In 1789, Benjamin Franklin wrote that “nothing can be said to be certain, except death and taxes.” Clearly, Franklin would have revised his infamous proverb to include “construction claims,” had he lived to see the nearly 60 cranes towering over Seattle’s skyline and the flood of construction claims emanating from the projects they help build. Defined generally, construction claims include bond claims, mechanic’s lien claims, breach of contract claims, delay claims, construction defect claims, and payment disputes.
Despite the frequency of construction claims, many developers are not familiar with the dispute resolution methods available to them, and the impact they have on the outcomes of their construction claims, projects, and businesses. This article defines the most popular dispute resolution methods, and provides developers with a guide to selecting the best dispute resolution method(s) for their construction contracts so they have a blueprint for how to handle construction claims when they arise.
The four most common dispute resolution methods for construction claims, in ascending order of formality, are negotiation, mediation, arbitration, and litigation. These methods are not necessarily mutually exclusive of one another. For example, it is common for parties to submit their construction claims to mediation as a condition precedent to either binding arbitration or litigation. When developers negotiate their construction contracts, they should confer with their attorney regarding what methods best accommodate the size and complexity of the construction claims likely to arise from their project.
In the Art of War, Sun Tzu wrote that “[t]o fight and conquer in all our battles is not supreme excellence; supreme excellence consists in breaking the enemy’s resistance without fighting.” The most underutilized and least expensive dispute resolution method is negotiation. Negotiation is a give-and-take discussion or conference between the parties, either with or without the assistance of counsel, that attempts to reach an agreement or settle a dispute. Indeed, teamwork is needed during each stage of a project. Developers should meet with the project team often to scout for potential issues and employ their negotiation skills before issues mature into full-blown construction claims.
Similarly, mediation is a privileged negotiation between the parties with the assistance of a third-party neutral, a mediator, who is usually a retired attorney or judge. Mediation is commonly used as a fact-gathering exercise to effectuate settlement of the parties’ construction claims before or after an arbitration demand or lawsuit has been filed.
Arbitration is a more formal dispute resolution method, where the parties select one or more impartial persons, an arbitrator, to hear the parties’ claims and render a reasoned decision. Arbitration is usually characterized by having abbreviated discovery powers; however, it mirrors litigation in that the parties are provided an opportunity to present their case. Depending on the construction contract’s language, the arbitrator’s decision may be binding on the parties.
Finally, litigation, the most formal dispute resolution method, involves a series of steps guided by the rules of civil procedure, wherein the parties are provided with an opportunity to engage in extensive discovery, and present their claims and defenses to a judge and/or jury for a resolution of the lawsuit. The trial court’s decision may be appealed. From start to finish, a lawsuit and subsequent appeals can take two to five years. Despite its time-consuming nature, litigation isn’t necessarily more expensive than arbitration.
Before developers with ripe construction claims enter what may feel like a legal abyss, they should pause to consider the impact their selected dispute resolution methods could have on the outcomes of their construction claims, projects, and business. Factors like the developer’s need for privacy, complexity of the issues, time constraints, and cost all contribute to whether the final resolution is actually a “win.”
Because the utilization of negotiation and mediation is fluid, the developer’s substantive decision is really between arbitration and litigation. Such is the case in the 2017 AIA 102 agreement’s check-the-box dispute resolution provision. Once a developer decides the dispute resolution method(s) it would like to use, it should ensure all of its construction contracts for the project contain the same dispute resolution provision. Otherwise, the developer may be limited in its ability to consolidate multiple claims into a single action, or worse, be subject to multiple and inconsistent decisions.
Developers should seriously consider selecting arbitration if their project is likely to result in complicated construction claims. Most construction cases hinge on dense, technical, expert-driven materials. Most unsophisticated juries are unable to meaningfully digest these kinds of materials. Likewise, judges with varying backgrounds, such as criminal or personal injury law, may need additional assistance from counsel to apply the facts to the law. Arbitration provides the parties with an opportunity to select decision makers with construction-specific expertise that may positively impact the outcome of their complicated case.
Also, arbitration’s heightened privacy makes it an attractive option. Unlike litigation, arbitration is closed to the public and can help protect the reputations of the developer and the potentially defective project. High-profile developers concerned about how a jury may perceive them can benefit from presenting their claims to an arbitrator.
On the other hand, a developer may want to select litigation if it wants a quick win or the right to appeal. If a developer’s construction claims against another party are a “slam dunk,” the case may be efficiently disposed of by filing a lawsuit and subsequent dispositive motion. Conversely, if the developer is not sure about the success of its construction claims, it may want to litigate so it can preserve its right to appeal an unfavorable decision by the trial court. Developers should confer with their attorney to determine the merits of their claims before proceeding with litigation.
Developers should make informed decisions about the dispute resolution provisions in their construction contracts and the impact they may have on the outcomes of their construction claims, projects, and businesses. Creating a dispute resolution blueprint early on can help developers quash issues before they mature, and efficiently dispose of construction claims so they can keep their focus on the successful completion of their project.
Originally published as “Dispute resolution tips for developers to use in handling construction claims” on November 1, 2018, by the Seattle Daily Journal of Commerce.