February 22, 2021 Articles

Two Methods to Avoid Costly Construction Litigation or Arbitration

Moving parties off positions taken in litigation or arbitration can be much more costly and time-consuming than moderating positions in a face-to-face meeting or mediation.

By Ronald Williams

Construction disputes frequently result in protracted, expensive, and time-consuming litigation or arbitration. However, before reaching either of those dispute processes, parties should consider two methods that can prove very effective and help avoid their negative effects. The first option is for the principals to meet in person, and the second is to employ the services an experienced, trained mediator to resolve their disputes. Both approaches can be far more cost-effective than typical construction litigation or arbitration, if planned and implemented correctly. Neither is exclusive of the other. Logically, a face-to-face meeting should occur before resorting to litigation or arbitration.

Within the context of settlement discussions—which are inadmissible in any subsequent litigation or arbitration—designated representatives of each party should meet face-to-face in a neutral location. The express purpose should be litigation avoidance. The parties should have an agenda of issues to resolve, divided into different categories based on degrees of complexity.

Meeting Face-to-Face

There is no substitute for businesspeople arriving at a deal through communication, and no better way to communicate than face-to-face. In a face-to-face meeting, representatives can establish common ground and truly invest in a process to resolve each and every disputed issue. In a face-to-face meeting, the principals engage each other as businesspeople, not litigants, with the understanding that compromise is part of the process and part of doing business.

To maximize the likelihood of success, each side must do its homework in advance of the meeting. Arriving at the meeting properly prepared, understanding the law, the documents, and history, improves the chances of achieving a resolution. To resolve issues, the participants must also have the authority to decide issues and bind the party they represent. The representative of each party needs to understand the risks associated with not resolving issues early, before losing control of the outcome if it goes to litigation or arbitration.

A party’s attorney has a vital role to play before a meeting takes place, both in setting the stage for the discussions and in explaining the costs and risks of arbitration and litigation, should talks fail to provide a resolution. Counsel should

  • clearly spell out the parameters of the talks to ensure both sides can speak freely in the context of a settlement discussion;
  •  educate his or her client on the strengths and weaknesses of each issue based on the facts and the law;
  • educate the client on the risks of litigation or arbitration;
  •  set forth a budget of fees and costs associated with each stage of litigation or arbitration;
  • describe the duration of litigation or arbitration and unexpected events that will inevitably arise, despite the best efforts of counsel;
  •  advise preliminarily as to the likelihood of success on each issue using three “buckets” (i.e., probable, possible, and remote),  a method that can be used for both liability and damages;
  • set forth a timeline for litigation to help the client understand and identify inherent challenges, such as employee turnover that could cause a key witness to depart long before a trial or arbitration hearing, faded memories, or poor project records; and
  • identify any scenario in which the communications can be admissible—for example, can a third party discover the communications in another legal proceeding?

If key decision-makers do indeed meet, counsel can also discuss with the client the importance of memorializing the resolution of each issue to bring finality and certainty to the process. Effective counsel will create a draft settlement agreement and go over the document with the client in advance of the meeting. The client can help identify any potential, less obvious hurdles that counsel may not be aware of that are material to a full and complete settlement. Having a draft ready can avoid losing momentum achieved in a meeting between the parties. It is never too early to put together a settlement document, even in draft form, to help the client identify and clarify any and all issues. By their very nature, construction disputes have complexities that are rarely fleshed out and effectively addressed overnight. Have a checklist of items to discuss and give the client time to review and consider every angle. If one face-to-face meeting fails to produce a settlement, the parties should keep the door open to subsequent communications or meetings.

Mediation

However, in a situation where face-to-face meetings alone do not resolve a dispute, a well-defined mediation can serve the same purpose and may be very effective. For mediation to succeed, counsel to both parties must adequately identify its parameters and select an appropriate mediator: someone with the requisite experience, training, and commitment to achieve a resolution. Drawing up a written mediation agreement is a best practice and can ensure confidentiality. Counsel should verify the particular law of a given jurisdiction that governs the mediation. Using a recognized mediation service can lend credibility to the process and allow for effective administration leading up to and during the mediation. Counsel for both parties should try to agree on mediation statements to be submitted and exchanged, including a history of settlement discussions, in order to avoid surprises. Counsel should also agree what documents to provide to the mediator in advance of the mediation and do so jointly.

Identifying a mediator who is invested in the merits of understanding each party’s position and who can have candid discussions, both with counsel and with the parties, is essential. The client needs to know that the mediator has the requisite, relevant experience in construction and in dispute resolution. Like counsel, the mediator must have gravitas and be an effective communicator. Clients will often be more receptive to a difficult but important message when it comes from a respected third party, rather than from even their own attorney. Employing a mediator early can also avoid one or both counsel spending time on issues that may not matter in the long run.

With virtual mediation now common, the ability to quickly arrange a mediation makes it a very attractive method of dispute resolution. Counsel must decide whether to be in the same room with his or her client and must prepare the client for the mediation. The client should understand the process in advance and should be prepared physically, in terms of stamina; emotionally, to communicate in a controlled manner; and mentally, to rationally defend his or her position on each issue. Counsel should educate the client on the consequences of speaking too quickly or abandoning a position because of fatigue. Create a checklist of best practices and review them with the client in advance of the mediation. Remind the client of the importance of body language, tone, and manner. The representative should serve as a good storyteller and exhibit honesty and authenticity. Taking the time to prepare the client by going over each and every issue is very important because it allows the client to understand in advance how receptive a third party may be to the client’s position on a given issue. Remind the client that you will be present at all times, effectively serving as a coach during the mediation. During breaks, review the history of discussions to keep the client focused on each issue and the progression of negotiations.

As noted in connection with face-to-face meetings, it is important to have a draft settlement agreement so that if the parties do achieve a resolution, it can be memorialized promptly in a fully executed, binding document. Depending on the jurisdiction, the law, and the mediation agreement, communications related to the existence of a binding settlement achieved in mediation may or may not be admissible in a subsequent proceeding to enforce a settlement. Try to avoid “term sheets” or similar documents that are not fully integrated and executed by authorized representatives. Ending the mediation process with an understanding that a settlement has been reached only to find that the parties cannot arrive at a final binding settlement agreement can be disastrous and can impair the ability of the parties and their counsel to work toward a resolution. If an agreement is reached, include a simple, written clause to resolve any dispute over performance of the terms and conditions of the agreement. This may involve providing for the mediator to retain “authority” to decide any subsequent issue, assuming he or she is willing to do so.

Conclusion

Both methods— meeting face-to-face and mediation—involve limited expenditure on legal fees and a lesser time commitment on the part of clients when compared with construction litigation or arbitration. They allow clients and counsel to control the process and the outcome and, if at all possible, should be undertaken before filing a lawsuit or demand for arbitration. Either formal filing represents not simply a legal statement but also a psychological statement as to the stance a party adopts. Staking out a position formally can also be far more expensive in the long run, especially if that position has not been completely vetted. Moreover, moving parties off positions taken in litigation or arbitration can be much more costly and time-consuming than moderating positions in a face-to-face meeting or mediation. Frequently, construction litigation or arbitration is a result of people adopting unreasonable positions that, when examined holistically, are not in their overall best interests. Sometimes these positions end up in the public domain, intensifying the parties’ emotions and making a resolution even less likely. By effectively employing face-to-face discussions and mediation, counsel can reduce the likelihood of such outcomes—and the fees and costs associated with them.

Ronald Williams is cochair of the Construction Law Group at Fox Rothschild LLP in Exton, Pennsylvania.

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