Important considerations exist for contractors when negotiating contract terms pertaining to dispute resolution. In addition to litigation through court, other alternative dispute resolution options are available and should be considered. Simply because a certain type of dispute resolution structure is preferred on one project does not necessarily mean it will be the preferred type of dispute resolution on another project. The most common methods of dispute resolution are negotiation, mediation, arbitration, and litigation.
NEGOTIATION AND MEDIATION
Negotiation and mediation are collaborative in nature and are generally used as a precursor to either arbitration or litigation, with the goal being to avoid those forums. They are non-binding in nature, meaning that all involved parties would have to agree to any resolution in order for there to be one. The two principal binding forums, arbitration and litigation, will result in a final award or judgment on a dispute. At the very least, a contractor should be aware of the basic advantages and disadvantages of each of the forums. Such an understanding will help the contractor make an informed choice as to where and how it wants disputes to be resolved.
Both negotiation and mediation involve substantially less cost than most any arbitration or lawsuit, and for that reason alone are worth seriously considering as dispute resolution mechanisms. Both are flexible, and can be approached either informally or formally. For example, while negotiation may occur informally, it could also involve a formalized structure where a neutral atmosphere may be created by including previously uninvolved principals of the respective businesses. Mediation can be left to the parties or can be structured to be administered by a third-party, such as the American Arbitration Association or JAMS. Negotiation and mediation provide parties with the best opportunities to resolve disputes on their own terms in a mutually acceptable manner. Mediation is actually required by a number of courts during litigation. A potential disadvantage is that participating in extended negotiations or mediation could delay moving forward in time sensitive disputes.
Arbitration is essentially a private trial with an arbitrator, or panel of arbitrators, issuing a final award that determines who prevails on the claims. The right to arbitrate is most often provided for in the applicable construction contract, although parties can agree to arbitrate after a dispute has arisen. While there may be some procedural rules in place for an arbitration, there is generally a less rigid structure and less formality than a lawsuit.
Governing rules, such as rules of evidence, may be consulted or serve as guides, but are usually not controlling. Parties can dictate who can participate, allowing interested parties to join or restricting joinder and consolidation to work as a cost control. If not addressed in the governing contract, parties can develop their own procedures for use in the case. The parties will often select their arbitrators, although the arbitrators may be appointed in some instances. Thus, there is generally greater control regarding the qualifications of the decision makers. But the arbitrators are paid by the parties, and costs can add up quickly. Arguments regarding equity and fairness may also be more persuasive in an arbitration as arbitrators may not necessarily have to follow legal precedent. There is generally no opportunity for an appeal, which can help control costs but leaves a dissatisfied party who is convinced the arbitrator was wrong with limited recourse. Typical advantages include the following: more control over procedures and appointment of decision makers and overall privacy. Typical disadvantages include the following: no appeals process, costly (compensation for arbitrators), and decision makers may venture outside of set legal precedent.
The standard for dispute resolution is generally litigation, where a lawsuit is filed and a final binding, and often appealable, judgment is entered. The typical lawsuit involves a judge deciding legal issues and a jury (or judge) deciding factual issues. Unlike arbitration, the costs related to securing a decision maker are essentially non-existent as tax dollars pay for the judge’s time. At the conclusion of a lawsuit, an enforceable order or judgment is provided, which may be reviewed by an appellate court. Rules of procedure and evidence provide a set structure, but can also create an inefficient dispute resolution process. There is also a risk that the judge assigned to a case may have limited knowledge regarding construction-related matters. A judge will most likely have any number of cases, which can make scheduling hearings a particular challenge at times (although this issue does exist as to arbitration as well). Courts are generally required to follow the law so arguments of what is fair may be less persuasive than in another forum. Typical advantages include the following: “free” judge, set procedural structure and protections, and an appeals process. Typical disadvantages include the following: time consuming and costly and potentially less knowledgeable decision makers.
Construction contracts should be drafted with dispute resolution in mind. If a contractor elects to forego any dispute resolution terms, litigation will be the assigned dispute resolution method absent any future agreement. While that may be acceptable for some projects, it almost certainly would not be the preference on others. The amount of detail that can be included when drafting dispute resolution clauses is near limitless. Negotiation and/or mediation can be included as a precursor to arbitration or litigation. The parties can develop their own procedural rules or select an entity, such as the American Arbitration Association or JAMS, to administer any dispute resolution process. The parties may be able to select the location of any lawsuit or arbitration.
These are only a few of the many options that can, and should be, considered by a contractor in regards to dispute resolution processes. Comprehensive and useful dispute resolution provisions should be addressed early on, long before a dispute actually arises. If a contractor realizes that arbitration would have been a preferred forum while it is at trial in the owner’s hometown with the owner’s colleagues as jurors, it’s too late. ■
About The Author:
R. Carson Fisk is a construction attorney and shareholder in the Austin, Texas, office of Ford Nassen & Baldwin P.C. (www.fordnassen.com), which is nationally recognized in the industry and is one of the largest construction law firms in Texas. He focuses his practice on commercial construction disputes, as well as other construction-related matters. He is also a mediator and arbitrator. Mr. Fisk can be reached at or 512.275.1783.
Modern Contractor Solutions, March 2015
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