Over the past two decades, arbitration has lost some of its luster as the best method to resolve construction industry disputes. The perceived “judicialization” of arbitration is at the heart of the industry’s recent dissatisfaction. Arbitration frequently assumes the hallmarks of a judicial proceeding — unlimited discovery, extensive motion practice, heavy expense and long delays.
Construction industry executives and counsel are now giving more thought about which alternative resolution methods are best suited for particular types of disputes on particular projects, recognizing that one size does not fit all. New initiatives favor resolving disputes early and quickly under the control of the parties themselves, with or without the help of neutral experts. Sophisticated owners and construction managers devote significant pre-contract planning with counsel to develop and incorporate various dispute resolution strategies into contract documents.
So, what are the alternative dispute resolution methods now accepted by the construction industry? Below are the ten most widely used methods, available for use alone or in conjunction with others:
1. Informal Discussion/Partnering
Direct communication through informal discussion is the beginning of every effort to resolve a dispute. The “rules” applicable to this method include principled negotiation, patience, ethical conduct, careful listening and a reasoned approach to evaluating risks. “Partnering” — and establishing a long-term relationship of trust and teamwork with industry participants — assists greatly in informally resolving disputes by promoting good working relationships among the parties. Prompt resolution of disputes is a fundamental precept of the “spirit of partnership.”
2. Structured Negotiations
Various factors cause informal negotiations at the project level to break down. Therefore, construction contracts often include an alternative dispute resolution clause that imposes, as the first among various methods, a “structured negotiation” process. Structured negotiation establishes a formal procedure for (1) full and prompt disclosure and exchange of information, (2) timely commencement and conduct of project level negotiations, and (3) senior management participation before turning a dispute over to a neutral third-party (if needed).
3. Standing Project Neutral
A standing project neutral is a person, or number of persons, identified in the contract documents to be “on-call” should a dispute arise. The standing project neutral assists the parties in agreeing upon dispute resolution procedures, mediating disputes and providing recommendations for resolution.
4. The “Initial Decision Maker”
The American Institute of Architects construction contract documents now allow parties to remove the architect from its historic role as professional peacekeeper and initial arbiter of disputes. Contracting parties may now appoint their own “initial decision maker.” This recent change in practice allows the parties to select a third-party who they believe is better equipped to resolve disputes.
5. Standing Dispute Review Board
Many civil projects in the United States are awarded under contracts that require the parties to establish a standing dispute review board at the beginning of the project. Board members are designated by the parties. Disputes arising on the project are submitted to the board for non-binding determinations.
6. Expert Determination
Expert recommendation and determination of disputes may prove beneficial in some cases. The expert listens to the parties or allows them to make written submissions regarding the project issue. The expert prepares a written report, which is typically non-binding unless otherwise agreed by the parties.
Parties often seek a third-party mediator to assist them in construction dispute resolution. Mediation allows the parties to retain control over settlement, but affords the parties the benefit of the mediator’s neutral perspective. Success frequently depends on the quality and experience of the mediator, the parties’ preparation and commitment to the process, and the exchange of documents and information before the mediation. Effective construction dispute mediators typically have in-depth knowledge of the construction industry, provide meaningful risk analysis, and offer insight into the legal and practical considerations concerning the dispute.
The “adjudication” method is utilized in the United Kingdom, where law requires construction disputes to be submitted to an “adjudicator” for an initial decision. The adjudicator’s decision is binding until the completion of the project and can only be challenged thereafter. Therefore, adjudication keeps the parties working and the money flowing without stalling project completion. Adjudication has had a warm reception in the U.K., prompting some to recommend its adoption in the U.S. In a broad sense, the same advantages of adjudication can be offered by the “project neutral” and “initial decision maker” methods listed above, if the parties so agree.
To help resolve a construction dispute, the parties may agree to participate in a mini-trial or mini-arbitration. Judges or arbitrators offer recommended, non-binding decisions on select dispute issues or the entire matter. These methods are called “mini” because the dispute is heard on the limited admission of evidence and arguments of counsel. Often, the dispute is simply submitted to the judge or arbitrator on memoranda, affidavits, expert reports and limited testimony.
While arbitration is no longer the default option in construction industry contract forms, it is still widely utilized in resolving construction project disputes. Parties who continue to use arbitration know how to assure its efficiency and cost-effectiveness. A few critical elements in successfully utilizing arbitration as a dispute resolution method include (1) pre-contract planning with competent counsel, (2) drafting a well-thought-out arbitration agreement that sets forth the applicable law and rules, and (3) selecting arbitrators with the requisite skill and expertise in construction industry practices, construction law and case management.
For over a century, the construction industry has been at the forefront of American utilization of alternative dispute resolution. Selecting appropriate dispute resolution methods will help industry participants continue to find success through non-judicial procedures.
This article summarizes content from Bruner & O'Connor on Construction Law. For more information on this topic, see Section § 21:3: Arbitration contrasted with other forms of alternative dispute resolution.