Rethinking the Boilerplate: Alternative Dispute Resolution Procedures in Construction Contracts

Robert Alfert, Jr. and Edward R. Philpot | Nelson Mullins Riley & Scarborough LLP | November 2, 2018

“Litigation is a basic legal right guaranteeing every corporation its decade in court.” Attributed to David Porter, Executive Vice President of Microsoft.

Most courts and juries are ill-equipped to handle complex business and technical litigation matters, yet most construction contracts fail to address dispute resolution and do not have provisions customized to the subject matter and unique needs of the parties. Unlike litigation, ADR allows parties to define nearly all aspects of their dispute resolution process. Overall, only ADR allows parties the full right of self-determination over the resolution of disputes, while litigation often exposes business parties to greater risk, costs, delays and uncertainties.

Taking full advantage of ADR means understanding each available process – whether mediation, arbitration, dispute review board or a combination – and the options for customization before executing a contract.

MEDIATION

Although success, and finality, are never guaranteed with mediation, it allows for control over the final settlement. Parties can craft a settlement otherwise impossible through trial verdict, as the parties can specify customized non-monetary terms. But, even if no settlement is reached, early mediation adds value. Through mediation, parties learn more about the strengths and weaknesses of various positions to move forward.

Mediation does not have to be a one-off. Most complex construction disputes will mediate more than once, and, if suit is initiated, most courts will order mediation regardless. Likewise, private arbitration services encourage mediation before a final hearing. If the parties engage an active mediator, it is also typical for that individual to continue to serve as a conduit for settlement talks, and to explore settlement possibilities throughout the course of the dispute.

Although mediation is driven by each party’s willingness to participate, the process is customizable. The mediation provision can specify a timeframe, identify a particular mediator, require exchange of claim and defense information and reaffirm confidentiality requirements.

ARBITRATION

Arbitration offers the most finality and control of ADR. In contrast to mediation, in which the third party is merely a facilitator, arbitration places the decision in the third party’s hands. In most circumstances, the court’s only role is to confirm the arbitrator’s decision or award, on an exceptionally deferential standard.

Final arbitral awards in less than one year are not uncommon, whereas trial to verdict in less than one year is exceptionally uncommon. A well-crafted arbitration provision and parties who treat arbitration like arbitration, rather than litigation, will ensure a faster and more cost-sensitive result.

Like mediation, the arbitration provision can specify the timeframe, a decision maker, confidentiality, discovery and other procedural characteristics. Parties can specify each to ensure that disputes are quickly and efficiently handled. With the active presence of an arbitrator, compliance with procedural requirements is mandatory. For example, discovery may be limited to written discovery and depositions, saving a large amount of time and cost – or may be more expansive, for costlier, more complicated projects – the parties control these parameters, which will be enforced by the arbitrator and respected by the court.

DISPUTE REVIEW BOARD

DRBs offer a middle ground between mediation and arbitration, providing recommendations in a manner akin to arbitration, but with the goal of assisting the parties to resolve a dispute themselves like mediation. This particular ADR process has been employed on billions of dollars’ worth of infrastructure projects in the United States, including, the Big Dig in Boston and the South Terminal program at Orlando International Airport.

DRBs usually consist of panels of neutral, seasoned construction professionals who render nonbinding recommendations to assist contract parties in resolving disputes. DRB members tend to be empaneled for the duration of a project and are familiar with the work and issues that arise. The DRB’s recommendations may be accepted by the contract parties, resolving the dispute, or may offer the starting point for negotiations.

One of the primary benefits of the DRB process is its availability to resolve disputes as they arise, versus when parties are already headed to litigation. The DRB process may be customized for the project and the parties. Additionally, the parties may specify submission and hearing requirements, procedures for acceptance and rejection of DRB recommendations, the admissibility of DRB-related materials in later legal proceedings and payment structures of DRB members.

Underscoring the flexibility of the processes described above, each may be used individually, or in combination with the others. In all cases, the parties design the process and exercise control in a manner not afforded to them in court.

Given the panoply of options available, it is incumbent on the construction executive to carefully negotiate the mode of ADR specified in each contract, and to customize it to the needs of the parties and the project. No two projects are alike.

A Word to the Wise: The AIA Revised Contract Documents Could Lead to New and Unanticipated Risks – Part II

George Talarico | Construction Executive | September 18, 2018

Part I addressed general conditions, revised insurance terms, revisions that affect owner’s required insurance and revisions that affect contractor’s required insurance.

REVISIONS THAT AFFECT DISPUTE RESOLUTION

A seemingly minor but noteworthy change is to the definition of “Claim.” Under Section 15.1 a “Claim” is defined to:

  • include a request for a modification of contract time; and
  • exclude any requirement that an owner must file a claim to impose liquidated damages.

Notably, any request relating to contract time must be brought within the specified time period for Notice of Claim1 and in the prescribed manner2. There are at least two traps for the unwary. First, even though email is regularly used for communications among the parties, the revised contract documents do not recognize email as an acceptable form of delivery of a Notice of Claim. Second, an unwary contractor may wrongly assume that an owner’s failure to assert a claim for LDs means that LDs will not be imposed. This may lull the contractor into failing to timely assert its own claim for a time extension and thereby waiving its ability to do so.

There have not been any major revisions to the arbitration provisions of Section 15.4. Other changes, however, will influence dispute resolution. As before, a condition precedent to commencing Mediation and thereafter a possible arbitration or litigation, Claims must first be submitted to the Initial Decision Maker3. The IDM is normally the architect as the architect is designated as the default IDM4. The 2017 revisions, however, now include strong exculpatory language protecting the IDM from liability “for results of interpretations or decisions rendered in good faith5.” This broad protection from liability could place the architect (acting as IDM) in an uncomfortable and possible conflicted position if, for example, the Claim infers liability on the part of the architect (such as improper or defective design). Moreover, it raises possible struggles to ascertain the meaning of ‘good faith’ in the context of the architect’s actions6.

REVISIONS THAT AFFECT SUPERVISION AND CONSTRUCTION PROCEDURE

In circumstances where the specifications do not prescribe construction means and methods, these remain the responsibility of the contractor. It appears, however, that the contractor is now being burdened with some of the architect’s design responsibilities, in circumstances where the specifications and/or drawings “give specific instructions concerning construction means, methods, techniques, sequences or procedures7.” Previously, if the contractor determined that the specified means, methods, techniques, sequences or procedures were unsafe, the contractor was required to provide the architect with timely notice and then stop the work it deemed to be unsafe, while awaiting further written instructions8. Now the contractor does not have the right to stop work and it is incumbent upon the contractor and not the architect to propose alternate means, methods, techniques, sequences or procedures9. The architect’s role has been diminished and is only required to review the contractor’s proposal, solely for “conformance with the design intent for the completed construction10.”

REVISIONS THAT AFFECT SHOP DRAWINGS

Another change which could shift some design responsibility from the architect to the contractor is contained in the section on Shop Drawings. On one hand this section adds an assurance that in preparing Shop Drawings the contractor is “entitled to rely upon the adequacy” of the architect’s design criteria, yet on the other hand it removes the language stating that “[t]he contractor shall not be responsible for the adequacy of the” design criteria contained in the Contract Documents11. This modification could be interpreted to mean that through submittal of Shop Drawings, the contractor is taking on responsibility for design criteria.

REVISIONS THAT AFFECT CONTRACT TERMINATION

Another deletion that could prove troubling for the contractor involves contract termination by the contractor. Both the prior and current versions are consistent in that each allows the contractor to terminate the contract if work is stopped for 30 consecutive days, for certain specified reasons, i.e. court order. The difference is that the prior version limited this option only to circumstance where the delay was not caused by the contractor, a subcontractor or “entities performing portions of the Work under direct or indirect contract with the contractor12.”The latest version deletes the underlined words and therefore implies that the contractor has no right to terminate if the delay is caused by any party performing work on the project regardless of whether or not the contractor has any control over that party.

In instances where the owner terminates ‘for convenience’ the contractor will no longer be permitted to receive payment for overhead and profit on work that the contractor performed as a result of the termination unless the contract otherwise provides. Since the contractor is entitled to a termination fee included the contract13, it is important that a contractor negotiate for inclusion of overhead and profit in its calculation for a termination fee.

While many of the 2017 revisions to A201 appear to be stylistic in nature, there are some changes which could affect the liability of the architect, owner and the contractor (including its subcontractors). In order to prevent unpleasant surprises, the parties need to recognize those revisions that:

  • effect the claims process;
  • increase and/or limit costs;
  • shift liability; and
  • change deadlines.

This will allow them to negotiate around the revisions, i.e. included overhead and profit in termination fee) and/or perform the contract in a manner that anticipates the impact of the revisions, i.e. filing a claim for contract time extension without awaiting the owners claim for LDs.

1 “Claims by either party under Section 15.1.3.1 shall be initiated within 21 days after occurrence of the event giving rise to the Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later.” A201-2017 § 15.1.3.1.

2 Pursuant to A201-2017 § 1.6.2 Notice of Claims must be delivered by registered or certified mail or by courier.

3 Note that there is no requirement that Claims submitted after the correction of work period be submitted to the IDM. A201-2017 § 15.1.3.2.

4 A201-2017 § 1.1.8.

5 Id.

See, e.g., MECO Systems, Inc. v Dancing Bear Entertainment, Inc., et al., 948 SW2d 185, 1997 Mo. App. LEXIS 1191 (the architect’s “actions raise genuine issues of fact regarding the architect’s partiality and good faith.” where the architect failed to demonstrate its compliance with contract provisions on timeliness and the contractor raised claims that construction delays were caused by the architect).

7  A201-2017 § 3.3.1.

8  Id.

9  Id.

10 Id.

11  A201-2017 § 3.12.10.1.

12  A201-2007 § 14.1.1 (emphasis added).

13 A201-2017 § 14.4.3.

Strategy for Enforcement of Dispute Resolution Rights

Whitney Judson | Smith Currie | May 21, 2018

Arbitration and litigation each offer their own benefits and drawbacks to litigants looking to resolve a construction dispute. A careful analysis of these benefits and drawbacks may be helpful in determining whether to avoid or pursue either dispute resolution process. Arbitration is oftentimes regarded as the more economically feasible dispute resolution option and is therefore attractive to many construction dispute litigants. Although arbitration may prove to be less expensive than litigation in the long run, some litigants may prefer to file a case in court because the upfront filing fees in litigation are less expensive than the filing fees of arbitration.

Litigants may also prefer the decision makers of one process for dispute resolution over another. Arbitrators in a construction dispute oftentimes have a background in the construction industry, whereas a judge or jury may not. Strategy may dictate whether the preferable decision maker should have experience within the construction industry or be free of any construction industry knowledge and possible biases. The finality of decisions may also be a reason to strategically choose one dispute resolution process over another. Arbitration decisions are overturned only under very narrow and specific circumstances. The losing party in litigation however, has a right to appeal decisions to a higher court and has more options for recourse when the findings of the court are not supported by the evidence or the law.

Jurisdiction and the Enforcement of Agreements to Arbitrate

Construction contracts oftentimes contain arbitration clauses where the signatories agree to resolve certain disputes through arbitration proceedings. Parties may disagree, however, on whether any given dispute falls within the scope of the arbitration clause. They may further disagree as to whether a judge or an arbitrator should have the power to rule on this issue. When one of these disputes presents itself, at least one party may insist that the issue of jurisdiction be decided before any arbitration proceedings can begin. The first step in either enforcing or avoiding an arbitration agreement may therefore be answering the preliminary question of who should rightfully decide whether claims in dispute belong in litigation or arbitration.

The United States Supreme Court has held that, in general, courts have the sole power to decide whether claims fall within the scope of an arbitration agreement, unless the parties have clearly and unambiguously decided to submit such questions to an arbitrator. The rationale behind this general rule is that an arbitration cannot be forced upon any party who has not agreed to participate. Parties that have not agreed to arbitrate are entitled to resolve their disputes in court. If a party prefers to participate in arbitration and have arbitrators decide issues of jurisdiction, it is important to clearly and unambiguously express these preferences within the contract. Additionally, parties that contractually elect to be governed by the American Arbitration Association Rules have agreed to empower arbitrators to decide issues of jurisdiction. The AAA Rules state: “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim.” Rule R-7, AAA Commercial Rules.

Incorporation and Waiver

Construction contracts, in particular, oftentimes incorporate other documents. For example, a subcontract may not contain any agreement to arbitrate, but it may incorporate a prime contract that contains an arbitration clause. The arbitration clause that is referenced or incorporated from the prime contract may be enforceable against the subcontractor, even if the parties to the subcontract have not signed an agreement to arbitrate. Enforceable incorporation language in a contract will work to the advantage of a party that prefers arbitration and seeks to enforce an arbitration agreement. While this is the general rule, a minority of courts have held that broad language of incorporation may not be sufficient to incorporate an arbitration agreement.

Even when an agreement to arbitrate exists, a party may avoid its enforcement by arguing that the opposing party has waived its right to arbitration. When one party behaves in a manner that is inconsistent with its known arbitration rights—especially when this inconsistent behavior causes prejudice to the opposing party—arbitration rights may be waived. Actions that are inconsistent with arbitration rights include, but are not limited to, filing motions in court, conducting discovery in court, delays in filing motions to compel or stay arbitration, or otherwise substantially invoking rights and powers in litigation prior to filing an arbitration demand.

Motions to Compel Arbitration

If litigation has been initiated by one party in court, a party opposing litigation and seeking to enforce its arbitration rights may choose to file a motion to compel arbitration. A motion to compel arbitration uses the litigation process to require a party to arbitrate claims in accordance with the arbitration agreement. A party that has not agreed to arbitrate, however, cannot be compelled to do so.

A motion to compel works as a shield to parties who wish to avoid litigation because if a motion to compel is granted, the parties must seek legal remedies through arbitration. A grant of a motion to compel can either be accompanied by a dismissal of the court case, or a stay of the court case. If the case is dismissed, the court’s decision is immediately appealable to a higher court, as it is a final decision on the merits. If any party chooses to appeal a final decision on the merits with respect to a motion to compel, both parties will then be required to invest additional time and expense in litigation in a higher court. This can be especially frustrating for a party wishing to pursue its rights to arbitration and avoid litigation.

If a motion to compel is granted and the case is stayed, the decision is not appealable, as it is not a final decision on the merits. Under these circumstances, the parties are required to take the dispute to arbitration, and the litigation of the case in court is effectively paused pending the outcome of arbitration. In terms of filing a motion to compel, a stay of the court case is the most desired outcome for a party seeking to enforce its arbitration rights. Such a party may even be more direct in its enforcement of arbitration rights by filing a motion to stay litigation pending arbitration.

Conclusion

Parties must balance the benefits and drawbacks of various options for dispute resolution. Despite an agreement to arbitrate, parties may initiate litigation in court based upon reasonable arguments of waiver, that a particular dispute falls outside the scope of any arbitration agreement, or that the arbitration agreement itself is unenforceable against a particular party. Parties who believe they have a legitimate right to arbitration however, are able to enforce their rights through motions to compel arbitration, motions to stay legal proceedings pending arbitration, and by ensuring that the contract designates that an arbitrator is to decide any issues of jurisdiction.

2 Dispute Resolution Choices For Construction Contracts

Stacy La Scala | JAMS | May 7, 2018

It was the best of provisions; it was the worst of provisions, crafted by the wise
and well-meaning alike. For years, construction documentation has been
primarily sourced from the American Institute of Architects. The AIA provided
guidance through the publication of contractual provisions involving many
aspects of the construction process, including alternative dispute resolution, or
ADR. It has been observed that the documentation provided by the AIA generally
favored both owners and architects, whose forms, as used by contractors,
typically required amendment and modification. So much so that in 2007 a group
of owners, contractors, subcontractors, designers and sureties came together
and published their own set of construction contract documents called
ConsensusDocs, and updated it in 2017.

For construction practitioners, serious consideration must be paid to the ADR provisions up front, as a failure to understand and allocate the tail risk can have dire consequences; hence, a tale of two approaches to ADR.

ConsensusDocs — ADR

The ConsensusDocs ADR provisions provide a multi-step process by which party representatives are initially required to negotiate with one another. Failing resolution, senior executives are then required to meet in good faith to attempt resolution of the dispute. The ADR path in the ConsensusDocs then forks depending upon the needs of the parties at the time of contracting. One path sends the parties a mitigation procedure involving a nonbinding finding by either a project neutral or a dispute review
board, whose determination may be introduced in subsequent litigation.

If the parties did not choose to go through the mitigation procedure at the time of contracting, the second path leads to mediation. The mediation option includes the ability to select mediators from AAA, JAMS or a body of the parties’ choosing. The provision provides that the parties choose mediation through one of the following:

• The current Construction Industry Mediation Rules of the American Arbitration Association, or AAA, administered by the AAA
• The current Mediation Guidelines of JAMS, administered by JAMS
• The current rules of [_____] administered by [_____]

If the mediation or mitigation processes fail to resolve the dispute, the ADR paths merge, sending the parties to binding arbitration or litigation. If arbitration is selected, the parties are given the option to determine which rules will be applied to their dispute. Article 12.5.1.2 provides that the arbitration shall use one of the following:

• The current AAA Construction Industry Arbitration Rules administered by the AAA; AAA Construction Fast-Track Rules shall apply to all two-party cases when neither party’s disclosed claim or counterclaim exceeds $250,000. If arbitration is selected but no rules are selected, then this subsection shall apply by default.
• The current JAMS Engineering and Construction Arbitration Rules and Procedures, administered by JAMS
• The current Arbitration Rules of [_____] administered by [_____]
• AIA ADR

Like the ConsensusDocs ADR provisions, the AIA ADR provisions were also updated in 2017. Of particular interest in the new AIA ADR provisions are new time restrictions, which, if not followed, may severely restrict a party’s rights, including a potential waiver.

In contrast to ConsensusDocs, there are no requirements that the parties meet in order to resolve the matter. Instead, the AIA ADR provisions have two separate dispute resolution paths determined by the time that a claim arises. Claims are defined broadly to include all disputes and matters in question between the owner and contractor arising out of or relating to the contract.

For claims that arise prior to the first year following substantial completion, the owner and contractor are required to submit their dispute to an initial decision-maker, or IDM, “within 21 days after occurrence of the event giving rise to such claim, or within 21 days after the claimant first recognizes the condition giving rise to the claim, whichever is later.” The AIA form, by definition and default, designates the architect of record as the IDM.

If a dispute remains following the IDM’s decision, there is a demand-shifting procedural step, new to the 2017 form, that gives either party the power to compel the other party within 30 days to proceed to mediation. Failure to timely proceed to mediation signifies a mutual waiver of rights for that claim.

For claims that arise after the first year following substantial completion, the parties go directly to mediation. This new demand-shifting provision appears once again in the mediation provisions. Should the matter fail to resolve at mediation, either party may demand, within 30 days following mediation or 60 days following the demand to mediate, that the other party proceed with arbitration or litigation. Should the party receiving the demand fail to file a demand or suit, then both parties waive their rights
to proceed to arbitration or litigation.

It should be noted that, where neither party triggers the demand-shifting provisions contained within the AIA ADR provisions, there is apparently no waiver of the right to proceed to future mediation, arbitration or litigation. Of course, this does not foreclose later arguments that known claims may be barred by shortened statute of limitations periods.

Comments and Considerations

The new AIA ADR provisions appear to build upon case law enforcing modified and “agreed upon” time-bar limitations of actions between the owner and contractor. In particular, in Brisbane Lodging LP v. Webcor (2013), limitations on the “delayed discovery” rule[1] were upheld in the 1997 version of the AIA standard form agreement between the owner and contractor. The same provision found enforceable in Brisbane has been renumbered as Section 15.1.1 and relocated within the ADR provisions
of the 2017 form. In conjunction with the broad-based definition of claim, and the new “demand shifting” provisions discussed above, there appears to be a clear intent by the AIA drafters to further identify and restrict potential future claims among the contracting parties.

Parties considering the use of either ConsensusDocs or AIA forms need to understand that each set of construction documents requires thoughtfulness and upfront risk assessment. The decisions at the time of contracting will have a significant impact on both the timing and resolution of any future dispute.

——————————————————————–

Stacy L. La Scala is a mediator and arbitrator at JAMS.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] prior Section 13.7
[2] Section 15.1.1

California Supreme Court Holds that the Right to Repair Act is a Homeowner’s Exclusive Remedy for Damages Arising from Construction Defects for New Residential Construction

Robert Nobel | TLSS Construction Law Blog | February 15, 2018

In McMillin Albany LLC et al. v. The Superior Court of Kern County (Van Tassel) [Case No. S229762], the California Supreme Court held that California Civil Code §§ 895 et seq. (the “Right to Repair Act”) provides the exclusive remedy for construction defect claims for economic loss and resulting property damages arising from new residential construction. The Supreme Court also held that homeowners are required to engage in the pre-litigation notice and cure procedures under the Right to Repair Act.

The long-awaited holding in McMillin resolved a split in authority among the California Court of Appeals, and effectively overruled the holdings in Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC [(2013) 219 Cal.App.4th 98 (“Liberty”)] and Burch v. Superior Court [(2014) 223 Cal.App.4th 1411 (“Burch”)], to the extent inconsistent with McMillin. In Liberty and Burch, the California Court of Appeals held that the Right to Repair Act is not the exclusive remedy for construction defect lawsuits that allege  resulting property damage arising from new residential construction. Homeowners were thus not required to engage in the pre-litigation notice and cure procedures under the Right to Repair Act because such lawsuits could be maintained as common law claims.  As to construction defect lawsuits where resulting property damage had not occurred (i.e. pure economic loss), such claims are barred by the holding in Aas v. Superior Court [(2000) 24 Cal.4th 627] unless they can be brought under the Right to Repair Act.

In McMillin, a construction defect lawsuit was brought by the purchasers of 37 new single-family homes from McMillin Albany LLC. The homes were purchased at various times after January 2003, thus implicating the Right to Repair Act. In 2013, the homeowners initiated the lawsuit against McMillin Albany LLC alleging numerous construction defects in their respective homes. The complaint included common law causes of action for negligence, strict products liability, breach of contract and breach of warranty, as well as a claim for violation of the Right to Repair Act.

In the trial court, McMillin Albany LLC moved for an order staying litigation to allow the parties to engage in the pre-litigation notice and cure procedures under the Right to Repair Act. The trial court denied the motion, relying upon the California Court of Appeals holding in Liberty.  McMillin Albany LLC appealed the trial court ruling.

On appeal, and disagreeing with the holdings in Liberty and Burch, the California Court of Appeals ruled that the parties must follow the pre-litigation notice and cure procedures because the Right to Repair Act is the exclusive remedy for construction defect claims where property damage has occurred.  The Court of Appeals observed that “the Legislature intended that all claims arising out of defects in residential construction involving post-2003 sales of new homes be subject to the standards and requirements of the Act.”

The California Supreme Court affirmed the ruling of the California Court of Appeals.  In its analysis, the Supreme Court looked to the language of the Right to Repair Act and its legislative history to determine whether the common law had been supplanted where construction defect claims resulted in property damages.  In this regard, the Supreme Court recognized that Section 896 states the Right to Repair Act applies to “any action” seeking damages for construction defect.  This section also states that “claims or causes of action shall be limited to violation of” the functionality standards set forth in the Right to Repair Act and apply only to “original construction intended to be sold as an individual dwelling unit.”

Moreover, Section 944 identifies what damages may be recovered under the Right to Repair Act by a homeowner, which covers the kinds of damages recoverable in a construction defect lawsuit, and Section 943 establishes that such damages may only be recovered under the Right to Repair Action, absent an express exception. The damages recoverable under the Right to Repair Act include pure economic losses, unlike a common law claim.

Furthermore, the Supreme Court recognized that “the creation of a mandatory pre-litigation process and the granting of a right to repair, would be thwarted if we were to read the Act to permit homeowners to continue to sue as before at common law, without abiding by the procedural requirements of the Act, for construction defect claims involving damages other than economic loss.”

Accordingly, the Supreme Court held the Right to Repair Act shows a legislative intent to modify the common law and effectively “provides that construction defect claims not involving personal injury will be treated the same procedurally going forward whether or not the underlying defects gave rise to any property damage.”  Therefore, “claims seeking recovery for construction defect damage are subject to the Act’s pre-litigation procedures regardless of how they are pleaded.”