SH orientation conference, immediately after being appointed and before any work commences on site. The objective of the SEA/SH orientation conference is to ensure a common understanding of all SEA/SH contractual requirements and remedies, including those available under PC 21.9 [SEA/SH Referrals], PC 21.10 [Dissatisfaction with DAAB’s decision of SEA/SH Referrals] and PC 21.11 [Bank’s disqualification of the Contractor and its Subcontractors]. Although the conference is to be run by the employer, the DAAB must promote the understanding of these provisions and of the DAAB’s role, both in relation to SEA/SH and more widely.

Site visit: agenda and report

After work has commenced on site, the DAAB will make regular site visits. However, the maximum period between these visits is less than is fixed in FIDIC 1999 and FIDIC 2017, having been reduced from 140 days to 90 days.¹²

The agenda for each site visit must include a review of the contractor’s SEA/SH obligations and the engineer’s actions in this respect.¹³ This review should normally include:

• management strategies and implementation plans (initial submission and review, updated submission and review);
• code of conduct (number of workers versus number of signed copies of the code of conduct, both for contractor and subcontractors; visibly displayed copies on-site and off-site);
• training (record of sessions held and number of participants);
• response mechanism (displayed visibly on-site and off-site; status of allegations);
• progress reports; and
• notices to correct.

The DAAB must record the outcome of the review in its site visit report.¹⁴ As a potential non-compliance identified in a site visit report might eventually lead to a referral on which the DAAB must issue a decision, its comments must be as neutral as possible.

Referrals

If the site visit report identifies any potential non-compliance, the engineer is to review the potential non-compliance and determine whether a Notice to Correct (the ‘Notice’) should be issued to the contractor under Sub-Clause 15.1 of the General Conditions.¹⁵

If the engineer determines that a Notice to Correct is not to be given, the engineer must inform the employer, with a copy to the DAAB, setting out the basis for its determination. Otherwise, the engineer is to issue the Notice to the contractor, copied to the employer and the DAAB. If the contractor fails to comply with the Notice, the engineer must immediately notify the employer and the contractor. On receipt of such a notification, the employer is to refer the non-compliance to the DAAB for its review and decision pursuant to Sub-Clause 21.9 [SEA/SH referral].

Alternatively, if the engineer identifies that the contractor has not complied with the SEA/SH Prevention and Response Obligations, the engineer is to give a Notice to Correct, copied to the employer and the DAAB. Thereafter the procedure is the same as for a potential non-compliance identified by the DAAB during a site visit.

A third trigger for a referral to the DAAB is receipt by the contractor, employer or the engineer of an allegation of SEA/SH. In this event, the allegation must be promptly notified to the other two parties and the employer must promptly refer the allegation to the DAAB for a decision with respect to non-compliance. Although Sub-Clause 6.27 states that ‘the allegation’ is to be referred to the DAAB, Sub-Clause 21.9 makes it clear that the DAAB is only to decide whether there has been any non-compliance with the SEA/SH Prevention and Response Obligations and is not to be asked to decide on the allegation itself.

Jurisdiction

The DAAB has jurisdiction to decide upon SEA/SH referrals by virtue of Sub-Clause 21.1 of the General Conditions and Sub-Clause 1.4 of the General Conditions of Dispute Avoidance/Adjudication Agreement, both as modified by the Special Provisions:

Special Provisions Sub-Clause 21.1 Constitution of the DAAB

‘The DAAB shall also review and decide on any SEA Referral submitted to the DAAB pursuant to Sub-Clause 6.27.2 [Receipt of SEA allegations] and Sub-Clause 6.27.3 [Contractor’s non-compliance with SEA/SH contractual obligations], in accordance with Sub-Clause 21.9 [SEA referrals].”

Special Provisions General Conditions of Dispute Avoidance/Adjudication Agreement: Sub-Clause 1.4 ‘DAAB Activities’.

‘This also includes handling of SEA Referrals in accordance with Sub-Clause 21.9 of the Conditions of Contract.’

Procedure

The procedure for dealing with such referrals is set out under Special Provisions Sub-Clause 21.9.

On receipt of the referral, the DAAB is to request the contractor in writing (copied to the employer and the engineer) to submit a statement demonstrating its compliance (including the compliance of any subcontractor identified in the SEA/SH referral), with the SEA/SH Prevention and Response Obligations. The statement should include details of actions taken in response to an engineer’s Notice to Correct any non-compliance with the SEA/SH contractual obligations and/or in response to an allegation of SEA/SH. The statement must be provided within 28 days from receipt of the DAAB request and must be copied to the employer and the engineer.

In reviewing the contractor’s statement, the DAAB must focus exclusively on the contractor’s compliance or non-compliance with its SEA/SH Prevention and Response Obligations. The DAAB must not address the underlying allegation, including the factual aspects of the alleged SEA/SH incident:

‘The DAAB shall not assess the merits of an underlying allegation, including the factual aspects of the alleged SEA and/or SH incident.’

The DAAB must render its decision in writing within 42 days of receiving the SEA/SH referral. The decision must state that it is issued pursuant to PC 21.9 and must be issued to the contractor and the employer and copied to the engineer.

If the referral arose from an allegation of an SEA/SH incident, the DAAB decision must state whether the contractor (and any subcontractor) was compliant with its SEA/SH obligations at the time of the alleged incident.

Recourse available to the contractor

A dissatisfied party has the right to serve a Notice of Dissatisfaction in accordance with Sub-Clause 21.4.4 of the General Conditions in relation to a decision issued under PC 21.9. The Notice of Dissatisfaction must be issued within 28 days after receipt of the DAAB decision and must set out the grounds for the dissatisfaction. If no Notice of Dissatisfaction is issued within such period, the DAAB becomes final and binding.

If a Notice of Dissatisfaction is served within the 28 day-period, the usual requirement to attempt amicable settlement following such a Notice of Dissatisfaction does not apply.¹⁶ Either party may refer the matter to arbitration in accordance with Sub-Clause 21.6 of the General Conditions. In addition, either party may invoke the ICC Rules of Arbitration’s Emergency Arbitrator Provisions.

Use of the DAAB decision by the World Bank

Following receipt of the DAAB decision, the employer must immediately notify the World Bank. They must also notify the World Bank of the commencement of any Emergency Arbitration and the Emergency Arbitrator Order.

If the DAAB’s decision is that the contractor failed to correct identified non-compliance with its SEA/SH obligations or was non-compliant with such obligations at the time of an alleged incident, and if no Notice of Dissatisfaction was served by either of the Parties, the World Bank will review the DAAB decision for procedural regularity. Following this review, it may disqualify the contractor (as well as any subcontractor determined to be non-compliant), from being awarded a World Bank-financed contract for a two-year period.

If Emergency Arbitration has been commenced, the World Bank will await the outcome and take due account of the Emergency Arbitrator’s Order. If the Emergency Arbitrator confirms the non-compliance, the contractor (and any non-compliant subcontractor) may be disqualified.

A contractor/subcontractor’s disqualification expires two years after the date of disqualification unless an arbitration award is made in favour of the contractor within that period.

The contractor’s disqualification is without prejudice to the Parties’ rights and obligations under the contract, notably, the right of the employer to terminate the contract if the contractor’s breach of its SEA/SH Prevention and Response Obligations is substantial. If the circumstances do not merit termination, the contractor will be required to complete the works.

On expiry of the disqualification, the contractor may bid for further World Bank-financed projects but must declare the previous disqualification and demonstrate what steps it has taken to ensure future compliance. This requirement applies not only to projects identified as being at high risk of SEA/SH but all World Bank-financed projects.

Furthermore, the contractor will be subject to greater scrutiny on other World Bank-financed projects on which it is working at the time of disqualification.