Trends in Construction Dispute Resolution: An Opportunity for Small Firm and Solo Practitioners
The evolution of dispute resolution processes in the construction industry has created a number of opportunities for attorneys in small law firms or solo practices. Not that many years ago the industry began to rise from the primordial ooze of litigation and regularly breathe the fresh air of arbitration as a means for resolving its claims and disputes. Slightly more than ten years ago, the industry ceased walking on all fours, stood erect, and began introducing in its contract documents the concepts of (a) early initial claim consideration by the project architect, and (b) mandatory mediation before arbitration. This evolutionary process has continued, and in late 2007 the industry took a number of important strides forward to make its dispute resolution processes more meaningful and effective.
Two Significant Trends Emerge
The construction industry (and its lawyers) have historically relied upon and utilized standard form construction contracts and related documents. Although these form documents are typically modified or customized by the parties on a project-by-project basis, one may study the development of these documents over the years to identify industry issues and trends. Two things happened in late 2007 that are of great interest to construction industry participants and observers: the American Institute of Architects (AIA) completed its ten-year review and modification of its family of contract documents, and a number of industry organizations banded together to create an entirely new set of construction contract form documents under the name ConsensusDOCS.
The revised AIA documents and the ConsensusDOCS documents hint at the further evolution of construction industry dispute resolution processes by illustrating two trends: first, a trend to emphasize earlier and less formal resolution of disputes; and second, a trend to utilize independent third parties as the initial arbiter in the early dispute resolution process.
The AIA Process
The AIA contract documents, drafted by architects, have historically required that the contracting parties submit claims and certain disputes to the architect for consideration and decision before the binding arbitration process could begin. Only after the architect rendered its decision or failed to render a decision could a party demand arbitration. See paragraph 4.5.4, AIA A-201 (1987). In addition, the AIA documents specified the American Arbitration Association (AAA) as the arbitration administrator and required compliance with the AAA Construction Industry Arbitration Rules. Id., paragraph 4.5.1.
The dispute resolution provisions of the AIA documents were substantially revised in 1997. The standard General Conditions, AIA A-201 (1997), still required that claims be submitted to the architect for an initial decision, but an intermediate requirement of mandatory mediation was inserted before binding arbitration could be pursued. See paragraph 4.5, AIA A-201 (1997). Unless the parties agreed otherwise, they were required to mediate according to the Construction Industry Mediation Rules of the AAA. Id., paragraph 4.5.2.
The arbitration provisions in AIA A-201 were modified and streamlined in 1997. Id., paragraph 4.6. Procedures for demanding arbitration were simplified, and the time for demanding arbitration was shortened from 45 to 30 days after the claim was submitted to the architect. Although the AAA was still the designated arbitration administrator, the door was left open for the parties to select a different provider.
The new 2007 versions of the AIA documents illustrate the further development of meaningful dispute resolution procedures in the construction industry. Key provisions include the following:
- Initial Decision Maker . This requirement in the AIA documents that the architect consider claims and render decisions before the parties could proceed to mediation and arbitration was a concern for many in the industry. First, contractors believed architects to be biased, favoring owners (who happened to be paying the architect), or protecting themselves where the architects’ conduct was an issue. Second, some owners did not want the architect deciding claims because the owners wanted the architects to be advocating openly in favor of the owners and against the contractors in the dispute resolution process. Finally, many architects had no desire to act as an arbiter of project claims due to the added administrative challenges and a perceived conflict of interest.
In the 2007 A-201, the AIA permits the parties to designate by agreement a third party that will act as the Initial Decision Maker (IDM) on claims. If no designation is made, the architect becomes the IDM by default. See article 15, AIA A-201 (2007). The parties cannot proceed with mediation, arbitration or litigation until they have sought an initial determination by the IDM.
- Mandatory Mediation . The 2007 A-201 retained the requirement that the parties mediate before proceeding to formal dispute resolution. Unless the parties agree otherwise, the AAA shall administer the mediation according to its Construction Industry Mediation Rules. Id., paragraph 15.3.2.
- “Check Box” Selection for Dispute Resolution . For the first time in over a century, the AIA documents do not mandate arbitration as the sole binding dispute resolution process. Instead, the AIA has implemented a system that requires the parties to check the desired box and specify a binding dispute resolution process-arbitration, litigation, or "other." If no selection is made, the agreement defaults to litigation. If arbitration is checked, the parties are free to specify an administrator of choice. If no administrator is specified, it defaults to the AAA.
With these revisions, the AIA has not only provided the parties with a greater variety of options with respect to their preferred methods if dispute resolution, it has also created an opportunity for interested attorneys to become more involved in the process.
The ConsensusDOCS Process
The ConsensusDOCS general conditions contain article 12, which is aptly named “Dispute Mitigation and Resolution.” The architect has little, if any, direct involvement in the mitigation or resolution of disputes. The ConsensusDOCS place an even greater emphasis than the AIA documents on the efforts of the parties to resolve their disputes before entering into an extended and expensive binding claim resolution process. The approach of the ConsensusDOCS is divided into the following stages:
- Direct Discussions . The first logical step in this process is to conduct “good faith direct discussions” between the parties’ representatives. If these representatives cannot resolve the dispute, then “senior executives” of the parties must get involved. In the event the senior executives cannot resolve the dispute, and the parties have so agreed, the dispute goes to the next level—the dispute mitigation procedure.
- Dispute Mitigation Procedures . At the time of contracting, the parties may elect one of two possible nonbinding dispute mitigation procedures—a project neutral, or a project dispute review board. If the parties select one of these options, they enter into a “retainer agreement” with the project neutral/dispute review board. The project neutral/dispute review board is then required to make regular visits to the project site, be familiar with the project and its progress, and be available promptly at any party’s request to address a dispute between the parties. Nonbinding findings must be issued by the project neutral/dispute review board within five (5) days of referral. If this mitigation procedure does not resolve the dispute, the parties proceed to the binding dispute resolution procedure specified in the contract. Interestingly, the nonbinding findings of the project neutral/dispute review board are admissible and may be introduced at any subsequent binding dispute resolution proceeding.
- Mediation . The ConsensusDOCS documents also provide for mediation, but it is not mandatory and is presented more as an alternative to the direct discussions mentioned above. The parties are free to select their own mediation procedure and rules, but if they do not, the default is mediation through the AAA according to its Construction Industry Mediation Rules.
- Binding Dispute Resolution . In the event the direct discussions or mediation are unsuccessful, the ConsensusDOCS documents provide for binding dispute resolution using the procedure selected by the parties. At the time of contracting, the parties may choose either binding arbitration or litigation. If arbitration is selected, the parties may designate a mutually agreeable provider and rules. If nothing is designated, the default is the AAA and its Construction Industry Arbitration Rules.
The new ConsensusDOCS approach to dispute resolution illustrates the construction industry's desire to resolve disputes early and informally, without the use of the architect as decision maker but with assistance from outside neutral third parties.
Opportunities for Practitioners
The emphasis of the 2007 AIA documents and the 2007 ConsensusDOCS documents illustrate trends toward earlier and less formal dispute resolution on construction projects. Small firms and sole practitioners can take advantage of these trends to simultaneously enhance their practices and further the goals of the project participants.
Assuming that the contracting parties will wish to designate someone other than the architect as the IDM or project neutral, there will be a real need for qualified individuals to serve in these roles. Factors that will likely be considered by owners, contractors, architects, and construction managers in selecting these individuals include:
- Expertise. The individual should have sufficient experience to understand the construction process and the dynamics of project relationships, have some familiarity with construction contracts and documents, and know construction law.
- Availability. The individual must be available to the parties on short notice to address claim situations when they first arise and before they grow into more serious problems with more serious consequences for the project.
- Impartiality. This individual’s lack of bias is what distinguishes him from the architect in the role of IDM or project neutral.
- Convenience. The easier it is for the parties to deal with you, the more likely it is they will use you as an IDM or project neutral. You can make it easy for them by having the IDM/project neutral retainer agreement prepared and ready for use. The agreement should set forth at a minimum the scope of services, cost and payment provisions, the procedure for presenting claims, and the timing and format for any decision to be issued.
- Cost. The parties are looking for prompt, economical assistance in resolving disputes. Assuming the other factors are relatively equal, and given the nonbinding nature of these services, the parties will likely select the individual available at the most reasonable rate.
Embrace the trend already evident in the newly published construction industry standard form documents. Fill the void, enhance your practice, and encourage and facilitate the early, cost-effective resolution of construction disputes.
David D. Hammargren is a founding shareholder of the Minneapolis, Minnesota, construction law firm of Hammargren & Meyer, P.A. He encourages the early, prompt, cost-effective resolution of construction claims and disputes.
© Copyright 2008, American Bar Association.