Mediation: The Sensible Means For Resolving Contract Disputes

This article first appeared in the April issue of Conflict Resolution Notes which is available from the Conflict
Resolution Center International, 204 37th St. Pittsburgh PA 15201-1859

Construction contracting is becoming increasingly complex and litigious. Owners are
reacting with 500-page or more contracts which attempt to place all responsibility on the
contractor. Contractors are reacting with pages and pages of exceptions and
classifications to the terms and conditions. Construction contracting has never been a
simple business, but over the past 20 years it has become even more difficult as owners
and contractors have had to rely more upon legalistic maneuvering to attempt to control
risks.

Along with more complex contracts comes increased opportunities for contractual
disputes. Most construction contracts today contain some form of Alternative Dispute
Resolution (ADR): a contractual means to resolve disputes without going into the classic
courtroom setting. By far, the most common form of ADR is arbitration.

While arbitration is a valuable contract dispute resolution method, it is not a
panacea. Contrary to common belief, arbitration is not always less costly than litigation;
and, there are serious drawbacks for this form of dispute resolution. For one, it does not
necessarily eliminate discovery (the costly procedure whereby the disputants must make all
of their documentation available for review and copy). Additionally, under arbitration,
there is no provision to appeal a “bad decision’ and the process can be very
expensive.

Given the less than perfect arbitration ADR process, owners and contractors are looking
for something better — a process where the disputants (rather than the lawyers) maintain
control of the process, the costs and the outcome. Mediation, a here-to-fore little
explored alternative dispute resolution technique is growing in popularity.

Mediation has shown some impressive results. Over 80% of the disputes that are
voluntarily submitted to mediation are satisfactorily resolved. And, even for
court-referred mediations, over 50% are settled satisfactorily without burdening the court
system. Yet, few people fully understand the process.

WHAT IS MEDIATION?

Mediation is a voluntary process in which all parties to a dispute work with an
impartial mediator who assists them in finding ways to resolve their
conflict. Different than litigation or arbitration, mediation is not a win/lose
determination. A skilled mediator facilitates a solution to the problem which best fits
the needs of both parties; the mediator does not decide who is right and who is wrong.
Because mediation is similar to negotiation (except that there is a neutral party guiding
the process), it is often referred to as facilitated negotiations. The terms mediation and
facilitated negotiations are used interchangeably in this article.

Why Mediate?

The primary benefit of mediation is risk and cost control. Because the parties arrive
at the solution (rather than a judge or an arbitration panel making a ruling) the
disputants maintain control of the entire process. The chart on the next page illustrates
what happens to cost, risks and process control as disagreements escalate from discussion
to negotiation to mediation to arbitration to litigation. Some describe this migration as
moving from Peace to all out War. As depicted in the chart, the best solution in terms of
cost management and overall control by both parties is discussion. This method of
settlement is followed by negotiation and then, historically, with arbitration and/or
litigation. [The opportunity to mediate has often been overlooked].

With mediation, a third party neutral is brought in to keep the parties working
together rather than turning the problem over to the legal departments. The mediator,
acting in a neutral capacity, facilitates continued negotiations by pointing out the
benefits of a cooperative settlement vs. a ruling by less informed arbitrators or the
courts. The cost of the mediation is usually shared and is nominal by comparison to the
classic forms of dispute resolution — arbitration or litigation. Cost and risk for each
party increases exponentially when the dispute crosses the line from a situation where the
parties resolve the dispute themselves to a situation where someone else resolves the
dispute.

Diagram 1 (2761 bytes)Different from arbitration or litigation, in mediation neither party has to lose.
Mediation is the method of handling disputes which provides the greatest opportunity for
win/win solutions. And, because the parties arrive at the solution, there is a very high
probability that the solution will be carried out as agreed. (It is a well-known fact that
even with a court-rendered judgments, the losing party may not comply. Its lawyers may
file for an appeal which can drag out the final settlement for years.) Historically,
disputes that are submitted to voluntary mediation are settled in an acceptable manner and
carried out as agreed in the mediation.

It should be noted that while mediation is usually a voluntary process, it is common
for the results of mediation to be binding. That is, while the parties are not obligated
to follow the mediation process to its completion, they frequently agree in advance that
if the dispute is resolved, the resolution will be memorialized in a written, enforceable
document. Again, history supports that there is a high probability that the agreement that
is reached through this voluntary process will be carried out without legal intervention.

KINDS OF ISSUES WHICH ARE RIGHT FOR MEDIATION

Mediation is an excellent forum for resolution of construction disputes, contract
disagreements, and equity claims. Simply put, any situation that would otherwise be
arbitrated, can be mediated. In fact, in most contract disputes the parties could benefit
from mediation. Even if the issues are so complex and emotional that arbitration or
litigation is inevitable, the issues can be narrowed by first submitting the dispute to
mediation. And, it is a little known fact that mediation may be appropriate within a
larger litigated matter. Often, parts of a bigger problem in litigation can be separated
and more effectively settled through facilitated negotiations.

Mediation is not appropriate for points of law or criminal actions or where one of the
parties is compelled to ‘send a message’ to a larger audience. But, in construction
disputes the vast majority of disagreements are not over legal issues. More often, the
questions at hand are matters of fairness or equity. For example, a delay claim (whether
made by the owner or the contractor) is usually not a legal matter. These kinds of claims
are characterized as “Requests for Equitable Adjustment” and the actual
disagreement is usually over what is equitable (not what is legally correct) for a
given situation.

THE ROLE OF THE MEDIATOR

The effective mediator has a challenging role. He/she is faced with a situation where
the parties may be emotionally charged as the result of protracted, unsuccessful
negotiations. One of the first objectives of the mediator has to be to ‘de-energize’ the
situation and get the parties focusing on the real problem and real solutions; not
who is at fault.

TIME AND COST

Because the mediation process is non-binding there can be less concern over having the
dispute fully detailed before trying to reach an agreement. Therefore, the otherwise
necessary months of information gathering by the lawyers can be drastically reduced or
eliminated. Meditation is truly more of a businessman’s solution to the problem. As such,
it can be achieved with less preparation and far less disruption to the businesses and
individuals involved.

Further, since the process in inherently faster, it is far less costly to resolve a
dispute through mediation than through arbitration or litigation. Because of the
non-adversarial dispute resolution technique used, complex issues can be satisfactorily
resolved in a matter of days; and, the important business relationship of the parties can
be preserved

The cost of mediation, ranging from $1,500 to $2,000 per day, that is shared by the
disputants. Typically, issues can be mediated in less than a week. Imagine solving a major
dispute for less than $5,000 in processing fees. Compare this to the tens of thousands in
legal expenses necessary to pursue an arbitrated solution or a court decision, and the
need for mediation in construction contracting becomes quite apparent.

Arbitration is often characterized as a “split the baby” kind of dispute
resolution process and as such it is not uncommon for both parties to be dissatisfied with
the outcome. Since a skilled mediator encourages the parties to solve their own problem,
each party is more likely to be satisfied with the final resolution of the matter. The
point to note is that if an issue can be arbitrated, it can be mediated — usually faster
and at a lower cost to the parties.

SELECTING A MEDIATOR

Since mediation is just beginning to find its place as a tool for contract dispute
resolution, it may not be obvious where or how to locate an experienced mediation firm or
individual. A word of caution is due here because few states have a required certification
program for mediation professionals. Virginia and North Carolina are two states that do
provide for certification, but even there, state-certification is optional. Mediation is
being looked at as a new business growth opportunity and therefore many organizations and
individuals are looking to get in on the ground floor. Not all those offering their
services necessarily have the skills required to handle complex construction issues.

In choosing a mediator, it is advisable (although not absolutely necessary) to select a
firm or individual with specific construction knowledge. Mediation principles are
generally the same regardless of what kind of dispute is being handled (construction
contract, supply contract or services contract, etc.), but the terminology is different.
An experienced construction mediator does not need to consume time learning construction
fundamentals such as the importance of a concrete slump test.

To locate skilled mediators, contact The Conflict Resolution Center International in
Pittsburgh, PA. Telephone Number (412) 687-6210, Fax: (412) 687 6232, E-mail:
Paul@ConflictRes.org

Check the Internet. By simply making a keyword search on the term “mediation”
or “mediators”, a wealth of information will become available including names,
addresses, expertise, rate structure and phone numbers of many mediation professionals.

WHERE TO GO FROM HERE

A major impediment to increased use of mediation is the need to educate owners,
contractors, business persons and contract writers. Due to the very nature of construction
work, most standard form contracts contain dispute resolution provisions. Owner contracts
also provide a means to resolve disagreements. Unfortunately, both are likely to be in the
form of Contracting Officer rulings or arbitration. In order to reap the cost, risk
control, time and resource management benefits of mediation it is up to us to push for
change.

At Adtranz we are incorporating mediation provisions into all of our contract forms as
the second level of dispute resolution. (The first level is, and should always be, problem
solving through discussion or negotiations). If mediation does not work, we will then
consider arbitration or litigation as the situation warrants.

                        author

Kenneth P. Kelsey

Kenneth P. Kelsey is Director Commercial Operations, ABB Daimler-Benz Transportation (North America) 1501 Lebanon Church Road, Pittsburgh, PA 15236 MORE >

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