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A BETTER WAY
Resolving Construction Contract Disputes through Mediation
By John H. Perkins*
"Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser - in fees, expenses, and waste of time."
Abraham Lincoln, Notes from a Law Lecture 1850
Nearly thirty years ago when I first became General Counsel for an engineering and construction company, I inherited the management of an ongoing law suit against one of the company's clients that was withholding a $45,000 payment (a lot of money at the time) on a water treatment facility installed by my new employer. Six month and some several thousand dollars in expenses later, the case was settled for about $30,000. The litigation expenses, exclusive of staff time and other costs, when the case was settled, were also about $30,000. I know this experience is not unique. Any one who has been through the litigation process knows how unsatisfactory and expensive litigation can be, even with the best result. Litigation requires significant expenditures of time and money, not to mention emotion, and provides no guarantee as to outcome. In fact, I have heard it said, and agree, that "even in a case where you have a 100% chance of winning, you have a 10% chance of losing". This is a lesson that has been painfully learned by even the best litagators. The only guarantee in litigation is that there will be a winner and a loser. In addition to the risk of winning or losing there are other problems and issues with litigating that should be considered. For example, in litigation there will be the disruption of productive resources such as staff and management time, the waste of capital resources, the damage to reputation and business relationships and other significant unrecoverable costs, all of which will negatively impact a company’s profitability. Added to these items is the emotional energy associated with any major dispute, a cost that will not show up on the bottom line of any balance sheet and which can some times be the most difficult aspect of litigation. For these, as well as various other factors not addressed here, there has been an increased interest generally, and in the E & C business particularly, in various ADR (Alternative Dispute Resolution) procedures as an alternative to a full blown litigation.
ADR procedures generally refers to methods used to resolve disputes by means other than litigation, utilizing a process that will be more efficient, cost less and reduce the risks that are experienced with litigation. Traditionally, that process has been arbitration. However, there has been growing concern about the arbitration process because arbitration results in a win lose situation and has the added disadvantage of a very limited basis to appeal the decision. Also, although arbitration was once thought to be more informal and less costly, more recent experiences have indicated that the cost and time to arbitrate is approaching that of formal court proceeding.
In seeking a more satisfactory means to resolve disputes in a manner that is more cost effective and which minimizes, if not eliminates, many of the problems experienced with litigation, mediation is being relied upon in the E & C business with increasing frequency. Mediation, to mention just a few of its advantages, has been found to be significantly more cost effective, more likely to produce a win win result, is more likely to produce a result that will preserve important business relationships, and can take place in a private setting where only the participants will know that there is a dispute and how the matter is resolved.
Mediation has been defined as the intervention in a negotiation or a conflict of an acceptable, impartial and neutral third party (the mediator), who has limited or no authoritative decision-making power but who assists the involved parties in voluntarily reaching a mutually acceptable settlement of issues in dispute. The mediation process is an informal private meeting with only the parties to the dispute, their counsel (if any) and the mediator present. Compare that to court proceeding that takes place in a formal setting in a public courtroom where the presentations, exhibits and testimony are strictly controlled by the rules of evidence and subject to the scrutiny of outsiders. Probably the most distinctive aspect of mediation is that the mediator has no authority to impose a decision. The mediator's role is that of a professional facilitator, generally a person with experience in the field, who will work with the parties to give them a better understanding of their respective positions, as seen by a third party, and who will help the parties in finding common ground acceptable to all sides. Before there can be a resolution in a mediation the parties involved in the dispute must be in agreement. In litigation or arbitration, after the parties have presented their case, they are no longer involved in the outcome. In those situations the judge, the arbitrator or a jury will make the decision on the final outcome. In studies that have been made of the mediation process, it is the aspect of the participation of the parties in the entire mediation process, including the decision that resulted in mediation being so favorably rated by participating parties.
To gain a better understanding of mediation, the following is a brief overview of the process, as it would be followed in a typical case. I have broken the process down into four stages: the initial stage, the start of the mediation session, the negotiation stage and the final stage.
- The initial stage. During this stage the parties make the commitment to mediate and make arrangements with a mediator. These two steps may be the most critical in the process and warrant at least a brief discussion. Any dispute is appropriate for mediation. However, one should have a reasonable understanding of the basis of the dispute and the facts involved prior to the start of mediation. A party should also have some understanding of what might be an acceptable resolution to the dispute before the mediation begins. In the selection of a mediator the parties need to select someone whom they trust, have confidence in, know to be fair, has training as a mediator and ideally has some understanding of the subject matter. If this is the first time the parties have used mediation, the parties or their counsel may want to talk directly to the mediator and develop general guidelines as to how the mediation will proceed. The mediator should discuss the decision making process, point out that the mediator’s role is to facilitate good faith negotiations and explain that the mediator is not a decision maker with the authority to impose a decision. The parties, working with the mediator, will need to make arrangements for the time and location for the mediation. The location of the mediation should be in a neutral setting. They should also establish an estimate of the amount of time necessary to carry out the mediation. When the arrangements are made the mediator will have the parties sign the Agreement to Mediate. If appropriate, advance information can be provided to the mediator with general background information concerning the dispute. An important element of this phase of the mediation is for the mediator to begin to develop an element of trust and a level of cooperation between the parties.
- The beginning of the mediation session. During this phase the mediator will determine that the necessary parties are present with the authority to resolve the dispute (a critical element if the mediation is to be successful), review the mediation process with the parties and attempt to establish an open and positive tone. Each of the parties in the mediation will describe their view of the basis of the dispute including their position with respect to fault or liability (if that is an issue). The mediator will guide the discussion among the participants, attempt to identify the major issues and the concerns of each party and obtain a sense of the personalities and dynamics of the relationships between the participants. The presentations of the parties are done in an informal manner. The rules of evidence do not apply and there is no cross-examination. It is strictly up to each of the parties involved as to how to present their position. A party may or may not choose to have witnesses or exhibits. As a general rule, the presentation should be kept simple but sufficient to give the mediator and the opposing party (or parties) a reasonable understanding of the basis of the claim and rationale for the positions taken. It is critical during this stage that all parties understand the importance of listening to what is being said. This is often the first time that each party may have had a complete explanation of the other party's position. At the conclusion of this phase, the mediator will begin to have private sessions with each of the parties, which begins the next phase.
- The next phase I call the negotiating phase. The mediator, during this stage, will have the opportunity to gather additional information, obtain reactions and positions concerning the presentations made during the joint sessions, identify issues of primary concern, review and discuss the opposing party's position and interest, and discuss any hidden interest. The mediator will also begin to explore with each party any areas of common interest and what might be a reasonable and mutually acceptable solution to the dispute. The discussion in each private session (caucus) will be shared by the mediator in meetings with the other party, unless the mediator has been requested to keep a particular matter confidential. There would typically be several of these sessions or caucuses, and, as the complexity of the case increases, the number of caucuses will also increase. It is not unusual during this phase that each party may choose to meet privately without the mediator, or to go back into a joint session for the purpose of clarifying various issues that arise during the breakout sessions. During these sessions, the mediator will work with each party to generate options for settlement and to help each party assess the various options suggested. An important aspect of this portion of the mediation, after having heard the presentation of the opposing party and with the help of the mediator, is performing a risk analysis of each party's position. The risk analysis should include an evaluation of alternatives (e.g. the cost, time and risk of litigation) and likely outcomes for each party if, through the mediation process, they can not reach a negotiated settlement. Experience has shown that most mediation disputes get resolved during this process. For disputes that are not resolved at this point it is often the case that mediation has been the start of more focused and meaningful negotiations resulting in a significant number of additional cases being resolved through follow up discussions after the initial mediation is adjourned.
- The final phase of the mediation is to review, in a joint session, the elements of the final settlement and to make certain that each of the participants is in agreement. If the settlement is complex, the steps necessary to implement the settlement need to be discussed, and agreement reached on the procedure to be followed. If a settlement is not reached then the mediator should review with the parties what their respective positions are in order to allow for further settlement discussion. The mediator should also use this time to remind each party that the mediation is confidential. What was discussed during the mediation session and the final position of the parties, if no settlement has been reached, were discussion for settlement purposes only and what took place in the mediation session can not be used in future litigation.
That's a brief description of the mediation process. But, why does mediation work so well and result in resolution of such a high percentage of cases? There are several explanation offered for this success. The most common explanation is that the parties to the dispute are participants in the process. They have the opportunity to present their position directly to someone in authority on the opposing side, the parties have input into the presentations and discussions and they participate in the decisions with respect to the final outcome. Mediation is not an adversarial proceeding and both parties are committing themselves to finding a common solution. As indicated earlier, even in cases where the mediation process has not resulted in a resolution of the dispute, the participants have expressed satisfaction with the process because of their ability to be involved in the process. Whereas, with litigation the parties tend to become entrenched in their positions and, because of the litigation, are reluctant to have a free exchange of information or positions.
I have observed mediations when the parties prior to the mediation have held entrenched position and yet the dispute was able to be resolved through the mediation process. Typically, when the parties show no interest in compromise the dispute is considered a poor candidate for mediation. However, in some states (e.g. North Carolina) where the court requires cases to be submitted to mediation before being litigated, even in those cases involving intransigent parties, high settlement rates have been experienced once the parties begin to spend their energy in a facilitated negotiation participating in finding a resolution.
Finally, in the engineering and construction business, as well as nearly any other field, the company that operates with the greatest efficiency will probably be the most profitable. Disputes and claims, although a real and common aspect of the E & C business are counter productive and result in a decrease in efficiency. However, most disputes do not need to be litigated and, through the use of mediation, these claims and disputes can be handled in a more efficient and satisfactory manner. There is a better way.
* The author John (Jack) Perkins, Esq. is the principle of ADR Solutions in Pittsburgh, Pa, is a certified Mediator for the North Carolina Superior Court and has been a long time member of the panel of neutrals for the American Arbitration Association.
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