There are a variety of options available for resolving construction
disputes. Whether you are an owner, contractor, subcontractor, supplier,
designer, or consultant, it is critical to consider in advance—and before
entering into an agreement—how best to resolve issues that can (and will) arise
on a project.
The old-style methods of using a baseball bat or facing each other ready to
draw at high noon in front of the Long Branch Saloon in Dodge, while perhaps
more effective and efficient, are no longer in vogue and not legal to boot.
Therefore, you have to consider alternate methods of dispute resolution which,
of course, include mediation, arbitration, and court.
These issues not only apply to construction agreements, but more and more
insurance policies require arbitration as a means of resolving disputes with an
insurer.
Keep an Open Mind
At the outset, it is helpful to keep an open mind and not assume one method
is better than another on a particular project. I recognize that many clients
and companies in the construction and surety industries have pretty strong
feelings about the forum for resolving the disputes. Some swear by arbitration,
while others look at arbitration as a plague on humanity. There is usually some
bad war story behind the preferences: a company that swears by the court,
because of a protracted arbitration which was costly and inefficient (where the
arbitrator split the damages anyway) versus a company that swears by
arbitration after enduring a trial before a political hack judge or jury that
had no clue.
Regardless, try to keep an open mind because one option may be better than
another, depending on the contract and project involved. For example, an owner
who is developing low-income housing in the Bronx may want to take her chances
before a judge and jury in the Bronx, figuring that they may be sympathetic to
the owner if a dispute arises. On the other hand, the contractor working for
that owner may want to arbitrate disputes, rightfully fearing that a local
judge or jury will give the owner some friendly home cooking.
I recall when I worked at Max E. Greenberg, Cantor and Reiss, years ago, and
we had cases against public agencies. The attorneys for the public agencies
seemed to love to be in court. Once there, they tried to make it clear to a
jury that if the jury awarded damages against the public agency, guess whose
taxes would be going up?
So, while everyone has feelings (some pretty extreme) on which method of
resolving disputes is best, try to keep an open mind and see what is best for
your particular contract and project.
Pros and Cons on Dispute Methods
Since you've agreed (at least for purposes of this article) to keep an
open mind, let's take a look at the benefits and disadvantages of
mediation, arbitration, and litigation, and then let's see how you can best
set up the format for resolving the disputes in the manner that you want.
Pick Your Poison at the Outset
Whether you lean toward arbitration, mediation, or court as the dispute
resolution process, it is important to determine and commit to one before you
enter into your agreement. If the agreement does not mandate arbitration or
mediation, then you will be forced to use the courts as the remedy for
resolving disputes. You will not be able to force the other side to mediate or
to arbitrate unless the signed agreement clearly provides for either.
There are many court cases on this. The courts hold that parties have a
constitutional right to access to the courts to resolve disputes. Parties who
do not wish to avail themselves of this almost heavenly right have to make it
clear in the agreement. Therefore, any agreement that does not specify
arbitration or mediation as the remedy for resolving disputes will
"default" to the court system.
Keep in mind, however, that even if your contract does not provide for
mediation or arbitration of disputes, you can voluntarily agree with the other
side to mediate or arbitrate later on. But, the only way that you can
force the other side to mediate or arbitrate is to have a clause in
the contract requiring those processes for dispute resolution.
Determine Which Is Best for You
The rule of thumb used to be that arbitration is faster, more efficient, and
more cost-effective than court, so it is the better way to go. That certainly
isn't true anymore. All too often, arbitration proceedings become lengthy,
arduous experiences, involving discovery and depositions and forcing the
parties to endure endless sessions and ever-mounting costs. All too often it
appears that the arbitrators are using the process for their retirement funds,
having no interest in ending hearings where they get paid for each day they
appear, plus "study time."
(There are ways to control those problems. And, I will note that the
arbitration folks are listening. I went to a conference given by the American
Arbitration Association in Los Angeles a few years ago. The opening statements
were to the effect that the system is broken and needs to be fixed. So there is
hope.)
For all the bad and negativity that surrounds arbitration, there is a
primary benefit that, to me, outweighs the detriments and makes arbitration the
favored way to resolve disputes—being able to select arbitrators with
experience in the field, who know the issues and can review, address, and
resolve those issues fairly. Rarely do you get that benefit in court. While
there are some very good judges out there, there are too many others who have
no experience in construction and cannot provide a fair or effective review of
a dispute. (Did I put that mildly enough?) And, do you really want a jury
composed of people who do not want to be there and who have no clue what the
evidence is showing or what is being said to hear and resolve your dispute?
Therefore, I typically lean toward arbitration for dispute resolution,
unless the project circumstance almost cries out for a court where I think I
can get some home cooking and a better result than arbitration.
Does Mediation Work?
I've found mediation to be a pretty useful process, especially where the
parties are serious about trying to resolve the issues. Sometimes, mediation is
used just to get a better feel for the other side's case and see what
backup they have. But, where the parties are serious and are willing to devote
the time and energy to address and resolve the issues, mediation can be very
effective—with a good mediator, of course. There are a number of effective
mediators out there. We've been fortunate to recently work with a few, and
they were very helpful in getting our clients' issues resolved. Oddly, in
one matter, the mediator that we selected had been an arbitrator in a different
case that we had years earlier. He was a better mediator than arbitrator,
though.
How do you select a mediator? Mediation can be done informally—where the
parties agree on an individual to perform the mediation and control the
process. Otherwise, mediation can be done formally through a specific tribunal,
such as JAMS or the American Arbitration Association. When it is done formally,
those tribunals will provide a list of proposed mediators. You then work with
the other side to select the one with whom you are most comfortable. When I am
trying to select a mediator, I can get good feedback and recon from colleagues
or from the references shown on a mediator's résumé. Those folks can help
narrow down the field.
There are exceptions, of course. We recently did a mediation in Long Island,
but the mediator was not as billed. We heard a lot of good stories from the
mediator and paid a lot for his time, but he was not helpful in resolving the
dispute. The other attorney and I did wind up settling the matter
ourselves—mostly out of fear that we'd have to sit though more war stories.
(Perhaps that was the mediator's strategy?)
If you are going to mediate, clarify the process. Mediation is a nonbinding
process. That is, no matter what is done, you will not be forced to accept any
result unless you want to. I see some folks who talk about "binding
mediation." If the result is binding, then the process is not mediation.
Therefore, if you are agreeing to mediate a dispute, make sure that the other
side agrees that everything is nonbinding—and that everything will be kept
confidential. Usually, whatever is said during the mediation process is and
should remain confidential and not subject to disclosure in any later
arbitration or court proceeding.
What Is the Process?
Make sure that your contract identifies the dispute resolution
process. It's essential to make sure that the agreements are clear on
the point that you have the right to mediate and/or arbitrate disputes that
arise on the project or with respect to the contract. As mentioned, if the
agreement does not specify and mandate mediation and/or arbitration, then the
general recourse and remedy will "default" to the courts. Therefore,
decide at the inception and prior to contract signing which dispute resolution
process is preferred, and be sure it is in the agreement.
Many form contracts have arbitration clauses in them. For example, the
American Institute of Architects (AIA) form agreements generally have mediation
and arbitration clauses. Depending on which version you use, the form may
require mediation and arbitration (unless the clauses are crossed out), or they
may have options that require you to actually fill in your choice. The earlier
AIA forms also required arbitration to be administered by the American
Arbitration Association. The forms were relaxed, and, at some point, the
American Arbitration Association was removed as the "default"
tribunal.
If you choose to arbitrate and/or mediate, make sure the contract clause
is clear and unequivocal. Since there is a constitutional right to access
the courts for dispute resolution, the courts require parties to a contract to
show a knowing and clear intention to give up and forfeit that right and go to
arbitration—before a court will force the parties to arbitrate. Some
arbitration tribunals will offer suggested language to use in the contract to
require arbitration as the dispute resolution mechanism. Generally, the clause
must state, in no uncertain terms, that the disputes will be resolved by
arbitration. The clause must also say which tribunal will administer the
arbitration (or mediation) and which rules will apply.
Take control over the process. There are very good options
available when you draft or mark up an arbitration clause in a contract. In
fact, here is where you can take and keep control over the process. When I
draft an arbitration clause in my construction contracts, I always have
language limiting the number of sessions and prohibiting any party from taking
any depositions. For example, depending on the contract amount in the
agreement, I may say that no more than 4 sessions will be permitted; or,
perhaps, no more than 10 sessions will be allowed for larger projects. My
clauses also prohibit any depositions, since that is where the process can
become more costly and inefficient. You can also set the location for the
arbitration and specify how many arbitrators you will use for a dispute.
Whatever you decide, try to avoid the situation where you agree to three
arbitrators, where each party gets to pick one, and then the two selected
arbitrators will pick a third. To me, this seems rather useless—you might as
well just go with one arbitrator since each party's selected arbitrator
will rule in favor of that party.
Don't be fluffy or too creative with the arbitration or mediation
clause. There are always cases where a court has to interpret an
arbitration clause and decide if the parties knowingly chose arbitration or
mediation as the process for resolving disputes. In a number of cases, the
arbitration clause makes arbitration appear to be optional. For example, in a
recent case, the court looked at a clause, which said the following.
All disputes between the parties concerning the interpretation or enforcement
of any rights or obligations under this Agreement ... may be
resolved by final and binding arbitration pursuant to the rules of the
American Arbitration Association.
The issue was whether the use of the words "may be resolved"
showed "a clear, explicit, and unequivocal agreement or mandate to
arbitrate the subject dispute." The court found the owner and contractor
agreed to arbitrate, even though they used the word "may."
Unilateral arbitration clauses. More recently, we are seeing
construction contracts that say, if there is a dispute, one party may select
arbitration or court at that party's option. There is a question whether
that type of clause is enforceable. Therefore, if you are going to include that
language in your agreements, make sure you know beforehand whether it is
enforceable.
My view is that these one-party options clauses are not enforceable. My
reason: as mentioned, for parties to give up a constitutional right to the
courts, they must clearly and explicitly agree that they want to avoid the
courts and use arbitration as a means to resolve disputes. An arbitration
clause that gives one party an option to go to arbitration or court does not,
at least in my view, show a knowing and irrevocable intention to use
arbitration and bypass the courts.
Apparently, these unilateral arbitration clauses are pretty popular in
international agreements. I Googled the term and found analyses discussing
whether the clauses are valid in various foreign countries. For example, I bet
you didn't know that Russia found these clauses unenforceable. So, if you
are contracting with Vladimir Putin, and he uses a unilateral option to
arbitrate, tell him in no uncertain terms that the clause is not
enforceable.
Whom should you select as an arbitrator? I recognize that it is not
realistic, but, if you can, try to have your agreement name one or more
specific individuals who can act as arbitrators or mediators for any dispute
that may arise. Otherwise, if a dispute results, you will be forced to rely on
the lists issued by the tribunal administering your arbitration or mediation.
Unfortunately, I do not have any faith in the process used by these
tribunals.
Typically, after the proceeding is started, the tribunal will circulate a
list of potential arbitrators. I know that, with the American Arbitration
Association, I am seeing the same names being recycled on the lists. That makes
it seem like the American Arbitration Association is pushing or favoring these
individuals, for some reason. Once you make your choices and cross out names
that are not acceptable, the list goes back to the American Arbitration
Association and—as far as I know—goes into some black hole and a completely
secretive process under which the arbitrator(s) are selected. Maybe it's
me, but I've never gotten a good explanation of who gets selected or why.
And that is scary to me.
Lawyers as arbitrators? Think twice about having lawyers as
arbitrators. I used to be dead set against having a lawyer as an arbitrator. My
experience was that the lawyers always tried to act as judges. On a
single-person panel, the lawyer tried to conduct the hearing as a court trial
and made rulings as if in court. (If we wanted to be in court, my position was
always that we would not have selected arbitration as a means for resolving
disputes.) On a three-person panel, I've found that the lawyer tends to
take over and try to control the other two arbitrators. I don't like that,
either. (Having said that, I do have to admit that we recently had a very good
experience with a lawyer as an arbitrator on a matter involving claimed
defective work by our client. So, it's not a given.)
All in all, then, I lean toward mediation and arbitration as the better
mechanisms for resolving disputes. They are certainly better than court in most
situations, unless there is some really compelling reason that you want to be
in court. I say this, but must give you one overall suggestion: avoid them
all, if possible! I've practiced construction and surety law and
government contracts for over 35 years and have come to the conclusion that the
best way to resolve disputes is to keep control over the process and not give
anyone the ability to make decisions about your issues. Be reasonable and
rational, and make every effort to personally work out the dispute and avoid
court, arbitration, or mediation.
Conclusion
Clearly, construction disputes are inevitable. However, many businesses that
I've worked with routinely avoid having any third party—be it a judge,
jury, arbitrator, or mediator—make any rulings or decisions about their issues.
Those businesses resolve most issues and disputes before they go to court or
arbitration, even though the result is far from what they want or where they
want to be. In the more contentious situations, those companies would rather
work out a bad settlement—where they wind up paying more than they want to or
taking less than they want—instead of going to court or arbitration. They
believe that the ultimate payback is never working with that other entity on
future jobs. Thus, a bad settlement on one dispute is looked at as actually
saving money and problems on other future projects.