What is alternative dispute resolution, and do you care? You should. If you’re in the business of contracting for construction services you will most likely, at some point in your course of business, be presented with a contentious claim from a contractor for extra payment for work, or initiate a claim against a contractor for damages you may have incurred. The reality is that, despite the fact you may have a very good position with such a claim—and in fact may be successful in the outcome of the claim—you could very well find yourself involved in a costly court action, suffering significant costs and additional damages that offset any potential award. Your knowledge of your available options to resolve a claim for damages could well save you money, headaches and time.

First, let’s look at the development of alternative dispute resolution. Once upon a time, if you had a dispute with someone, it was likely settled it under the prevailing principle that might-makes-right—the last person standing won the argument. The might-makes-right dispute resolution method had obvious shortcomings, and over the long term frequently contributed to larger problems, a good example of which was the ongoing Hatfield versus McCoy feud. As a result, the alternative to violent dispute resolution became the development of laws and litigation. Litigation, while imperfect, allowed each party to present its case and make its claim to an impartial party of judge or jury with a reasonable expectation that the outcome of the case would be based on agreements entered into and applicable laws. The litigation system works fine for cases where you as owner have the financial ability to pursue or defend the action, when time is not particularly critical, and when it appears that the legal position you hold is so overwhelmingly superior that you believe you are invincible. However, there is always some doubt in the litigation process.

Litigation, while workable, is not perfect. Owners often find that they don’t necessarily have

the financial ability to keep in step with a complainant contractor or his bonding company,

that the litigation process poses issues of concerns with time—especially if a project is left

half completed—or receive less than desirable results because of what is often referred to

as “vagaries of the law” which expose the owner to the uncertainties of the system.

Those problems have led to several fairly new methods—alternative dispute resolution

methods—to solving disputes. The common definition of alternative dispute resolution is

any method other than a formal adjudication, such as court litigation or an administrative

proceeding. The most common current alternative dispute resolution methods—meant to

offer a choice other than the litigation process—are the arbitration process and the

mediation process. Each is different, with distinct advantages and disadvantages when

compared to each other and to the litigation process.
 

Arbitration is a fairly straightforward process in which one or more neutral parties are asked by both the claimant and the defendant to hear the facts of a dispute and to render a decision which can be either binding or non-binding. Usually, smaller disputes are heard by one arbitrator who is mutually acceptable to the disputing parties. Larger claims may have three or more arbitrators who can be picked in various fashions and confirmed by various methods between the parties. In binding arbitration, both parties agree in advance that the decision will be binding and neither party can later challenge such decision unless there is proof of fraud on the part of the arbitrator. Parties need not be represented by attorneys but typically would be, especially for larger claims. Parties can present evidence and have witnesses sworn in to offer testimony and witnesses are subject to cross examination. The allowance of evidence is less formal than in a court action, and the arbitrator has the ability to hear evidence which may not otherwise be entered into a formal court proceeding.

Depending on the complexity of the case, a judgment can be rendered in a very quick fashion--often within days of the hearing. A decision made by the arbitrator has the force of a legal judgment with the exception that it cannot be appealed. Depending on the agreement between the parties on the arbitration process, it is typical that either party can stop the proceedings and withdraw prior to the rendering of judgment. Non-binding arbitration is similar, except that the decision reached is not binding on the parties involved. If the decision is not accepted, the case would be taken to litigation or another form of resolution that results in a final decision.

A standard arbitration clause, easily inserted into any contract, could simply state as follows:
 

“Any controversy or claim arising out of or relating to this contract or engagement letter, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Arbitration Rules for Professional Accounting and Related Services Disputes and judgments on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.” American Arbitration Association.

Mediation, unlike arbitration, is typically not binding. It is simply an effort for discussion and resolution with a neutral party as mediator. Like arbitration, mediation allows the parties to present various forms of evidence and witnesses. Unlike arbitration, the role of the mediator is not to reach and render a decision but to act as a facilitator to encourage and enable the combatant parties to reach their own mutually acceptable decision. No decision reached in mediation has any legal status unless the parties so agree in advance.

A standard mediation clause, easily inserted into any contract, could simply state as follows:
 

“Owner and Contractor may mutually request mediation of any Claim. The mediation will be governed by the Construction Industry Mediation Rules of the American Arbitration Association in effect as of the Effective Date of the Agreement. The request for mediation shall be submitted in writing to the American Arbitration Association. Owner and Contractor shall participate in the mediation process in good faith. The process shall be concluded within 60 days of filing of the request.” Paraphrased from the Engineers Joint Contract Documents Committee Standard General Conditions of Construction Contract, Funding Agency Edition.

The dispute resolution process has evolved from expensive and time-consuming court and legal procedures and litigation to alternative forms like mediation and arbitration to accommodate the needs of the construction industry. Arbitration and mediation allow willing owners and willing contractors to have an avenue to pursue reasonable, timely, and equitable resolution of possible claims, and provides a tool by which both parties can lower the risk of the uncertainties of construction and contracting.

Alternative dispute resolution—why do you care? Staying out of the litigation process and court can save you money, time, and aggravation. Staying out of court could save your customers money and provides an avenue for contentious construction projects to be completed in a timely fashion. And that can be a winning solution.