Putting ADR in the Contract – (ADR 3-part series)


This article is part of a three part series titled “Alternative Dispute Resolution – Why, When & How.” To read the other parts in this series, or to read more articles about ADR, navigate to the Wolfe Law Group ADR page here: ADR.

While parties can agree to alternative dispute resolution at anytime, the most appropriate time for parties to plan dispute resolution procedures is during contracting.

ADR provisions in contracts come in all shapes and sizes, and can be as general or specific as the parties elect. Typically, the more complex a project, the more specific the ADR clause. However, whenever drafting any contract, there are important considerations to keep in mind. This article will explore the ADR clause, and the things you should keep in mind when creating an alternative dispute resolution process.

Quick Notes
It’s common in the construction industry to use certain popular form contracts, such as documents published by the American Institute of Architects or ConsensusDOCS.

These contract document sets are drafted by the respective trades and associations, and are generally great contracts for the right types of projects. The documents are extensive, intricate and expensive, however, and in many instances they aren’t right for a project.

These contract documents usually allow the contracting party to “elect” which type of dispute resolution procedure they’d like to use, and contain basic ADR provisions therein. The ADR provisions can be added to by the parties with some of the detailed clauses discussed in this article.

If you’re not using a contract document set (which applies to tradesmen and most small to mid-sized construction projects), you can still craft usable ADR scenarios. Start with the basic provision discussed immediately below, and add the detailed clauses that are applicable to your project.

The Basics
There isn’t anything fancy about the standard alternative dispute resolution clause. If you’re interested in binding the parties to arbitrate or mediate in the event of a dispute, the following standard clauses should do the trick:

Standard Arbitration Clause
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by binding arbitration, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

Standard Mediation Clause
If a dispute arises out of or relates to this contract or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try to settle the dispute by mediation before resorting to arbitration. If a party fails to respond to a written request for mediation within 30 days after service or fails to participate in any scheduled mediation conference, that party shall be deemed to have waived its right to mediate the issue in dispute.

Getting Detailed
Because of the flexibility of the ADR process, the parties are essentially free to construct a custom dispute resolution process. The manners in handling your dispute are limited only by the needs and creativity of the parties. Before adding any type of “custom” or “detailed” provision into your contract, however, you should consult with an attorney to discuss how the provision might affect your project.

Selecting the Arbitration Association
Every major city has a competitive arbitration market. While the American Arbitration Association is clearly one of the most popular and deeply rooted arbitration providers, by no means are they the only game in town, nor are they required to be the arbitration provider of your choice.

Small and local arbitration companies offer a more personalized service than the larger providers, and sometimes they can be much less expensive than the national outfits.

You should research the ADR options in your jurisdiction before establishing your “choice” in contract. Once you agree on an arbitration provider, however, it’s simple to make that company the official provider for any dispute under your contract. Simply add a provision in the basic arbitration clause as follows:

(i.e.) …shall be settled by arbitration by the American Arbitration Association…

You can even get so specific as to stipulate which set of “rules” will govern the arbitration. Each arbitration association has its own rules and procedures. For construction projects arbitrated by the AAA, the following provision is common:

(i.e.) …shall be settled by arbitration by the American Arbitration Association under its Construction Industry Arbitration Rules…

How Many Arbitrators? How are Arbitrators Selected?
The parties may elect to have one, or more than one arbitrator. Typically, more complex projects will lend itself to an increased number of arbitrators…but, it’s not always the case, and even the smallest projects may request more than one arbitrator.

The purpose of having more than one arbitrator, of course, is that there is less risk of a single rouge arbitrator handing down an unfair decision. Requiring a majority from three arbitrators, in theory, should be consistently more fair than allowing a single person to make the final decision.

Of course, the more arbitrators used, the more expensive the proceeding.

The number of arbitrators, and the method of their selection, may be handled in contract with the following example provisions:

1. Tying No. of Arbitrators with the Size of Dispute
In the event that a claim exceeds [$1,000,000], exclusive of interests and attorney’s fees, the dispute shall be heard and determined by a panel of three arbitrators…

2. Regulating Who Can Serve As Arbitrator and How Selected

  • The arbitrator(s) shall be a civil engineer
  • The arbitrator(s) shall be a practicing attorney specializing in construction law
  • A balanced panel of three arbitrators, such as one consisting of one contractor, one design professional and one construction attorney

The Applicable Law and Location for Arbitration
Once a dispute arises on your construction project, those in charge of settling your dispute are going to be faced with some preliminary questions: (1) What law applies?; and (2) Where to hold the actual arbitration.

If two local companies are contracting in relation to a project in their company’s city, then these questions are really no-brainers. In construction, however, it’s n
ot uncommon for out-of-state general contractors to contract with local companies, or vice versa. Depending on the situation, these two simple questions can become quite sticky, and in some cases may even be the source of leverage for one party over another.

As such, it may be beneficial to choose the applicable law and the locale of the proceedings at the onset. Making these decisions via contract is simple, and you can use language similar to this:

  • The place of arbitration shall be [city], [state] or [country]
  • This agreement shall be governed by and interpreted in accordance with the laws of the State of [specify]. The parties acknowledge that this agreement evidences a transaction involving interstate commerce. The Federal Arbitration Act (Title 9 US Code) shall govern the interpretation and enforcement of the arbitration clause in this agreement.
  • This contract shall be governed by the laws of the State of [specify]

Attorneys’ Fees
It’s a general rule in the American legal system that each party bears its own legal expenses, including the expense of attorneys fees. Of course there are a number of exceptions to this rule, but by far the most concrete and certain exception is when the parties contract otherwise.

Each type of “attorneys’ fees” provision is interpreted differently, and in some cases, an arbitrator might find that a general attorneys fees provision does not apply to fees incurred in connection to a mediation or arbitration. In other words, an unspecific attorneys fees provision might only provide reimbursement of fees in the event of actual litigation.

It might be prudent, therefore, to include attorneys’ fees provisions directly within your arbitration clause. See some of the following examples:

  • The prevailing party, as determined by the arbitrator, shall be entitled to an award of reasonable attorney fees.
  • The arbitrator(s) shall award to the prevailing party, if any, as determined by the arbitrator(s), all of its costs and fees. “Costs and fees” mean all reasonable pre-award expenses of the arbitration, including the arbitrator(s)s’ fees, administrative fees, travel expenses, out-of-pocket expenses such as copying and telephone, court costs, witness fees and attorneys’ fees.
  • Each party shall bear its own costs and expenses and an equal share of the arbitrator(s) and administrative fees of arbitration.
  • The arbitrator(s) may determine how the costs and expenses of the arbitration shall be allocated between the parties, but they shall not award attorneys’ fees.

Even More Detailed
By no means does this article exhaust the types of detailed provisions available to those contracting to engage in alternative dispute resolution. In fact, it’s just the beginning.

Other provision amendments can me made to regulate the form and scope of arbitration awards, the ability to appeal an arbitration award, the statutes of limitations applicable to certain claims, the confidentiality of arbitration proceedings, the type of remedies available to parties, the type of awards allowed to be granted, the duration of ADR proceedings, the discovery process related to the proceeding, and more.

When customizing your contract and ADR provision, its best to speak with a knowledgeable attorney.

The Next Series
Next in this three part series on Alternative Dispute Resolution is the final article, a discussion on
choosing ADR Post-Dispute and post-contract. This is important for parties who failed to add an ADR provision within their contract, but who still want to take advantage of ADR’s benefits.

The Importance of Good Counsel – National Legal Climate Polls

The U.S. Chamber Institute for Legal Reform just released their 2008 Harris Poll numbers related to the Legal Climate across the country. It’s bad news for Louisiana businesses and contractors, and marginal news for the same group in Washington.

Louisiana’s legal climate was ranked second to worst in the country (49th). U.S. Chamber of Commerce President Tom Donohue stated that businesses in Louisiana still suffer from a court system that allows unsubstantiated evidence and lawsuits that are unfair to businesses.

Washington’s legal climate ranked right in the middle of the pack (27th).

These troubling numbers and remarks in relation to both WA and LA underlines the importance of retaining quality legal counsel for contractors in both states. The construction field is stuffed with legal land mines, and construction disputes can carry high stakes and fatal outcomes. A lawsuit based on unsubstantiated evidence can cost your business thousands.

Good legal counsel before a dispute may thwart difficult legal situations, and the same during a dispute may position your company for a “best case scenario” outcome.

Learn more about Wolfe Law Group as a firm, and about our Attorneys, as we’re experienced in helping contractors, design professionals, and material suppliers avoid legal catastrophes.

The 2008 State Liability Systems Ranking Study was conducted for the U.S. Chamber Institute for Legal Reform among a national sample of in-house general counsel or other senior corporate litigators to explore how reasonable and balanced the tort liability system is perceived to be by U.S. business.

Alternative Dispute Resolution – Why, When & How (3-part series)


This article is part of a three part series titled “Alternative Dispute Resolution – Why, When & How.” To read the other parts in this series, or to read more articles about ADR, navigate to the Wolfe Law Group ADR page here: ADR.

In the world of construction, litigation is perhaps unavoidable.

The complications and high stakes of each construction project make the construction industry a hotbed for dispute and litigation, and failing to prepare for disagreements can prove fatal.
Through dispute resolution planning, construction companies can minimize their potential exposure in the event of a disagreement.

Problems with Litigation
An adequate discussion of all the drawbacks to litigation would consume a volume of books, and so this brief summary should be taken in context. Nevertheless, it seems to be common knowledge that litigating disputes in courts of law can be time consuming, expensive, unpredictable and generally unfavorable to any of the participants.

The average lawsuit takes between 2-5 years from start to finish, and can cost thousands of dollars. The process is draining on the participants emotionally and physically, and in the end, the parties usually compromise their initial positions to reach a “settlement.”

Unlike in dispute resolution proceedings, a party to litigation cannot pick the judge or the venue, nor can the parties dictate the rules. Litigation is consumed by procedural requirements, motion hearings and discovery – each item contributing to increased time and expense.

The Option of Alternative Dispute Resolution
Alternative Dispute Resolution (“ADR”) is centered around the idea of the parties agreeing to resolve their differences through a non-litigation process. Instead of filing a lawsuit and incurring the associated expense and risk, the parties each submit to another procedure. This procedure is usually less formal than the state or federal court system, and is governed by rules crafted by the parties themselves.

Alternative Dispute Resolution can be chosen by the parties at anytime. Normally, parties will include an Alternative Dispute Resolution provision within their contract requiring each other to use ADR in the event of a dispute. In other circumstances, however, the parties will agree to engage in ADR even after filing a lawsuit in an effort to encourage a fair and speedy resolution.

ADR Types
Since ADR is largely driven by the goals and agreement of the parties, the manner in which a dispute will be adjudicated is restricted only by the parties’ creativity. There are, however, a number of ‘standard’ ADR mechanisms used frequently in the construction industry. Oftentimes, all three of the below types of ADR processes are used to resolve a dispute.

The three below discussed types of resolution are discussed in their usual order of use. In many cases, only one of the below ADR processes are used by the parties, and sometimes they are even mixed and matched with traditional litigation.

It’s important to recognize that each process will carry delay and expense, and so it might not make sense to schedule all three processes when the parties are only arguing over $10,000.00. Furthermore, when all resolution types are used, the parties could be faced with delays and costs that resemble traditional litigation. Accordingly, parties must be careful in their selection of their own ADR rules.

1. The Construction Neutral
The “neutral” concept in construction has recently been sanctioned by huge contract document publishers like ConsensusDOCS and AIA, whose documents now contemplate the appointment of a “Initial Decision Maker” to resolve disputes quickly and on-site.

Traditionally, the Architect served as an initial decision maker in a construction project. When an owner and contractor disagreed about a change order amount or quality of work issue, the decision of the architect would be sought.

Being hired and paid by the Owner, this put the architect in an uncomfortable and conflicting position. The dispute often escalated even after the architect’s decision, leaving the parties with expensive litigation and a delay in the project.

The idea of a “neutral” or “initial decision maker” simply tenders the decision-making role to a neutral third-party, appointed by the parties during or subsequent to contracting. The initial decision maker provides the parties with a fast and inexpensive third-party voice, hopefully capable of resolving the dispute and keeping the project on-track towards completion.

The decision of the initial decision maker is usually considered “final” by the parties for the purposes of the project’s progress, but in almost every instance, the parties allow the decision to be disputed through further dispute resolution processes (such as mediation, arbitration or litigation).

2. Mediation
Unlike almost every other type of dispute resolution procedure, mediation does not pit one party’s position against the other, does not provide a “decision” of a neutral party and is not binding upon the parties in anyway.

Contrary to any other dispute resolution procedure, mediation is a confidential meeting of the parties, whereby they each air out their positions and explore its strengths and weaknesses. The mediation process encourages settlement by providing a forum for an open discussion of the party’s respectful positions, and the road ahead in the event the parties continue in their disagreement.

Normally, the mediation will begin with a meeting of all parties and the mediator, whereby each party expresses their position and their concerns. The mediator then breaks the parties into different rooms, whereby they only communicate to one another through the mediator.

Mediation is a very successful settlement tool, and when used correctly it can help parties avoid the costs and risks of litigation.

While the mediator is greatly involved with the parties and works to help them settle, he or she will not make any decisions that will binding upon the party. The mediation proceeding is only “binding” if a settlement agreement is reached.

3. Arbitration
The third and final type of dispute resolution process discussed in this article is “arbitration,” perhaps the most traditional ADR procedure.

Arbitration is very similar to traditional litigation in that it involves a decision maker (i.e. judge), witnesses and testimony, a traditional review of evidence and procedural rules.

While similar to litigation in some manners, arbitration is certainly an entirely different proceeding. The parties are intimately involved with setting the rules and proce
dures, as well as even cho
osing who will arbitrate. The “rules” of the proceeding are also much less formal than traditional courts require.

In a typically arbitration, the parties will appear before a single arbitrator, or a panel of arbitrators. These decision makers are typically experienced in the field of law and industry at dispute, and they will listen to each side present their case. Thereafter, the arbitrator(s) will make a decision that is enforceable by one party over the other.

Pros and Cons of ADR
The pros and cons of ADR over traditional litigation is a worn topic.

While there are certainly a lot of positive characteristics to ADR, it is not a process that fits in every circumstance. Like almost any other legal decision, you should consult the advice of an attorney and consider the pros and cons of each procedure before deciding on one over another.

Although there are some circumstances when traditional litigation is preferred over ADR, in the construction industry ADR is a fact of life and is normally an asset to those working on projects of all shapes and sizes.

Here is an overview of some of the most discussed pros & cons to ADR:

Pros to ADR

  • ADR can help preserve the relationship between the parties. In construction, genuine disputes may arise between the parties on scope and quality issues, and although the parties are at odds over this issue they may likely have to continue working together or work on a project in the future. ADR may save the relationship while resolving the dispute.

 

  • The parties are in the driving seat. Unlike in litigation, the parties can choose the resolution procedures, the players, the rules…and even the outcome. Traditional litigation has rigid rules, and you get what you get. The parties are not allowed to explore creative alternatives, and the result may sometimes be unfair. When certain ADR solutions work (like mediation, or construction neutrals)….the result may actually be win/win.
  • Costs of ADR are typically lower than costs of litigation. Traditional litigation can be extraordinary expensive, regardless of whether the dispute is large or small. ADR costs more closely resemble the complexity of the dispute and the purse at stake. Further, its informality results in less obligations and lower costs.
  • ADR is efficient. ADR is run by private companies who get paid by getting claims in and out of the door. Traditional courts, obviously, do not have the same motivation. ADR moves at the pace of the parties, and not the courts.

 

Cons to ADR:

  • Instant Legal Remedy. Sometimes, the parties need an instant legal remedy (i.e. construction lien, construction lien removal, injunction, eviction, etc.). These instant remedies cannot often be obtained through ADR, and litigation is necessary. When an instant legal remedy is required and the parties have chosen to resolve their disputes through ADR, the party seeking the legal remedy may have boxed themselves in to an unnecessary and expensive process.

 

  • Loss of Leverage. Sometimes, the costs and burdens of litigation is actually leverage for one party over another. While not exactly fair, it is a fact of life in the legal world. If one party is better funded, or if one party is in possession of the money or property in dispute, the long and expensive process of litigation is actually leverage for that party against the other.
  • Quality Standards. While it might seem humorous to many to assert that the court systems have “quality control,” in reality there may be more quality control in that system than in ADR systems. In court, there are manners to appeal decisions not found with most ADR proceedings. Furthermore, arbitrators, mediators and neutrals are oftentimes not decision makers by trade, and that inexperience makes them prone to mistakes.
  • Too Focused on Compromise. A pro to the ADR system is its focus on settlement and compromise, but its also a con to the system. Sometimes, the parties do not want to compromise, or they cannot find “justice” in a compromise. The ADR system’s encouragement of compromise consumes a large amount of time and resources that is wasted on a litigant who seeks a final and fair determination. Even when the ADR system gets to the arbitrators, they are still less likely to impose severe penalties on one party or to make a very prejudicial decision.

 

Where Do I File For ADR?
With so much discussion of ADR, a reader may be quite curious as to who manages “ADR,” and where the ADR courthouse is located.

Interestingly, there isn’t a courthouse system for the ADR network. Every city has a number of private companies that offer ADR services, and these services are usually located in office buildings in-between doctors, lawyers and accountants. Since the parties are in the driving seat of ADR proceedings, they can even choose their neighbor or relative to conduct the proceedings (not recommended, but mentioned to highlight the informality of the processes).

Some companies are more established than others, and you should investigate any organization before choosing them to adjudicate your dispute. In many instances, the parties will actually select the ADR provider at the time of contracting .

The most popular provider of ADR services is the American Arbitration Association.

The Next Series
Next in this three part series on Alternative Dispute Resolution is a discussion on:

  • Choosing ADR in Contract: Well crafted ADR clauses and some of the factors you should consider when constructing your ADR requirements in contract.
  • Choosing ADR Post-Dispute: How to involve ADR in an already existing dispute