A legal opinion published in PileDriver magazine, 2020 Issue #6
by: C. Ryan Maloney, Esq.
Jimerson Birr, P.A.
Disputes are a fact of life on construction projects. There are just too many variables, unknowns and unpredictable things that can occur during the course of a project that can lead to disagreements and disputes, particularly when significant dollars are at stake. However, as many in the construction industry know, or come to find out, engaging in litigation or arbitration over disputes can sometimes be so time consuming and expensive that, as the old saying goes, the cure can be worse than the disease.
Even as a lawyer that specializes in construction litigation and arbitration, sometimes the best advice I can provide to a client is to help them resolve their dispute without having to resort to litigation or arbitration. One of the ways to try to facilitate that type of resolution is through well-crafted contractual dispute resolution procedures that are required before the parties can engage in litigation or arbitration. While there may still be certain disputes that just cannot be resolved without going to court or arbitration, effective pre-suit dispute resolution provisions in a construction contract make it more likely that there will be fewer such disputes by requiring the parties to engage in meaningful dispute resolution before resorting to litigation or arbitration.
Stepped Dispute Resolution
One of the keys to an effective dispute resolution contract provision is to require the parties to meet and attempt to resolve the dispute before they can file a lawsuit or an arbitration. Therefore, one of the key things that needs to be included in the contract language is that the dispute resolution process needs to be made a mandatory "condition precedent" to the ability of either party to institute legal action or arbitration. This means that they must engage in the dispute resolution process before filing suit or commencing arbitration, and if they fail to do so, the court or arbitrator will either dismiss or stay the proceedings until the dispute resolution process is completed. While the parties can mutually agree to dispense with the dispute resolution procedures if they each agree to do so, the contractual condition precedent language prevents one party from unilaterally ignoring the process and going straight to litigation or arbitration without engaging in the required dispute resolution procedures.
In order to have a better likelihood of success, the dispute resolution procedures should also be a stepped process, with at least two sets of meetings, with the first being at the project manager level. The provision should require the respective project managers to meet in person to try to resolve the dispute within a certain number of days after the written submission of a claim or dispute. Such a face to face meeting at the project level can sometimes leads to resolution of a dispute that emails or letter writing simply cannot.
Second, if the project level meeting is not successful in resolving the dispute within a certain time frame, such as 30 days after submission of the claim or dispute for example, the next step should be a required in-person meeting at the executive level of the respective companies within another set time period. The intent with this type of meeting is to move it from the project level participants, who may be very personally invested and whose emotions may run higher, to the executive level where the participants would be less likely to be day to day project participants and may be able to take a more holistic and potentially more objective view of the dispute.
This should also be a face to face meeting, and generally should not have legal counsel in attendance at the meeting in order to try to facilitate practical negotiations less focused on adversarial legal positions. Oftentimes, executives may be able to see the bigger picture and have more authority and flexibility to be able to come to a resolution that could not have been reached by the project level participants.
Mandatory Pre-Suit Mediation
If the project level and subsequent executive level meetings are not successful in resolving the dispute after an agreed time period, then the next required step should be mediation. Mediation should be identified in the contract as a mandatory condition precedent to institution of legal action or arbitration so that mediation has to occur first, unless both parties agree to waive the requirement.
Mediation is a structured settlement conference managed by a professional and trained mediator whose job it is to work with the parties to try to resolve their dispute. While the mediator cannot make any rulings or force the parties to resolve their dispute, the mediator will often be an attorney with experience in construction law and special training in dispute resolution who should be able to provide the parties with an outside view on how a judge or arbitrator might view their dispute and can point out significant issues with the parties' respective claims and defenses. This is particularly true where the parties provide in the contract for the mediation to be administered under the construction industry mediation rules of organizations like the American Arbitration Association ("AAA") or JAMS, which have large lists of mediators specializing in mediating construction industry disputes. In addition, most states have laws that make what is said or presented during mediation by the parties or mediator completely confidential, and not admissible in court or arbitration, in order to try to encourage frank and open settlement discussions.
It is recommended that the contract provision requiring mediation incorporate the mediation rules of an organization such as AAA or JAMS to facilitate the mediator selection and the procedures of the mediation. If not, then the mediation contract provision should include a specific process for mediator selection to try to avoid disputes over who the mediator will be for the mediation. It should also provide that mediation should be held in the same city or county where the project is located, and should provide that the parties will split evenly the mediator fees. It is also important that the mediation contract provision provide that any agreements reached in mediation shall be enforceable as settlement agreements in any court of competent jurisdiction so that settlements reached in mediation are binding and enforceable. In addition, it is recommended that the contract provision allow for suits to be filed prior to completion of mediation if necessary to perfect mechanic's lien or bond claims, but that the parties agree that such proceedings shall be stayed pending completion of the required mediation.
If the project level meeting, the executive level meeting, and mediation are all unsuccessful in resolving a dispute, then the next step would appropriately be resort to litigation in court, or arbitration if the parties have agreed in the contract to require arbitration of disputes in lieu of litigation. While the type of stepped dispute resolution process described in this article is likely to result in faster and less expensive resolution of many disputes without the need for litigation or arbitration, disputes that remain unresolved after going through such a process are likely to be the type of dispute that truly needs the involvement of a judge, jury or arbitrator, and for which the time, effort and expense of litigation or arbitration may be justified. However, most disputes are not of that type, and requiring in the construction contract that the parties engage in a stepped dispute resolution process is likely to result in faster and less expensive resolution of many disputes, permitting the parties to focus their efforts on project completion and profitability rather than protracted and expensive litigation or arbitration.
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