Dispute Boards, Resolution and Avoidance of Disputes in Construction Contracts

Abstract

In a hydroelectric power plant project (HEPP) in an Asian country, the headrace tunnel was damaged and water leaked when pressurized as a test for completion. There was not only damage to the tunnel but the leaked water which caused landslide and the dirt dammed up the downstream of the river which flooded the power station. The Employer and the Contractor had entered into a construction all risks policy of insurance. Parties (Insureds) notified the insurer of a claim under the Policy in respect of the cost of repair of the Damage. Meanwhile, the Contractor carried out the remedial works and the Employer paid for it. The insurer declined to pay the claim on the grounds that the damage was due to the faulty design of the headrace tunnel and the cost of the repair of the damage was excluded from the Policy. The expert employed by the insurer stated that the failure was attributable to low horizontal stresses of the mountain allowing hydraulic jacking or fracture and that such failure was predictable and concluded that the design did not take risk of such failure into account. This dispute went to arbitration. Meanwhile, there was another contract between the Employer and the Consultant who provided design for the project on behalf of the Employer. The Employer told the Consultant that if he failed in the arbitration with the insurer, he would seek for design liability of the Consultant. The Consultant is covered by the Professional Indemnity Insurance (PI) with an insurer. This insurer has the intention to invoke arbitration arguing that the incident was not due to faulty design, if the Consultant claims the insurance when they (the Employer and the Contractor) failed in the arbitration with the insurer for the all risks policy. What will happen if the Employer loses the arbitration with the Consultant? He may go to arbitration with the Contractor for his bad material and/or bad workmanship. How to avoid such a risky situation as a contracting party?