Surviving the Construction Law Backlog: Nontraditional Approaches to Resolution

Jeffrey Kozek | Construction Executive

Across the construction industry, COVID-19’s impact has caused a range of problems for contractors and projects—prolonged or intermittent work shutdowns, supply chain delays, pricing increases on materials and funding shortfalls. It has also led to court closures. The legal backlog for claims and disputes means that owners and contractors are facing the option of waiting until the courts are functioning the way they were previously or utilizing alternative approaches to resolution to keep projects and businesses running. 

Though courts across the country reopened to some extent in the latter half of 2020, many state and federal facilities were shut down or working with a limited capability for weeks or months. The closures not only froze the progress of numerous disputes already underway, but caused new schedule, cost and COVID-19-related claims to also be held up in the same backlog that is slowly being addressed under current restricted operations. New safety measures to reduce viral transmission, including reduced usage of courtrooms, restrictions on personnel and increased cleaning and sanitizing measures, have limited the number of cases courts can handle on a daily basis and lengthened legal timelines in ways many parties had not anticipated and cannot afford. 

That many small businesses have continued to struggle financially through the pandemic period further complicates payments and work completions on projects that have been disrupted. Before filing or proceeding with a claim, contractors and construction owners will have to take a harder look at the significance of the claim they’re filing, the likelihood of success and potential for recovery, and the added risks of prolonged litigation. These deliberations are certainly familiar, but their potential outcomes take on a greater significance now. Having to wait longer for discovery and a trial to occur, for a judge to rule on motions or to decide a case, could ultimately determine whether moving forward with litigation should even be considered versus reaching an alternative settlement. 

With parties on all sides looking to recoup the lost time and cost from the pandemic, as well as resolving their prolonged matters in dispute, some parties may opt to instead settle more quickly and for less money. Though nonbinding, dispute resolution options like mediation can offer the chance to reach an agreement without going through arbitration or litigation. After both sides select a neutral mediator or review board, schedule time and prepare statements, they may be able to come to an agreement based on the mediator’s determination. On the other hand, if not satisfied with the nonbinding decision, the matter can still be re-mediated and/or litigated. It’s important to note that while this process is typically quicker than legally binding routes, it is not an overnight answer to resolution either. 

The best option to resolve each project’s disputes will vary as there’s still a lot of uncertainty in the pandemic environment, including how it is impacting options for construction litigation. For better or worse, these delays have already altered how contractors and owners approach contracts and cases. No one yet knows what the new normal looks like, what expectations should be about legal timelines and costs due to the limited operations of the court system, but parties should expect to face similar extended circumstances regarding claims and disputes for the foreseeable future and be prepared to adapt. 

Virtual Hearings and Mediations Are Here to Stay

Patrick J. Mahoney | JAMS

As the COVID-19 pandemic recedes, every aspect of our pre-pandemic ways of work is under review. Simply returning to our old ways is not the answer. To do so is to ignore the lessons learned while working remotely. Dispute resolution, like almost every aspect of society, changed as a consequence of the pandemic and what will remain is the extensive use of video. Why because it is less costly, efficient and effective.

COVID-19 thrust the legal community to work online. To the surprise of many lawyers, mediators, arbitrators and judges, the work continued to get done. Virtual hearings and mediations proved to be so successful that they are here to stay.

At the outset, one obstacle to conducting virtual hearings was learning how to operate in a virtual world, such as how to sign on to a virtual platform, upload and access documents and move participants between “rooms.” Security measures were enhanced to provide access only to the designated participants. In contested hearings, protocols were developed to preclude real time coaching of witnesses. Finally, adoption was slow until it became obvious that virtual hearings were essential to resolve disputes. Like riding a bike, once you learn, you do not forget.

What drove the acceptance was need. Courts were effectively closed for public hearings, and the convening of a jury was a rare event. The only way to address a legal dispute was virtually. Increasingly, legal professionals learned that the work could get done in a more efficient manner. For example, travel ceased to be an issue, which reduced costs and facilitated scheduling. Documents could be sent electronically to anyone at any time. Witnesses no longer had to sit and wait to be called; a simple text message could alert them when to sign on. Breakout rooms allowed parties and counsel to caucus in their own cyber room. Given that this process was not business as usual, lawyers learned to cooperate in scheduling and related aspects of a hearing.

However, there are lingering limitations. In mediations, personal contact can be critical in the final stages of a negotiation. The impromptu hallway conversations do not exist. Participants can simply sign off in frustration, and there is no opportunity to stop them at the elevator door. Distractions at participants’ locations can divert their attention, and participants are no longer sequestered in a single room mulling over the issues.

In-person contested hearings make it easier for the arbitrator to manage all the participants. Everything that is before a witness can be seen. The interactions between counsel and client are observable, which may not be the case in a virtual hearing. As a consequence, there is a perception that assessing credibility is enhanced by in person proceedings. An article by Judge Wayne Brazil, “Credibility Concerns About Virtual Arbitration Are Unfounded,” demonstrates that is not the case.

There are benefits of in-person proceedings, but I believe they are marginal in the overwhelming number of matters. The concerns about credibility or presenting evidence in a virtual hearing have not been borne out. The efficiencies of virtual hearings have driven their acceptance and continued use.

Top 10 Things To Like About Virtual Insurance Mediations

Andrew S. Nadolna | JAMS

Virtual mediation is the newest tool in the insurance alternative dispute resolution (ADR) toolbox, and it is here to stay. Here are 10 reasons to use virtual mediation for insurance-related matters.

1. Inventory reduction—now

Right now, there is a window of opportunity. COVID-19-related insurance cases are arising quickly. They will soon swamp lawyers, clients and insurance companies in multiple lines of insurance. These cases will take a disproportionate amount of time. Those working in claims for insurance companies, or as in-house counsel and risk managers, or for law firms working in the insurance space are seeing a massive influx of business interruption claims under property policies; but other lines, such as employment practices liability, directors and officers liability insurance and commercial general liability, are not far behind. The increase in volume will be monumental. In the meantime, every other case will be put on the back burner. Virtual mediations led by experienced neutrals can help. With no need to travel, or even commute, it is much easier for even the busiest mediators to be available, and you don’t need to schedule them months in advance. Go ahead. Settle some cases—virtually.

2. Scheduling convenience

Scheduling is a lot easier. Part of the reason for this is because you don’t have to worry about travel. Once travel has been eliminated, you don’t have to worry about the day before and/or the day after for participants or the mediator. You also don’t have to worry about commuting. You also don’t need to wait for an available room in a busy dispute resolution facility. Virtual rooms are virtually unlimited.

3. Ease of starting

See above: no commuting. I rarely hit traffic when I am walking down the hallway to get to my laptop. Virtual mediations tend to have everybody present and ready to go on time. Leveraging virtual platforms, there is the option to book as many as 50 rooms or only a few—at no additional cost. This means that matters involving complicated towers of coverage can have breathing room. Everyone gets their own room, and various participants can be assigned easily to that room. Participants just need to dial in, and the administrator or mediator will instantly put each participant in the appropriate room.

4. Geography doesn’t matter— so you can focus on skills

You can look nationally or even globally for the appropriate neutral with the kind of expertise you need, without any travel expenses. The participants can be anywhere. I’ve had cases with participants in four time zones. Many policyholder and insurer law firms have national (or international) practices aligned to the needs of their clients. Some mediators have a similar focus. Drawing on their skills is now easier than ever.

5. More meaningful mandatory ADR

There are now more mandatory alternative dispute resolution (ADR) clauses in more insurance policies (and other contracts) than ever before. If you are required to mediate, do it well and do it now, before you get inundated. A good mediator can help transform a session from a “check the box” exercise into a meaningful discussion and risk-analysis session. The worst-possible outcome is that your views of the facts, the law and the policy language will be thoroughly tested. The best thing that could happen is discovering that your idea of a reasonable settlement is not far off from the other side’s idea, so you settle. It’s worth a try.

6. Increased intensity of focus

There is something about being on camera that creates an unusual and helpful level of focus, but it can be extremely draining for any length of time. However, the benefit is that we tend to get to the point in a different—more considered and concise—way. Things are happening quicker in online insurance mediations. That isn’t necessarily always a good thing. Some cases require a more leisurely unfolding of events. Being aware of this can lead to more productive sessions.

7. Flexibility and creativity

The processes for conducting a virtual mediation will rapidly evolve. The global mediation community is now using online meeting platforms for mediation. We are engaged with the technology. We are thinking about how to do it better. We are thinking about the range of processes and structures that might benefit our clients and our cases. There are many possibilities.

8. The efficiency of a disaggregated mediation

A mediation can be separated into segments over the course of a few days or weeks, and the time in between can be used for assessment. Maybe the magic of the day can be transformed into bite-sized pockets of magic. Why is this important? Many insurance mediations have become multiday efforts, allowing each side the opportunity to regroup and consider what happened. Often there is a lot of downtime. Now we have the chance to have separate caucuses without keeping everyone else sitting in a room waiting for their turn. We can schedule it.

9. The new and improved opening session

We may be communicating more effectively now than ever before, which may mean that a substantive joint session can be productive and lead to negotiations. The strange intimacy of the technology— it can feel like you are very close to the people on your screen—enhances civility in discourse. With some guidance from the mediator—structured around a few issues and rules about time and types of discourse—we can get so much more accomplished at the beginning of a session. The other possibility is that the joint session becomes a two-part presentation over a couple days, and before the individual caucuses or bargaining begins, each side has the opportunity to consider whether there is anything new in the other side’s presentation that requires an alteration to its mediation strategy.

10. Technology choices

Pick your platform. Although Zoom seems to be the default option given its range of mediation- appropriate features, cost and ease of use, there are many other options. Many clients prefer platforms such as Microsoft Teams, Cisco Webex, Endispute or BlueJeans. Similar to any other detail concerning the mediation process, the selection of a virtual platform and any additional communication modalities is a matter that can be tailored to the needs and specifications of the parties. The time it takes to master the controls of any of these platforms is minimal. Mediators can work through any technology issues by using the platform for presession activities and can arrange for a brief practice session to get everyone comfortable with the technology.

As you can see, this tool belongs in your case resolution toolbox.

Arbitration or Litigation?: Data and Discussion for Construction Industry Decision-Makers

James T. Dixon | Construction Executive

With litigation as the default method for the resolution of disputes of all types, the construction industry has long used its contracting terms to fashion alternatives. These include mediation, arbitration, dispute resolution boards, partnering, early neutral evaluation, fact-finding and the use of an initial decision maker. Even with these options, a contractor’s choice is most often between litigation and arbitration, and the debate over which is best has continued for years. 

Industry sources have provided data relating to time, cost and other important factors that construction executives can reference to inform their decisions and supplement what they know from their own experience. 

ARBITRATED CASES CAN TAKE LESS TIME TO RESOLVE

The American Arbitration Association is the nation’s leading provider of arbitration services. It provides detailed procedural rules, trained case administrators and a panel of trained and experienced arbitrators. Because of its prominence, a web search for reported data on time revealed limited information since that information relating to arbitration proceedings is private. 

The AAA compared its construction cases to lawsuits of all types filed in the United States District Courts in 2015 and measured them from filing to a final award.1 The AAA reported that federal cases took nearly 28 months to conclude at trial while arbitrated construction took eight months. Arbitrated cases involving less than $100,000 resolved in less than five months. If the data sample for federal cases had been reduced to construction cases only, it is likely that the resolution time would exceed 28 months since construction cases tend to be more complex.

The use of the federal court information as a bench-mark means that those investigating their options should look to local data to make a more accurate comparison for cases that would be tried in state court. In Ohio, for example, only 721 of 68,735 “other civil” cases, such as construction cases, were pending at the end of 2015 that had exceeded a 24-month duration, meaning that 99% of state-level cases resolved in less than that time.2  Anecdotally, this author does not spend much time discussing the time difference with clients because arbitration is the clear winner in this category. Even so, complications do arise in an arbitration proceeding that extend the date of conclusion and frustrate clients. The cause of those complications is highlighted by another study discussed below. 

COST DIFFERENCES ARE CASE SPECIFIC

While the cost of legal assistance is foremost, decision-makers must also consider the cost of expert witnesses, court reporters, document production services, filing fees and the cost of the judge, jury and arbitrator. There are also internal costs such as time that staff members dedicate to the resolution of the dispute. And, there is an emotional toll that can be imposed by the stress of proceedings. All of these costs will vary based upon the nature and complexity of the dispute. 

For filing fees, litigation is much less expensive. It may cost $300 to file a complaint in the local trial court, whether the dispute involves $30,000 or $30 million. Courts will also typically charge for other filings, such as motions, but those charges are minimal. The AAA relies upon filing fees to fund its operations. For the initiation of an arbitration proceeding, the filing fee varies based on the dollar amount of the claim. For a claim of between $150,000 and $300,000, the fees are $4,650. For claims between $1 million and $10 million, those fees are $14,700. 

Tax-payer funded courthouses do not charge for judges and jury fees are minimal. Arbitrators typically charge by the hour, and those rates will vary based upon the local market and the experience of the arbitrator. The parties share these costs. Under the AAA’s procedures, cases with claims less than $100,000 proceed on a fixed fee basis of $1,750. Cases with claims that exceed that amount will see arbitrator charges that vary with the complexity of the case. Cases involving claims in excess of $1 million are handled by three arbitrators. In a recent case, the initial estimate of arbitrator fees and costs exceeded $300,000 for a three-member panel overseeing a two-party dispute with competing seven-figure claims.

While this figure is eye opening, the control on motion practice and discovery that the arbitrator(s) can impose will reduce the legal fees incurred by the parties when compared to litigation. Only recently have federal and some state courts introduced the idea of discovery “proportionality.” Without a limit based on the nature of the dispute, either party can make the opposing party spend considerable sums on discovery. The idea of discovery proportionality is ingrained in the arbitration process, with the AAA’s rules favoring a more limited approach to discovery. Some cases are limited only to an exchange of records while others depositions are disfavored and, when used, are limited in number.

Motion practice is another key driver of costs. The federal and state courts permit the filing of motions at the outset of a case (such as a motion to dismiss), during discovery (such as motions to compel), after discovery (such as motions for summary judgment), before trial (motions in limine challenging the anticipated evidence), during trial (a motion for directed verdict), or after trial (motions for a new trial). While the AAA does give the arbitrator the discretion to address necessary pre-hearing motions, the focus tends to be on motions that can simplify the hearing process if granted. 

Time is money, and postponements, without a doubt, add expense. The culture of the local court, or the culture within a particular judge’s chambers, will determine whether a lawsuit will proceed according to its original schedule. The same can be said of arbitrators, though their training and the rules emphasize the need for a timely resolution of the dispute.

With so many factors in play, the nature of the dispute will dictate whether arbitration or litigation is the least expensive option. Parties should not be completely dissuaded by the filing fees and the cost of the arbitrators since those arbitrators can more than offset those expenses by limiting discovery and motion practice.

COST AND TIME ARE NOT THE ONLY CONSIDERATIONS

Another measure relates to the qualifications of the decision-makers. Trials typically involve jurors that know nothing about construction, the rules of evidence or the rules of procedure. Judges do not often have significant experience with construction disputes. While there can be anxiety based upon the personal experience and propensities of an arbitrator, they are typically chosen from a list of qualified individuals with industry experience. For larger cases, the use of three arbitrators often creates a peer dynamic where each arbitrator is challenged to do his or her best. In most cases, there is a strong argument in favor of arbitration because of this factor. 

The litigation process does have its proponents. Some argue that cases of significant complexity benefit from open discovery so the parties can be fully informed. It can be more complicated to collect information from non-parties through arbitration because of the need for subpoenas, the effectiveness of which varies from state to state depending on local law. And others prefer to have the opportunity to appeal an adverse award. Arbitration will only provide for the right of an appeal if the parties agree, while courts provide for an appeal as a matter of right. Awards at trial are quite often followed by an appeal, adding months to the resolution of a dispute.

And, it can be difficult to involve all of the parties to the dispute to an arbitration proceeding if the contracts at issue do not all call for arbitration. 

CONCLUSION

Over a three-year period, the AAA collected survey information from 422 arbitrators of commercial cases with a median of $2.5 million in dispute. Those survey results indicated that combative counsel and parties were the most likely factor to increase costs, discovery the second most, motion practice the third and postponements the fourth. That survey concluded that, to keep costs to a minimum, parties should set limits on discovery and motion practice in their arbitration agreements and use a set of rules to govern the process.

That recommendation highlights the key to managing the costs of dispute resolution—thoughtful drafting of the dispute resolution terms within the construction agreement. One party can maintain a right to choose between litigation and arbitration of a dispute as it sees fit. Or, both parties can agree to use arbitration for some cases and litigation for others depending on the size and nature of the claims and the number of parties involved. 

Try Med-Arb as an Alternative to the Typical Alternative Dispute Resolution

Brian Gaudet | Kilpatrick Townsend & Stockton

An alternative to traditional alternative dispute resolution called med-arb, a combination of mediation and arbitration, should be strongly considered in small and uncomplicated cases.

Alternative dispute resolution in the construction context typically means arbitration and mediation. Dispute review boards and executive negotiations are some others, but those are far less frequently used. There are alternatives to traditional alternative dispute resolution (hi low arbitration, baseball arbitration, med-arbs, neutral case evaluation, and other creative variations of trying to figure out who gets what from whom). One such method that I would ask folks to consider is the med-arb, a combination of mediation and arbitration. The parties first try to mediate the case to resolution and in the event the mediation is unsuccessful, the mediator turns into an arbitrator and renders a decision. Depending on the facts and complexity of the case, there may be nothing more needed after the mediation in order for the arbitrator to make a decision. Occasionally, additional documentation or witness testimony is required. A variation (called arb-med) is having a short arbitration first with the arbitrator putting a decision in a sealed envelope; the arbitrator then tries to mediate the parties to a mutually agreeable resolution in lieu of the decision. If the case is resolved in the mediation, then the arbitrator simply throws away the proposed award.

Med-arb should be strongly considered in small and uncomplicated cases. Parties usually do a pretty good job of setting out their position and the law during a mediation. With several back and forth trips of the mediator, the dispute is usually fairly well understood. After investing half a day talking about the facts and legal issues, it seems wasteful to repeat that process in court or an arbitration. A med-arb should start with the parties exchanging a position paper rather than a confidential mediation memo so that the mediator/arbitrator (“facilitator”) and the other party have an opportunity to understand the other sides position on the pertinent facts and the law.

One concern of the facilitator is whether the parties have agreed going into a mediation that it will be a med-arb. There may be reluctance to turn a mediation into a med-arb at the end of the day. Accordingly, this should be discussed in advance. The main criticism of the med-arb is the idea that parties may not be candid with the mediator during mediation (i.e. especially in disclosing weaknesses in their case), thereby preventing the mediation process from working appropriately and making an arbitration result much more likely. Theoretically that is possible, but one must question how vulnerable and candid parties become during a construction mediation to begin with. One criticism of mediation is sometimes parties do not attend with the intention of trying hard to resolve the case at mediation, but rather to find out more about the opposing parties case or to try to set up a resolution down the road. The benefit of the med-arb is that the parties last chance to resolve the matter themselves IS during the mediation… there is no tomorrow or later. The med-arb can be useful in making sure both parties are committed to trying hard to resolve the case in that moment. When the dollar amounts are lower and the issues are not complex, significant efficiencies in resolving the matter can be gained by trying a med-arb.

I have participated in a number of med-arbs as a party representative. In all but one case a mediated settlement agreement was reached. In the one instance it went to arbitration, the facilitator did not require any additional information from the parties and rendered a decision that was reasonable based on the evidence presented. Admittedly, there was some evidence not gathered that could have helped inform the decision, such as a site visit that would have taken a full day and/or several depositions. If the parties engaged in those activities, a mediated settlement would not have been a possibility, and the outcome of the arbitration may have differed. Or it may not have, but in either event both parties would have spent significantly more in legal fees than what the value of the dispute supported. In this instance, the legal expense was relatively low, the dispute was over even though the process was a little imperfect, and, in that sense, both parties got a great outcome overall.