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.

AIA Arbitration Provisions May Limit Recoverable Damages on Colorado Projects

Kelly Smith | Snell & Wilmer

The American Institute of Architects (“AIA”) produces form contract documents widely used in the construction industry. Because of the prevalence of AIA contracts, many parties consider them to be standard and may not fully scrutinize the contract provisions or their future implications. This is especially problematic in Colorado where the use of AIA contracts, specifically their arbitration provisions, may jeopardize a party’s ability to recover punitive damages or cause a party to spend additional time and incur substantial fees litigating what damages are recoverable.

Many AIA contracts include binding arbitration provisions if the parties elect to include them to govern future dispute resolution. They generally also include choice-of-law provisions stating that the contract shall be governed by the law of the place where the project is located. Importantly, Colorado Revised Statute § 13-21-102(5) prohibits exemplary (or punitive) damages from being awarded in arbitration proceedings “[u]nless otherwise provided by law.” Thus, § 13-21-102(5) bars a party from recovering punitive damages if there is a binding arbitration provision in a construction contract and the project is located in Colorado.

Typically, to avoid this prohibition, a party must successfully argue that the Federal Arbitration Act (“FAA”), rather than Colorado law, governs the parties’ arbitration dispute. Colorado courts have acknowledged that when the FAA governs, § 13-201-102(5)’s prohibition on awarding punitive damages does not apply. See Gidding v. Fitz, 2018 WL 480607,*3 (D. Colo. Jan. 19, 2018); Pyle v. Securities USA, Inc., 758 F.Supp. 638, 639 (D. Colo. 1991). The FAA governs arbitration proceedings that arise out of contracts involving interstate commerce—even if those contracts include a Colorado choice-of-law provision. See 1745 Wazee LLC v. Castle Builders Inc., 89 P.3d 422, 425 (Colo. Ct. App. 2003). “Commerce” is construed broadly and includes interstate shipment of goods. Comanche Indian Tribe v. 49 LLC, 391 F.3d 1129, 1132 (10th Cir. 2004). Accordingly, one way a party may be able to invoke the FAA and recover punitive damages in arbitration is to show that the materials utilized for a Colorado construction project came from out of state.

However, a party will not likely be able to invoke the FAA where the actual arbitration provision states that it is governed by Colorado law. Pyle, 758 F.Supp. at 639. Further, it is possible that some Colorado construction projects may involve only materials, equipment and labor sourced from within the state. In those cases, a party who has signed an AIA contract with a binding arbitration provision and Colorado choice-of-law provision may be barred from seeking punitive damages.

In sum, before entering into a seemingly standard AIA contract (or any contract at all), a party involved in a Colorado construction project may want to consider consulting with counsel. Parties may want to pay particular attention to:

  • The general choice-of-law provision in the contract;
  • Dispute resolution provisions in the contract;
  • Whether the dispute resolution provisions contain additional choice-of-law designations;
  • Who the other parties to the contract are; and
  • To the extent possible, from where project materials, equipment and labor will be sourced.

These factors will typically affect the types of damages that a party can recover in the event of a contract dispute.

Dispute Review Boards for Real-Time Dispute Avoidance and Resolution

Neal J. Sweeney | ConsensusDocs | July 19, 2019

The use of dispute tribunals generally referred to as Dispute Review Boards or DRBs on major projects has matured. Use of a DRB cannot guarantee elimination of post-project litigation, but when used properly, a DRB can be an enormously effective tool to avoid and resolve disputes rapidly and during construction.

The modest out-of-pocket costs of a DRB can pay big dividends. DRBs offer the opportunity to shorten the life cycle of a dispute by requiring the principals to confront and address the merits of their dispute, rather than simply hunkering down and focusing on posturing and preparing for arbitration or litigation. Even when a DRB cannot immediately resolve a dispute, the process can still facilitate subsequent settlement and cost-effectively prepare both parties for formal adjudication. DRBs can also enhance communications and help the parties avoid and resolve problems before they spiral into disputes.

DRBs were first and are most widely used on big civil and infrastructure projects, but the benefits of a DRB extend equally to major building projects, particularly hospitals, and industrial projects and should be used in those sectors.

Key Details – The DRB Specifications
DRBs are a creature of contract; the scope and authority of the DRB as well as DRB procedures are established in the construction contract, generally incorporated through the specifications and other attachments (“DRB specifications”). It is important to review the DRB specifications on each project before submitting a bid or proposal. Although there is a fair amount of standardization, details may be customized, and those details can have considerable practical, legal and risk implications. Examples of standard DRB specifications are provided by the DRB Foundation and ConsensusDocs . Some of the key details are the DRB member selection process, the scope of the DRBs authority, who can directly participate in the DRB process, and the impact of a DRB decision.

Regular DRB Participation on the Project to Avoid Disputes
Although focus is often placed on DRBs rendering formal decisions on disputes, the role of a DRB can and should be broader. The DRB should be part of the communication structure of the project, with regular project visits and meetings so the DRB members are generally aware of the nature and progress of the work and become familiar with the principals for the parties.

The DRB members are most often experienced industry professionals or construction attorneys. DRBs are most effective when the DRB members know the project and the people on a retail level. The DRB should not be trotted out only when a problem has degenerated into a polarizing dispute that the DRB is asked to decide.

These regular site visits and meetings provide an informal and non-adversarial forum in which the principals are called on to identify and discuss potential problems before they become disputes. These group interactions with the DRB help enhance communication and preserve relationships between the parties as they address issues in a non-contentious setting. In this way, problems are more likely to be addressed and disputes avoided or at least mitigated before moving down the trail to a formal disposition with a DRB hearing and decision.

Formal DRB Hearings and Recommendations
When the DRB is asked to formally resolve a dispute by rendering a formal decision the principals have less control than they do in bilateral negotiations. With the DRB, the dispute will be “judged” and a decision will be rendered. Although that DRB decision is generally nonbinding, the DRB decision and the process required to get to a decision can be tremendously valuable to both parties. Far more often than not the DRB recommendation leads directly or indirectly to the resolution of the dispute and avoidance of litigation or arbitration. The written submissions and hearings that are part of the process for the DRB to decide a dispute are more formal than the regular site visits and meetings, but far more informal than a court or arbitration proceeding.

Attorney participation in DRB hearings is a recurring issue, and should be addressed in the DRB specifications. Based on extensive experience with DRB hearings, this author believes DRBs are most effective with minimal to no direct attorney participation in presentations. Even in DRB hearings in which the parties make detailed and extensive presentations, it appears to be more effective to limit the presenters to project personnel, even if attorneys are permitted to attend the hearing and assist in the preparation for the hearings and of written submissions to the DRB. Limiting attorney participation does appear to lower adversarial tensions, reduce formality and allows the DRB and both parties to hear directly from first hand participants.

There is no need to restrict a formal DRB hearing to multi-million dollar claims. On the contrary, when there is a dispute on a recurring issue that can be presented before the costs mount, it may be possible to have the DRB decide entitlement quickly on a single occurrence that provides guidance to the parties about how the DRB will view all the other similar occurrences. The parties may still disagree over the issue and the DRB recommendation, but with that guidance, the parties have the opportunity to react and adjust during construction rather than waiting until all the costs are incurred.

Impact of the DRB Recommendation
A DRB decision is generally called a recommendation, and it is just that — a recommendation. It is not binding on either party unless both parties accept the recommendation. It is not like an arbitration award that either party can unilaterally enforce.

An important consideration is whether the recommendation is admissible in a subsequent litigation or arbitration if the parties do not settle. The issue of the admissibility of the DRB recommendation must be addressed in the DRB specification, such as the ConsensusDocs 200.4. Even if the DRB recommendation is not binding, a judge, jury or arbitrator will likely give a lot of weight to a detailed recommendation by three industry professionals who were selected by the parties and were familiar with the project. Those in favor of the admissibility of DRB recommendations seem to recognize the heavy weight the recommendation will carry if admissible, but believe that by knowing that weight, the parties will be more likely to fully invest in and make the most of the DRB process.

In some international standard forms contracts, such as the FIDIC documents, the decision of the tribunal, called a dispute adjudication board, is binding on an interim basis. The decision can immediately provide financial or schedule release to the prevailing party, but the distinction is still subject to general challenge in any subsequent court or arbitration proceeding.

Activate the DRB at the Beginning of the Project
If your contract calls for a DRB, do not wait for a dispute before you activate the DRB. The DRB should be set up immediately. The ConsensusDocs 200 Standard Agreement Between Owner and Constructor requires, at section 12.3.1, that if a DRB is selected that the parties select a DRB “as soon as practicable after the execution of this Agreement Once there is a serious dispute, it is tough to agree on anything, including setting up a DRB. In addition, by waiting, you lose the potential benefit of the DRB as a dispute avoidance tool.

Do not wait to use the DRB process to air out potential problems that may become disputes. That does not mean dump every problem on the DRB to solve. On the contrary, use the regular DRB site visits and meetings to enhance communication with the other side to help limit lack of communication, misunderstanding, or a party sticking its head in the sand. More open communications help the parties address problems and mitigate disputes.

When a formal DRB hearing and decision is sought, do not wait and see for the outcome before digging into the issue and investing serious effort into evaluating and supporting your position. At that point it will be too late. If you get an adverse DRB recommendation, the DRB is unlikely to give you a “do-over”, especially if the problem was lack of preparation. The consequences of not properly preparing for a DRB hearing are compounded when the adverse DRB recommendation is admissible in court or arbitration.

DRBs when properly understood and employed are a tremendous benefit and value on any major project to help avoid, mitigate and resolve disputes in an expeditious and cost effective manner.