The Dispute Resolution Process: The Steps in the Process
Partner Content
The Dispute Resolution Process: The Steps in the Process
By Joseph Scott Shannon, Esq., Lee/Shoemaker PLLC
Contracts on a handshake work when everyone acts in good faith to uphold their end of the bargain. When that does not happen, when the contractor under-bids the project, when owner-directed changes result in budget overruns, when the work is not completed on time, or for any other reason giving rise to disagreements, a well-thought-out contractual dispute resolution process can be invaluable to achieving a settlement before significant attorney’s fees and litigation costs are incurred. The first article in this series, The Dispute Resolution Process: Choice of Law and Forum Selection, addressed critical components of a contractual dispute resolution provision. This article discusses the process.
Negotiations on construction projects begin before the contract is drafted and often continue after the work is completed. Most project disputes are resolved through those ongoing negotiations as part of the RFI and Change Order processes, submittal reviews, weekly progress meetings, and nearly every other point of contact between the owner, the contractor and the design professional. Most of the time, project stakeholders vested in achieving a successful completion for all concerned are committed to working together to accomplish that goal. When the contract administration processes are unavailing, the contractual dispute resolution clause defines the process and parameters for reaching an outcome.
Mediation
Mediation is regularly the first step in a contractual dispute resolution process before recourse to either arbitration or litigation. Mediation is a formalized, structured continuation of negotiations. The claims and defenses are submitted to a neutral mediator who works with the parties to forge an agreement. The parties provide statements of the facts and their claims that may be confidential for the mediator only, or shared with the other party, outlining their position and the weaknesses of the other party’s claims or defenses.
The mediator does not take sides, although in breakout sessions with each of the parties they will emphasize the strengths of the other party’s position in an effort to forge an agreement. Good mediators are tireless in their efforts to craft a negotiated resolution, trained in techniques that promote compromise, and remain above the fray to build the parties’ trust and confidence in their objectivity.
Mediation will only settle a dispute if the parties agree. Absent agreement, the dispute resolution process continues to the next step, either arbitration or litigation.
Arbitration or Litigation
To paraphrase von Clausewitz, arbitration and litigation are just a continuation of negotiations by other means. Although similar, the differences between arbitration and litigation warrant making an informed choice for which to include in a contractual dispute resolution provision.
Arbitrations are conducted before a private tribunal such as the AAA and presided over by a panel of 1 or 3 arbitrators with a knowledge of construction disputes and the applicable law. The claims, proceedings, and awards are not a matter of public record unless disclosed by a party or an award is filed with a court for enforcement. Litigation dockets, filings, and proceedings are open to the public, except in rare circumstances in which the judge determines that a sealed filing or closed proceeding is warranted.
Arbitrations are intended to provide the parties with a quicker, more cost-effective means of reaching an adjudicated resolution than litigation before a state or federal court. In practice, however, because the parties pay filing fees keyed to the amount in dispute, and arbitrator time is billed at $350 - $700 per hour for each of one or more arbitrators, as well as administrative and other fees, arbitration costs can balloon and negate the savings on attorney’s fees that might be expected from a quicker arbitration schedule.
The parties select and agree on the arbitrator(s) to be appointed from a panel containing some design and construction professionals with a background in the law and several more lawyers with construction claims experience. Arbitrators with such backgrounds can provide informed, incisive awards, although candidates with design backgrounds or representing design professionals are difficult to find. It is more common to find arbitrator candidates with a background representing developers or contractors who will likely view the claims through their experience gained as advocates for project owners or builders. This can work to the disadvantage of a design professional presenting or defending a claim before an arbitrator whose career has been built on finding fault with work performed by architects and engineers.
In litigation, judges are randomly assigned and may lack a solid construction law background; however, judges are usually well-grounded in contract law and will have access to other judges and law clerks who can assist them in understanding discrete issues particular to construction law claims, if the attorneys for the parties do not sufficiently develop them in their submissions to the court. Jurors will likely lack special expertise in construction, and for that reason will be more likely to adhere to the instructions given to them by the judge defining the requirements for finding liability and the limitations of any award they may make.
Arbitration rules depend upon the parties working cooperatively on procedural issues while limiting discovery disclosures. This can result in dilatory tactics delaying proceedings, and hearings in which the facts are not fully developed. Absent the strictures placed on most court dockets, large, complex claims may take years to be arbitrated to an award, increasing the parties’ costs. In litigation, judges will enforce the court’s rules and procedures, and they are usually subject to internal operating procedures requiring the resolution of cases within a set timeframe.
Litigation also provides the parties with opportunities to present pre-hearing motions for discovery, seeking summary judgment or limiting the scope of evidence to be presented. Arbitrators discourage pre-hearing motions and are unlikely to grant any dispositive motions as a matter of practice.
Anecdotally, arbitrators’ livelihoods being tied to being selected by the parties can lead to arbitration awards that provide partial relief akin to a mediated resolution are common. Such awards tend to make it more likely that parties will recommend or select that arbitrator as “safe” should a party find themselves in a future arbitration dispute. Arbitration awards giving a claimant all that they seek, or, conversely, finding for the respondent and awarding nothing to the claimant, are uncommon, even when the facts or the law would support such an all-or-nothing result.
In addition, arbitrators are not required to issue opinions explaining the bases for their award. The right to appeal an arbitration award is limited to rare circumstances of egregious arbitrator misconduct or the ability to demonstrate an arbitrary and capricious award untethered to any facts or the law. A party to an arbitration might therefore find themselves paying a substantial award premised upon a questionable rationale (if one is provided by the arbitrator) with no realistic ability to appeal the result.
Final results through litigation will be explained by the judge’s opinion if awarded on summary judgment or after a bench trial, or through responses to jury interrogatories if after a jury trial. If the judge or the jury gets it wrong, there are opportunities to seek reconsideration by the court, or to pursue an appeal to overturn an adverse, unsupported or unjust result.
The dispute resolution process written into a contract should be tailored to the project, the other parties involved, and the potential amount to be in dispute at the end of the project. Ongoing, good faith negotiations throughout the project and afterwards can avoid recourse to the process, but the design professional needs confidence that the outcome will be acceptable. In the next article, we will discuss how to prepare for, and recommendations for achieving, a successful outcome through mediation of a dispute.
Scott Shannon is Senior Counsel at Lee/Shoemaker PLLC, a law firm devoted to the representation of design professionals in DC, Maryland, and Virginia. The content of this article was prepared to educate related to potential risks, but is not intended to be a substitute for professional legal advice.
Lee/Shoemaker PLLC is an Educational Program Sponsor of AIA Potomac Valley.
