Six Reasons Alternative Dispute Resolution May Be Right for Your Next Construction Project

Matthew R. McCubbins | Faegre Baker Daniels | November 6, 2017

For over a century, the United States construction industry has promoted the use of non-judicial dispute resolution methods. These alternative dispute resolution (ADR) methods enable construction entities to handle disputes within the industry, and they often produce more favorable results — and more effectively preserve industry relationships — than litigation options.

But why else might construction entities consider ADR when looking to resolve a dispute? Consider the following:

Construction is technologically complex. Construction comprises a host of applied sciences such as architecture, engineering, principles of construction and construction management. This technological complexity is amplified by its distinctiveness—projects are unique, built by a unique aggregation of companies, where productivity is affected by weather, geology, local labor skill and availability, local building codes, and site accessibility.

Construction is the largest segment of the production sector of the U.S. economy. The industry comprises millions of companies that employ many millions of people. The size and complexity of the construction industry produces numerous complex construction disputes.

Construction law is extremely complex. Because of construction’s technological complexity, size and uniqueness, American law governing the construction industry has become incredibly complex. Construction law relies heavily on industry experience, custom and usage, specialized language, implied duties, and unique concepts of risk allocation perceived as invoking the “law of the shop” more frequently than the “law of the court.” Industry insiders, their counsel and third-party neutrals understand construction’s unique nature and apply that knowledge throughout the ADR process.

Construction disputes are typically settled by industry professionals anyways. Resolving construction disputes relies heavily upon opinion testimony from experts who are trained in the nuances and complexities of their particular field. This aspect of construction disputes can be frustrating and confusing to jurors. Therefore, ADR conducted by those knowledgeable in industry customs and practices is viewed as the superior option to submitting a dispute for a courtroom determination.

ADR is amenable to maintaining important business and personal relationships. It has been said that ADR effectively blurs the distinction between victor and vanquished, so that the parties can continue their business and personal relationships within the industry and within the community.

Juries can have problematic perspectives. Juries are made up of members of the local community who sometimes hold views reflecting local prejudices and biases. ADR can place disputes in the hands of independent, impartial neutrals beyond the reach of local bias and prejudice.

This article summarizes content from Bruner & O’Connor on Construction Law. For more information on this topic, or for additional citations, see Section 21:4: Problems with arbitration and new “rapid resolution” alternative dispute resolution initiatives.

Mediation: Investing in the Solution

Kent Scott | Babcock Scott & Babcock | October 6, 2017

Mediation is an effective alternative dispute resolution method that empowers the parties to resolve their dispute while preserving their resources in terms of time, money and effort.  Mediation is a dispute resolution process where the opposing parties meet with a neutral third party to find a better option to a litigated result. Any resolution requires both parties to consent to the terms thereof  before the agreement is finalized. The signed agreement binds both parties and can be enforced by the courts.

 

Why Use Mediation?

 

Limited Discovery. One of the most expensive parts of a legal dispute is the discovery process where the courts require both parties to produce documents, files, or other information relevant to the dispute. The discovery process may require considerable time and effort by both parties in a dispute. In mediation both parties simply agree to exchange the relevant information used to support each side’s case.

 

Faster Results. There are many rules and procedures involved with the legal system that require following a set time frame and court calendar. Mediation allows the two parties to meet on their own schedule at an agreed upon time and place that also fits the mediator’s schedule. Often both parties hope for a fast resolution to the dispute, so an agreement is typically reached faster than going through the courts. A faster agreement means a faster return to normal business routines.

 

More Efficient Legal Strategy. Mediation requires the disputing parties to focus on solving the dispute. The legal strategy shifts from building a case with supporting facts and legal authorities to focusing on a resolution that is a better option to a litigated result.

 

Confidentiality & Privacy. Mediation is conducted privately which can help protect parties from potential embarrassment and lost business if a supplier or customer learns about a lawsuit. Before mediation begins both parties will sign a confidentiality agreement and submit it to the mediator. If the mediation is conducted after a legal dispute has been filed, the judge and jury are not entitled to hear any information exchanged during the mediation. What is done in mediation, stays in mediation.

 

Preserve Business Relationships. Many parties in mediation find a way to move on from the dispute and return to a business relationship with each other. Resolution through mediation will help to avoid a long and drawn out adversarial litigation battle that will often hurt the business relationship past the point of future cooperation.

 

Self Determination and Empowerment. Mediation retains the power of choice with the parties. It  is the only dispute resolution method that, through the facilitation of the mediator, allows the parties to choose the final agreement. The options available to resolve a dispute are far more numerous than legally define remedies which a court is restricted to use. Even if the mediation process fails to result in an agreement, parties can still benefit from narrowing the issues in dispute or possibly reaching a partial settlement.

 

What to Expect in Mediation

 

When and Where. Most design and construction contract contain mediation clauses requiring the mediation of any dispute arising under or relating to the contract. The contract may reference a upper tier prime contract and incorporate the terms its terms that may include a mediation provision.

 

Helping the Mediator to Help You. The mediator should have enough information and communication at this point to, along with consultation with counsel, make the best judgment call on how much interaction the parties should have in order to accomplish a successful mediation. To increase the chances of a smooth mediation proceeding, both parties should bring any concerns to the attention of the mediator about interacting with the opposing party.

 

Party Participation. The parties should bring their attorneys and a very limited number of employees or persons with relevant information regarding the dispute. Usually this requires no more than two employees or witnesses for each side. Having a decision maker for each side is crucial for an efficient and binding mediation.

 

Day of Mediation. The mediator starts by setting out the ground rules and expectations for civil and professional conduct. Each party may or may not direct an opening statement to the opposing decision maker that briefly describes the dispute and their ideal resolution terms. Opening statements may be waived. The mediator caucuses with both sides. Private caucuses allow the mediator to gather information in a comfortable and confidential setting. Candid and complete information exchange is a critical component in reaching a settlement.  The mediator will discuss strengths and weaknesses of positions, and if needed, will help parties re-evaluate their position. During the caucuses the mediator will keep in mind the desired outcome for both parties while working towards a solution.

 

Settlement, Recess or Termination. Once a settlement is reached, the main terms of the written agreement are summarized and signed before either party leaves mediation. This agreement is enforceable by any court of appropriate jurisdiction. If mediation fails to produce an agreement, the mediator can help determine if another meeting will potentially achieve an agreement or if the mediation should be terminated and the dispute sent  back to litigation.

 

The Recipe for a Successful Mediation

 

  • The attendance of a decision maker.
  • A strong commitment from both parties to resolve the dispute.
  • Choosing a reputable and skilled mediator.
  • Willing parties who keep an open mind.
  • Hard work and willingness find a better option to a litigate result

 

Conclusion

 

Mediation, which provides the disputing parties with the opportunity to find a resolution that represents a better alternative to a litigated result, will allow the parties to invest in the solution rather than litigate through the problem.  Mediation empowers the parties to be responsible for the resolution they have crafted rather than having a litigated resolution imposed upon them by a judge or jury.  The mediation process, in short, provides disputing parties with a better option to resolve their differences. Happy mediating to all!

 

 

Kent B. Scott is a shareholder with the construction law firm of Babcock Scott & Babcock PC in Salt Lake City, Utah. He is a mediator and serves on several mediation panels including the American Arbitration Association Panel of Neutrals.

The Relevance and Reasonableness of Destructive Testing

David Adelstein | Florida Construction Legal Updates | August 12, 2017

Destructive testing is a routine investigatory procedure in construction defect disputes.   The destructive testing is necessary to determine liability (causation), the extent of damage, and the repair protocol.   Destructive testing is designed to answer numerous questions:  Why did the building component fail?  Was the building component constructed incorrectly?  What is the magnitude of the damage caused by the failure? What specifically caused the damage?  What is the most effective way to fix the failure and damage?  There are different iterations to the same questions, but in many instances, destructive testing is necessary to answer these questions.

 

Claimants sometimes prohibit destructive testing.  Of course, destructive testing is intrusive.  In many instances, it is very intrusive.  But, this testing is a necessary evil.  Without this testing, how can a defendant truly analyze their potential exposure and culpability?  They need to be in a position to prepare a defense and figure out their liability.  This does not mean destructive testing is warranted in every single construction defect dispute.  That is not the case.   However, to say it is never warranted is irrational.

 

Florida Statutes Chapter 558 (the pre-suit notice of construction defects process) addresses the issue of destructive testing when parties are participating in this obligatory pre-suit notice of construction defect process:

 

(a) If the person served with notice under subsection (1) determines that destructive testing is necessary to determine the nature and cause of the alleged defects, such person shall notify the claimant in writing.

(b) The notice shall describe the destructive testing to be performed, the person selected to do the testing, the estimated anticipated damage and repairs to or restoration of the property resulting from the testing, the estimated amount of time necessary for the testing and to complete the repairs or restoration, and the financial responsibility offered for covering the costs of repairs or restoration.

(c) If the claimant promptly objects to the person selected to perform the destructive testing, the person served with notice under subsection (1) shall provide the claimant with a list of three qualified persons from which the claimant may select one such person to perform the testing. The person selected to perform the testing shall operate as an agent or subcontractor of the person served with notice under subsection (1) and shall communicate with, submit any reports to, and be solely responsible to the person served with notice.

(d) The testing shall be done at a mutually agreeable time.

(e) The claimant or a representative of the claimant may be present to observe the destructive testing.

(f) The destructive testing shall not render the property uninhabitable.

(g) There shall be no construction lien rights under part I of chapter 713 for the destructive testing caused by a person served with notice under subsection (1) or for restoring the area destructively tested to the condition existing prior to testing, except to the extent the owner contracts for the destructive testing or restoration.

If the claimant refuses to agree and thereafter permit reasonable destructive testing, the claimant shall have no claim for damages which could have been avoided or mitigated had destructive testing been allowed when requested and had a feasible remedy been promptly implemented.

Florida Statute s. 558.004(2).

 

Under this pre-suit process, if a claimant refuses to permit reasonable destructive testing, the claimant shall have no claim for damages which could have been mitigated or avoided had destructive testing been allowed and had a feasible remedy been promptly implemented.  In my opinion, this has very little teeth as it raises too many factual issues such as 1) was the destructive testing reasonable, 2) what damages could have realistically been mitigated and how do you prove this, 3) what is a feasible remedy and how is one to know whether the defendant would have even proposed or implemented a feasible remedy, 4) is the feasible remedy a remedy that mitigates future damage or fully addresses the root of the problem, and 5) what is the quantum of damages that could have been mitigated or avoided.   Establishing the reasonableness of the destructive testing is likely easy as an expert would support this.  But the same expert would have to establish the other requirements as a basis to establish an affirmative defense that some of the claimed damages the plaintiff is seeking could have been mitigated had the claimant allowed pre-suit destructive testing.

 

Oftentimes, however, a defendant wants to undertake certain destructive testing after a lawsuit has been initiated.  What happens if the plaintiff refuses such testing in this scenario?  In a recent products liability case, Westerbeke Corp. v. Atherton, 42 Fla.L.Weekly D1741c (Fla. 2d DCA 2017), a defendant wanted to perform destructive testing on a gas generator that caused an explosion on a boat.  The plaintiff did not want this testing to be performed.   In support of the testing, the defendant relied on a federal district case that applied four factors to consider whether the destructive testing is warranted:

 

1) Whether the proposed testing is reasonable, necessary, and relevant to proving the movant’s case; 2) Whether the non-movant’s ability to present evidence at trial will be hindered, or whether the non-movant will be prejudiced in some other way; 3) Whether there are any less prejudicial alternative methods of obtaining the evidence sought; and 4) Whether there are adequate safeguards to minimize prejudice to the non-movant, particularly the non-movant’s ability to present evidence at trial.

 

Westerbke Corp., supra, quoting Mirchandani v. Home Depot, U.S.A., Inc., 235 F.R.D. 611, 614 (D.Md. 2006).

 

The trial court did not apply these four factors and denied the defendant’s request to perform destructive testing on the gas generator.  On appeal (through a petition for writ of certiorari), the appellate court reversed.  Unfortunately, the appellate court punted without providing specific guidance as to what standard the trial should follow when granting or denying a request for destructive testing.  The appellate court simply held that the four factors above may provide guidance to the trial court, but are not controlling in Florida.  The appellate court further summarily pointed to the Florida’s Rules of Civil Procedure to address the issue:

 

The Florida law regarding discovery in general provides that a party in a civil case is entitled to discover evidence that is relevant to the subject matter of the case and that is admissible or reasonably calculated to lead to admissible evidence. Fla. R. Civ. P. 1.280(b)(1); Allstate Ins. Co. v. Langston, 655 So. 2d 91, 94 (Fla. 1995). In addition, “[a]ny party may request any other party . . . to inspect and copy, test, or sample any tangible things that constitute or contain matters within the scope of rule 1.280(b) and that are in the possession, custody, or control of the party to whom the request is directed.” Fla. R. Civ. P. 1.350(a)(2). “The discovery rules . . . confer broad discretion on the trial court to limit or prohibit discovery in order to ‘protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense.‘ ” Rasmussen v. S. Fla. Blood Serv., Inc., 500 So. 2d 533, 535 (Fla. 1987) (citing Fla. R. Civ. P. 1.280(c)). We conclude that the trial court departed from the essential requirements of the law in failing to apply the proper discovery standard…..

 

 

The four factors outlined above are reasonable factors that comport with Florida law – whether the testing is relevant to the subject matter of the case. The factors provide guidance as to how to determine relevancy of destructive testing during the course of a lawsuit.  Plus, the court can always impose limitations or restrictions to reduce any intrusion and protect the claimant’s interests while allowing testing to be performed.   By the appellate court punting and not even ruling on whether the destructive testing would be relevant in the underlying action, the court is simply inviting another appeal.

The Ten Most Widely Used Alternative Dispute Resolution Methods

Matthew R. McCubbins | Faegre Baker Daniels | August 9, 2017

Over the past two decades, arbitration has lost some of its luster as the best method to resolve construction industry disputes. The perceived “judicialization” of arbitration is at the heart of the industry’s recent dissatisfaction. Arbitration frequently assumes the hallmarks of a judicial proceeding — unlimited discovery, extensive motion practice, heavy expense and long delays.

Construction industry executives and counsel are now giving more thought about which alternative resolution methods are best suited for particular types of disputes on particular projects, recognizing that one size does not fit all. New initiatives favor resolving disputes early and quickly under the control of the parties themselves, with or without the help of neutral experts. Sophisticated owners and construction managers devote significant pre-contract planning with counsel to develop and incorporate various dispute resolution strategies into contract documents.

So, what are the alternative dispute resolution methods now accepted by the construction industry? Below are the ten most widely used methods, available for use alone or in conjunction with others:

1. Informal Discussion/Partnering

Direct communication through informal discussion is the beginning of every effort to resolve a dispute. The “rules” applicable to this method include principled negotiation, patience, ethical conduct, careful listening and a reasoned approach to evaluating risks. “Partnering” — and establishing a long-term relationship of trust and teamwork with industry participants — assists greatly in informally resolving disputes by promoting good working relationships among the parties. Prompt resolution of disputes is a fundamental precept of the “spirit of partnership.”

2. Structured Negotiations

Various factors cause informal negotiations at the project level to break down. Therefore, construction contracts often include an alternative dispute resolution clause that imposes, as the first among various methods, a “structured negotiation” process. Structured negotiation establishes a formal procedure for (1) full and prompt disclosure and exchange of information, (2) timely commencement and conduct of project level negotiations, and (3) senior management participation before turning a dispute over to a neutral third-party (if needed).

3. Standing Project Neutral

A standing project neutral is a person, or number of persons, identified in the contract documents to be “on-call” should a dispute arise. The standing project neutral assists the parties in agreeing upon dispute resolution procedures, mediating disputes and providing recommendations for resolution.

4. The “Initial Decision Maker”

The American Institute of Architects construction contract documents now allow parties to remove the architect from its historic role as professional peacekeeper and initial arbiter of disputes. Contracting parties may now appoint their own “initial decision maker.” This recent change in practice allows the parties to select a third-party who they believe is better equipped to resolve disputes.

5. Standing Dispute Review Board

Many civil projects in the United States are awarded under contracts that require the parties to establish a standing dispute review board at the beginning of the project. Board members are designated by the parties. Disputes arising on the project are submitted to the board for non-binding determinations.

6. Expert Determination

Expert recommendation and determination of disputes may prove beneficial in some cases. The expert listens to the parties or allows them to make written submissions regarding the project issue. The expert prepares a written report, which is typically non-binding unless otherwise agreed by the parties.

7. Mediation

Parties often seek a third-party mediator to assist them in construction dispute resolution. Mediation allows the parties to retain control over settlement, but affords the parties the benefit of the mediator’s neutral perspective. Success frequently depends on the quality and experience of the mediator, the parties’ preparation and commitment to the process, and the exchange of documents and information before the mediation. Effective construction dispute mediators typically have in-depth knowledge of the construction industry, provide meaningful risk analysis, and offer insight into the legal and practical considerations concerning the dispute.

8. Adjudication

The “adjudication” method is utilized in the United Kingdom, where law requires construction disputes to be submitted to an “adjudicator” for an initial decision. The adjudicator’s decision is binding until the completion of the project and can only be challenged thereafter. Therefore, adjudication keeps the parties working and the money flowing without stalling project completion. Adjudication has had a warm reception in the U.K., prompting some to recommend its adoption in the U.S. In a broad sense, the same advantages of adjudication can be offered by the “project neutral” and “initial decision maker” methods listed above, if the parties so agree.

9. Mini-Trials/Mini-Arbitrations

To help resolve a construction dispute, the parties may agree to participate in a mini-trial or mini-arbitration. Judges or arbitrators offer recommended, non-binding decisions on select dispute issues or the entire matter. These methods are called “mini” because the dispute is heard on the limited admission of evidence and arguments of counsel. Often, the dispute is simply submitted to the judge or arbitrator on memoranda, affidavits, expert reports and limited testimony.

10. Arbitration

While arbitration is no longer the default option in construction industry contract forms, it is still widely utilized in resolving construction project disputes. Parties who continue to use arbitration know how to assure its efficiency and cost-effectiveness. A few critical elements in successfully utilizing arbitration as a dispute resolution method include (1) pre-contract planning with competent counsel, (2) drafting a well-thought-out arbitration agreement that sets forth the applicable law and rules, and (3) selecting arbitrators with the requisite skill and expertise in construction industry practices, construction law and case management.

For over a century, the construction industry has been at the forefront of American utilization of alternative dispute resolution. Selecting appropriate dispute resolution methods will help industry participants continue to find success through non-judicial procedures.

Thinking Beyond the Dispute Resolution Provision in Construction Disputes

Benjamin Pollock | King & Spalding | June 5, 2017

When parties cannot resolve a claim during a major construction project, the contracts dispute resolution provisions do not always need to read as step-by-step instructions. To the contrary, the situation may warrant a different approach that can be negotiated after the dispute arises. While agreement certainly is required to deviate from the contractual obligations which themselves reflect the parties prior and current agreement other options can be considered and proposed whenever they would be beneficial to the Project or parties needs. This article discusses alternative methods by which a resolution to a construction dispute concerning costs or delays can be found in ways not necessarily proscribed by the contracts dispute resolution provisions.

Contracts Do Not Predict Every Situation

As an initial point, by no means is this article suggesting that the contract should be ignored or disregarded. Indeed, the contract provisions should be the embodiment of the good faith negotiations of the parties, often hard-won through sophisticated bargaining. But this does not mean that one size fits all, and the individual situation and claims should be considered when an actual dispute must be managed.

This can be particularly true when circumstances change between the parties, or when the companies develop a business relationship outside of the one specific project. To be sure, the contracts dispute resolution provisions establish the original framework by which the parties are to resolve disputes arising from construction of that individual project. But the realities can change when those companies subsequently enter into additional contracts regarding multiple projects, or agree to an Operation and Maintenance Agreement that binds them to each other at the same site for multiple years following completion. Suddenly, the prospect of filing for arbitration over the one construction dispute can become a challenging or unacceptable option. Indeed, preserving the relationship and maintaining peace may prove more valuable than escalating a dispute to a jury or an independent panel. And with arbitration or litigation seen as a last-ditch option, the parties may do well to think beyond the contracts instructions in order to get the dispute resolved.

Conditions Precedent Can Be Mutually Waived or Changed

In many ways, a contracts dispute resolution provision can be seen as the designation of the ultimate deciderarbitrator, judge, or juryand a series of conditions precedent that must be followed before reaching the final stage. These conditions serve various purposes, like promoting party communication in an attempt to avoid costly litigation, or ensuring notifications are being effected internally at appropriate levels of management. These interim steps can include formal notice, a mediation or other non-binding proceeding, various waiting periods, and/or a meeting between management personnel. When a particular dispute reaches impasse, however, these actions may not always serve their intended purpose. In such scenarios, the contract provisions do not always need to be strictly adhered to, but instead should be evaluated for their perceived effectiveness under the circumstances. When it serves both parties or the Project to take different action, consider seeking a mutual agreement to waive or adjust certain of these conditions.

Take waiting periods. It is not uncommon for a contract to mandate that arbitration cannot be filed until a certain number of days after a formal notice letter is served (or other triggering event). But what if the dispute is impacting critical path activities, and a quick resolution would allow the parties to mitigate the impact or at least would provide the parties more certainty regarding the risks of a situation already affecting cost and schedule? As an initial matter, the owner may do well to instruct the contractor to continue working, or enter into a temporary agreement that maintains Project progress while the claim is addressed. But in this scenario, both parties may wish to consider waiving the required waiting period and submitting the dispute on an expedited schedule. Similarly, both sides may benefit from adding strict time limits on the selection process of nominating one arbitrator eachwho then nominate a chairpersonor even forgoing this timely process in favor of selecting a single fact-finder.

Another example is mandatory meetings between managers. Sometimes it may be patently obvious that certain disputes will not be resolved at such meetings. Perhaps the representatives designated by the contract have personality conflicts, the parties positions are extreme and irreconcilable, or the contemplated meeting would present other challenges that may actually exacerbate the situation. If the parties are entrenched in their positions, more might be at stake than a waste of time and resources: ill will can result if one party believes the other is not participating in good faith. In certain circumstances, a discussion by the designated persons about the dispute can do more harm than good.

Agreeing not to hold such a meeting is an option, although generally speaking, parties engaging in discussion before launching litigation is a good thing. If the contract requirements do not create an environment for success, they can be tweaked. Notwithstanding contractual restrictions on attendees, the parties can agree to select personnel best suited to attend, usually so long as there is someone present with decision-making authority. The presence of a mediator, expert, or third party neutral to facilitate discussions and offer opinions can be considered, regardless of whether the contract requires such a presence. And rather than meeting to discuss the merits of the disputewhich likely is encapsulated already in opinionated change documentation and argumentative claims letterscommercial settlements can be discussed instead. Indeed, such proposalsbonus milestones, additional resources, overtime, changes to the payment schedule, etc.may resolve the dispute without having to discuss, much less decide, the contentious issues, and can also benefit project progress itself. In these ways, parties can still hold the required meeting but tailor it to best position themselves for success.

Conclusion

A dispute resolution provision identifies the final arbiter of a dispute and contains other requirements meant to facilitate discussion and negotiation so that litigation can be avoided. Sometimes, however, the specific provisions will not best serve those purposes. In these situations, prudent parties will study the contracts requirements but also consider options that might more effectively resolve the particular dispute at issue, get the project back on track, and improverather than harmthe business relationship. Rather than view the various required stages as items on a checklist, parties can agree to waive or alter certain provisions and thereby adopt a procedure that may better facilitate resolution the specific dispute.