Editor's Note: This article is based on the construction industry. Disputes in projects are not unique. If you are not involved in construction projects, this article should be read, but with similar concepts from the reader's project mileau substituted. Learn from the construction industry and apply the lessons in your own type of project.
Feature Editor's Note: The following article is the first part of a two-part series discussing the growth of Alternative Dispute Resolution in the construction industry. As correctly noted by the author, parties are demanding alternatives to the cost and difficulties associated with litigation, lncreasingly parties are incorporating a variety of ADR procedures into construction contracts. For example, large public works projects are employing dispute review boards to address project disputes as they arise during the construction process. As a permanent part of the project structure, the dispute review board addresses and resolves disputes before they cause substantial impact to the project schedule or budget.
Even those parties who choose to litigate disputes are confrontting mandatoty ADR procedures as part of the litigation process. Some courts, such as the Superior Court for the District of Columbia, require mediation between the parties prior to setting a case for trial. In the Superior Court for the District of Columbia, the parties are ordered to appear at a mediation session as part of the pre-trial procedures. The court does not set a trial date unless the mediation proves unsuccessful.
Thus, ADR procedures are becoming a key component for the resolution of construction-related disputes. In my own experience, ADR procedures such as mini-trials can be an effective tool in forcing parties to confront the true dimensions of the article, Mr. DiDonato provides an informative survey of ADR procedures and their utility in the construction industry
Jon Wickwire
Feature Editor
INTRODUCTION
This article will attempt to provide you with an overview of the current status of dispute resolution procedures in the construction industry, and some of the reasons why all who are involved in that industry should become more familiar with the new techniques that have been introduced to prevent, manage, and resolve construction project disputes and claims. Alternative Dispute Resolution (ADR) means exactly what it says; other methods of resolving disputes outside of a courtroom. We will discuss the alternatives, and also several techniques now in practice that have proven to help in avoiding or in resolving such disputes.
The status of dispute resolution in the industry has been summarized by stating that the construction industry suffers from an “adversarial sickness.” However, promising new tools for solving disputes have been developed. The adversarial culture of the construction industry is beginning to be changed.
The old concept of “sticking it to the other side” by shifting as much risk liability as possible to their side of the contract is now clearly viewed as a detriment to the successful completion of projects on time, within budget, and with reasonable quality of work and materials. The experts in the industry agree that the unabashed risk-shifting which has flourished in the writing of construction contracts must be reversed. A partnership between the owner, architect/engineer and contractor must be re-established on the basis of risk sharing. If that effort succeeds, there will be a real promise of turning the adversarial tide.
INDUSTRY MOVING IN NEW DIRECTIONS
Organizations and publications that serve the construction industry have been mounting an effective campaign to publicize and educate the industry's participants in the use and success of alternate dispute resolution.
The Construction Industry Institute (CII), in an effort to measure the cost of quality in design and construction, concluded that “The U.S. Construction Industry is ill.” Productivity has declined significantly in the past two decades. Delays in construction are common and expensive, and litigation related to design and construction continues to increase.
The Center for Public Resources has created a Construction Dispute Study Committee to review the alternatives to the high cost of litigation.
Engineering News Record repeatedly addresses “ways to ease construction's litigiousness.” ENR says that “The time may be right for recapturing the control of construction from lawyers and judges.”
The ENR, in conjunction with other industry leaders, recently co-sponsored major conferences on “Constructive Resolution of Construction Disputes.” In one, over 400 leaders of the construction industry met in Washington, D. C., to discuss the critical issue of alternate methods of solving construction disputes to the benefit of owners, lenders, designers and construction contractors. The American Arbitration Association (AAA) has created a Construction Dispute Resolution Committee to study the issue further as the AAA increases its efforts to recommend mediation or arbitration of construction disputes.
New organizations are coming into being to assist the industry in this major effort at ADR. Two of the most recent are the Dispute Avoidance and Resolution Construction Industry Task Force (DART) and the Building Futures Council (BFC). Public agencies, led by the Corps of Engineers, are beginning to adopt the new approach to administering construction projects which has been named…“Partnering”!
ANATOMY OF PROJECT DISPUTES
The Start of a Project
The happiest day in the start of a project is the day that the construction contracts are signed and all of the participants are so pleased that the design is complete, the funding is in place, and a qualified contractor has been engaged to construct the facility. However, there is usually an air of apprehension in the room because most of the participants know that on the next day there probably will be a “Declaration of War.” The parties will then launch their own agendas, which they each believe will lead to their successful completion of the project:
The owner wants to be assured of getting the most for the dollar and of not having to assume any risk for additional costs beyond the contract amount. The owner expects the project to be the most magnificent in the world, constructed on time and within budget.
The architect/engineer wants to be assured that their “pride and joy” will be constructed with the highest quality of materials and workmanship and that their “near perfect” set of contract documents will not incur any risk for added costs or delays to the project.
The contractor(s) has just been awarded a contract for submitting the lowest responsible price from among those other contractors bidding the project. The contractor understands that the project must be completed within schedule and within the cost estimate in order to survive, and will attempt to obtain approval of “minimum adequate” selection of materials and construction procedures that will assist in completing the project with a profit.
NOTE: Not one of the parties will be willing to share any of the risk for unexpected delays and costs. The bottom line of this adversarial dance is a constant state of confrontation!
Unexpected Costs and Delays
Who will pay for the unexpected costs of construction, and where do the majority of the claims come from? The experience of the industry indicates that the three most prevalent causes for delays and damages are:
Differing site conditions, which usually involve the subsurface quality, location, and volume of soil, rock or water (subsurface unidentified utilities and other installations may also fall into this category);
Change in scope of work, either changing or increasing the scope of the original contract work by the owner to meet some additional need, a change by the architect/engineer to correct an omission or error in the contract documents, or a constructive change arising from an occurrence which is beyond the control of the contractor; and
Unexpected delaying events, such as an Act of God, major labor strikes, unavailable site access, shop drawing approval delays, or changes and additions to the work after the substantial completion of the contract.
In hindsight, we can quickly determine that the differing site conditions may have been avoidable if the owner had invested in more extensive geotechnical investigations such as borings, test pits and test wells. Changes in the Scope of Work could have been minimized if there had been a better coordinated set of design documents, clearly understood by the owner and a commitment by the owner to avoid any unnecessary scope changes during the term of the contracts under way. Unexpected delaying events which are under the control of one of the parties can be avoided by better planning, or at least the impact minimized by advance notice or an accelerated effort to solve the problem. Utilizing a construction schedule to plan and lead the project is an excellent tool. Too many projects have schedules that are principally utilized to create a record of what happened, rather than planning for the successful completion of the work.
A recent speaker on construction disputes identified what he called “the dirty half dozen.” He identified the following occurrences as being the principal causes of the overwhelming majority of construction disputes from which arise damages and delays:
- Failure to deal promptly with changes,
- Owner discretionary changes,
- Unrealistic risk-shifting,
- Ambiguous contract documents,
- Contractors who bid too low or are unqualified,
- Poor communications during construction.
DISPUTE RESOLUTION
The dispute resolution spectrum ought to be clear to all the participants before any construction project begins. The first two steps of prevention and negotiation or mediation by a neutral party are the types of dispute resolution procedures that keep the problem within the control of the parties. Once the parties decide to address the dispute through arbitration or litigation, the final decision is no longer under their control.
The old war cry “Sue the bum!” no longer works to the benefit of either party. In most cases, the lengthy and costly litigation process ends in a situation where the winner may also be a loser.
The Contract
Attorneys speak about “questions of fact and law” in reference to construction disputes. They indicate that usually “facts are for the jury, and the law is for the judge.” Under this philosophy, parties who feel that they have a strong case under the contract and under the law would not ask for a jury trial, since the judge will decide usually on the basis of the law and the contract only. Other parties who have a case which is weak on the side of the law and the contract, but may appeal to compassion and fair play, would elect to have a jury decide their case.
Unfortunately, construction disputes usually require both the law and the facts for a fair and equitable solution. It is frightening to discover that a contractor or an owner may not even know what their contract says in reference to disputes until after they have signed the agreement and a dispute arises. Most certainly, the parties ought to be aware before they sign the contract as to the applicable law, what is the venue for litigation, and whether, in fact, there is an arbitration clause in the agreement. Does arbitration allow for consolidation of several claims on the same issue? Does it provide for mandatory arbitration or must the parties agree? Who selects the arbitrators and under what rules does the arbitration proceed? The parties must read their contract before they sign it; after the project commences they are stuck with the procedures and conditions included therein.
If anyone has the slightest doubt that disputes and litigation have reached a crisis situation on construction projects, please recognize that the American Bar Association's Forum on the Construction Industry, which includes almost every construction lawyer in the country, ten years ago had a membership of 500 lawyers; today it has a membership of 5,500. It is also reported that there is approximately one lawyer for every 750 people in the United States, while in Japan there is approximately one lawyer for every 15,000 people. That is not to say that the lawyers are causing the disputes, but just to indicate that there is a greater propensity to litigate a dispute.
ADR—RX FOR ADVERSARIAL ILLNESS
The proactive approach to avoiding serious litigation is the liberal use of dispute prevention and dispute resolution at every stage of the construction project. When I first began in this industry some 40 years ago, the old-timers would always tell you to let the dispute ride to the end of the project, where everyone would sit around a table and equitably settle those disputes at the conclusion of the project. That just can't happen anymore! Disputes never get smaller; they are like a cancer which continues to grow and get larger and larger the longer they are left unsolved. The best time to settle a dispute, at the least cost to the parties and with the least impact on the project, is at the time the issue is raised. The various options of ADR are:
- Negotiations between the parties in the dispute,
- Mediation of the dispute with an independent mediator,
- Utilizing a Mini-trial, Endispute, or Rent-a-Judge,
- Binding arbitration with AAA rules, or
- Through a Dispute Review Board.
Negotiations
The art of negotiating is very simply “getting what you want from others, or limiting what others get from you.” We are all negotiators. Negotiation is a fact of life. You negotiate a raise with your boss, you negotiated a price for your house with a stranger, you negotiate with your wife on where you are going for dinner, or with your child about when the lights go out or the amount of allowance. More and more occasions require negotiation; fewer and fewer people will accept decisions dictated by someone else. Even when parties end up going to court, they almost always negotiate a settlement before or during the trial.
You can win at negotiation without the other side losing. The objective is to achieve a reasonable solution without either side getting badly hurt. You don't have to like your opponent in order to successfully negotiate. You must learn to separate the people from the problems and to focus on the interests which are mutual to each side, not the differing positions. You must invent options for mutual gain or satisfaction so that when the negotiations reach a roadblock you have another position to move to. Insist on both sides using objective criteria.
If your opponent appears to be more powerful, or does not want to play, or attempts to use dirty tricks, don't give up. Never be the first person to leave the room in a negotiating session. The other side must understand that you are there to settle and you don't intend to give up. Communication between the parties is the most crucial aspect of negotiations. Someone in a negotiating session once said, “ I know you believe you understand what you think I said but I am not sure you realize that what you heard is not what I meant.” That certainly is an indication that the parties are failing to communicate clearly what their position and their interests are.
Mediation
The next step to follow when negotiations fail is to engage an independent mediator, acceptable to both sides, who can assist the parties with a decision that it is time to make peace and to settle the dispute. The independent mediator can be suggested by either side or the parties can agree that an organization like the American Arbitration Association select either one or a group of mediators which each of the parties can consider. The key to the success of mediation is that the mediator is not interested in the outcome of the settlement, but in a successful settlement.
The mediator is not a judge who will render a decision and is not an attorney who will give legal advice or direction to either side. The mediator may separate the parties into two different rooms or places and the parties can each provide the mediator with certain facts that need not be shared with the other side. Mediation usually requires less time and the fees are reasonable, usually shared by both sides. The objective of the mediator is that neither side loses and both sides win.
If either the parties or the mediator loses faith in the fact that the process can succeed, then the mediation can be terminated and the parties can move on to some other procedure. Although mediation does not always succeed, it ought to be given a chance before the parties move on to a procedure wherein control over the decision is given to someone else.
Dispute Review Board
This is a relatively new procedure used mostly on larger projects. The contract documents provide that disputes over a certain dollar amount will be settled by the parties presenting the issues to a panel of three individuals who sit for the entire span of the project for the sole purpose of rendering binding decisions. Usually, the parties each pick a member of the board and those two select a member with the cost of the time of the individuals shared equally by the parties in the contract.
Since the board is picked during the first 30 days of the project, they have an opportunity to become familiar not only with the project, but also with the documents and the parties to the contract. Any dispute which is not settled by negotiations between the parties within 30 calendar days after the issue is identified is then referred to the dispute review board. The positions are presented within 15 days, and a decision rendered either at the end of the hearing or within 15 days thereafter. If the issue in dispute is crucial to the continuing project, the parties can agree on an expedited hearing and decision. Industry representatives have reported that the experience of review boards to date (on approximately 100 projects with a construction value of $6.4 billion) indicates that approximately 98 disputes were referred to the boards and none of them were later arbitrated or litigated.
Binding Arbitration
This is the most frequently used ADR procedure for the settlement of disputes. This probably arises from the fact that there are arbitration clauses in the Standard Contracts published by the American Institute of Architects (AIA) and the Associated General Contractors (AGC). Some contracts require mandatory binding arbitration of all disputes within a certain time after the claims are submitted, while others provide that arbitration takes place only if the parties mutually agree.
Although the American Arbitration Association has a standard set of rules which is usually referenced in contract documents for the conduct of the arbitration sessions, the process is flexible and the parties can agree to modification of the rules. Sometimes each party picks their own arbitrator and the two selected pick the third. Under the standard AAA rules, the arbitrators are picked from a list provided by the AAA. Most contracts allow for the parties to attempt either negotiations or mediation prior to entering into binding arbitration. Although most contracts do not allow for consolidation of claims, even when the issue in dispute is the same, the parties can agree to that procedure since it will avoid conflicting decisions on the issue from different panels.
The parties can also agree to certain voluntary discovery of documents and depositions of witnesses. Although awards made by arbitrators or arbitration panels do not usually provide the reasons for the findings of fact for the award, the parties may be able to agree at the beginning as to the nature of the award decision to be issued by the arbitrator(s).
ADJUDICATION BY MINI-TRIAL, ENDISPUTE, OR RENT-A-JUDGE
Adjudication, another major step along the ADR path, is a process where the parties present proofs and evidence to a neutral third-party judge who will then render a binding decision on an objective basis. This technique is also known as “private judging.” Adjudication is voluntarily entered into by the disputing parties and is a private action unless judicial enforcement or review is sought after the decision is issued. The adjudication decision is binding but subject to appeal.
There are private organizations throughout the United States that provide adjudication services for a fee. The parties involved in the dispute will select, by agreement, the adjudication forum and the individual adjudicator.
The advantage of adjudication is that a law-trained third party will render an objective decision based on the facts and the legal arguments presented; however, the adjudicator is not bound to follow the legal principles of any jurisdiction and may apply equity to the degree required to provide justice. The decision is sometimes supported by findings of facts and conclusions of law.
Adjudication has various disadvantages, however. It is more expensive and more adversarial than mediation; the parties are bound to the contracted rules of evidence and discovery; and the outcome may be different than that received in a court system. (Anybody displeased with the result may attempt to appeal, though the basis for the appeal is limited by the remedies provided in the adjudication contract entered into with the adjudication forum.)
COMPARING THE OPTIONS
With mediation and arbitration, the parties consent to the process either at the time the dispute arises or by signing a contract which requires the parties to utilize the process. Both these forms of ADR offer significant flexibility in that the parties can decide whether or not the process is binding and what rules of procedure will be followed. Litigation, however, is non-consensual, since any party can sue without the other side's consent once all contract prerequisites are met. The procedures governing litigation are imposed by relatively rigid rules of court.
In the sense that a mediator does not render a decision or make an award, mediation is non-judgmental. Resolution of a dispute is reached without reference to liability on the basis of negotiations between the parties. Mediation may be either binding or non-binding and is settlement-oriented.
Arbitration and litigation, on the other hand, involve imposition of liability by award or judgment based on an adversarial process. Settlement of disputes submitted to arbitration or litigation may occur at any time short of trial or arbitration hearing and can be fostered by the good faith conduct of both parties. Litigation is always binding, subject to reversal upon appeal, while arbitration can be either binding or non-binding, depending on the parties’ agreement. Case law and most arbitration clauses provide that appeal can be made from an adverse arbitration award to a court of competent jurisdiction only in situations where the award was procured by fraud or the arbitrator engaged in misconduct.
Other key distinctions among the three most common forms of ADR are time and cost. Mediation is usually a short-term event which is scheduled at the convenience of the parties and the mediator. Arbitration can take much longer and litigation even longer yet. If the parties to arbitration agree to limited discovery and depositions and the number of days required to present the arbitration is great due to the complexity and number of disputes, arbitration can even take approximately the same amount of time as typical litigation, which can involve a duration of up to two years or more from the date the suit is first filed.
Mediation is certainly the least expensive option, with parties splitting the mediator's fees and expenses. Some companies employ the services of attorneys or consultants to prepare for a mediation, while other companies do not.
Arbitration is generally less costly than litigation, unless the parties engage in extensive discovery. In a typical arbitration, the parties pay a fee to the AAA or other supporting organization and share the cost of the three arbitrators’ fees and expenses (smaller disputes may require only one arbitrator). An adverse arbitration award may require the losing party to cover all of the winner's arbitration costs, including reasonable attorney's fees. Use of attorneys for arbitration is not required, although it is usually the practice.
Litigation involves similar, but usually more costly, expenses as compared with arbitration. The attorneys’ fees are generally greater in litigation as there are interim court hearings, discovery, depositions, and other proceedings prior to trial which require the services of an attorney. Court costs are minimal although transcript and jury costs may be substantial. A successful litigant may recover costs and attorneys’ fees from the opponent.
The benefits of ADR include accelerating the dispute resolution process, allowing the parties to concentrate on specific interests rather than on the strategy of the case, affording greater confidentiality, and allowing the parties and their counsel to focus on the real issues in dispute—without expending energy and resources on…Legal Strategy!
SOURCES
American Institute of Architects. 1987. AIA Document A201. General Conditions of the Contract for Construction. Washington, DC.
Building Futures Council, Georgetown, Md.
Carr, Frank. “Partnering: Dispute Avoidance the Corps of Engineers Way.” The Punchlist, vol. 14, no. 3. American Arbitration Association.
“Construction Industry Arbitration Rules.” 1990. American Arbitration Association.
“Constructive Resolution of Construction Disputes.” Conferences co-sponsored by ENR and the Building Futures Council.
Edelman, Lester. 1990. “Resolving Disputes Without Litigation.” The Military Engineer (July).
Edelman, Lester. 1991. “ADR in the Public Sector.” 1991 CII Annual Conference.
Engineering News Record. 1990 (May 20).
Groton, James P. 1991. “Current Status of ADR in the Industry.” 1991 CII Annual Conference.
Groton, James P. “Dispute Resolution Devices for the Construction Industry: An Overview.” The Punchlist, vol. 13.
Hatch. H. J., LGen. 1990. Policy Memo #11 (Alternative Dispute Resolution). U.S. Army Corps of Engineers.
Molineaux, Charles B. 1991. “Who Pays for the Unexpected in Construction?” In Proceedings Construction Congress ‘91. ASCE.
Richter, Irvin E. “For Those Who'd Rather Resolve Than Litigate.” Hill International, Willingboro, NJ.
U.S. Army Corps of Engineers. “The Mini-Trial Pamphlet.”
S. Leonard DiDonato, senior vice president of the Project Management Group at Hill International, is an expert in contract administration, construction management and claims settlement. He has over 35 years of experience in the design/ construction industry and has been involved in all aspects of industrial, commercial and institutional development and construction.
Mr. DiDonato is a member of many related professional groups. He has been honored as “New Jersey's Master Builder” by former Governor Brendan T. Byrne, and “Construction Man of the Year” by the Subcontractors Association, American Concrete Institute, and The Society of American Military Engineers.
