Almost 20 years ago Marcus Associates, a Connecticut based firm, introduced “Fact-Based Mediation for the Construction Industry,” a new technique for both mediators and the construction community. Marcus described it as follows:
Fact-based mediation is a departure from conventional mediation techniques. It is specifically designed to serve the needs of the construction industry. Dispute resolution by fact-based mediation permits the parties to make informed business decisions based on an independent and impartial analysis of the facts. For that they need an impartial, confidential assessment of the probable outcome and possible future costs should they go to arbitration (or litigation). With that information in hand, the parties are able to make rational choices that allow the mediation to be successfully concluded. The settlement rate for fact-based mediation is approximately 90 percent.
Construction Mediation Inc. had been using a similar technique since its founding in 1983 and the principals of the firms compared notes when the Marcus technique was discussed in a September, 1987 ARBITRATION JOURNAL article. Since then both firms have continued using the technique, and variations thereof, with that same high level of success.
Fact-Based vs. Facilitative (David vs. Goliath)
Not all construction mediators, however, are equipped to practice “fact-based mediation” nor are those in the overpopulated facilitative school of mediation pre-disposed to play the role of devil’s advocate that is required in the fact-based method. (Ex-judges populate the ex cathedra school of construction mediators.) Some mediators can play either role as the case demands. As the article declared:
There is no set technique for mediation that should be used in all cases. In time, mediators or mediation teams develop an approach with which they can be comfortable and efficient. Construction disputes are almost always the result of an accumulation of minor confrontations and disagreements. There is generally fault on all sides. (And) since the construction field is not populated by shrinking violets, over time these disputes tend to ripen into major disagreements, resulting in explosions. Parties to a (construction) dispute do not want to be cajoled or coaxed into a compromise settlement. They are not interested in “splitting the difference,” and they are generally convinced of the merit of their positions. If the resolution of disputes required only simple negotiations, we would not need the courts or alternative solutions such as arbitration and mediation.
As in any mediation the parties and their attorneys must be absolutely convinced of the mediator’s impartiality and complete lack of bias. This is particularly crucial in “fact-based mediation” wherein the mediator will be expressing a point of view about the weaknesses of a party’s case when caucusing with that party. This devil’s advocate role is its essence. As Marcus said:
…. the parties may hear many things that they will not like… The parties will however, emerge from the mediation with a clearer understanding of their own cases and what the consequences may be of a continuation of the dispute. With the help of their representatives, they can now make a reasoned business judgment. That is the primary goal of fact-based mediation.
But the unpleasant things the parties may not like may be exactly the same things that the party’s attorney may have been reluctant to tell their clients, or having done so, will welcome the mediator’s support. Attorneys may hear things in private they do not like either. Everyone, including the mediator, who participates in “fact-based mediation”, should bring their sense of humor, thicker skins and maybe even their hardhats to the bargaining table. For construction people, it’s just another day in the office (or field).
It follows that if such opinions are to have weight with the parties and their attorneys, they must also be convinced that the fact-based mediator has a comprehensive background in the construction industry and experience in its day-to-day operations. Also to be expected is expertise in the technical, legal and business issues that are in dispute. Needless to say, flexibility and open-mindedness of the parties, and their attorneys, are essential ingredients in the technique’s consistent record of success.
Procedure and Aims
Just as in traditional construction mediation, the parties submit confidential mediation statements to the mediator some time before they are to meet for the initial mediation session. And, as traditional, is the inflated rhetoric and posturing found in these statements. If they were to be the scripts for the initial settlement discussions between the disputants, such negotiations would get off on the wrong foot and things could go downhill from there. Enter “fact-based mediation.”
With the mediation statements in hand, the fact-based construction mediator makes a preliminary assessment of each party’s position. This review invariably raises questions in the mediator’s mind that leads to requests for further information from the parties and their representatives. The goal is to have sufficient information to formulate the recommendations and reasoning for the settlement proposal that each party will be given prior to their first, face-to-face mediation session. Depending upon the complexity of the case, and other factors, this confidential report may be oral or in writing.
The report to each party deals only with the weaknesses of that party’s case. This allows each party to assess its own position without obtaining any information or opinions by the mediator about the other side’s case.
Mediation that fails should not provide ammunition (to the other party) for a future arbitration (or litigation).
Also included in the report is the probable cost to each party to resolve the dispute if a mediated settlement is not achieved.
After the parties have reviewed their reports, the fact-based mediator is available to discuss the reports with each party prior to the first mediation session.
The parties are then able to negotiate with all the facts at hand. They control their own negotiations with the guidance of the mediator. The mediator remains available to answer further questions, make suggestions, and maintain momentum.
A Typical Case: Construction Contractor vs. Condominium Developer
The contractor had a $2 million contract for dry wall and rough carpentry work on the fast-track erection of a condominium complex in the Chelsea section of New York City. Despite almost 300 extra work orders, the contractor completed his work on time.
At the job closeout meeting there remained a number of approved, unpaid change orders totaling $350,000. Each was comprised of multiple extras. There also remained a number of extras to be negotiated. The contractor and the owner’s representatives settled these remaining extras and combined them into the last change order for $95,000. The next day a formal change order in that amount was issued, but was not signed by the owner’s construction manager as all the others had been.
Shortly thereafter the contractor visited the owner’s offices to receive his final check – payment for the $445,000 in outstanding change orders. He had already been paid the contract price. The owner, however, balked and refused to honor the full value of the $95,000, unsigned change order. The contractor walked out of the meeting empty-handed. He immediately filed a lien on the project and a lawsuit for more than $600,000, claiming, in addition to the unpaid change orders, delay damages and other extras that had been left on the table during the closeout negotiations. Interest and attorney fees were also sought.
The owner answered, claiming that the number of extras on the job was “alleged,” “amazing” and excessive. He refuted the $95,000 change order as invalid because it was not signed. Also sought were backcharges of $25,000 for work that was judged defective in an independent study prepared by another contractor. In addition, vague, unspecified losses were claimed due to delayed condo unit sales.
The parties agreed to a bench trial. The judge suggested they try mediation first.
Mediator’s Report to the Contractor:
The terms of the contract had a typical “no damage for delay” clause that, on its face, would bar the delay claim. The extras that were left on the table during the job closeout meeting should best remain there; if the contractor went after them in the lawsuit it could confuse things and jeopardize his full recovery of the final, unsigned $95,000 change order.
Mediator’s Report to the Owner:
Despite the fact that the $95,000 change order was not signed by the owner, the notes of the closeout meeting and the formal CO produced the next day by the owner’s construction manager clearly indicated that the owner’s representatives had agreed to it. And it could be cynically argued that the owner did not have the CO signed in anticipation of low-balling it and playing hardball when the contractor visited his offices for his closeout check. The judge might frown on such tactics by the owner and judge him a “deadbeat” if thought the tactics were designed to get a reduction in what he justly owed the contractor. This could cloud other aspects of the owner’s case, as well.
The “amazing” number of extras could be more logically judged an indication of poor or incomplete design documents by the owner’s design professionals, not poor performance or over-reaching by the contractor. If any were inappropriate in any way, the owner’s construction manager should not have signed them. And the fact that the contractor finished on time despite the “amazing” number of change orders reflected positively on his performance.
The study to substantiate the contractor’s defective performance indicated that the source of the defective work could have been other contractors (“the source of the moisture must be traced”) or design errors (“a naturally weak joint”). At best it was ambiguous as to who was at fault in each instance.
The contract had an arbitration clause which gave the arbitrator license to award attorney fees. The parties could not agree on an arbitrator so the dispute ended up in litigation. The owner’s attorney was adamant that attorney fees were precluded from a judgement. The report warned, however, that since the contract expressed an intent to award fees if an unresolvable dispute arose, the judge could award them, especially if the judge thought the owner inappropriately held back undisputed funds ($350,000) for the three years it took the case to reach the docket. These fees could be substantial and if the contractor revamped his delay claim into a lost productivity claim (which the mediator thought a distinct possibility), the fees would be higher. This was a real risk the owner would have to weigh since there was no doubt in the mediator’s mind that the contractor would get a significant judgement.
Each report concluded with a summary of the financial exposure facing each party.
The Mediation Session
The mediator discussed the reports with the parties and their representatives in phone conversations and in face-to-face meetings immediately before the mediation session.
When the parties convened, introductions and opening remarks were immediately followed by presentations by each party and its representatives. Thereupon, the parties engaged in a reasoned and vigorous debate that, the mediator noted silently, was less contentious and hyperbolic than the tone of their mediation statements. Gone were some of the over-the-top demands by each party that could have short-circuited the negotiations or driven the parties unrealistically and unnecessarily apart. The mediator kept discussions on the road to reality.
A settlement was not achieved during this first session but all agreed that progress had been made and channels of communication would remain open.
Shortly thereafter, after phone exchanges and e-mails between and among the parties, their attorneys and the mediator, a settlement was reached that closely followed the mediator’s recommendations.
The Marcus article concluded:
Experience has shown that fact-based mediation is a valuable tool in the resolution of construction disputes.
The “experience,” however, has not been widespread. “Fact-based mediation” is still a relatively well kept secret within the construction community because of the scarcity of mediators who have the tools and temperament to practice it and because of the technique’s low profile within the construction bar despite its effectiveness, speed and relative low cost.
The typical “fact-based mediation” consumes a week of the mediator’s time (including study time, phone calls and meetings, report preparation and the mediation session) spread over only a few weeks (so long as the parties and their representatives make themselves readily available). Just as cost-effective are the silent savings in management time and emotions that are dissipated in protracted disputes.
And most important, during the entire “fact-based mediation” process, the parties are in control of their destiny. If at any point either party does not like what’s going on they can bow out and take their dispute elsewhere (with a far better understanding of their case and the hurdles they face). But those who try it almost never do.
July 19, 2005
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