Avoiding the Anguish of Litigation.

Whether large or small, it is almost inevitable that some unexpected incident or delay will occur on a job. The experienced and creative construction management team will have the mechanisms in place to mitigate these problems before they occur and the savvy to handle them in the moment.

A critical place to head off problems on the job-site is by having sound contracts, both between the client and GC/CM and between the GC/CM and their sub-contractors. Having clean contracts goes beyond stating what is expected from each party under ordinary circumstances and makes provisions for alternative dispute resolution (ADR) in the event of unforeseen issues between parties.

Why is the use of ADR important to you as an owner or contractor? Consider it a preventive practice. When parties to a contract take the time to anticipate problems and create a system to minimize these problems that can occur, the resolution will be easier. By agreeing on terms of ADR before the project starts--including contract clauses that limit exposure, liability, and others that provide for the continuation of work during disputes--the project team and their clients can often avoid both the legal expenses and acrimony that go along with the litigation process. It's simply good business.

Methods of Alternative Dispute Resolution

The most commonly used methods of ADR are arbitration and mediation. When a dispute occurs between companies whose contract stipulates arbitration, both parties review a list of proposed arbitrators and must mutually agree upon their selection. In preparation of the hearing, the parties will interview witnesses and review assembled documents and additional material evidence. At the hearing itself, each party will make opening statements, present their evidence, introduce their witnesses and make closing statements, before the arbitrator issues a decision.

In this situation, though no real "trial" exists, the arbitrator serves as "judge." Depending on the parties' prior agreement, the arbitrator's decision may be advisory, may be legally binding, and in most cases, is not subject to appeal.

A standard arbitration clause in a contract may be worded something like this: "Any controversy, dispute, or disagreement arising out of this agreement or the breach thereof shall be settled by arbitration in accordance with the provisions set forth in paragraph (X) of this agreement, and any award shall be enforceable in any court having jurisdiction over the parties."

In lieu of arbitration, a contract may include a provision for mediation. The first steps of mediation are similar to arbitration in that both parties must agree upon the mediator, assemble their material evidence, and typically state their positions in the presence of each other at the initial session.

A standard mediation clause may read like this: "If, during this contract, the parties are unable to resolve a dispute or controversy among themselves, they shall first endeavor to settle such dispute in a nonbinding, voluntary manner by referring same to (X firm) prior to filing for arbitration or having recourse to a judicial forum."

There are substantial differences between arbitration and mediation. The decision the arbitrator makes at the hearing is legally enforceable and the process of arbitration is generally more formal and considerably more expensive. Since it has a final and binding decision, the nature of arbitration effectively pits the sides against each other. Mediation, on the other hand, is intended to be a nonadversarial process where both parties can only voluntarily accept the decision rendered. The difficulty here is reaching a decision that satisfies both parties.

Avoiding the Court System

Regardless of the method chosen for alternative dispute resolution, it is good business sense to reduce the need for litigation. Avoiding the costs, public scrutiny and aggravation associated with litigation can not only increase a contractor's profitability but also help save the relationship with a client or subcontractor.

By Marc Newman, CPA 

Anchin, Block & Anchin LLP