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Mediation of Construction Disputes
By Arthur L. Tarlow, Esq.


Introduction

There are several reasons why mediation is an increasingly popular process for resolution of construction disputes. Mediation is a response to the financial cost and emotional stress to contractors, owners, developers, design professionals and others who resort to arbitration or litigation to resolve their construction disputes. All too often, arbitration is not a low-cost alternative to litigation as a means of dispute resolution. In either arbitration or litigation, a third party or parties determines the resolution of the claim. Owners and managers of involved companies not only lose 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 is a confidential process and the parties and their lawyers are required to sign an agreement to that effect. Mediation allows the business executive to minimize legal costs, control the decision-making process, avoid most of the emotional stress, maintain business relationships, and provides the most rapid process for full and final resolution of disputes. Critically important in choosing a method to resolve a construction dispute is the fact that success rates in mediation exceed 80%.

Mediation Distinguished From Arbitration and Litigation

Both arbitration and litigation are binding procedures while mediation is non-binding. 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 claim. 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 adversary 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.

Agreeing to Mediation and Selecting the Mediator

The Contract Clause

Mediation can occur by contractual requirement or agreement after a dispute arises. 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 strongly encouraging mediation should be sufficient basis for enforcing the mediation clause.

After the Dispute Arises

At any time after a dispute arises, including after trial or during the appellate process, mediation may be agreed to and conducted. 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 relating only to confidentiality and payment of the mediator are routinely signed at the commencement of the mediation. A party desiring to mediate but concerned about the reaction of their adversary is advised to contact the administrator at one of the mediation companies who is skilled in convincing the other party to agree to a mediation. Such organizations will also provide the mediator and the location for the mediation. Alternate methods of encouraging a reluctant adversary to mediate include suggesting to a 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

Through the Courts

There are a variety of places to find a mediator. Most other jurisdictions have seen the benefits of mediation and have instituted a mediation program of one type or another. Programs vary from a judicial settlement conference to a true mediation. The careful practitioner should investigate the program in a particular jurisdiction, the experience of the mediation judge in construction and lien cases, and their belief in and experience with the mediation process. One advantage of mediation through the court system is that there is no cost.

Private Mediation

Private alternatives to mediation through the judicial process require payment of fees. There are several organizations throughout the country whose major focus is mediation and who also provide private arbitration. These organizations, U.S. Arbitration and Mediation, American Arbitration Association, and numerous active mediators not affiliated with any mediation organization. The mediators available from nonjudicial sources have varying degrees of experience as mediators and varying degrees of competence in construction disputes. The fees for their services also vary. Fees currently range from approximately $75 per hour to $10,000 per day.

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 who is not present at the mediation. Arguably, 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. Insuring 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.

Types of Mediators

The Structure of a Mediation-How it Works

The Process

Many mediators commence the mediation by holding a joint meeting. In that meeting, each party will have the opportunity to state its position to all of the other parties. No witnesses are called, no cross-examination is allowed, and a premium is placed on brevity and concise statements. Either the attorney or the 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 decision-maker. The underlying concept is that most disputes occur when communications break down and the initial session is an aspect to 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 into their own rooms and the mediator will continually circulate from room to room reminiscent of Henry Kissinger in his Middle East shuttle diplomacy. 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 parties is confidential and the mediator fully explores the position of each party in a separate caucus. The positions, concerns, and proposals of each party are communicated to the others with the help of the mediator. Generally, after several rounds of caucuses, a full and final resolution is reached. During the process, the mediator will move past nonessential detail and address and resolve the major obstacles to resolution. After an appropriate exchange of information, the mediator will focus on the practical economic costs of the dispute and help the parties reach an appropriate monetary resolution. A mediation typically is completed within one day and rarely takes longer than two days.

Mediation Strategies

When to Mediate

When to mediate is a very delicate question. Generally, mediation should be conducted as early as possible in a dispute. 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. Mediation will generally be unsuccessful if one of the parties has not communicated the amount or description of their claim. However, mediation is appropriate immediately after the initial exchange of the general positions of the parties. 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 the mediator to determine that fact or facts in the initial caucus. If an independent investigation or expert analysis is required, such as engineering analysis, those should generally be completed before commencement of the mediation. With those caveats, the sooner the mediation occurs, the less money has been spent on the lawyers, the less anger and hostility has been generated, and the more money there is available to invest in the resolution as opposed to the dispute itself.

Negotiation Prior to Mediation

A difference of opinion exists whether the parties should attempt to negotiate and commerce mediation after negotiation between attorneys breaks down. Many lawyers 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 with 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 lawyers and their clients.

The Role of the Attorney During Mediation

The purpose of mediation is to allow disputing parties to resolve their own disputes. That statement implies a limited role for the lawyer. The major contribution which the lawyer can make to the process is determining the appropriate time to reach 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 advocate lawyers, should encourage maximum client communication with the mediator. Venting by the client is extremely valuable and the lawyer may be surprised at the flexibility and willingness of the client to reach settlement. The mediation process, and particularly the construction industry executive's involvement in that process, encourages and facilitates parties to discard posturing and candidly discuss their real objectives. The lawyer can be extremely helpful in reinforcing those statements of the mediator with which the lawyer agrees and which move the parties toward resolution. Many lawyers are slow to recognize that clients will place greater faith in an effective mediator than in their advice. If the client is pleased and satisfied with the result, the lawyer has fulfilled his or her professional responsibility. Lawyers need to remember it is the client's case, even if the lawyer thinks the value of that case was greater or less than the client agreed to in the mediation.

How to Win the Mediation

The comments on the role of the lawyer during the mediation caucus should not be construed as conflicting with a strategy to "win" the mediation. Winning the mediation commences with determining the timing of the mediation. The lawyer should strive to have the mediation occur when his or her relative knowledge of all the facts and circumstances of the dispute are superior to those of the adversary. Winning strategy continues with selection of the right mediator and culminates with the persuasiveness of the letter to the mediator. If the advocate attorney's letter appropriately sets out a road map and agenda for the mediation, it will often be followed by the mediator. Any time a negotiation takes place in the context of your view of the issues and the dispute, you are bound to achieve a superior result. It is always an advantage to commence the negotiation with your adversary on the defensive without knowing it. The ultimate battle is for control of the mediator's analysis of the case. This will not occur by more frequent early contact nor by the quantity of the material and legal authorities presented to the mediator. Instead, it will be achieved by a concise and cogent recitation of the objectives of all the parties, obstacles to reaching those objectives, and suggestions to the mediator on how to proceed to overcome those obstacles.

Mediation Do's and Don'ts

Attribution

Arthur L. Tarlow, is a shareholder in Tarlow, Jordan & Schrader, an Oregon law firm with practice concentrations in Dirt Law - construction, real estate, land development, environmental, creditor's rights, business, and employment and labor law for business, design and construction companies. Mr. Tarlow can be reached by calling 1-800-338-2991.

The information in this and all other RISK Administration and Management Company articles is intended for information and risk management purposes only and does not constitute legal advice. For legal advice and assistance, please contact competent counsel in the jurisdiction of you professional practice.

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