Construction Mediation: Why and How

Mediation is without question the most rapidly growing type of alternative dispute resolution mechanism in the construction industry. The new version of the AGC Subcontract for Building Construction (Form 600) contains a mediation clause. The ASC and ASA support mediation and inclusion of mediation clauses in subcontracts. A statute has been enacted in California mandating mediation of disputes in local public agency contracts. Apocryphal stories abound about construction law firms from Seattle to New York to Atlanta whose litigation backlog has gone from three years to three months as a result of widespread mediation of disputes. Many public agencies routinely agree to mediation of large and complex construction disputes. The Engineer's Joint Contract Documents Committee (EJCDC) in its December, 1990 General Conditions rewrote it's earlier arbitration language so that mediation and mandatory and binding arbitration are listed as the preferable methods for dispute resolution.

Mediation Distinguished From Arbitration and Litigation

Both arbitration and litigation are binding procedures; mediation is not. This crucial point is still not well understood by either the business or legal community. Since mediation is not binding, the business executive retains control over the scope, amount, and details of resolution of the business dispute. Frequently, the resolution includes elements which would not be achievable in either arbitration or litigation. Since mediation is not binding, the familiar ex parte rules are not applicable. All parties should be encouraged to make contact with the mediator in whatever frequency and method creates comfort and confidence in the mediator and the process. Experienced advocates encourage their opposition's ex parte contact with the mediator knowing that the greater the confidence the other party has in the mediator, the greater the likelihood of final resolution. These advocates are also comfortable that an experienced mediator will retain his or her impartiality throughout the mediation process.

Advantages of Mediation

There are several reasons why mediation is an increasingly popular process for resolution of business disputes, particularly in the construction industry. Mediation is a response to the financial cost and emotional stress to business owners and managers who must resort to arbitration or litigation to resolve their differences. All too often, arbitration is not a low-cost alternative to litigation. In either arbitration or litigation, a third party or parties determines the resolution of the business problem. The business executive not only loses control of the cost of resolution of the dispute but also the decision-making process. Except for the unusual circumstance, business relationships are severed, seldom to be reestablished.

Mediation has many advantages over other forms of alternative dispute resolution.

• Quick and Easy to Schedule
  Mediation sessions can usually be scheduled within a month or two, and sometimes more quickly. Construction mediations typically last only a few hours to one or two days and require far less preparation than an arbitration or trial. They can be scheduled at a time and place convenient for the parties, not the court. This can be particularly helpful when the parties are geographically distant from each other.
• Inexpensive
  Construction litigation is expensive. Expert witnesses are costly as they spend weeks and thousands of dollars on analysis and preparation of exhibits. Trials are often long and complex. Mediation can avoid some or most discovery, and mediator fees are often relatively low.
• Avoids Unnecessary Confrontation and Conflict
  It is not unusual for a construction dispute to pit parties who want or need to work together in the future — general contractor and subcontractor; owner and general contractor; owner and design professional. Mediation can save a relationship with a client or future business partner. It allows informal exploration of settlement options through face-to-face meetings of the principals.
• Gives Parties Control of the Process
  There are no firm rules on how a construction mediation must be conducted. The parties may tailor the timing, issues to be discussed, parties present, form or order of presentation, discovery prior to mediation, involvement of principals, and any number of other factors to satisfy real or perceived needs.
• Outstanding Success Rate
  Typical announced success rates are in the 80% range. Actual results with experienced mediators is even higher. Mediation also allows creative solutions to difficult problems leading to resolution of the "unsettlable case."
• Confidential and Private
  Mediation is just between the parties, with no announcement of filings or results in the local business daily. Negotiations, positions, and outcomes can be confidential.
• Good for Multi-Party Disputes
  Often construction disputes involve many parties at a jobsite — owner, design professionals, general contractor, subcontractors, suppliers, and sureties. Generally insurance carriers or contract documents, or both, preclude consolidation of such interrelated claims. However mediation is considered to be safe, fair, and an effective way to resolution.

Agreeing to Mediation

Mediation can occur by contractual requirement or agreement at any time after a dispute arises. Although some commentators believe it is inappropriate to mandate mediation as successful mediation requires good faith intent by all parties, we recommend that a mediation clause be included in all contracts. Our experience is that the economics, both in financial and human terms, quickly create good faith bargaining even if the desire was not there prior to the first meeting with the mediator. Sharing costs of mediation is important to a successful resolution whether the cost sharing is contractually required or agreed to after a dispute arises. Both parties must have a financial and emotional stake in a successful resolution of the dispute through mediation. Careful contract drafters will require mediation in their home city to reduce their own costs of resolution. While there are no known decisions enforcing a mandatory mediation clause prior to arbitration or litigation, the current judicial climate, which strongly encourages mediation in most jurisdictions, should be sufficient basis for enforcing the mediation clause.

Following is a form of mediation clause that may be effective to encourage mediation of disputes.

Except for claims for indemnity arising out of or relating to a lawsuit filed by or against any party to this Agreement, the parties mutually agree that any dispute that may arise under this Agreement will be submitted to a mediator agreed to by both parties as soon as such dispute arises, but in any event prior to the commencement of arbitration or litigation. Such mediation shall occur at the place where the Project is located and the mediation fees and mediator's expenses shall be shared equally by the parties. The parties agree to exercise their best efforts in good faith to resolve all disputes in mediation.

The first sentence of this sample mediation clause is intended to avoid problems that may arise out of tort or workers' compensation claims. Without the indemnity proviso, as pleading battles ensue, it may be difficult to facilitate settlement of such cases.

After the Dispute Arises

Mediation may be agreed to and conducted at any time after a dispute arises, including during or after trial or during the appellate process. An agreement to mediate needs no procedure, or detail. The parties need only agree on the approach and select a mediator or a mediation organization. There is very little structure to the process and the necessary agreements need only relate to confidentiality and payment of the mediator. They are routinely signed at the commencement of the mediation. The Construction Industry Mediation Rules of the AAA are a good set of procedures for most mediations.

A party desiring to mediate, but concerned about the reaction of their adversary, may contact an administrator at the AAA or other organization providing the mediator who is skilled in convincing the other party to agree to a mediation. Alternate methods of encouraging a reluctant adversary to mediate include suggesting to a case judge, motion judge, or presiding judge that you are eager to mediate but your adversary is reluctant. Given such an opening, most judges will bring strong pressure to bear on the other party to mediate.

Selecting the Mediator

There are a variety of places to find mediators. Private organizations such as the American Arbitration Association provide a wide variety of dispute resolution alternatives, including mediation, with panels of trained experts, carefully formulated rules and topnotch administration. In addition there are numerous active mediators not affiliated with any organization. All of these nonjudicial providers charge fees for their services that may be on an hourly, per diem, or flat rate basis.

Some public agencies, the New York School Construction Authority, for example, provide a list of mediators and allow the contractor to pick who will mediate. Many courts of original jurisdiction have one or more judges assigned as full time mediators. In some jurisdictions mediation is mandatory if a request is made by one party. Many judge mediators have broad experience, a good sense of business issues, and a high rate of success in mediating business cases. Their ability to deal with pleading and scheduling issues in pending cases can make them particularly effective when mediation takes place relatively late in the litigation process. Programs vary from a judicial settlement conference to a true mediation. The careful practitioner should investigate the program in the applicable jurisdiction, the experience of the mediation judge in business cases.

The Structure of a Mediation

Who Should Attend
It is crucial to the success of a mediation that each party be represented by an individual who has full and complete authority to resolve the case. It is unacceptable in a mediation to have final authority reside in an individual at the home office or other remote location who is not present at the mediation. Perhaps the largest single reason for mediation failures is that the individual with authority to resolve the dispute is not present. Every effort must be made to have the responsible person with full authority present for the entire mediation. Ensuring the presence of the appropriate individual is the joint responsibility of the attorneys for the advocates, the mediation administrator, and the mediator. An attorney who has a concern about who will be present should communicate that concern immediately to all parties involved in structuring the mediation.

The Letter
Consistent with permissible ex parte contact, the attorney for each disputing party should, prior to commencement of the mediation, send a private confidential letter to the mediator. This letter is not a legal brief nor should it be in the nature of a detailed argument of legal position. Rather, it should be the attorney's candid evaluation of the crucial issues, the obstacles to resolution, and a proposed road map for the mediator on how the case should be resolved. In contrast to binding resolution processes, this is the opportunity to explain to the mediator the personalities of the parties, the outside pressures and the facts or events which would be inadmissible in an arbitration or litigation, and what the attorney perceives to be the real objectives of each party. The opportunity to send such a letter invites an analysis by the attorney, with the help of his or her client, which should be familiar to advocates experienced in negotiating business deals. Clients are usually an invaluable aid in developing the mediation objectives and strategy. The mediator should not be interested in pleadings, motions, and legal positioning. The mediator is interested in any legal issue which may be dispositive of the entire dispute and a concise statement as to whether the law on the issue is clear and overwhelming, unclear and subject to dispute, or nonexistent. A mediator is not a judge nor an arbitrator, and has no ability to make binding decisions.

The Opening
Most mediators commence the mediation by holding a joint meeting. In that meeting, each party has the opportunity to state its position to the other parties. No witnesses are called, no cross-examination is allowed, and a premium is placed on brevity. Either the attorney or the represented party, or both, may speak. The purpose of the initial session is for each party to hear facts and positions not previously communicated to the adverse decision-maker. The underlying concept is that most disputes occur when communications break down and the initial session is an aspect of the process by which communications begin.

The Caucus
Immediately after the initial session or, sometimes, in lieu of an opening session, the parties will be separated while the mediator and shuttles from room to room. In situations where the mediator believes that a joint meeting has the potential to aggravate animosities, or where there has been a full communication of the parties' positions, the mediation will commence with the caucuses. In a caucus, communication between the mediator and the party is confidential. The mediator fully explores the position of each party in one or more sessions. The positions, concerns, and proposals of each party are communicated to the other parties through the skill of the mediator. Generally after several rounds of caucuses, a full and final resolution is reached. During the process, the mediator moves past nonessential detail and addresses and resolves the major obstacles to resolution. After an appropriate exchange of information, the mediator usually focuses on the practical economic costs of the dispute and helps the parties reach an appropriate monetary resolution. Non-monetary resolutions or solutions are also common.

Memorializing the Agreement
The agreements reached in the mediation should always be formally memorialized in a writing, signed by all the parties, or by going on the record before a court reporter. All of the parties should acknowledge the agreement so that "seller's remorse" at a later time does not destroy what has been accomplished. The more complicated the resolution, the more important it is that it be memorialized in writing. It is strongly recommended that the writing be created and executed before the parties leave the mediation — even if the agreement is handwritten.

Mediation Strategies

When to Mediate
When to mediate is a very delicate question. Generally, mediation should be conducted as early as possible, particularly in construction disputes. If the prerequisites to mediation can be met, the mediation should occur before litigation or arbitration is commenced. The only requirement to mediation is that there be a general understanding of the positions of each of the parties. Sufficient discovery (formal or informal) needs to have been done to allow a knowledgeable presentation to be made. The effective mediation presentation requires an accurate evaluation of the facts and the law.

Mediation will generally be unsuccessful if one of the parties has not communicated the amount or description of their claim. Mediation should not be delayed because one party is concerned that they don't know a piece of information held by one of the disputing parties. In such a situation, the letter to the mediator should request that the mediator determine the necessary fact or facts in the initial meeting. If an independent investigation or expert analysis is required, such as an appraisal, business valuation, or engineering analysis, it should generally be completed before commencement of the hearings. Proper preparation will pay big dividends: less money will be spent on attorneys, less anger and hostility will be generated by the parties, and there will be more money to invest in the resolution as opposed to the dispute itself.

Negotiation Prior to Mediation
A difference of opinion exists over whether the parties should attempt to negotiate and commence mediation after negotiation between attorneys breaks down. Many attorneys believe that they are fully capable of settling cases. After all, they have been doing just that for many years. Another school of thought argues that if the attorneys have exhausted their exchange of settlement amounts, and committed to each other that no greater or lesser amounts will be paid or accepted, they arrive at the mediation in a psychologically inflexible position which makes the job of ultimate resolution much more difficult. This school of thought believes that attorneys should exchange as much information and as many documents as they feel comfortable, but arrive at the mediation having exchanged few, if any, settlement amounts so that the greatest degree of flexibility is possible on the part of the attorneys and their clients.

The Role of the Attorney During Mediation
In no other type of mediation, except perhaps cases involving securities, is it more important to utilize experienced advocates than in construction. The complexities created by field construction situations, and the nuances of the inevitable questioning by opposing counsel and the mediator, require it. Saying that, however, the purpose of mediation is to allow business people to resolve their own disputes. That statement implies a limited role for the attorney. The major contribution which the attorney can make to the process is to determine the appropriate time to hold the mediation, selecting the best mediator possible, and writing a persuasive letter to the mediator outlining a path to successful resolution. Almost all mediators, and attorney advocates, should encourage maximum client communication with the mediator. Venting by the client is extremely valuable and the attorney may be surprised at the flexibility and willingness of the client to reach settlement during or after such an outpouring. The mediation process, and particularly the business executive's involvement in that process, encourages and facilitates parties to discard posturing and candidly discuss their real objectives. The attorney can be extremely helpful in reinforcing those statements of the mediator with which the attorney agrees and which move the parties toward resolution. Attorneys need to remember that it is the client's case, even if the attorney thinks the value of that case was greater or less than the client agreed to in the mediation.

Conclusion

Litigation has been the bane of the construction industry for decades. The industry has been debating for years the merits of various ADR options. The proven effectiveness of trained and qualified construction mediators has finally made believers of construction professionals and, along with "partnering", promises to usher in a new era of claims avoidance and settlement.

Proper timing is very important. Mediation should be talked early in the process, but should not be scheduled until the time is ripe. Mediation should not take place too early — when the parties are not sufficiently aware of the strengths of their opponents' cases and the weaknesses in their own. It should also not take place too late — when the parties perceive that they have already spent so much time and money that they might as well see what the courtroom lottery will bring.

Make sure that principals, or decision-makers, for all parties are in attendance. Use the mediator to compel attendance if necessary. Let the client have maximum dialogue directly with the mediator. The attorney should not dominate the negotiation.

Make sure that your case and your client are thoroughly prepared. Know your strengths and weaknesses. Identify information that you can and will present and know its relevancy to your case. Be prepared to realistically evaluate the range of probable outcomes at trial, and the costs of getting to and through trial. If the mediated settlement is likely to be significantly different than your client's hopes begin preparing the client early for that eventuality. Don't set a "bottom line" before the mediation begins. Memorialize the outcome before the parties leave the mediation.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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