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Alternate Methods to Resolve Contract Disputes

Copyright, Hill International, Inc., 2000

Ever increasing financial pressures experienced by today's municipalities make capital improvement and construction projects seem insurmountably risky.  Unforeseen disputes among the project participants - designers, contractors and subcontractors - can cause massive schedule delays and cost overruns.  Such disputes often arise over the liability for a specific problem.  If not checked, these disputes can lead to costly and time-consuming litigation, leaving municipal managers with unfinished projects and skyrocketing costs to complete them.

Generally, most construction-related disputes and schedule delays involved three issues: 

·        Differing Site Conditions - conditions at the work site that are different than anticipated or shown on design drawings and other project documentation.  A utility line not shown on drawings, or an abnormally high content of rock in soil at the site are two examples of differing site conditions.

·        Changes in Scope of Work - a differentiation in the amount of work or tasks needed to complete the project.

·        Changes in scope can be the result of several factors, including changes deemed necessary by the designer, contractor, or municipality.  Changes in scope also can result from unforeseen factors encountered during the design and construction processes.

·        Unexpected Delaying Events – Weather, labor problems, loss of funding and unanticipated delays in permit approvals each are examples of unexpected events that can delay a construction project.

Disputes often involve who's at fault for the above-referenced changes, whether the changes could have been anticipated, or who should have anticipated them.  Such disputes often can be mitigated, however, with proper, proactive steps taken at the beginning of a capital project, well before design and construction have begun.

First, a partnership between the municipality, architect/engineer and contractor must be established on the basis of risk sharing and a commitment to resolve disputes equitably and expediently.

In recent years, new techniques have been introduced to do just that ‑ prevent, manage and resolve construction project disputes and claims.  Alternate Dispute Resolution or (ADR) when used proactively can help resolve disputes outside of the courtroom and help keep capital projects running smoothly.

ADR:  R_X FOR ADVERSARIAL ILLNESS  

Dispute prevention and dispute resolution must be employed during each stage of the construction project ‑ from concept and design through construction and occupancy.  Ideally, 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.  Options for resolving disputes via ADR include:

1.   Negotiation among the parties involved in the dispute

2.   Mediation of the dispute using an independent mediator

3.   A dispute review board

4.   Binding arbitration, using guidelines of the American Arbitration Association

5.   Partnering

NEGOTIATION

Equitable negotiation is crucial.  During negotiation, recognize the adage that a fair settlement beats the heck out of a good lawsuit."  A timely examination and amicable confrontation of a problem will greatly improve the chances of its resolution.  Also, don't ignore a problem or postpone attempts to negotiate.  Both sides should exhibit good faith in their discussions to facilitate a quick settlement.  Remember that negotiation requires preparation, a willingness to “give and take,” and the need to leave personality conflicts at home.  In addition, recognize that you're part of a team.  The roles of the project "owner" or municipality, engineer, architect, project manager and contractor are interrelated.  Everyone involved in the capital project must play a part in preventing, mitigating and resolving claims.

MEDIATION

When negotiations fail, engage an independent mediator acceptable to both sides who can assist the parties with a decision.  Ideally, an independent mediator should be selected by all parties before work begins and, more importantly, before disputes arise.

The key to the success of mediation is that the mediator be a neutral and objective third party, and that he or she not be interested in the outcome of the settlement, but only in a successful settlement.

DISPUTE REVIEW BOARD

Dispute Review Boards are relatively new entities, set up to review claims and other disputes and render decisions about their validity.  Usually, parties involved in the capital project present the issues to a three-person panel that is established at the beginning of a project to render a binding decision on each dispute as it arises.  Each party chooses a member of the board.  The two board members chosen then select a third member, with the cost of the time of the individuals shared equally by the parties in the contract.  Since the board members normally are chosen 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 that is not settled by negotiation within 30 calendar days is then referred to the review board for a hearing within another 15 days.  The board then conducts a hearing and normally makes a decision on the disputes within 15 days thereafter.  However, if the issue in dispute is crucial to the progress of the work, the parties can agree on an expedited hearing and decision.  Industry representatives have reported that dispute review boards can be highly successful.  Statistics indicate that of 100 recent cases sent referred to dispute review boards, 98 were resolved there; only two cases proceeded to arbitration and/or litigation.  The 100 cases studied involved more than $6 billion in construction.

ARBITRATION

Arbitration is the most frequently used and most standardized ADR procedure.  The American Institute of Architects (AIA) and the Associated General Contractors of America (AGC), and the American Arbitration Association (AAA) have standardized, published guidelines for arbitration.  Arbitration is becoming increasingly common as more and more construction contracts require mandatory binding arbitration of all disputes within a designated period.  Other contracts call for arbitration at the discretion of the parties.

Although the American Arbitration Association has a standard set of rules to guide the arbitration procedure, the process is flexible and can be jointly modified by both parties.  For example, each party involved in the dispute can pick its own arbitrator, and the two selected arbiters then choose a third.  Under American Arbitration Association rules, however, arbiters must be chosen from an approved AAA list. 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 or the findings in fact for the award, the parties may be able to agree at the beginning about the nature of the award decision.  Once the arbiters are selected, the arbitration progresses much like a trial, often with a binding decision.  Arbitration procedures and a panel of arbiters should be agreed upon well before work on your capital project begins, and disputes arise.

COMPARING THE OPTIONS

With mediation and arbitration, the parties consent to the process either at the time the dispute arises or by signing the contract which contains that provision.

·        Litigation, however, is non-consensual ‑ any party can sue without the other side's consent.

·        Mediation and arbitration are flexible; the parties can agree to the procedures.

·        Litigation is rigid, in that the rules within the court have already been established.

·        Mediation is non-judgmental, in that the mediator does not render a decision or an award.

·        Arbitration and litigation are judgmental in that binding decisions and/or awards are rendered.

·        Litigation produces a decision that usually can be appealed to a higher court.

·        Arbitration provides for a final award with no appeal. ‑ Mediation, however, is settlement-oriented and encourages the parties to reach a mutually acceptable agreement. 

·        Mediation can end successfully with a written agreement between the parties for the record.

·        Arbitration usually results in an award, without a decision or findings of fact. ‑ Litigation produces a final decision, as well as findings of fact and law.

·        Mediation usually takes a relatively short amount of time and can be accomplished in a matter of weeks.

·        Arbitration and litigation may take much longer.  In fact, arbitration can take several months, and litigation up to two years.

·        The mediator's fees are usually split among the parties.

·        Arbitration may require fees to be paid to three arbitration panelists, and also to the AAA or other sponsoring organizations.  Litigation usually results in extensive legal costs for both sides, as well as court fees.

PARTNERING

Partnering is one of the most proactive ways to resolve disputes.  The basis of partnering is an understanding that all parties benefit from a successful project, and that disputes only undermine that success.

Partnering, often established via an agreement at the start of a project, is based on trust between the parties and constant communication to keep all of the parties informed.

The municipality architect/engineer the contractor usually enter into a partnership agreement before work begins, wherein they sign a pledge to assist each other in providing a successful project that is completed on time and within budget.  That pledge should include an agreed-upon effort to prevent disputes before they occur and to continuously work toward eliminating any adversarial relationship between the parties.

In addition, partnering can only succeed with the support of each of the parties' top management.  That support must include dispute resolution training, procedures for open and consistent communication, and a commitment to risk sharing.  Partnering among all of the project participants also fosters a sense of ownership of the mission and a stake in the success of a project.

CHOOSING AN ADR METHOD THAT' RIGHT FOR YOU

The nature and magnitude of problems on previous capital projects may help you decide which method of Alternative Dispute Resolution will fit your needs.  But, whether you choose partnering, mediation or arbitration, that choice should be made before you begin design and construction.  Procedures for dispute resolution should be established and agreed upon early.  And, follow-through is essential to ensuring that the procedures are being properly and consistently used.

As municipal expenditures and funding applications become increasingly scrutinized, avoiding time-consuming and costly litigation has become an imperative.  ADR can be an effective tool for resolving disputes before they drain precious financial and manpower resources, and place your long-debated capital project at risk.