By AIA Contract Documents
November 1, 2021
When it comes to resolving issues on a project, most contracts, including AIA contract documents, are set up to first try mediation and then move to the option of litigation or arbitration.
It’s important to be aware of the benefits, associated costs and consequences to all parties associated with all options.
For reference, the most common dispute resolution methods are summarized per the National Association of Surety Bond Producers’ Understanding Dispute Resolution Options in the Construction Industry.
· Mediation: A non-binding mechanism in which the disputing parties use the assistance of a third-party mediator to help them reach a settlement. The mediator is a facilitator and does not decide who has the correct position or how much money should be exchanged to resolve the dispute. Rather, the mediator’s role is to ensure the parties understand each other’s position and ask tough questions to help the parties reach settlement. Typically, the mediator has no authority to force an outcome on the parties, and either party can walk away from the mediation at any time.
· Arbitration: Relies on one arbitrator or, with more complex disputes, a panel of three arbitrators, usually attorneys or judges with construction industry expertise, and sometimes an engineer or contractor. Arbitration results in a private, binding, enforceable decision. The arbitrator’s decision may be appealed to a court having jurisdiction, but an arbitrator’s decision can be reversed only in exceptional circumstances, such as obvious bias by the arbitrator or fraud. Arbitration typically involves limited discovery and simplified rules of evidence.
· Litigation: Begins with filing a lawsuit in a state or federal court and continues until the court issues a final decision or the parties settle and withdraw the lawsuit. A party that loses in litigation has the ability to appeal the result.
Incentivized for Resolution
Now let’s focus on the benefits and challenges of each, beginning with mediation.
For mediation to work, all parties have to be committed to settling. If everyone agrees to get together with a limited exchange of documents to resolve an issue, that’s great. If all parties are not incentivized to settle, then mediation is not going to work.
Remember, it’s very difficult to see the warts in your side of a case until you see all the information. In many cases, owners and project teams need to live through a year or more of their case to realize that it might have some holes. For example, sitting through a deposition often increases everyone’s appetite for resolution.
The Flow Down
The choice between arbitration and litigation is a long debated topic.
While arbitration is often pitched as less formal and cheaper than litigation, that’s not always the case. The choice of arbitration or litigation is something that should be determined on a project-by-project basis with careful deliberation prior to signing contracts. Factors might include project location, a court’s history of interpretating similar prior cases, and the quality of available arbitrators in the project area.
Just as importantly, careful consideration should also be given to the flow down provisions that exist in the trade contractors’ agreements. Why? Likely your trade partners are less liquid and rely on a steady stream of payments to stay afloat.
Any dispute that lingers to the point where your trade partners aren’t getting paid for work completed is dangerous to current and future projects for that contractor. For the long-term health of your partnership and the industry, it’s good practice to have a conversation with your trade partners to see what kind of dispute resolution they prefer.
Contractually specified dispute resolution methods are not one-size-fits-all and require balance. We’ve worked hard to assure that the AIA documents strike that balance.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.