Features: Issues & Trends — March/April 2005

Talk is Cheap — Justice is Not

Arbitration and other alternative dispute resolution methods offer ways out of
deadlocked disputes — the more binding the method, the bigger the bucks

By Mary Buckner Powers

Alternative dispute resolution and litigation have their own advantages and disadvantages, and there are specific reasons to choose one over the other in resolving project disputes. But industry experts still agree that both should be avoided whenever possible. When disputes do get stuck, an old industry mainstay-arbitration-may be making a comeback.

The best way to avoid disputes altogether is to properly allocate risk in the contract, says Bill Ernstrom, general counsel for contractor Alberici Corp., St. Louis, and former co-chairman of the Associated General Contractors' contract documents committee. "The more balanced the risk allocation, the better it is for owners and contractors," Ernstrom says.

But that is not always possible, as some owners view the contract process as an opportunity to shift project risk to the design and construction team. And some of those team members, in turn, may try to shift risk to companies below them. When disputes do arise, they should be handled carefully to avoid turning them into full-blown claims, which tends to solidify the positions of parties.

Non-binding methods of resolving disputes work if problems cannot be resolved at the project level, which is where all dispute resolution attempts should start. Some ADR choices focus on that, such as dispute resolution boards, also known as disputes review boards.

DRBs are established at the outset of larger projects with the consent of the owner and contractor. They generally consist of a panel of three construction experts-one selected by the owner and approved by the contractor, one by the contractor and approved by the owner and one selected by both the owner and contractor. The panel keeps up-to-date on project developments and if a snag arises, attempts to resolve the dispute in real time to minimize cost and schedule impact.

Other ADR options include mediation, mediation-arbitration (med-arb) and mini-trials. Arbitration and litigation should be a last resort, industry sources say. While mediation is not binding, it tends to preserve the relationship with the client. "Costs go up as do hostilities in binding dispute resolutions," Ernstrom says.

Keep Talking

AGC recommends resolving issues first on the project level through project representatives, says Mark McCallum, senior counsel. From there, dispute resolution should progress to talks between the senior managers. If discussions are not successful, the next step is to bring in a third party through mediation, which the American Arbitration Association can administer. "The mediator will help guide them and it really becomes a reality test for both parties," says McCallum. At that point, the parties will realize how strong or weak their case is. "It gives them a chance to think it all through before going into an adversarial adjudicating process," he says. In med-arb, a panel of arbitrators stands by if the mediator is unsuccessful, which sometimes acts as a powerful incentive to settle the dispute.

AGC has been a supporter of arbitration since its founding in 1918. McCallum says the process has two strengths-it is private and it is binding. Beyond that, it is less formal and more efficient than litigation and the decisions are made by people who understand construction, who can be selected in advance. "But, in fact, it is another form of litigation," McCallum says.

Parties begin to lose control over their fate as they move to a binding form of dispute resolution, McCallum says. By putting a dispute in the hands of a third person, the parties involved are saying they cannot resolve the issues themselves.

Arbitrators usually are industry experts, a big point in favor of arbitration over litigation. "Judges and juries usually aren't schooled in construction industry practices," says McCallum. Arbitration is superior to litigation because it is judgment by peers, says arbitrator Tom Barfield, a past president of the American Subcontractors Association. "We are familiar with the terms and practices and can do a better job of ferreting out contrary advice from both sides," he says.

But one criticism today is that there are increasing numbers of attorney-arbitrators, which gives arbitration more trappings of litigation. "They tend to make it what they are familiar with," McCallum says.
Another limitation to arbitration is that the underlying reasoning of arbitrators in reaching an award does not necessarily have to be spelled out in the decision and courts will not overturn arbitrators unless a party can show extraordinary circumstances, such as an arbitrator colluding with a party. Parties can select what kind of decision they want at the outset of the arbitration-a dollar figure to be paid to a party, a dollar figure with a specific breakdown or a reasoned opinion.

There are times when litigation is appropriate. "Strict provisions are more likely to be upheld in court rather than by a panel of arbitrators," says Robert Rubin, an engineer-attorney and 25-year arbitrator in New York City. "If a case requires a more equitable decision than strict enforcement, a case is better off in arbitration," says Rubin.

Speed is another factor. If a firm wants the process slowed, go with litigation. If a quick resolution is a concern, then arbitration is the answer, says Rubin. "If a company knows it's going to have to pay, it may want to take the longer route," he adds.

Other issues, such as the discovery process, also play a role. '"If the other guy has possession of much of the information, you would rather be in court with access to full discovery," Rubin says. But arbitrators tend to be more liberal in what they will hear. "They will bend over backwards to give everyone a chance to be heard," says Rubin.

Not Cheap

Rubin says that arbitration is not necessarily less expensive than litigation. "Arbitrators get a hefty rate, usually $400 an hour. Engineers get $250 an hour," he says. Arbitration cases usually run their full course, while litigation cases often are settled. "But none of these are simple solutions. The client has to look at the options and decide," he says.

A typical $10-million construction dispute may cost upwards of $100,000 to arbitrate, says Rubin. This would involve three arbitrators, about 15 days of hearings, five days of arbitrator study and decision-writing time, transcripts and AAA fees, he says. It does not include attorney fees or award.

Arbitration had slipped out of favor and its reputation was tarnished, says W.O. Jones, an arbitrator and former president of a Richmond, Va., construction firm. "Eight or 10 years ago, there were 20,000 construction arbitrators named by AAA," Jones says. There now are less than 3,000, as the association became more selective.

AGC met with AAA last November to discuss ways of recruiting and educating arbitrators. The issue is important as the industry becomes more complex, says McCallum. "Projects are more technically complex; there are more specialty subcontractors on a job; schedules are compressed and margins are razor thin, which makes a problem even more unforgiving," he says.

AAA is revising its rules to make the process better, says Bob Meade, senior vice president. Arbitrators are trained initially at a workshop and must update their skills annually. "It's mandatory. If you miss, you're off [the panel]," says Meade. AAA also is trying to streamline the process and set timeframes for dispute resolution.
"People are more pleased with the outcomes," says Rubin. "It is kind of like colleges," he says. "They get a reputation and it continues after circumstances change."

Arbitrators need to be educated on how best to administer disputes and contractors need to know how to use the process, says McCallum. "Industry needs to make sure that the promises of these processes are maintained and enhanced."