Arbitration or mediation? Is alternative dispute resolution the panacea for your construction cases woes?

In my September column, we discussed why construction cases hurt. One possible means to ease the pain is alternative dispute resolution. ADR has two main vehicles – mediation and arbitration. Depending on the nature of your business, the type of work you perform, the likely source of liability exposure, and possible legal defenses, one vehicle may be more appropriate for you than another. This month, we compare and contrast those vehicle with each other, and with traditional litigation, and finally ask the question of whether ADR really relieves the pain of construction litigation.

What Is Mediation?

Mediation is, in essence, a formal attempt by the parties to sit down and resolve their problems amicably. Most often, the parties will agree to a mediator (or a court will tell the parties who the mediator is). This third party establishes a framework for a dialogue about the case. Through these discussions, the parties generally engage in a back and forth approach to attempt to resolve the case via settlement.

I am a big proponent of mediation. A very high percentage of my cases that have gone through mediation have settled at the mediation. Some additional cases have settled shortly thereafter based directly upon what occurred at the mediation.

The success of mediation depends on a couple of factors. First, if a party is completely intractable and has no intent to settle, there really is no point to mediation. I have been involved in cases where a party started with an unreasonable demand or offer prior to mediation, came to mediation and restated the original position, and refused to budge. If you are not coming with an open mind to discuss strengths and weaknesses of a case, you are crippling the mediation before you start.

Second, the mediator must command respect and credibility. Most mediations consist of a brief opening statement in front of everyone by each party. The groups then retreat to separate rooms with the mediator engaging in “shuttle diplomacy”. This permits the mediator to speak frankly and confidentially with each party regarding its strengths and weaknesses. Often, the presence of a neutral, credible and respectable third party pointing out weaknesses in a case to a client can be helpful to moving the settlement process along.

Third, the decision makers must be present. It is all too easy for a party to punt on the final call by stating that the person with authority is not present. Further, the decision makers are the ones that really need to hear the interplay of third party evaluation of the case.

Why Isn’t Mediation The Panacea?

Mediation ultimately depends on the parties reaching a mutual agreement about resolution of a case. If the parties cannot agree, there is no decision. There is no fact finding. There is no judgment. As such, mediation really cannot completely replace the courts or arbitration when a conflict is intractable.

What is Arbitration?

Unlike mediation, arbitration does involve a true finder of fact who issues a decision in the case. In arbitration, an “arbitrator” is selected or agreed upon by the parties. This arbitrator (or sometimes a panel of arbitrators) hears the evidence in the case and issues a decision.

In a case in litigation in court, rules of civil procedure outline multiple methods of discovery of facts relating to the case. These include not only production of documents, but also interrogatories, depositions, requests for admissions, and requests for inspections or entry upon land. The discovery process generally represents the bulk of time and expense in handling any case. This is even more true of construction litigation.

In contrast, arbitration was designed to streamline the discovery process and reduce expenses. For example, many construction contracts provide they will be governed by the rules of the American Arbitration Association. AAA provides for only document subpoenas. Witnesses may also be compelled to appear at the arbitration. The parties sometimes agree to slightly more involved discovery, like a deposition or two or exchange of expert reports in advance of the arbitration; however, these typical discovery procedures are not a matter of right.

Proponents of arbitration also state that selecting a knowledgeable arbitrator can assist in the search for a fair and appropriate result. The point is that selecting a construction attorney, contractor, engineer, or architect translates to someone more familiar with construction practices, standards, laws, and appropriate conduct than a lay person sitting on a jury.

Finally, arbitrations present the potential for a more rapid resolution of a case. In courts with a large backlog, getting a trial date can take quite a while. An arbitration can be held as soon as the parties and arbitrator agree.

Is Arbitration the Panacea?

In practice, arbitration offers a number of possible drawbacks. First, its very informal nature lends itself towards a dramatic relaxation of the rules of evidence. Indeed, most arbitrators tend to let most everything into evidence and let objections go to weight rather than admissibility. If there is a piece of evidence damning to your case that would be inadmissible in court, you may prefer being in court to arbitration.

Second, despite the claimed advantage of the better informed finder of fact, some people feel that arbitrators often “split the baby” rather than making the tough call on the facts, the law, and the evidence. Further, even well informed people bring their own biases and prejudices to the fact finding table. A totally uninformed lay person on a jury may in fact have less bias and render a more fair and impartial result than an arbitrator who inherently leans towards one party’s position based on work experience.

Third, arbitration also tends to reduce the impact and effect of purely legal arguments. For example, many arbitrators routinely ignore statute of limitations or statute of repose defenses. Those with a rock solid legal defense or excellent offensive summary judgment argument may prefer a judge to an arbitrator.

Fourth, arbitration virtually eliminates appellate review of an unfair decision. The only grounds for overturning an arbitration result generally relate to whether the decision was properly submitted for arbitration. The alternative grounds generally turn on whether the arbitrator committed actual fraud and that is naturally very difficult to demonstrate.

Finally, the cost savings of arbitration may be dependent on the parties, the arbitrator, and the case. I have been involved in arbitrations that did not finish during the scheduled time. Rescheduling for additional appearances may wipe out both the rapid result and cost savings rationale for arbitration. Similarly, arbitrators often take a more active role in asking questions of witnesses. These examinations may not only chew up available time and extend the arbitration, but also take the case in new, irrelevant, and ultimately expensive diversions.

Does ADR Really Relieve the Pain?

In response to the ultimate question, I will give that most lawyerly of all answers: it depends. Mediation is certainly a useful tool to resolve many cases and one that I support in every case. Nevertheless, an unsuccessful mediation can involve simply spending time and money to not resolve the case.

Arbitration is generally a faster and less expensive way to resolve a case, but this is not always the case. Arbitration can translate to losing important evidentiary or legal issues and rights of appeal. Arbitration results can be arbitrary.

You need solid legal advice that evaluates these options. You must analyze the nature of your business, the type of work you perform, the likely source of liability exposure, and possible legal defenses. Nevertheless, you should carefully consider available ADR options as a potential means of reducing the pain of construction litigation.
 

Timothy R. Hughes, Esq., is the principal of the Northern Virginia law firm of Hughes & Associates, P.L.L.C. He specializes in construction litigation, corporate and business related representation, and complex civil litigation. He may be reached at tim@hughesnassociates.com.

Printed with permission from Mid-Atlantic Construction

http://midatlantic.construction.com/opinions/law/archive/0411.asp

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