Resolving Construction Disputes Out of Court Through ADR.

The construction industry has become known as one of the most adversarial and problem prone. Claims and disputes on construction projects are the rule rather than the exception. In the state of New Jersey alone, construction lawsuits cost millions of dollars a year. Much of that money comes from taxpayers who support the court system and pay for public facilities. However, many of these suits can be resolved before they ever end up in court.

In today's construction industry, private owners of construction projects rely heavily on alternative dispute resolution (ADR) to prevent or resolve construction claims and disputes. Frequently, multiple ADR techniques are designated by contract, with binding arbitration the forum of last resort if other techniques are unsuccessful. Litigation is simply too time-consuming, costly, and acrimonious for most industry participants.

The prevalence of claims and disputes is especially problematic for public owners, who are governed by strict contracting statutes mandating that the lowest responsible bidder obtains the work. Cost overruns and schedule delays, frequently the subject of significant and protracted claims, pose serious fiscal and public interest concerns to the community.

The Local Public Contracts Law in New Jersey now requires that public entities include a provision in their construction services contracts stating that disputes arising out of the contract will be submitted to a form of ADR before becoming the subject of a lawsuit.

ADR Tools and Techniques

ADR can help public officials prevent disputes and resolve those that do occur quickly and fairly -- without crippling the project or the participants. The various procedures available for resolving construction disputes are tools that, when properly used, help achieve project objectives without engendering adversarial relations with contractors. The following ADR techniques can be used sequentially to provide a comprehensive blueprint for managing claims and disputes. They escalate in cost, formality, time, and a level of hostility that falls just short of full-blown litigation.

Partnering. Led by major industry participants, such as the U.S. Army Corps of Engineers and the Associated General Contractors of America, the construction industry has recognized the need to rebuild and maintain mutually beneficial relationships between owners, design professionals, and contractors. Partnering is a shift away from adversarial dealings that requires a certain amount of training. A workshop led by a facilitator experienced in team building, communication, and problem solving challenges all parties to sit down across from one another and build a viable working relationship. Participants have their interests addressed, learn to listen to each other, and develop a clear understanding of all parties' goals and objectives. The Arizona Department of Transportation, which uses the partnering technique on all of its projects, has virtually eliminated contract litigation.

Step negotiations. One of the most important skills in dispute resolution is recognizing when a dispute cannot be resolved at a particular level and must be brought up the management chain. In step negotiation training, decision makers at all levels are taught to hone their listening and communication skills. Next, they learn to recognize the urgency of resolving disputes as they arise as well as determine when the resolution is beyond their capability or authority. Finally, they are encouraged to seek the participation of the next level of management. Under step negotiation, disputes are constantly monitored by increasingly senior levels of management for as long as the dispute remains unresolved.

Neutral experts. A primary reason claims and disputes are downplayed or ignored for as long as possible is that the responsible party doesn't recognize, or want to accept, the responsibility. One of the more effective ADR procedures developed in recent years is to designate, at the time of the contract, a person or organization to serve on the project in a neutral capacity. The neutral expert must have experience in identifying potential problems at the embryonic stage as well as expertise in defining the problem, evaluating responsibility for the problem, quantifying the impacts, and facilitating a resolution between or among the parties.

The contract documents must identify the neutral expert, define his or her role, and provide a mechanism for (1) expeditious referral of any dispute to the neutral party, (2) prompt evaluation and meaningful resolution of the dispute, and (3) closure. The cost of the neutral expert's services can be shared by the parties.

Dispute review boards. Dispute review boards (DRBs) were first used in tunneling contracts but, in recent years, have been used on a variety of construction projects. The scope and cost of the DRB can be tailored to fit the project easily. Established in the contract documents, the role of the DRB is to monitor construction, keeping abreast of a project's progress and any potential problems. This monitoring may involve attending job meetings or simply reviewing project documents periodically When a dispute arises that the parties are unable to resolve themselves, either party may request the board to convene a meeting.

Under the typical DRB clause, the board, as an advisory party, takes one of the following actions after the parties present their contentions. It asks one or both parties for more information or makes a decision on entitlement -- either ruling that the contractor is entitled to an "extra" and suggesting that the parties negotiate over the amount to be paid or denying the claim. Even though the DRB's decision is not binding, it is generally admissible as evidence in any subsequent proceeding because it is a decision made by experienced individuals close in time to the dispute's origination.

Mediation. This is perhaps the most widely talked about and commonly misunderstood method of dispute resolution. Mediation is a structured negotiation in which the mediator provides the structure. Mediators do not settle disputes. He or she will establish ground rules and act as referee, facilitating communications between parties. A major function of the mediator is to keep the parties talking and exchanging information. It is information -- usually the lack of it or misunderstanding of it -- that frequently causes disputes and impedes their resolution. The mediator's role is to help parties determine what caused the breakdown and then help them re-establish some of their lost trust and respect.

Mini-trials. Compare this method to the executive summary of a lengthy report. The basic concept is to present as much information as possible in the shortest time possible to someone who is not directly connected with the dispute. This individual will then evaluate the information and give the parties an assessment of the dispute in the form of a nonbinding advisory opinion. If the third party is neutral, his or her role could end with the advisory opinion. After the presentation, the neutral party may write an opinion that is then used by representatives of the disputing parties as a basis for further negotiations. The neutral party also might mediate between or among the executives.

Binding arbitration. Arbitration is what the parties make of it. It can be a very effective form of dispute resolution if used properly. Parties typically agree to arbitration at contract signing, well before any disputes arise, generally with the hope and expectation that there will be no disputes. However, if the only ADR mechanism in the contract is arbitration, it might preclude the use of other, more appropriate techniques should either side wish to enforce the arbitration clause.

Arbitration can be tailored to fit a particular dispute. It also offers advantages over litigation in many respects, including time and cost savings, informality, privacy, greater control by the parties, and access to a decision maker with relevant industry expertise. Loss of control and aberrant awards with no judicial remedy can be controlled by carefully drafted arbitration clauses.

Baseball arbitration. This is one form of arbitration that can be used in specific types of disputes. The name comes from the salary arbitration provision in Major League Baseball's collective bargaining agreement. Under this form of arbitration, each party states its last best offer in writing. The arbitrator then has the limited authority only to render an award by selecting one figure or the other as the more reasonable. There is no compromise award. This type of arbitration encourages settlements short of arbitration and gives the parties a strong incentive to be reasonable. In addition, the time required to arbitrate is reduced because the arbitrator need not be presented with all the evidence necessary to reach an independent evaluation. The sole issue is, which offer is more reasonable under the circumstances?

Conclusion

ADR is now the law in New Jersey local public contracts. Whether it will be effective depends entirely on the public officials charged with implementation. Parties are free to craft their own dispute resolution process. The new statute requires only that ADR procedures in public construction contracts comply with industry standards. Such standards include fundamental fairness and true neutrality of the neutral party. The selected procedures will be reviewed by courts in light of the fact that public construction contracts are contracts of adhesion.

Richard H. Steen is an attorney in private practice in New Jersey. His practice emphasizes the management and resolution of complex construction, commercial, and environmental disputes through litigation or ADA.

Robert J. MacPherson is a partner with Poster & Rubin in New York. His practice emphasizes mediation in construction-related matters ranging from counseling on delivery systems and contract negotiation to resolution of disputes.