Do You Mediate, Arbitrate, or Litigate?
Contractors and their lawyers are very familiar with arbitration being the preferred method for the resolution of any dispute. It is called for in most construction contracts. But what happens if an agreement is not very clear and the parties are uncertain if their misunderstanding is to be presented to an arbitration panel or to a court.
Who gets to make that decision?
The supplier of impact resistant doors and the general contractor on a hi-rise project had a difference of opinion over whether delivery of ordered product was timely but it wasn’t clear if they had agreed to arbitrate or litigate their dispute. So they presented that question to the court. In short order a judge decided that by incorporating a reference to the Construction Industry Rules of the American Arbitration Association within their contract, the parties had sufficiently evidenced their intent to have arbitrators, not a court, hear and decide that it the matter – an important warning for everyone dealing with construction contracts. If you want to be clear how a dispute is to be resolved in any agreement, be it litigation or arbitration, better specify your preference in your contract.
Mediation
Often misunderstood as just another form of arbitration, mediation is quite different. It is a private and confidential process where the parties voluntarily agree to meet and, with the assistance of a neutral third-party mediator (jointly selected by the parties), try to work through their disagreement. The process does not involve the evidentiary and testimonial aspects associated with a trial or arbitration, but is rather a mediator’s shuttle diplomacy to seek an acceptable middle ground that both parties might accept. If a settlement is reached, it may be enforceable by law. Many states now require that mediation take place after suit is filed and before trial. It is a very worthwhile step in any dispute resolution procedure and is highly recommended.
Arbitration
Arbitration has historically been the preferred method for contractors and their lawyers to resolve a dispute. It is often noted in their contracts as the way an unresolved claim or controversy is to be addressed. Believed to be a simpler, faster and cheaper option than litigation, this has not always proven to be the case. Depending on the dollars involved in the misunderstanding, an arbitration would be before one, or a panel of three, disinterested and jointly selected arbitrators (generally experts in the field). The process is much like a trial, with discovery being taken and evidence presented. While both may be more limited in arbitration, the fact that construction issues these days may be difficult or intricate could result in any arbitration actually taking more time. The coordination of multiple parties, witnesses, lawyers and arbitrators could easily cause any presentation to be spread out over a number of months versus one continuous hearing. But most importantly, and not often understood by contractors, arbitration decisions are rarely appealable, even if based on an incorrect interpretation of the law. You would need to show fraud or bias to have a good chance of winning at overturning an arbitration.
Is Arbitration Right For You?
How does your contract address dispute resolution? It probably says arbitration is the preferred method. And why not? It’s been favored by construction professionals for years. But that popularity may be fading. In fact, the American Institute of Architects contract forms now state that if the parties don’t specifically select arbitration as the way to deal with a dispute, then the choice automatically defaults to litigation.
Problems with Arbitration
Most people don’t realize that arbitration can actually be just as time-consuming and expensive as litigation. Discovery may be limited, but it isn’t eliminated. Document production and depositions remain integral in moving a construction case forward. And arbitrators’ fees—which aren’t cheap—are paid by the parties, whereas judges and juries are paid by the taxpayers.
But what may be the most important distinction between arbitration and litigation is the little-known fact that arbitration decisions are rarely able to be appealed. Short of a showing of bias or fraud perpetrated by the arbitrator, it is unlikely you can have a bad outcome overturned, even a decision based on an incorrect interpretation of the law. That is not true in litigation. You have the absolute right to appeal a judge’s ruling or jury’s verdict if you don’t agree.
Litigation
Then, there is the tried and true method of litigation – suing in state or federal court before either a judge or a jury. This approach has one clear advantage – any decision, judge or jury, can be presented for further appellate review. While costly, it remains an effective way to move a controversy to a resolution. The complexity of the issues can dictate whether a judge or jury would be the appropriate forum. But frankly, more and more cases reach a settled resolution before ever going to trial.
So, What Should You Do?
For starters, put a requirement for mediation into your contracts. Many mistake mediation for arbitration. That would be wrong. In an arbitration, an arbitrator hears evidence and renders a decision that is enforceable in a court of law. In mediation, a neutral third party negotiates with the people involved and looks to find a middle ground which might settle the dispute. The mediator makes no decisions and his or her recommendation does not have to be accepted. An arbitration continues to a decision while a mediation can reach an impasse when the sides simply do not agree.
Set a time frame for a mediation to occur before any next steps take place. Courts in most jurisdictions now require mediation before a trial can proceed. If mediation is futile, then litigation, preferably before a judge, should be pursued.
To be clear, none of these options is pleasant. But having no stated path to resolving a dispute is worse.
Finally, make sure to have a prevailing party attorney’s fee provision. You wouldn’t want to go through all this, win your case, and then have no way of recovering some of the legal expenses you have incurred.
Recovering legal fees and costs
The matter of legal fees and costs. Are they recoverable? Absent a statutory provision and a corresponding claim, the attorney’s fees and costs you incur will not be recoverable, even if you win, unless you have a contractual provision which calls for the prevailing party to recoup his/her incurred legal expenses. Be sure to add such a provision along with your choice of dispute resolution alternatives when finalizing your contract. You’ll be glad you did.
Alternative Dispute Resolution Option
Many of you in the construction industry may already be familiar with dispute resolution models, such as mediation and arbitration, in resolving construction disputes. However, a number of reports and studies show an increasing trend toward one model of dispute resolution in particular– the Dispute Review Board (DRB). In fact, Florida recently used a DRB to reach a settlement in a dispute related to the ongoing PortMiami tunnel project. The disagreement arose when it was discovered, after digging began, that limestone needed to be grouted for the project to continue. This unanticipated work carried a heavy cost, which the Florida Department of Transportation (FDOT) has agreed to pay as part of the settlement.
Use of DRBs is not unique to Florida. A DRB was first used in Colorado in 1975 during construction of the Eisenhower Tunnel, and the construction industry has since reported using them with great success. In 1996, the Dispute Resolution Board Foundation (DRBF) was created and has developed a best practices and procedures manual to encourage the use of DRBs in construction disputes.
THE DISPUTE REVIEW BOARD (DRB)
Typically, DRBs are made up of a panel of three impartial individuals with industry experience. According to the DRBF’s website, a DRB is a “board of impartial professionals formed at the beginning of the project to follow construction progress, encourage dispute avoidance, and assist in the resolution of disputes for the duration of the project.” The Board members are usually selected and then approved by the owners and contractor before construction begins. Members remain current with the project by periodically visiting the jobsite and reviewing project documents.
When there’s a conflict, the DRB writes a recommendation that the parties can choose to adopt. This recommendation is based on review of the contract, meeting notes, correspondence, and any statements made by the parties. The recommendation explains how the Board evaluated the facts and the reasoning behind their advice. Importantly, the Board’s recommendation is not binding on the parties, although in many cases the parties choose to follow the recommendation.
The DRB model differs significantly from other forms of dispute resolution, particularly mediation and arbitration, both of which are commonly used in construction disputes. Mediation often takes place when parties to a lawsuit are ordered to try to settle before going to trial. A mediator is a neutral party who helps the parties reach a compromise agreement on their own terms but does not render a decision. Unlike a mediator, an arbitrator (could be one or three depending on the size of the dispute) makes a binding decision based on his or her interpretation of the law. Arbitration is common in construction disputes because many construction contracts have clauses requiring the parties to arbitrate.
Proponents of mediation and arbitration emphasize that these models save time and money by avoiding lengthy and expensive litigation. However, mediation and arbitration are not without their own risks, so you should understand the pros and cons of all your options, including litigation, before deciding on the best choice. As the case of the PortMiami tunnel demonstrates, Florida construction cases can be quite complex. Arbitrators may incorrectly interpret the law. If that happens to you, you may find it difficult to overturn the arbitration award. Unlike court decisions which can be appealed, an arbitration award is unlikely to be vacated unless there is evidence of fraud, corruption, misconduct, or similar ground. That means you may be stuck with an arbitration award that incorrectly evaluated the facts or law of the case. Finally, while arbitration and mediation offer the neutral advice of an impartial decision-maker, the costs of these procedures can sometimes match that of complex litigation.