Maybe you are an owner and things are going so slow that you’re stuck between a rock and a hard place. You’ve sold your old home and have no place to go. Or maybe your business has already marketed the grand opening and you’ve got customers and product scheduled to arrive — and no place to put them.
Then again, you could be an architect. The contractor is substandard, RFIs are flying and costs are skyrocketing, and the finger is being pointed at you and your design. You know it’s not design error, but the unsophisticated owner may buy the contractor’s excuses.
What to do?
The traditional answer was to file a lawsuit if the dispute could not be resolved in the ordinary course of business. Today, however, there are options to filing suit that can prove to be more efficient in time and less costly for everyone. Collectively, they are labeled as “alternative dispute resolution” and each has its own set of benefits and disadvantages.
Construction of even the most humble structure requires an interweaving of talents and a cooperation between contributors that works best when everyone is proceeding in an efficient and supportive manner. Disputes stall this process, and if informal negotiations do not find a quick answer to the problem, mediation may be the fastest method to get things smoothed out, and back on track.
Mediation is an informal process where the dispute is brought before a trained mediator for resolution. The parties can agree in advance on whether or not the mediation will be binding or non-binding upon them. The mediation can take place at any agreed-upon location, and the mediator need be only someone that the parties agree should act in this role. Ordinarily, mediators are construction professionals trained in mediation resolution techniques. Many attorneys with a background in construction law act as mediators in construction matters.
In some instances, the mediation will be a multi-party mediation since construction involves such an overlap of interests and issues. For example, representatives for the architect, general contractor, and owner may all participate in mediation. Similarly, two or more sub-contractors may participate in mediation with a general contractor.
After negotiation among the parties themselves, mediation costs are among the least expensive in dispute resolution. The mediator’s fee can be split among the parties, and with adequate preparation, the issue can be resolved in a very short amount of time.
Binding mediation involves a contract between the parties in which they agree to forego the right to file a lawsuit and to accept the decision of the mediator as final resolution of the dispute. This works well with keeping a construction project up and running.
In fact, binding mediation is a cheaper and faster option to a more formal arbitration and studies show it is gaining in popularity among construction professionals. Nevertheless, formal arbitration remains the most widely used alternative resolution method in the construction industry today.
Arbitration is more formal than mediation, and less so than trial. Arbitration has no discovery process – there are no depositions, nor any courtroom fights over whether or not the opposing party has a right to look at certain documents, for example. However, simplified rules of evidence do apply in arbitration proceedings and the resolution itself does have some of the formalities of a courtroom.
The decision-maker in arbitration can be a single arbitrator, or a group of individuals collectively referred to as an “arbitration panel.” The arbitration decision is final and cannot be appealed, unlike the traditional legal process, except in certain limited situations (e.g., the arbitrator failed to mention past business dealings with one of the parties and failed to recuse himself, etc.).
The American Institute of Architects includes a provision for arbitration of disputes in their contract forms, which have been widely used and adopted throughout the construction industry. The American Arbitration Association also promotes the use of arbitration in construction matters though its National Construction Dispute Resolution Committee (“CRE”).
The CRE promulgates rules and procedures for residential and commercial construction arbitration, as well as fact sheets, forms, and ethical guidelines that can be obtained online. (The CRE also offers some mediation documentation, as well.)
Arbitration can get a resolution in a relatively short amount of time: unless the matter is complex, the process can be completed within 90 days. If the parties have agreed to an accelerated process, then the time can be shorted to 30-60 days; with enough cooperation among the participants, arbitrations have been known to complete within as little as 14 days.
Arbitration can be costly. Preparation of the supporting documentation as well as the legal arguments to be advanced can become expensive. Compared to the same dispute in the traditional litigation process, however, arbitration will always be the cheaper alternative.
Arbitration must be agreed upon by the parties before the process begins. Most general contractors are insisting that arbitration clauses be included in their contracts, since their business encounters the most disputes and can be hardest hit by any conflicts.
Both state and federal law contain detailed requirements on arbitration clauses within contract documents. Since the arbitration provision effectively denies the parties their constitutional right to the courtroom process, protections are strict to insure that everyone understands exactly what they are foregoing when they sign their agreement to the arbitration option. Arbitration clauses must be in a certain size font, for example, and must contain clear explanatory language of the finality of the arbitration option.
With the popularity of mediation and arbitration, are there still construction lawsuits? Of course. For some, the opportunity to have a jury trial is not something they are willing to give up. For others, the time and money involved in traditional litigation is not a significant detriment to them — and may even provide them a strategic benefit.
In big, complex disputes, traditional litigation does offer advantages and sometimes can be the only option. A general contractor filing bankruptcy may necessitate the filing of formal litigation. Violations of law or code may require court determinations of legal liability. Suspicions of fraud may require the formalities of full discovery. If the conflict is so large and voluminous that the project has stalled indefinitely, then why not file a lawsuit?
Traditional litigation insures that witnesses will be interviewed, depositions will be taken, and documents will be gathered from all available sources. Judges will be available to oversee the process: a party hiding evidence can be compelled to release it, and an unwilling witness can be subpoenaed and compelled to testify.
An owner, for example, may find it necessary to force the testimony of a subcontractor unwilling to speak up against a general contractor to whom he is dependent upon for future work. Similarly, a contractor may need formal subpoena power in order to obtain documentation from an engineer unwilling to volunteer information detrimental to an architect with whom he does repeat business, and an architect may need legal formalities to obtain financial evidence from a third-party concerning the liquidity of a non-paying owner.
Litigation takes time, and it can be expensive. Residential disputes are usually heard by a judge, and can be faster than a commercial dispute which ordinarily involves a full jury trial. Appeals can be filed, and the appellate process can take years before a final determination is reached.
Sometimes, lawsuits admittedly are filed with the full knowledge that the expected expense in time and money invites a settlement that might not have been so readily available otherwise. Sometimes, lawsuits are the only option. When issues such as illegality or fraud are involved, inter-party resolution simply may be insufficient and the traditional legal process may be required.
For more information:
American Arbitration Association
AAA’s National Construction Dispute Resolution Committee (CRE)
State of Louisiana – Arbitration and Mediation Acts
(you must enter each section number, this site does not automatically scroll through the statutes)
State of Washington – Arbitration and Mediation Acts