The goal of contractors, subcontractors, and materialmen on every project is to get paid for the work they perform, the materials they supply, and the services they render. When disputes arise over payment -- and every dispute in a construction project is ultimately about payment -- contractors generally are obligated to provide some sort of written notice stating their claims. Typically, then, the project architect or engineer is obligated to decide whether the claim has merit. What is the contractor's next step if its claim is denied, or if the Owner refuses to pay, even after the claim has been resolved in the contractor's favor?
There are three basic ways to resolve construction claims: litigation, arbitration, and mediation. Each method of dispute resolution has its pros and cons, and they are not mutually exclusive. Understanding the nature of these methods is critical to deciding which method to use in any given situation.
The classic method of dispute resolution is, of course, litigation. The contractor files a lawsuit, generally in state court, where the dispute is ultimately settled by a trial before a jury. Of the three methods for resolving disputes, litigation is generally the most expensive and time-consuming. Moreover, it puts the responsibility for deciding a contractor's entitlement to payment in the hands of six persons who almost certainly have no experience or background in construction. So, why would a contractor choose litigation to resolve a payment dispute? Sometimes the contractor has no choice. For example, West Virginia contractors making claims against the State on a public works project have no alternative but to pursue claims in the West Virginia Court of Claims. Also, where a contractor has filed a mechanic's lien, it must initiate suit within six months of recording its lien against the project in order to "perfect", or maintain, its lien claim.
Other times the contractor will choose litigation because it is the only method of dispute resolution that allows "discovery", which allows the parties to obtain documents from the other parties to the lawsuit, and even from others not involved in the suit, as well as to take depositions and statements of the other parties and neutral witnesses in advance of the trial. Finally, litigation is the only method of dispute resolution that allows a contractor to pursue claims against entities with which it does not have a contract. Thus, if a contractor wishes to pursue a claim against the project architect or engineer, for example, it generally must pursue that claim through litigation.
Alternative Dispute Resolution
Arbitration and mediation, the other two methods of dispute resolution, are referred to collectively as Alternative Dispute Resolution or, simply, ADR. They arose, and have become increasingly popular, as a way of resolving disputes without the negative aspects of litigation. Each form of ADR, however, has its own pros and cons, as well. Contractors and lawyers often confuse mediation and arbitration, particularly since the two methods can, in some of their extreme forms, become almost identical.
Arbitration refers to a process where an arbitrator or a panel of arbitrators decides the dispute between parties. The result is binding, i.e., once the arbitrator decides the dispute, the parties cannot go to court and litigate it or have it decided by another arbitrator. Arbitration is generally faster than litigation at resolving disputes and cheaper overall, although the parties to the arbitration must pay the arbitrators for their time. Arbitrators currently charge $1,000.00 to $1,500.00 per day, although rates can vary widely. There is no right to discovery in arbitration, so the contractor cannot force the adverse party to turn over documents or make its witnesses available for deposition, or even to tell the contractor who those witnesses are. Also, there is no right to appeal the decision rendered by the arbitrator or arbitrators. As a result, even if the arbitrator makes mistakes of law or of fact, the parties cannot have the decision set aside or altered. Finally, because the arbitration process is the result of an agreement between the parties to a contract, other entities who may be involved in the dispute cannot be compelled to participate in the arbitration as they can in litigation. Arbitration agreements are included in virtually all form construction industry contracts, which typically specify arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. Both the American Institute of Architects (AIA) and the Association of General Contractors (AGC) form contract documents contain mandatory arbitration provisions. Additionally, virtually all form contracts involving the use of federal funds on state projects contain mandatory arbitration provisions.
In West Virginia, arbitration agreements are presumptively binding and specifically enforceable. This rule of law is based on the Estate's strong and settled policy of fostering and encouraging arbitration agreements. In recognition of this policy, the State has enacted legislation in support of arbitration agreements at W. Va. Code § 55-10-1. That provision states:
Persons desiring to end any controversy, whether there be a suit pending therefor or not, may submit the same to arbitration, and agree that such submission may be entered of record in any court. Upon proof of such agreement out of court, or by consent of the parties given in court, in person or by counsel, it shall be entered in the proceedings of such court; and thereupon a rule shall be made that the parties shall submit to the award which shall be made in pursuance of such agreement. (Emphasis added.)
The policy favoring arbitration has become so strong that it is now the law in West Virginia that when presented with an arbitrable dispute, a court is required to stay any other action pending arbitration in strict accordance with the arbitration agreement.
Federal law also encourages and enforces arbitration agreements. Section 2 of the Federal Arbitration Act, 9 U.S.C.§2, provides that written agreements to arbitrate disputes relating to maritime transactions or involving commerce are valid, irrevocable and enforceable. Section I of the Act defines "commercial" as commerce among the several states or with foreign nations, i.e., interstate commerce.
The law encouraging arbitration agreements recognizes that state and federal courts have the power and duty to stay court proceedings of arbitrable disputes pending arbitration. In addition, Section 3 of the Federal Arbitration Act, 9 U.S.C.§3, specifically provides that the courts of the United States may stay the trial of any action that is determined to be arbitrable.
The United States Supreme Court has held that "state courts, as much as federal courts, are obligated to grant stays of litigation under §3 of the Arbitration Act." Moses H. Cone Memorial Hospital v. Mercury Construction Corp, 460 U.S. 1 (1983). Thus, courts are not only authorized, but obligated, pursuant to West Virginia law and Section 3 of the federal act, to issue an order staying the litigation of a claim that is subject to arbitration.
Mediation, in contrast to arbitration, does not decide the merits of a dispute. Rather, mediation is a form of refereed settlement. The mediator does not decide the dispute, nor can he or she force the parties to settle. The parties to mediation are required only to negotiate in good faith. Although contractors are often skeptical, at least initially, concerning mediation, it is successful in resolving disputes in a surprisingly high number of cases. For that reason alone, it is usually worth the relatively minimal expense involved to mediate a dispute. Moreover, virtually every circuit court in West Virginia will order a dispute to mediation before allowing it to proceed to trial, whether the parties really want to or not. In addition, the 1997 edition of the AIA contract documents requires mediation before arbitration is resorted to.
Mediation, because it is non-binding and consensual, can take on whatever procedural shape the parties desire. People sometimes think that a mediation should look like a mini-arbitration or trial, with each side putting forward an abbreviated version of its evidence and the mediator telling the parties how he or she would decide the case. This way of proceeding, called "evaluative mediation," is often unsuccessful, because it just further polarizes the parties. It also puts the mediator "on the side of" one of the parties, which hinders his or her ability to communicate effectively with both sides. A mediator is most effective when he or she can help the parties bridge the communication gap and enable them to evaluate their exposure and make business decisions concerning settlement. Mediators who are skilled at helping the parties make realistic evaluations of exposure, find creative solutions, and save "face" are called "facilitative." Facilitative mediators seldom resort to issuing opinions on the merits of a dispute.
Why is the construction industry interested in mediation? Mediation has become an increasingly popular form of dispute resolution in the business community for several reasons:
1. Parties want to be more in control of how disputes are resolved and do not want to be subject to the risk of adverse decisions by judges, juries, or arbitrators. In mediation, the clients, as opposed to the lawyers, are the decision makers.
2. Parties do not want to sever their business relationships, which can, and usually does, occur when matters are arbitrated or litigated.
3. Parties who would not be willing to be consolidated into an arbitration are willing to participate in a mediation.
4. Architects and engineers have an incentive from their professional liability insurers: DEPICT and CNA will give credits on deductibles for disputes resolved by mediation.
5. Design professionals and contractors avoid having to disclose pending claims in connection with pre-qualification procedures.
6. During construction, mediation may prevent an escalation of claims and the deterioration of relationships which could affect the project. Escalating problems may be avoided even if a portion of the disputes are resolved via mediation before construction is completed.
What disputes are conducive to successful mediation? The cases with the best predictors of a successful mediation have the following elements:
1. The parties have a continuing business relationship.
2. The parties will benefit economically from elimination of the dispute.
3. The parties want to settle, but are too far apart on the numbers.
4. There are no elements of bad faith/bad blood present. However, these elements can sometimes be overcome through a cathartic process.
5. Time pressure exists because of court or arbitration hearing dates. This is why the presence of an arbitration clause usually helps the success of a mediation.
6. The stakeholders are willing to commit time to the process.
7. The mediation has been custom-designed for this particular dispute with these particular parties.
8. The parties have sufficient information to evaluate their positions and the eventual outcome of a binding resolution.
Initiating mediation can be difficult if the parties don't cooperate. In arbitration under the AAA Construction Rules, arbitrators can be appointed, hearings commenced, and awards issued without participation of an unwilling party. However, a mediation requires a certain amount of good faith to participate in the process, even if the parties are far apart concerning settlement.
The potential difficulty of initiating a mediation may be caused by bad relationships or by such legitimate concerns as who should participate in the mediation. Accordingly, it is best to have a pre-dispute mediation clause incorporating an administering agency. This allows the agency to identify problems, suggest solutions, and sell the process to the necessary parties. Often when the parties try to sell the process to each other, it represents "the kiss of death" to the process. Even where there is no pre-dispute clause, a party desiring mediation may find it advantageous to use an administering agency to sell the process to the necessary parties. When litigation has already commenced, the court may provide this function.
Under the 1997 AIA contract documents, mediation is a precondition to arbitration or any legal or equitable proceeding. While arbitration or legal proceedings may be commenced prior to the filing of a mediation, those actions must be stayed sixty days from the date of filing to allow mediation to proceed. The stay of proceedings is in effect for the sixty days regardless of any lack of progress in the mediation. Parties wishing to protect the right to injunctive relief from either arbitrators or courts may want to provide some escape from the stay. This may be in the form of a unilateral right to terminate the stay if any party to the mediation determines in good faith that progress is not being made in the mediation. Further, some form of preliminary injunctive relief, but not final relief, may be allowed concurrently with the mediation.
Mediation in the 1997 AIA documents is under the American Arbitration Association rules unless the parties agree otherwise. These Rules provide a mechanism for confidentiality and the appointment of a disinterested neutral mediator. Be careful about striking mediation rules referenced in an agreement. Having a formal procedure in place is often necessary where there are recalcitrant parties to the dispute.
Contractors who need to protect mechanic's liens may make necessary time-related filings prior to resolution by mediation under A201. There is no similar specific right under B141; however, it is unlikely that a court would not allow such a protective filing.
For a claim between Owner and Contractor to be subject to mediation, it must be a valid "Claim" otherwise subject to arbitration. This means that it cannot be a claim relating to aesthetic effect or one that has been waived. Also, the claimant must have filed a demand for arbitration within 30 days after receipt of an Architect's final decision indicating that the decision is final but subject to mediation and arbitration.