Anatomy of a Construction Mediation

Preface


In the fastest growing method of resolving construction disputes, construction mediation, where contentious parties and representatives with little experience in the process or expertise in the subject matter of the dispute is the rule, not the exception, the mediator must be prepared to abandon the traditional role of not making suggestions or judgments on the parties’ settlement proposals. And if the mediator has to assume the non-traditional role, in order to be optimally effective the mediator must have expertise in construction and construction claims and experience in arbitration and litigation. The non-traditional mediation described below follows a technique developed by Kenneth R. Feinberg, the court appointed Special Master who successfully mediated the Agent Orange, Dalkon Shield and Shorham cases, among others.


The Dispute


The dispute arose from the erection of one school building and the renovation of an adjoining one for a university in New York City. The claimant trade contractor was a reputable, national organization whose client list would envy anyone in its trade. The respondent was the University. Each was represented by an established, first-rate law firm; the University’s a general commercial litigator, the contractor’s a firm that specialized in construction cases. Somewhat less than $1,000,000 was in dispute. Mechanic’s liens had been placed against the buildings by the contractor. The writer was the mediator.


The mediation was dictated by a mediation clause inserted into the standard construction contract the parties had executed. This contract, a short brief from each side and documents the parties thought pertinent were forwarded to the mediator two weeks before the parties and their representatives were to meet with the mediator for the first mediation session.


The dispute had two main elements: an outstanding contract balance and a monetary claim for lost labor productivity alleged to be the result of excessive change orders, stacking of trades, defective drawings and poor planning on the part of the University. The University denied the lost productivity claim citing the contract’s ‘No Damage for Delay’ clause which stated that the contractor waived “any claim for damages on account of any delay, obstruction or hindrance for any cause whatsoever…and agrees that its sole right and remedy…shall be an extension of time fixed for completion of the Work.” The University also declared offsets against the contract balance but acknowledged the backcharges were minor, easy to resolve and “not the essence of the dispute.” It was not surprising that the University would not discuss nor pay the contract balance until the labor inefficiency claim was resolved, a reticence for negotiation leverage that infuriated the contractor. There were, however, some real surprises once the mediation got underway.


Hostile Participants


Silence that was deafening and hostility that could be cut with a knife pervaded the mediation room. The parties and their representatives were seated across a conference table ignoring each other and not even speaking among themselves. The University was represented by its director of plant operations and outside counsel. The contractor’s group included the company’s president, his project superintendent and project manager, the president of a construction claims consulting firm and the construction attorney.


Before I could take the mediator’s traditional seat at the head of the table, introduce myself and commence the mediation, the claims consultant conveyed regards from his vice president, someone I had worked with 15 years earlier at another construction claims firm and had not seen since. My long lost friend had supervised the preparation of the contractor’s claim. If there were any questions he encouraged me to call my old acquaintance. Eyebrows arched on the University’s side of the table but there were no comments. Happy not to address this surprising revelation, it was brushed off with a ‘send him my regards.’ So before the mediation got underway a mini-cloud of bias hung over it because of a past relationship that heretofore had not risen to the surface.


A nominated mediator must have the approval of the parties. Part of the approval process is disclosure by the potential mediator of any past, present or future relationships with the participants in the mediation. The parties are asked to list all anticipated participants on a form that is then forwarded to the mediator prior to the mediation’s commencement. (The parties, of course, just as in arbitration, may waive any disclosed association they believe will not affect the mediator’s objectivity. On more than one occasion the writer has been an arbitrator in a construction dispute in which one of the attorneys had appeared before me in a previous case.) The contractor, however, failed to name his claims consultant or the vice president who prepared the claim. The mediator could not, therefore, call attention to the past association. But even at this late date, the University’s had the right to ask for, and obtain, my replacement as mediator. No objection was raised, however, and the mediation began.


The critical, immediate burden upon the mediator is to convince the parties that he, or she, is capable and objective. Most mediators do not have reputations that proceeds them so all the parties know about the mediator is contained in the mediator’s resume that is forwarded to the parties prior to the mediator’s approval. The mediator, therefore, must come out of the gate with confidence and that confidence must be instilled in the parties, and their representatives, with regard to the process as well. The mediator’s opening remarks must also include a full explanation of the rules so that no one is surprised by any of the mediator’s actions during the course of the mediation.


Construction mediation participants are skeptical about the process because it is new territory for most in the industry. Only recently and reluctantly has mediation been ‘discovered’ by the lawyers who represent the construction community. Seasoned attorneys have an instinctive, in-bred aversion to mediation because most have been trained to be hard-liners, not compromisers. (Law schools have just begun to teach Alternate Dispute Resolution (ADR) and this new breed of attorneys who find it user friendly are not yet at the forefront of the bar that represents the construction industry in its disputes.) And as mediation’s loose and flexible procedures are foreign to the formalities and strict rules found in the courtroom, a structure that is predictable and gives litigators comfort, if the mediator does not take control immediately, the attorneys will wrestle to fill the leadership void and the mediation will get off track and lose focus.


(In this case the attorneys were a mixed blessing. The contractor’s attorney was well versed in construction and construction law, not always characteristic of lawyers who represent members of the industry, many who think a blueprint is a lithograph from one of Picasso’s early creative periods. He had previous unsuccessful and expensive experiences in construction mediations at Rent-A-Judge type mediation firms with mediators who had limited construction expertise. The University’s attorney was a different story and the source of my next surprise.)


After the mediator makes introductory remarks and fields questions, each side makes a presentation of its case. As is the custom, the claimant was asked to go first. Usually the attorney makes a short statement of the facts, the law and sums up the reasons why their party should prevail.


The contractor’s attorney was a seasoned and savvy construction litigator, a senior partner in his law firm, so it was surprising that the contractor’s claims consultant rose to make the presentation. What followed was an elaborate dog-and-pony show; multi-colored schedules, charts and graphs which laid out the contractor’s lost productivity damages. The University’s people showed little interest and much contempt for the presentation. Now it was the University’s turn. Its attorney rose. His statement was short and to the point. ‘ ‘No Damage for Delay’ means no damages, period.’ He sat down.


In construction mediations with hostile participants, mediators should frown upon exchanges and the questioning of one side by the other both during and after the presentations. They usually turn into verbal fisticuffs. And while verbal ‘ventilation’ is encouraged in some types of mediation, i.e. family and neighbor disputes where emotional stress must often be relieved before the mediation can move forward, in commercial disputes, with considerations that are strictly monetary, venting is seldom a step in the right direction. After the presentations, therefore, I immediately commenced the next phase of the mediation, separate, private meetings with each party and its representatives.


The First Round of Caucuses


The purpose of the caucus is to elicit more information and to listen to anything the parties want to say about the case, the other side or things they may want to tell the mediator in private. The parties may give the mediator the option to use these disclosures if the mediator believes they will further the success of the mediation. (At the first caucus the University’s attorney said the claims consultant was a “used car salesman” whose performance was “insulting,” a reflex response, I thought, to a presentation that caught him off guard. These statements were later utilized in private conversations with the contractor’s attorney to explain his opponent’s enhanced hostility during the first day of the mediation and his reluctance, later on, to move toward a settlement.)


Usually the mediator caucuses first with the claimant. It was decided, however, to meet first with the University. Not only did I want to immediately discuss and dispel the minor bias problem that arose, but its attorney’s curt presentation indicated a stridency that need immediate attention or a lack of experience that needed immediate edification.


Despite the apparent age of the University’s attorney – late 40’s – he was relatively inexperienced as a lawyer, knew nothing about construction and little about construction disputes or construction law. His field of practice was employment. After a successful career as an educator he had decided to become a lawyer, graduated first in his class and had been admitted to the bar only five years previously. He advised me that his law firm, most of who’s members graduated from the University, had a ‘no arbitration’ policy because of bad experiences. He also acknowledged that mediation was new territory for his law firm and they were wary. The mediation clause had been put in the contract by the University’s construction manager who negotiated the construction contract with the contractor. But the attorney had an open mind, was a quick study and would listen to logic and reason. This was not going to be a run-of-the-mill construction mediation but one that would take time and effort on the part of the University and patience on the part of the contractor.


In order to achieve a settlement in mediation, almost without exception, each party has to make concessions from its opening position. In construction mediation this occurs most readily after the mediator plays devil’s advocate and raises legitimate doubts as to the validity and viability of their positions and explores with them the costs if the road to litigation or arbitration is taken and the risks to be faced if the case is decided in either venue. However, if either side cannot understand nor appreciate such arguments, they fall on deaf ears and little, if any, movement toward settlement is likely to occur. If this mediation were to have any chance of success, therefore, the University and its attorney would have to allow me to educate them about construction, construction claims and construction litigation and the contractor would have to give me the time to do this.


With this in mind the rest of the day (and most of my time) was spent in caucuses with the the University’s people. The goal was to convince them their mediator was knowledgeable about construction and construction disputes and objective despite my past association with the person who prepared the lost productivity analysis, an analysis they found to be a garish display of smoke and mirrors. In direct, but non-confrontational terms, they were advised the consultant’s presentation was not atypical in construction disputes, lost productivity claims were not without validity and deserved objective consideration, and despite their position that even if valid, the ‘No Damage’ clause protected against such claims, similar lost productivity claims have been successfully litigated.


Caucuses with the contractor and his representatives, many less and much shorter than those with the University, were devoted to diplomatically deflating its lost productivity claim as it was reviewed with their consultant. The consultant had overreached in the hours to which lost productivity had been applied and the inefficiency rates were too high. The analysis contained a minor flaw: lost productivity compensation was demanded on change orders that had been paid and in which the contractor had tallied the hours after the item of work was completed and then submitted them for payment. When the University paid these change orders the contractor had been compensated for lost productivity on the hours therein. Coincidentally with these discussions, the contractor was being prepared for what had been determined earlier; if they wanted a settlement they would have to sign on for the long haul.


A Non-Traditional Proposal


At the end of the day the parties were called together for a joint meeting. Rarely should parties in an angry commercial dispute be allowed to meet again the first day after the opening session because innocent remarks can ignite volatile temperaments (particularly with construction personnel) and undo a day of progress. But it was essential that each side observe the rapport and spirit of cooperation the mediator had developed during the day with their opponent. Each would see that progress had been made in these respects and hopefully be encouraged to keep mediating despite the fact that neither had moved from its original position.


Almost immediately the two sides began trading barbs. But before things escalated the parties acceded to my request for calm and they allowed me to make the following proposal: If they would give me a month to review the project documentation and speak with project personal, I would analyze the contractor’s claim and the University’s defenses, as well as the law, the risks and costs to each if there were no settlement and report back with a settlement figure the mediator deemed appropriate. This number would be the mediator’s best assessment of a settlement fairest to each side all things considered, a number designed to give each an immediate opportunity to settle the case, not one to be used by either as a platform for further negotiations. It was reiterated that the mediator must have access to all documents and all people associated with the dispute. The parties agreed and a meeting was scheduled for one month hence.


Educating the University


During the next month, the project documents and the claim book prepared by the claims consultant were reviewed. Time was spent with the University people and the University’s attorney discussing construction, construction law and the concept of lost productivity. The contractor’s attorney was asked for copies of ‘No Damage’ and lost productivity cases. These and other cases were forwarded to the University’s lawyer and we discussed them at length. It was suggested that he review our discussions with members of his firm or with outside counsel who practiced construction law. He was also cautioned, based upon the mediator’s own experience, that despite his ‘no arbitration’ stance, if a case like this went before a judge, he should not be surprised if the judge pressured the attorneys to have it heard by an arbitration panel of construction experts where unpredictable equitable considerations by the arbitrators could replace strict legal interpretations by lay judges and juries.


Also discussed were the situations where legitimate lost labor productivity occurred, how it could be measured within a reasonable degree of accuracy using statistical studies and circumstances where it was, and was not, a recoverable monetary damage. It was a concept that was giving him a lot of discomfort, as it would anyone not versed in construction disputes, but his comfort level rose the more we discussed its principles, theory and practice.


An examination of the change orders indicated that there were almost 200, an average of one every other day during the course of the contractor’s work. He was advised that, in and of itself, this was a job condition where labor and management do not perform efficiently, a prima facie lost productivity situation. More than 100 of the changes were revisions to the original contract drawings because of unanticipated field conditions or were simply design changes due to second thoughts by the architect and engineer. The project had been designed as it was being built, in effect, a ‘fast-track’ job, one that always invites bids, when advertised as such, inflated to take into account the chaotic work situation that usually occurs in the field. The University’s attorney asked: “What’s a fast-track job?”


The University’s architect was interviewed and acknowledged excessive change orders, defective drawings and poor performances by other contractors and the University’s construction manager created a sometimes stop-and-go work condition that largely contributed to the project’s eight months delayed completion. The University’s lawyer, who had not spoken with the architect, was surprised when apprised of this. He had relied upon the University’s director of plant operations for this kind of information but such a disclosure was not on the rep’s agenda.


During this same period there were discussions with the contractor about its field performance and about the lost productivity study with regard to its puffery and defects. The claims consultant was asked to make a “1% Study,” a lost productivity analysis more valid and accurate than the approach he had taken which used lost productivity data compiled and published by trade organizations for its members and not recognized as very objective criteria. The “1% Study,” however, could not be done because no period of field construction was stable enough to provide the required base datum against which alleged periods of inefficiency could be compared to compute the lost labor productivity damages.


A Settlement Number is Suggested


As agreed, we all met a month later for another mediation session. I first met with the contractor and his attorney. His project manager, super and claims consultant were excluded to keep this meeting as focused as possible. I did not wanting to deal with their separate agendas: the consultant defending his analysis, the project manager and super defending their performance. (As each had been spoken with previously, everything they wanted to say had been listened to and discussed.) Agenda identification is a normal but distracting aspect of mediations with many participants and every mediator has to wade through them diplomatically.


The contractor and his attorney were advised that although I thought he had a legitimate lost labor productivity claim that was not mooted by the ‘No Damage’ clause, it was not fairly priced. (They were not told, nor would it have been appropriate to reveal the confidential information from the University’s architect which exonerated the contractor from responsibility for any delays and for the stacking of trades that had occurred.) As he had been told previously there were certain defects and overreaching in the productivity claim that reduced its value considerably. They were shown an objective, 155 page monograph on lost productivity that examined the type of project, the contractor’s trade and the problems that occurred on this job. (It had been submitted as evidence in an arbitration the mediator had been involved in a few years earlier. It contained 94 footnotes, as many charts and graphs, and was the most comprehensive and sophisticated lost productivity study the writer had come across.) We went over the monograph and how it was used to arrive at the narrow settlement range I thought appropriate. This settlement range vs. the costs in time and money and the chances for a successful litigation were discussed. After a short, private meeting with his attorney the president agreed to accept a settlement within the suggested dollar zone if such was offered by the University.


Immediately thereafter a meeting was held with the University’s representative and its attorney who were waiting in an adjoining room. They were not advised as to the contractor’s reaction to the suggested settlement range but if the University accepted it as well, it would have been a simple matter to shuttle back and forth between the parties to reach an agreement on a hard number within the suggested range. This aspect of the dispute would be resolved and all that would remain would be the part that was supposed to be easy, the contract balance.


By this time the University’s attorney and its director of plant operations had accepted the legitimacy of a lost productivity claim and the attorney was not so strident in his belief that the ‘No Damage’ clause completely protected the University from liability for this type of claim. They were reminded what their architect had said about who bore responsibility for the delay and its ramifications were discussed. We went over the monograph, the lost productivity damage analysis done by the mediator based upon it, and we had the same cost of litigation vs. risk of not settling discussion, this time from the owner’s perspective. The University’s representative and the attorney huddled and requested ten days to consider the suggested settlement. The contractor was advised of the University’s request and agreed to wait, forbearing any legal action. We all went our separate ways.


A “Nuisance” Offer


Two weeks later the University’s attorney advised me that he was authorized to offer 1/3 of the amount at the low end of my suggested settlement range. He still was not convinced that the ‘No Damage’ clause did not provide the University with complete exculpatory protection and the University’s people thought I had been too generous to the contractor in my analysis of his productivity losses. The offer was characterized as a “nuisance” number to get the contractor out of the University’s hair. It was apparent that the University had still not developed enough confidence in its ability to adequately assess the suggested settlement, the kind of confidence the contractor brought to the table from the outset. But their attorney said the University might up the ante if their offer was refused; they wanted to keep the mediation alive. I knew, however, that if that offer was transmitted to the contractor, the mediation would be dead.


The next day I told the contractor’s attorney that an offer had been made but said ‘We weren’t there yet.’ As is the mediator’s prerogative, the number was not disclosed nor did he did not press me to reveal it. I said we were making progress. After all, something is infinitely more than nothing. More time was needed to discuss the case with the University and my opinion was offered that it would be imprudent to break off the mediation at this point. He consulted with his client who reluctantly agreed to go forward.


Half Way There



During the next month the University was sent several more analysis done by the mediator on the contractor’s claim and the law. In addition, comprehensive excerpts from the lost productivity monograph were forward to support the mediator’s contention that the amount of hours and the inefficiency rates used to arrive at the mediator’s suggested settlement range had been more than fair to the University. We discussed the change orders, continued our ‘No Damage’ debate and reviewed the risks and costs involved in litigation. His ‘No Damage’ security blanket was beginning to unwrap.


At the end of the month the University doubled its offer. It was a figure I knew the contractor would reject but enough not only to merit its consideration but a further indication that progress was being made; slow but sure. The offer was conveyed in typical mediator language: ‘What would you do if they offered…..?’ It was refused but both sides wanted to keep the mediation alive.


Discussions with both sides continued and a few weeks later the University made another offer, this one within the range suggested by the mediator, but at the absolute bottom of the range. After some shuttling back and forth between the parties they agreed on a higher number within the range. It seemed we were home free since all that remained was the contract balance issue. But there was another surprise in store.


The Dean Intervenes


At the meetings on the mediation’s first day the mediator obtained the parties’ agreement that if they settled the lost productivity claim but thereafter could not agree on the contractor’s figure for the contract balance, the contractor’s project manager and the University’s director of plant operations would sit down with the mediator who would change roles from mediator to arbitrator and make rulings, within the range of their disagreement, on any contract balance or backcharge item they could not resolve between them. That role, however, could not be assumed to bring the mediation to a conclusion until the University’s representative made his evaluation of the contractor’s contract closeout number. But the rep refused to make the evaluation despite repeated requests from his attorney. Nor would he respond to similar requests by the mediator in faxes and phone calls.


The University’s attorney was at a loss to explain his client’s behavior. I suspected, however, that the University’s representative had gotten cold feet much like those contracting officers in the Army one sometimes runs up against who are first in the pecking order to hear a contractor’s claims for damages on Government construction projects. These low ranking personnel want to avoid responsibility for spending additional sums of the Army’s funds so they deny all claims, whatever their validity, and pass them on to the brass above to decide upon their merit.


Needless to say, the contractor wanted to collect his money and was becoming impatient with the University’s failure to act. He was threatening to withdraw from the mediation and commence a lawsuit. It was time to turn up the heat.


I decided to speak with the Dean of the University. It was not a spur of the moment decision but one that had been first thought about when the owner’s rep started dragging his feet. (As stated previously, at the initial mediation session it is absolutely essential that the mediator receive permission from all the parties to have access to any person with a vested interest in the dispute.) The Dean was told, that in the mediator’s opinion, it would be unfortunate if, because of a lack of attention on the part of the University to a few remaining items, an expensive and time consuming legal war broke out when the real battle – the lost productivity issue – was over, peace was at hand and all that remained was a little mopping up on the contract balance and backcharges.


A Done Deal


Two days later the University’s attorney forwarded a settlement agreement. Although the settlement number was blank the University’s attorney guaranteed that at the Dean’s gentle urging, the director of plant operations was completing his evaluation of the contract balance issue and an offer would soon be forthcoming. The agreement was forwarded to the contractor’s attorney who reviewed it as to form and language.


But as luck would have it a computer system crash and a sick accountant delayed the evaluation. Soon a call came from the contractor’s attorney informing me that the CEO of the contractor’s parent company had instructed him to file suit the next day. I suggested I speak with the CEO. The CEO agreed to my request that the suit be held off a few days while pressure was turned up on the University. In no uncertain terms the University’s attorney was told that all our progress would unravel unless his client acted immediately. The next day an offer was made which, including offsets, was within $5000 of the contractor’s requested closeout payment. It was conveyed to the contractor and accepted. The blank in the settlement agreement could be filled in. All issues had been resolved and the mediation was over.


At that point the attorneys were asked to deal directly with each other so they could work out the logistics of the execution of the settlement agreement and the release of the liens. This was the first personal contact between the parties since the initial mediation meeting some four months previously. The final wording of the settlement agreement had been worked out over the previous two weeks, the mediator serving as a middleman to iron out the minor language disagreements between the two attorneys.


Summing Up


A construction mediation, with parties who are inclined to settle, who will compromise and are represented by experienced construction representatives should be successfully completed within a month’s time after two or three meetings and a couple of additional day’s work by the mediator. Cases with difficult or inexperienced participants and/or complex issues, like the mediation just described, will take longer. The formula for success in a traditional construction mediation is simple and straightforward: a devil advocate’s evaluation of each side’s position by an objective construction expert who can advise each side as to the pluses and minuses of its positions, the risks and the legal costs that will be incurred if settlement is not reached, or reached, as is usually the case, on the courthouse steps. When such advice comes from an experienced mediator in whom the parties have faith and confidence it is a powerful and compelling influence (vs. the onslaught of subjective demands and opinions from an adversary) that will lead to an early, low cost settlement 95% of the time.


Although the cost of the non-traditional mediation described in this article was relatively high – all tolled, it took 4 weeks of the mediator’s time spread over 4 months and cumulatively, 3 weeks by the attorneys, including briefs and meetings – had the case ended up with battling experts and protracted proceedings in litigation or arbitration the result would, more than likely, have been the same but the costs 10 times more for each side. And had this mediation gone to a Rent-A-Judge, or similar type firm, whose steep fees (up to $400/hr.) support high-priced retired judges and plush offices, it is unlikely that there would have been a resolution. These nationwide firms, recent to ADR and more recently to construction mediation, have mediators and arbitrators who are knowledgeable about process but they have not yet established a stable of construction neutrals expert in construction and construction disputes who are capable of playing the devil’s advocate in cases with complex construction issues. These firms could bring in outside construction experts to assist their mediators and arbitrators, of course, but this would not be as effective as having an ‘all-purpose’ mediator and the cost of the process would increase substantially as well.


Win-Win Result


Beyond achieving a settlement some say the real litmus test for a successful mediation is either two parties who are happy or two parties who are unhappy with the settlement. In this case it was the former. When the University was advised that the contractor accepted its offer on the contract balance, thereby settling the dispute, their attorney offered volunteered that they would have paid more. When the contractor received his settlement check he called and confided he would have taken less!


Gary Morgerman Construction Mediation Inc. 334 West 84 Street, #2 New York, NY 10024




                        author

Gary Morgerman

Gary Morgerman, founder and president of Construction Mediation Inc. (CMInc), was born, bred, and educated in New York City. A graduate of the Cooper Union for the Advancement of Science and Art, with a degree in structural engineering, he later attended New York University School of Law. Twenty years ago… MORE >

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