Alternative Dispute Resolution – Why, When & How (3-part series)

Alternative Dispute Resolution – Why, When & How (3-part series)

On May 11, 2008 Author By Scott Wolfe Jr


This article is part of a three part series titled “Alternative Dispute Resolution – Why, When & How.” To read the other parts in this series, or to read more articles about ADR, navigate to the Wolfe Law Group ADR page here: ADR.

In the world of construction, litigation is perhaps unavoidable.

The complications and high stakes of each construction project make the construction industry a hotbed for dispute and litigation, and failing to prepare for disagreements can prove fatal.
Through dispute resolution planning, construction companies can minimize their potential exposure in the event of a disagreement.

Problems with Litigation
An adequate discussion of all the drawbacks to litigation would consume a volume of books, and so this brief summary should be taken in context. Nevertheless, it seems to be common knowledge that litigating disputes in courts of law can be time consuming, expensive, unpredictable and generally unfavorable to any of the participants.

The average lawsuit takes between 2-5 years from start to finish, and can cost thousands of dollars. The process is draining on the participants emotionally and physically, and in the end, the parties usually compromise their initial positions to reach a “settlement.”

Unlike in dispute resolution proceedings, a party to litigation cannot pick the judge or the venue, nor can the parties dictate the rules. Litigation is consumed by procedural requirements, motion hearings and discovery – each item contributing to increased time and expense.

The Option of Alternative Dispute Resolution
Alternative Dispute Resolution (“ADR”) is centered around the idea of the parties agreeing to resolve their differences through a non-litigation process. Instead of filing a lawsuit and incurring the associated expense and risk, the parties each submit to another procedure. This procedure is usually less formal than the state or federal court system, and is governed by rules crafted by the parties themselves.

Alternative Dispute Resolution can be chosen by the parties at anytime. Normally, parties will include an Alternative Dispute Resolution provision within their contract requiring each other to use ADR in the event of a dispute. In other circumstances, however, the parties will agree to engage in ADR even after filing a lawsuit in an effort to encourage a fair and speedy resolution.

ADR Types
Since ADR is largely driven by the goals and agreement of the parties, the manner in which a dispute will be adjudicated is restricted only by the parties’ creativity. There are, however, a number of ‘standard’ ADR mechanisms used frequently in the construction industry. Oftentimes, all three of the below types of ADR processes are used to resolve a dispute.

The three below discussed types of resolution are discussed in their usual order of use. In many cases, only one of the below ADR processes are used by the parties, and sometimes they are even mixed and matched with traditional litigation.

It’s important to recognize that each process will carry delay and expense, and so it might not make sense to schedule all three processes when the parties are only arguing over $10,000.00. Furthermore, when all resolution types are used, the parties could be faced with delays and costs that resemble traditional litigation. Accordingly, parties must be careful in their selection of their own ADR rules.

1. The Construction Neutral
The “neutral” concept in construction has recently been sanctioned by huge contract document publishers like ConsensusDOCS and AIA, whose documents now contemplate the appointment of a “Initial Decision Maker” to resolve disputes quickly and on-site.

Traditionally, the Architect served as an initial decision maker in a construction project. When an owner and contractor disagreed about a change order amount or quality of work issue, the decision of the architect would be sought.

Being hired and paid by the Owner, this put the architect in an uncomfortable and conflicting position. The dispute often escalated even after the architect’s decision, leaving the parties with expensive litigation and a delay in the project.

The idea of a “neutral” or “initial decision maker” simply tenders the decision-making role to a neutral third-party, appointed by the parties during or subsequent to contracting. The initial decision maker provides the parties with a fast and inexpensive third-party voice, hopefully capable of resolving the dispute and keeping the project on-track towards completion.

The decision of the initial decision maker is usually considered “final” by the parties for the purposes of the project’s progress, but in almost every instance, the parties allow the decision to be disputed through further dispute resolution processes (such as mediation, arbitration or litigation).

2. Mediation
Unlike almost every other type of dispute resolution procedure, mediation does not pit one party’s position against the other, does not provide a “decision” of a neutral party and is not binding upon the parties in anyway.

Contrary to any other dispute resolution procedure, mediation is a confidential meeting of the parties, whereby they each air out their positions and explore its strengths and weaknesses. The mediation process encourages settlement by providing a forum for an open discussion of the party’s respectful positions, and the road ahead in the event the parties continue in their disagreement.

Normally, the mediation will begin with a meeting of all parties and the mediator, whereby each party expresses their position and their concerns. The mediator then breaks the parties into different rooms, whereby they only communicate to one another through the mediator.

Mediation is a very successful settlement tool, and when used correctly it can help parties avoid the costs and risks of litigation.

While the mediator is greatly involved with the parties and works to help them settle, he or she will not make any decisions that will binding upon the party. The mediation proceeding is only “binding” if a settlement agreement is reached.

3. Arbitration
The third and final type of dispute resolution process discussed in this article is “arbitration,” perhaps the most traditional ADR procedure.

Arbitration is very similar to traditional litigation in that it involves a decision maker (i.e. judge), witnesses and testimony, a traditional review of evidence and procedural rules.

While similar to litigation in some manners, arbitration is certainly an entirely different proceeding. The parties are intimately involved with setting the rules and proce
dures, as well as even cho
osing who will arbitrate. The “rules” of the proceeding are also much less formal than traditional courts require.

In a typically arbitration, the parties will appear before a single arbitrator, or a panel of arbitrators. These decision makers are typically experienced in the field of law and industry at dispute, and they will listen to each side present their case. Thereafter, the arbitrator(s) will make a decision that is enforceable by one party over the other.

Pros and Cons of ADR
The pros and cons of ADR over traditional litigation is a worn topic.

While there are certainly a lot of positive characteristics to ADR, it is not a process that fits in every circumstance. Like almost any other legal decision, you should consult the advice of an attorney and consider the pros and cons of each procedure before deciding on one over another.

Although there are some circumstances when traditional litigation is preferred over ADR, in the construction industry ADR is a fact of life and is normally an asset to those working on projects of all shapes and sizes.

Here is an overview of some of the most discussed pros & cons to ADR:

Pros to ADR

  • ADR can help preserve the relationship between the parties. In construction, genuine disputes may arise between the parties on scope and quality issues, and although the parties are at odds over this issue they may likely have to continue working together or work on a project in the future. ADR may save the relationship while resolving the dispute.

 

  • The parties are in the driving seat. Unlike in litigation, the parties can choose the resolution procedures, the players, the rules…and even the outcome. Traditional litigation has rigid rules, and you get what you get. The parties are not allowed to explore creative alternatives, and the result may sometimes be unfair. When certain ADR solutions work (like mediation, or construction neutrals)….the result may actually be win/win.
  • Costs of ADR are typically lower than costs of litigation. Traditional litigation can be extraordinary expensive, regardless of whether the dispute is large or small. ADR costs more closely resemble the complexity of the dispute and the purse at stake. Further, its informality results in less obligations and lower costs.
  • ADR is efficient. ADR is run by private companies who get paid by getting claims in and out of the door. Traditional courts, obviously, do not have the same motivation. ADR moves at the pace of the parties, and not the courts.

 

Cons to ADR:

  • Instant Legal Remedy. Sometimes, the parties need an instant legal remedy (i.e. construction lien, construction lien removal, injunction, eviction, etc.). These instant remedies cannot often be obtained through ADR, and litigation is necessary. When an instant legal remedy is required and the parties have chosen to resolve their disputes through ADR, the party seeking the legal remedy may have boxed themselves in to an unnecessary and expensive process.

 

  • Loss of Leverage. Sometimes, the costs and burdens of litigation is actually leverage for one party over another. While not exactly fair, it is a fact of life in the legal world. If one party is better funded, or if one party is in possession of the money or property in dispute, the long and expensive process of litigation is actually leverage for that party against the other.
  • Quality Standards. While it might seem humorous to many to assert that the court systems have “quality control,” in reality there may be more quality control in that system than in ADR systems. In court, there are manners to appeal decisions not found with most ADR proceedings. Furthermore, arbitrators, mediators and neutrals are oftentimes not decision makers by trade, and that inexperience makes them prone to mistakes.
  • Too Focused on Compromise. A pro to the ADR system is its focus on settlement and compromise, but its also a con to the system. Sometimes, the parties do not want to compromise, or they cannot find “justice” in a compromise. The ADR system’s encouragement of compromise consumes a large amount of time and resources that is wasted on a litigant who seeks a final and fair determination. Even when the ADR system gets to the arbitrators, they are still less likely to impose severe penalties on one party or to make a very prejudicial decision.

 

Where Do I File For ADR?
With so much discussion of ADR, a reader may be quite curious as to who manages “ADR,” and where the ADR courthouse is located.

Interestingly, there isn’t a courthouse system for the ADR network. Every city has a number of private companies that offer ADR services, and these services are usually located in office buildings in-between doctors, lawyers and accountants. Since the parties are in the driving seat of ADR proceedings, they can even choose their neighbor or relative to conduct the proceedings (not recommended, but mentioned to highlight the informality of the processes).

Some companies are more established than others, and you should investigate any organization before choosing them to adjudicate your dispute. In many instances, the parties will actually select the ADR provider at the time of contracting .

The most popular provider of ADR services is the American Arbitration Association.

The Next Series
Next in this three part series on Alternative Dispute Resolution is a discussion on:

  • Choosing ADR in Contract: Well crafted ADR clauses and some of the factors you should consider when constructing your ADR requirements in contract.
  • Choosing ADR Post-Dispute: How to involve ADR in an already existing dispute
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