Selecting the Appropriate Dispute Resolution Procedure

By Bruce Demeter

While it is every firm's goal to avoid formal claims, sometimes they are unavoidable. Firm's must be prepared for those instances by having selected, prior to the execution of its agreement, the dispute resolution procedure that best fits the project and project parties. This requires the firm to know and understand the types of dispute resolution procedures that are available.

Frequently, a firm will repeatedly specify the same type of dispute resolution procedure for each project. This is typically the result of having experienced a “bad outcome” in another procedure, thus considering that procedure to be defective in some way. However, the unfavorable result may not be the product of a defective procedure but an incompatibility between the process and project parties.

There are many types of formal dispute resolution procedures, but the three (3) most recognized are litigation, arbitration and mediation. Each of these processes will be examined because of the frequency of their. However, attempts by project participants to resolve issues early on in a dispute should be the primary method to resolving any disputes.

Litigation

Litigation is the process that engages the Court system's formal rules of procedure and evidence. Dependent upon various factors, such as the value of the dispute, the location of the project and project parties, and issues involved in the claim; project parties can call upon a federal or state court to resolve their dispute. Litigation affords parties the opportunity to have their “day in court.” Litigation also affords parties structure. Strict rules guide a case from its filing to the obtaining of a judgment. Rules govern the discovery process, motion practice and the introduction of evidence during trial. The rules level the playing field for the parties. If a party fails to play by the rules, sanctions can be imposed by the court. Accordingly, litigation can be a very orderly process that results in a declaration of a winner and loser.

Litigation, however, has certain weaknesses. Civil court systems are presently back logged throughout the country. A construction case can take over five years to bring to trial. Litigation is also expensive. The litigation process promotes the discovery of as much evidence and info rmation as possible, regardless of its relevance to the issue in dispute. As a consequence, parties to the process can see legal costs breaking six figures within a few months of the initiation of a proceeding.

Additionally, litigation does not provide parties with a trier of fact that is knowledgeable in construction. Most judges do not have a background in construction and construction contracts. In the case of a jury trial, the jury will not be a jury pool of peers (i.e., ones versed in the environmental, engineering and/or construction industry) but comprised of lay people who have been conditioned by television programming that trials take 60 minutes to resolve. An average month-long construction trial will often expend the jury's collective patience and attention before the closing of opening statements. Lastly, judge and jury decisions can be appealed leading to additional expenditures of significant time and money.

Litigation, therefore, is not for every project. Complex projects that have the potential for multiple party claims may benefit from the rules of procedure that govern the process. A project, however, that generates fees that can be easily surpassed by litigation costs may not be a good fit for the litigation process. Many states require disputes on public projects to be tried by a jury in the county or locale of the project. Therefore, the firm's fate is in the hands of a jury whose tax dollars are supporting the public project and any decision that may be rendered in favor of the firm. This may affect the jury's decision-making process. Litigation is not for every project and must be considered carefully.

Arbitration

Arbitration is also a process that results in the rendering of a decision. Instead of a judge or jury rendering the decision, arbitration relies on an arbitrator or panel of three (3) arbitrators to determine who is right or wrong. Arbitrators can be selected by the parties from a myriad of private arbitration firms, such as the American Arbitration Association (“AAA”), or from a pool of individuals deemed mutually acceptable by the parties. Unlike a judge or jury, arbitrators have direct first-hand knowledge of the construction industry and construction contracts. Arbitrators are former and current design professionals; constructors; construction attorneys; and consultants. Therefore, an arbitrator knows the industry and does not have to be “educated” during the proceeding with regard to means, methods and processes. The parties can focus on presenting the evidence that supports their respective positions.

Arbitration is designed to expedite the resolution of the claim. The process discourages the scope of discovery promoted by litigation. Parties are encouraged to exchange relevant materials and evidence a few days before the hearing, dependent upon the arbitration body used. Unfortunately, parties and their counsel are often uncomfortable with the lack of traditional discovery. The arbitrator is frequently requested to allow the parties to engage in the exchange of depositions, interrogatories and documents. This expansion of the discovery rules also expands parties' costs and the length of the case.

In arbitration, the formal rules of evidence are not employed unless specifically requested by the parties and accepted by the arbitrator. Matters that do not lend themselves to the formal rules of evidence are not weighed down by same and progress more smoothly. However, in certain instances, this can also be a detriment. Without the application of the formal rules of evidence, certain testimony and evidence that would not see the light of a courtroom are accepted in arbitration. Statements purportedly made by individuals who will not appear before the arbitrator or be cross-examined are regularly accepted in arbitration. The same testimony would probably be excluded from a courtroom as a consequence of hearsay rules.

In most cases, arbitration can be as expensive and time consuming as litigation. Dependent upon the claim and the number of parties and arbitrators involved in the process, the scheduling of hearings can be a logistic nightmare. However, when an arbitration decision is entered, the avenue of appeal is very limited in scope. The ability of a party to further draw out the process through appeal is not as great as litigation. Arbitrator awards are generally upheld.

Arbitration, however, is not for every project. If structure is needed due to potential claim complexity, litigation and its rules may represent the better claim resolution process. If the parties are able to work with each other to set their own procedures, arbitration may be more attractive. Arbitration may also benefit a project that contains processes and requirements that should be heard by someone experienced in construction.

It should also be noted that the AAA has established an expedited hearing process for claims under $75,000. Under their “Fast Track” rules, an award is to be entered for all claims under $75,000 within 60 days of the filing of the Demand for Arbitration. Therefore, “Fast Track” arbitration can be specified in a contract to handle smaller claims while leaving “larger” claims for litigation.

Mediation

Mediation is a process where no decision is rendered by a trier of fact. “Public” declarations regarding a party's claim or position are not made by the mediator. The mediator also does not render a decision in the matter. The matter rests solely within the control of the parties.

In the typical mediation, the mediator will be an individual knowledgeable in construction and skilled in negotiation. The mediator can be specified by the parties in their agreement, or the selection of the mediator can be left to the mediation service that may be retained by the parties. The mediator “hears” the positions of each party. This expression of position is done in the presence of the other parties. After the parties have expressed their positions, private caucuses will be held by the mediator with each party. The mediator works in private with the parties in an effort to reach common ground and a settlement of the claim. The parties are in total control of the info rmation they provide the mediator, as well as the info rmation they ask the mediator to convey to the other party. At no time will a mediator disclose any info rmation a party does not want disclosed. A party can withdraw at any time during the process, and does not have to settle. Anything said in mediation is specifically recognized as being private.

When entering mediation, a party must consider, along with its claim position, the expenditures of time and money that can be avoided if settlement is recognized. Mediation can be an effective tool in settling claims before formal litigation or arbitration is commenced. More and more, courts are using mediation prior to trial in an effort to resolve cases and relieve backlogged dockets of civil litigation cases.

Despite its apparent benefits, mediation has its drawbacks. Mediation contains no teeth. There is no requirement that the parties must settle. Furthermore, if a party enters mediation without a serious intent to consider settlement there is no punishment that can be assessed against that party. Similarly, a party who engages in the process only to gain info rmation about the other party's position, or because they are required to mediate, will not be penalized. However, utilized effectively, mediation can produce reasonable settlements that result in a saving of significant time and money.

Conclusion

Each project demands that firms consider the dispute resolution procedure that best fits the parties and the project. While the prime goal for a successful project is to avoid and prevent claims, the control of claims that do arise is critical to avoiding significant expenditures of time and money. Careful and proper selection of the dispute resolution procedure is key to being able to manage claims and risk exposure effectively.

Bruce Demeter is a Senior Vice President with the XL Insurance companies. Mr. Demeter was a founding member of the construction litigation law firm Simon & Demeter, P.A. Prior to practicing law, he was a Construction and Project Manager on various multi-million dollar construction projects. Mr. Demeter is a frequent lecturer and writer on the subjects of risk management and construction law.

PROFESSIONAL LIABILITY BULLETIN

Editor: Cynthia Turner

PROFESSIONAL LIABILITY BULLETIN is published by the Construction & Environmental Services unit, XL Insurance, 520 Eagleview Blvd., PO Box 636 , Exton , PA 19341-0640 to provide insureds with information about professional liability issues.

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