Alternative Dispute Resolution or ADR is any procedure for settling a dispute by means other than litigation in state or federal court. The long-term and multi-party nature of construction work has made the various methods of ADR particularly popular in this industry. Mediation clauses are widely used in construction industry contracts. Though, as was discussed in the preceding article in this series, arbitration is often no longer mandatory. ConsensusDocs, AIA, and EJCDC contracts now require parties to select litigation or arbitration for any potential conflicts in advance. The frequent use of these mechanisms suggests that it is extremely beneficial for construction professionals to at least be familiar with the basics of ADR. So what are the basics? And what do all of these ADR methods entail?

THE THREE PRIMARY TYPES OF ADR

Party to Party Negotiation

Party to Party Negotiation is the most familiar and informal of all ADR methods. The parties select representatives to advocate for their interests, who commonly are the employees of the parties themselves. Those representatives engage in a face to face negotiation with the intent of reaching an amicable solution. This approach is usually the cheapest, particularly because this method rarely involves discovery. But party to party negotiation requires good will and a willingness to compromise on both sides. Construction disputes can be both heated and complicated. Frequently, the parties will need outside help to steer through the antagonism caused by a dispute.

Mediation

Mediation is a more formal approach at accomplishing the same goal, which involves a neutral third party. Many court systems, seeking to reduce their case load, either mandate or strongly encourage mediation. In the construction industry, mediation is more frequently the result of an agreement to mediate before litigation or arbitration, either by contract or by mutual agreement, after a dispute has arisen.

The third party is referred to as a neutral or a mediator and will seek to bring the parties together by addressing the strengths and weaknesses of their cases. Mediations can involve joint sessions with the adverse party and the neutral, private meetings with the neutral and each party, or some mix of the two. Mediation can be non-binding or binding, which is more similar to arbitration. The parties to non-binding mediation can litigate any unresolved issues after the process. Virtually all mediation-related communications are treated as settlement negotiations and remain confidential. Mediation can take place before, during, or after discovery. And cases can be mediated more than once. Mediation is more expensive than party to party negotiations, but, if successful, will be far less expensive than arbitration.

Arbitration

Arbitration is the most formal means of ADR and most similar in practice to litigation. The parties agree to the selection of one or more arbitrator(s), who decide the dispute for the parties. The findings of the arbitrator or the arbitration panel are binding and enforceable in the courts. Agreements to arbitrate are enforceable under the Federal Arbitration Act or FAA, as well as various state arbitration codes. Arbitration awards can be appealed, but the grounds for appeal are very limited and appeals are relatively rare compared to appeals of state and federal court judgments.

Organizations Sponsoring ADR

There are several organizations with experienced practitioners that specialize in resolving construction disputes. These practitioners often come with years of experience in the industry and familiarity with even the most unique aspects of the practice. These organizations also usually have their own rules for practice. Three such organizations stand out in particular, all of which offer both mediation and arbitration services.

American Arbitration Association (AAA)

The American Arbitration Association (AAA), founded in 1926, is the oldest and perhaps most widely used organization. Its rules allow flexibility and include an expedited arbitration process for disputes of smaller value, which involves a hearing within 100 days. AAA’s arbitrator fees are calculated based on the amount in dispute, while the mediation fees are limited to the hourly or daily rate of the mediator themselves. The AAA arbitration process includes the options for appeals, but the parties have to separately agree to do so in advance. AAA’s rules for arbitration allow for the award of attorney’s fees unless those are otherwise prohibited. AAA’s rules for mediation state that all of the costs shall be split evenly by the parties unless otherwise agreed to.

Judicial Arbitration and Mediation Service (JAMS)

Judicial Arbitration and Mediation Service (JAMS) rules allow for flexibility as well. Those rules include their own expedited arbitration process for disputes of smaller value with a hearing required within four months. JAMS’s arbitration rules are especially unique in their approach to fees, which are based on the services provided and are usually split evenly by the parties unless otherwise agreed to. JAMS includes rules for appeals of arbitration findings to be used if the parties agree to allowing them. The awards of attorney’s fees are permitted if they are not otherwise prohibited.

International Institute for Conflict Prevention and Resolution (CPR)

International Institute for Conflict Prevention and Resolution (CPR) rules also include an expedited arbitration process for disputes of smaller values, which are required to be completed within 100 days. Similarly to the AAA, CPR’s fees for arbitration are based on the amount in dispute between the parties. CPR’s rules for mediation state that the costs are normally split evenly by the parties unless otherwise agreed to. The awards of attorney’s fees are permitted in CPR’s rules for arbitration if they are not otherwise prohibited.

The election of the sponsoring organization’s rules does not bind the parties to use the organization’s arbitrators or mediators. Parties can hold a non-administered mediation or arbitration without sponsorship of the above organizations. The use of the non-administered arrangements is riskier, especially because of the specialized nature of construction law practice, but the flexibility to do so is there. CPR even provides useful rules for those interested in conducting non-administered arbitrations.

ADR and Federal Contract Claims

Non-binding mediation is particularly popular with the Federal Boards of Contract Appeals. Both the Civilian Board of Contract Appeals (CBCA) and the Armed Services Board of Contract Appeals (ASBCA) offer the opportunity for mediation. Many of the offered services are similar in process to those of the sponsoring organizations discussed above, such as the availability of an expedited mediation process for small dollar value cases.

During non-binding mediation before the Boards, one of the Board’s judges will serve as a neutral and will meet with the parties both together and separately in order to try and reach an agreement. In a situation where the mediation was unsuccessful, the case will proceed to another Judge for resolution, as it would have had there been no mediation.

The Boards also offer an arbitration-like process called a Summary Trial with Binding decision, which results in binding, but non-precedential and non-appealable written opinions. This process is more commonly used for the less complex and small value disputes.

The Court of Federal Claims applies ADR in a manner similar to that of the boards, but the services it lists under its procedures for ADR are limited to non-binding processes only. For instance, non-binding mediation is available with either a third-party or a court judge not assigned to the case serving as a neutral.

ADR Advantages and Disadvantages

So what advantages does ADR offer? Particularly with mediation, it can result in lower cost and quicker resolution, but other factors are worth considering as well.

The benefits of the various forms of ADR will vary depending on the specifics of the case. While forms of ADR have typically proven to be cheaper and faster than litigation, particularly in the busiest jurisdictions, they all come with their own disadvantages.

It is important to consider the fact that an arbitration award is very difficult to appeal. Some parties consider this closure beneficial. Others do not. The non-binding nature of Mediation and Party to Party Negotiations can result in additional litigation costs and time after the conclusion of the process, particularly if a settlement is not reached.

ADR has played an important part of the construction industry disputes resolution for many decades. Mediation has grown in popularity and has led to the relatively inexpensive resolution of many seemingly intractable disputes. Arbitration, particularly when thoughtfully controlled by the parties still has the potential to be faster and less expensive than state or federal court.