In today’s litigious times, individuals and large companies want the lowest prices possible. When things do not go exactly as expected, it does not take long for attorney letters to start arriving.
Contractors are particularly vulnerable to disputes because of the large number of moving parts involved with the successful completion of a construction project. Contractors have to deal with vendor delays, damaged materials, workforce issues, owners, architects and more. As the project increases in scope, so does the potential for disputes and litigation. Understanding how to deal with these disputes is critical for success.
Best Efforts to Resolve Matters
When a dispute arises, the best course of action is to attempt to resolve it through open communication and direct negotiation with the other party. Generally, it is always faster and less costly to resolve matters directly without bringing in third parties. In fact, many construction contracts include a provision in the agreement that requires the parties to use “best efforts” to resolve a dispute before turning to third-party resources.
However, there are times when disputes cannot be resolved between the parties. For example, one party may believe it did nothing wrong or perhaps the settlement demand is too high and is not supported by factual information. If all attempts have to resolve a dispute have failed, there may be no option but to call in a third party.
Primary Means of Dispute Resolution
There are three primary means of resolving disputes through third-party intervention: mediation, arbitration and litigation. Choosing a method depends on a variety of factors. First, the contract may require that a particular dispute resolution process be followed. For example, it is not uncommon for a construction contract to require dispute resolution through a commercial arbitration process. Unless there is a reason the contract provision would be deemed voidable or invalid, the parties are typically bound by the contractual requirements. Thus, even if one of the parties wanted to file a lawsuit but the contract contains an arbitration requirement, that party would be prevented from filing the lawsuit.
It is worth noting that dispute resolution contract terms are something that the parties are generally able to negotiate during the initial contract review process. Unfortunately, the dispute resolution clause is often overlooked during the review, with more attention being paid to payment terms and scope of work.
If the contract does not specify a particular means of dispute resolution, then the parties are free to select mediation, arbitration or litigation. It is important to understand the basics of each before selecting one method over another.
Mediation is often thought of as the most “civil” means of third-party dispute resolution. When mediation is selected, the parties share a desire to resolve the dispute quickly and cost-effectively, but know they need the help of a mediator to do so. Typically, the parties must agree to mediate and then select a mutually acceptable mediator. The mediator can be an attorney, retired judge or other professional. Generally, the parties split the cost of the mediation.
The most important point to understand about mediation is that it is non-binding. This means that the parties can choose or refuse to accept the recommendation of the mediator. Only if the parties desire to accept the mediator’s decision and put it in writing in the form of a settlement agreement or related document will the mediator’s recommendation become enforceable.
because mediation is non-binding, if the parties cannot resolve the matter at the mediation or they disagree with the mediator’s recommendations, the parties can proceed with arbitration or litigation.
Unlike mediation, arbitration is binding. In a commercial setting, arbitrations are usually conducted by an individual arbitrator or an arbitration panel. A number of organizations, such as the American Arbitration Association, handle construction and other commercial disputes through the use of specialized arbitrators.
In arbitration, the parties are permitted to submit evidence and other supporting documents to prove their claim or disapprove their adversary’s positions. The arbitrator reviews the evidence and then issues a ruling and, if appropriate, an arbitration award. The arbitrator’s award is binding and often very difficult, if not impossible, to appeal. The arbitrator also can require the losing party to pay the other parties legal fees or expenses.
Arbitration is considered to be more formal than mediation, and its impact is similar to a court order or judgment. One of the main benefits of arbitration over litigation is that typically the process is faster and less expensive. However, the downside is the finality of the arbitrator’s ruling and the extremely limited grounds to appeal or attempt to overturn the award.
The other option, again assuming that the contract permits it or is otherwise silent about dispute resolution, is to file a lawsuit. Many contractors feel that they have the best chance of either reaching a reasonable settlement or winning their dispute through litigation. The benefits to litigation are the large scope of discovery, the process by which evidence it presented or obtained, the ability to appeal erroneous rulings, and the ability to have a jury hear the evidence and facts and decide the outcome of the case.
Litigation does have a downside. Unlike arbitration, litigation can last for one or more years and carries with it a hefty price tag. Litigation attorneys can charge upwards of $250 per hour for commercial litigation matters. However, if the damages being sought are relatively high, a contractor may have the best chance at proving his case through litigation.
There is no wrong or right way to resolve a dispute. The most important goal should be to resolve the matter and move on. If “best efforts” have failed, a contractor can utilize mediation, arbitration or litigation. The choice between dispute resolution options can be based largely on personal preference and budgetary restrictions. One thing is definite: the longer a contractor is in business, the greater the likelihood it will experience one of these resolution options.