Albert Bates, Jr. and R. Zachary Torres-Fowler | Pepper Hamilton
Days after the World Health Organization declared the COVID-19 outbreak a global pandemic, governments from around the world scrambled to enact measures aimed at mitigating the spread of the virus. In the United States, cities and states have enacted travel restrictions, issued shelter-in-place orders, and directed nonessential businesses to shutter. While all aimed at mitigating the spread of the virus, these measures will have an immense disruptive impact on businesses and industries around the world — the construction sector included.
As notices concerning force majeure, changes in law, and change orders swirl, parties should prepare themselves for how these disputes will be managed and resolved. The COVID-19 outbreak will rapidly reshape how the construction sector does business. This article offers our insight into just once facet of the construction industry: alternative dispute resolution and how the COVID-19 outbreak has and will affect construction disputes going forward.
Before the Dust Settles – How Will the COVID-19 Outbreak Impact Pending Proceedings
For those parties in the midst of a complex construction arbitration or dispute, the COVID-19 outbreak is likely to have thrown a wrench into the proceedings’ carefully choreographed schedules. Below is a summary of the issues we expect that parties to pending disputes will continue to confront over the coming months.
- Postponements – The most obvious impact of the COVID-19 outbreak on pending construction disputes is that most in-person hearings will likely have to be postponed. This is true not only for hearings scheduled while state and city restrictions remain in effect, but also for hearings scheduled months from now. Indeed, the disruption caused by current measures aimed at slowing the spread of the virus will inhibit parties from accomplishing the long list of tasks needed to prepare for a hearing, including meeting with clients and witnesses and conducting pre-hearing discovery (e.g., depositions).
- Remote Dispute Resolution –In some cases (particularly in cases of less complex construction disputes), it may be possible for parties manage the proceedings remotely. Specifically, in cases where the number of planned depositions is low or where a relatively limited number of hearing days are required, it might be possible for arbitration proceedings to continue through the use of remote/online technology. However, many lawyers and their clients are skeptical of written testimonial submissions and truncated remote hearings within the context of binding dispute resolution. Further, while the concept of “online dispute resolution” (ODR) has been batted around for years, it is unclear whether ODR is truly ready for prime time. Indeed, early efforts by the D.C. Circuit to host appellate arguments just by telephone have proven difficult.1 Given that many law firms and parties have been forced to shutter their offices and rely on remote–working environments, the high–resolution cameras and broadband connections often required to effectively execute a remote hearing may not be as readily available in home office settings. This consideration may be especially important in proceedings where the subtleties of verbal and nonverbal communication are absolutely critical to assessing credibility. This is not to suggest that ODR may not have a place during these challenging times. Anecdotal reports in recent days suggest that some arbitrators have completed ongoing hearings via remote means to avoid delays, and that counsel and the parties have expressed satisfaction with the process.2 As a result, there may be opportunities to use ODR to minimize delay in appropriate cases, particularly in cases where legal and/or technical issues predominate and the parties agree to the use of written testimonial submissions.
- Increased Mediation and Settlement Rates –One area that will likely be less affected by the limitations of ODR is mediation or settlement negotiations. Indeed, while mediation and negotiation discussions inevitably require the parties to assess the veracity of the other parties’ positions, commercial considerations are typically the driving factor in reaching an amicable resolution. Given the inevitable pressure on parties to resolve disputes quickly — especially in an environment where deteriorating economic conditions may mean that cash-flow requirements take an increasing priority — expect a rise in remote mediation/settlement proceedings. Parties’ access to mediation and settlement negotiations holds promise and anecdotal reports over the recent days suggest parties and mediators are willing to use remote means, such as Skype and Zoom, to successfully mediate disputes.3
- Alternative Procedures for Existing Arbitrations – As mentioned above, parties and arbitrators considering remote hearings should also consider the use of witness statements in lieu of depositions and direct examinations. For parties that prioritize maintaining scheduled hearing dates or minimizing the length of any postponement of hearing dates, eliminating, or at least minimizing the number of, depositions is of great importance. Written witness statements provide ample disclosure of the witness’s proffered testimony, allowing for fair and effective cross–examination. While many practitioners may be uncomfortable with the prospect of giving up the opportunity to depose a witness or forgoing direct testimony, this process is widely used in international arbitration proceedings. Written witness statements enable parties to gather information concerning a witness’s planned testimony, eliminate or minimize depositions, and shorten the total required hearing time (which, in turn, may enable the parties and panel to hold scheduled hearing dates or reschedule hearings earlier than might otherwise be the case).
After the Dust Settles – How The COVID-19 Outbreak May Affect Future ADR Proceedings
When the COVID-19 outbreak subsides, many arbitrators expect a surge of disputes to press forward toward arbitration. Specifically, arbitrators contemplate an increase in the number of new case filings as a result of the impacts of the COVID-19 pandemic on projects that were under construction at the time of governmental actions, as well as projects that were deferred or cancelled due to the economic impact of the pandemic. In addition, many also anticipate that arbitrations currently scheduled to be conducted in 2020 may be postponed. This expected surge in new and existing arbitrations in the immediate aftermath of the pandemic comes with a host of additional considerations.
- Conditions Precedent – Given the financial pressures on owners, contractors, subcontractors and suppliers, cash–flow considerations may place pressure on contract managers and in-house counsel to push for swift resolution of the disputes. However, many construction contracts include step-up clauses or conditions precedent to filing a demand for arbitration. Negotiations among principals and/or mediation may lead to the prompt resolution of disputes in many circumstances, and parties are cautioned that the urge to file an arbitration demand without first satisfying the conditions precedent may only result in further delaying the ultimate resolution of the dispute.
- Increased Arbitration Caseloads – While much about COVID-19’s impact on the construction arbitration field remains to be seen, as mentioned above, many expect that arbitrators and arbitral institutions will see a significant increase in new case filings. To further complicate the situation, arbitrators will already have to grapple with the backlog of cases that were postponed as a result of the COVID-19 outbreak in the first and second quarters of 2020. As a result, arbitrator availability could become an issue in the 12 to 18 months following the gradual return to the new normal in aftermath of the pandemic. Thus, it is plausible to expect that, over the coming year, arbitration proceedings may take longer to fully resolve than would otherwise be the case.
- Expanded Use of Mediation and Other Forms of Nonbinding ADR – Given the pressures associated with the need to quickly resolve construction disputes and the complications associated with increased arbitration caseloads, parties may begin to consider utilizing other forms of nonbinding ADR. Mediation and executive–level negotiations are the two most obvious candidates for resolving these disputes, but others forms of nonbinding ADR may also become increasingly attractive alternatives for parties seeking to quickly and efficiently resolve their disputes. For example, the expanded practice by mediators to create customized negotiation plans, including the exchange of just enough information to enable parties to make principled business decisions about settlement, has become a hot topic among practitioners. Indeed, Guided Choice Dispute Resolution was formed several years ago to introduce the best mediation practices to a broader audience and help parties and their counsel to create an efficient settlement process designed for the specific dispute at hand.4
We are all operating in unchartered waters, and how the COVID-19 pandemic will shape our society, businesses and ultimately the construction industry is unknown. Construction disputes stemming from the COVID-19 outbreak are inevitable and will continue to disrupt parties’ ability to quickly and efficiently resolve their disputes. Parties should work carefully with counsel to craft a strategy aimed at navigating these challenges and preparing to manage the complications they are likely to face over the coming months.
Above all else, however, stay safe.
1 Law.com – It’s Kind of a Mess – Phone arguments get rocky debut at DC Circuit during COVID-19 Pandemic, https://www.law.com/nationallawjournal/2020/03/20/its-kind-of-a-mess-phone-arguments-get-rocky-debut-at-dc-circuit-during-covid-19-pandemic/.
2 As an example, a press report indicated that hearings in a scheduled two-week ICC arbitration with 70 participants from around the world began in person in Brazil on March 9, 2020. The first week of hearings was conducted in person. As a result of the COVID-19 pandemic, the hearing could not continue in person, and postponing the remaining hearing dates would have been very disruptive. The second week of hearings was conducted remotely using Zoom. (https://exame.abril.com.br/negocios/a-pandemia-na-maior-arbitragem-societaria-do-pais-a-disputa-pela-eldorado/).
3 See generally A. Schmitz, C. Rule, D. Larson, ODR in the ERA of COVID-19: Experts Answer Your Questions (March 23, 2020), https://www.americanbar.org/groups/dispute_resolution/resources/resources-for-mediating-online/odr-in-the-era-of-covid-19-experts-answer-your-questions/.
4 Additional information and a collection of resources on this topic is provided by the Guided Choice Mediation Interest Group (https://gcdisputeresolution.com/).