In my previous post, I commented on arbitration and whether it still deserves to be the go-to procedure for binding dispute resolution in construction contracts. Carrying that post one step back into the dispute resolution process, parties to construction contracts should also consider the procedures they create for non-binding dispute resolution such as mediation.
Like arbitration clauses, many construction contracts have clauses requiring procedures for addressing disputes prior to commencing litigation. Many contractors and owners have mediation as a condition precedent to binding arbitration or litigation. Often, the mediation provisions are included in each contract as a matter of course. While I strongly favor the mediation of construction disputes, I think parties should consider the likelihood of settlement and the best mechanisms to foster settlement rather than simply putting a steadfast requirement for mediation in all their contracts.
In many of the contract forms I see, the parties have drafted a dispute resolution provision that contains terms requiring all disputes not resolved through negotiations be submitted to mediation within a certain time frame prior to either party having the right to litigate a claim.
The problem with these mediation provisions is that disputes are often not ripe for settlement early in a dispute. If the contract requires mediation during the project, there is a substantial likelihood that the parties may not have sufficient materials and data to carefully and properly evaluate the claim. Even if the parties hold off on a mediation until after completion, there remains a high likelihood that the parties still may not have learned enough about the dispute at the conclusion of the project. A recent dispute I was involved in provides an excellent example of how a required mediation can be doomed to fail.
In that dispute, the parties were involved in a scope dispute that threatened to derail a project. The parties agreed to reserve their rights to assert claims and defenses after the scope of work had been completed. The contract required mediation as as precondition to arbitration. The subcontractor who performed the work demanded mediation immediately following the completion of the disputed scope and the other party was bound by contract to proceed into mediation. This process required the expenditure of thousands of dollars to prepare for and attend the mediation as well as pay for the mediator’s time. However, during the early hours of the mediation, it became clear that the claimant had not yet fully developed its claim and did not have the ability to explain how much it claimed to be owed, why, and for what. It seemed that the mediation had been demanded only to allow for the arbitration demand to be filed. The mediation never really had a chance at succeeding because the claimant did not know what it’s actual position and ability to negotiate were and the respondent could not give the claimant any real offers of settlement because it never had enough information to properly evaluate the risks and value of the claim.
This mediation would have been more successful had the parties engaged in some investigation, exchange of information, and dialogue about the claims before rushing into a mediation. Further, the fact that a mediation had occurred early put the parties in a position that discouraged a pretrial mediation that would have had a greater chance of success because both sides felt they had been down that road and it had proven to be unfruitful.
I suggest that the parties consider the likelihood of settlement at an early mediation before requiring mediation as a condition precedent. Contracts should be written to encourage dialogue, exchange of information, and dispute resolution. The key to these provisions is to create a situation that allows the mediation or other dispute resolution process to work. Simply requiring a mediation at a given point in a dispute does not, in practice, accomplish much in the development of a resolution. A forced mediation can actually increase distrust and make a dispute more costly and time consuming in the long run. Be creative in the drafting of dispute resolution clauses in your construction contracts. Do not simply adhere to a particular technique because it’s familiar. Keep in mind and put into words processes that encourage negotiation and take advantage of proven techniques to resolve disputes.