Dispute Resolution Options
by: Monica L. Freeman, Woods & Aitken LLP
It is important when drafting or negotiating any contract to give consideration to the dispute resolution options that will be available or required and to understand the benefits and drawbacks of each should a dispute arise on a project. This article will touch on some of the dispute resolution options that are available, particularly in the construction industry.
INFORMAL DISPUTE RESOLUTION
One common form of dispute resolution that is used frequently, not necessarily because it is required by the contract, but because it is practical and cost-effective, is informal discussion between project participants. This can begin as a negotiation between project managers and can rise to the level of direct discussion between company executives. The advantage of this approach is that it allows the people with the most knowledge of the facts and circumstances to discuss the matter directly without involvement and expense of counsel. It also allows the people with the greatest amount of knowledge about the company’s business and bottom line to make the ultimate decision on whether to pay a claim and/or whether to accept a reduced sum on a claim. One potential risk to utilizing this process is that unless the discussions are appropriately characterized and communicated as settlement negotiations, statements made in the course of negotiations could potentially be used as admissions in subsequent arbitration or litigation if the dispute is not resolved informally. It is also important to make sure that by participating in this process you do not in some way jeopardize your ability to proceed to formal dispute resolution if there are specific requirements for claim processing in the contract that need to be followed.
The ConsensusDOCS 200 Owner Contractor Agreement provides for informal dispute resolution through direct discussions in Section 12.2. The provision sets forth specific timelines for the parties to follow and if an agreement is not reached instructs the parties to proceed to other more formal dispute resolution methods.
Dispute Review Board
The Dispute Review Board (“DRB”) is a somewhat informal board that was formed by those in the construction industry to provide another option to litigation or arbitration. DRBs in essence function similarly to a project neutral, or a panel of neutrals in reviewing the facts and the law surrounding construction disputes and making recommendations to the parties upon review. The process is generally designed to emphasize the involvement of the parties and to minimize attorney involvement. DRBs are most often used on larger budget projects, because the involvement of the panel members doesn’t just begin when a dispute arises, but starts when the project begins, which can add to the project’s budget. DRB members will typically visit a project site a few times a year to observe the project and keep apprised of any potential disputes. When the parties aren’t able to resolve the disputes internally they call on the DRB to review the matter and issue non-binding recommendations following a fairly informal hearing. Once the recommendations are made the parties may consult with their attorneys whether to accept the recommendations or proceed to formal dispute resolution (i.e. litigation or arbitration).
One of the advantages of the DRB is that because the panel making the recommendations has been involved in the project from the beginning on an observational basis, there should already be a high level of understanding of the issues in dispute. Further, because the panel is comprised of construction industry professionals, the learning curve is greatly reduced. The additional cost of the DRB, whose members typically charge their time on an hourly basis plus expenses, is not necessarily a disadvantage because an effective DRB can help the parties avoid increased legal expenses. One potential disadvantage to the use of the DRB is that while the recommendations of the DRB are not binding they may be admissible in court. More detailed information about the DRB, including a listing of DRB members, can be found at: http://www.drb.org/.
FORMAL DISPUTE RESOLUTION
The remaining dispute resolution options are categorized as Formal Dispute Resolution primarily because they generally require the involvement of counsel to varying degrees.
Mediation is essentially a facilitated negotiation between the parties to a dispute and it can take place before or after a lawsuit is filed. At mediation, the mediator works with each party individually to discuss the respective strengths and weaknesses of their claim to help them evaluate the risk of proceeding to the next step in the process and ultimately to facilitate settlement. In a typical mediation, the parties are asked to prepare position statements for the mediator’s review several days before the mediation. The position statement typically contains a summary of the facts, any legal position the party is advocating, discussion about prior resolution efforts, and a statement about the parties’ potential exposure. Mediation statements can be, and often are, kept confidential between the individual party and the mediator. While mediators typically raise questions about factual or legal theories advocated by the parties, the mediator is not sitting as a judge and does not offer legal advice. One of the primary advantages of mediation is that the parties are ultimately in control over the process as there is no requirement that an agreement be reached at mediation. One of the perceived drawbacks of mediation is that parties’ may view the process as a mechanism to force them to devalue their claim or that the claim will always settle somewhere in the middle. While it is a common that following a mediation neither of the parties feels like they’ve “won”, the process is designed to give the parties control over their evaluation of the risk of proceeding to the next step. There is no reason that a party with strong legal and factual support for its position cannot obtain a fair settlement at mediation without substantially discounting its claim. It is worth noting that if mediation is attempted too early in the process it may be difficult to reach a resolution, because it is important that the relevant facts are known by the parties in order to allow them to make an informed decision. For that reason, in claims where a lawsuit has already been filed, parties will typically wait until at least an initial exchange of information and documents through discovery has been completed prior to attempting mediation.
Arbitration is often thought of as the cheaper and faster alternative to litigation for dispute resolution. This may or may not be the case depending upon the specific dispute at issue, the parties involved, and countless other factors. Regardless, arbitration remains a common method of dispute resolution for construction projects. By submitting a claim to binding arbitration the parties are essentially waiving their right to have their claim decided by a judge or jury and instead the claim is decided by an arbitrator or panel of arbitrators. On large construction projects that utilize arbitration panels, it is typical to have one arbitrator selected by each party with the third arbitrator selected by the other arbitrators. If the case is arbitrated pursuant to the rules of the American Arbitration Association, the parties generally have an opportunity to review a list of approved arbitrators and if there is no consensus among the parties, the AAA has authority to appoint the arbitrators from its membership.
Most arbitrations proceed in a similar fashion as litigation in which the parties first agree on a schedule for pre-arbitration hearings, including exchange of written discovery, depositions and per-hearing filings. After the parties have completed pre-hearing activities a hearing is held before the arbitration panel. Again, much like litigation, the hearing consists of witness testimony and the submission of written evidence. Unlike litigation, however, typically the technical rules of evidence do not apply in litigation and most evidence is received by the arbitration panel without or in spite of objections. In some instances there is also the ability for the parties’ attorneys to present summaries of key facts and documents to the panel. One of the primary disadvantages to using arbitration is that by avoiding trial by judge or jury you also lose your ability to appeal. Except for appeals based on procedural irregularities in the arbitration process, arbitration awards are binding and not appealable. A key advantage to arbitration is its use of expert arbitrators that know and understand the construction industry instead of many courts who look at construction projects and lengthy trials as a burden.
The form of dispute resolution that has historically been most common is litigation. In fact, unless provided otherwise in your contract, litigation is available by default. In litigation the parties set forth their position before the court in documents called pleadings. Once the pleadings have been filed, depending on the particular court (federal or state) and jurisdiction the Court may set a trial date and schedule early in the case. In Nebraska state courts, trial dates and schedules are not typically set until much later in the process. The parties proceed substantially without intervention from the court through written discovery and depositions. Pre-trial motions (i.e. motion for summary judgment) are often filed if one of the parties believes that it can prevail on its claim based on a clear legal issue or undisputed facts without the necessity of holding a trial. Once the case is ready for trial it is heard either by the judge (bench trial) or by a jury. At trial attorneys make opening statements setting forth their clients’ respective positions. Following that the parties each present witnesses for direct and cross-examination and offer evidence into the Court’s record. Unlike arbitration, in litigation, the rules of evidence are more strictly applied (especially in jury trials) and the parties’ attorneys must be prepared to make and oppose objections concerning various documents or oral testimony to either have the information received into evidence or have it excluded based on the rules of evidence. If the case is heard by the jury a decision will be rendered within hours or days. If the case is tried to the judge several months may pass before a decision is rendered. What could be viewed as both an advantage and a disadvantage depending upon whether or not you prevail at trial, is that following the decision the parties have the right to appeal the decision to a higher court. Thus, even after potentially years of litigation, a decision by a judge or jury does not mean that the case is over.
Every form of dispute resolution has its own specific advantages and disadvantages. Parties to construction contracts would be well-advised to review the relevant contract documents to make sure they are apprised of the particular dispute resolution processes and timelines that are required to avoid waiver of claims and to properly understand the potential risks and financial impact that dispute resolution may necessitate.