Reimagining the Dispute Resolution Provision in Construction and Design Contracts

Dispute resolution is usually one of the last items addressed during negotiation of a construction or design contract. The reason is obvious: in the rush and excitement of getting a new project started, the last thing on anyone’s mind is the possibility that things will go south.

But as any experienced owner, contractor, or designer knows, disputes happen — even when the parties have the best intentions. And while detailed dispute resolution provisions carry the romance of a prenuptial agreement, they can have major benefits down the road if properly tailored to the project, parties, and type of dispute most likely to arise.

Concepts like mediation, arbitration, and attorney fee shifting are firmly established in the world of construction and design contracting and are contained in almost every form contract. But with some minor reimagining, the parties can better utilize these boilerplate provisions to save time, heartburn, and resources down the line.

Mediation

Many template agreements require mediation as a pre-condition to binding dispute resolution. This is an advisable first step in any dispute resolution protocol. But simply stating that the parties agree to mediate — without addressing particulars — could have the unintended consequence of creating even more issues for disagreement when a dispute does arise. By addressing up front matters such as selection of the mediator, location of the mediation, and how the mediator’s costs will be shared, the parties can focus on the substance of their dispute and increase their chances for an early resolution.

Arbitration vs. Litigation

One of the biggest decisions that the parties make is whether disputes will be resolved through binding arbitration or court litigation. Arbitration can be a quicker, more efficient, and cost-effective alternative to court litigation. And because it is often possible to select arbitrators with a construction background, the parties may benefit by having a decision maker who is familiar with the types of disputes that commonly arise on construction projects. On the other hand, by agreeing to arbitration, parties waive significant rights, including most rights of appeal.

Yet the arbitration versus litigation decision is sometimes left to simply checking a box for one or the other. While this approach may occasionally be acceptable, in almost all other cases the parties will benefit from addressing the specifics of what and how they are agreeing to arbitrate or litigate. For instance:

• If the parties agree to arbitrate, do they also agree that related claims involving other parties will be addressed in a single arbitration? And, if so, what happens if efforts at obtaining a consolidated arbitration fail?
• Will arbitration proceed before one arbitrator or three and how will the arbitrator(s) be selected?
• Will the arbitration be administered by the American Arbitration Association or one of the similar organizations, and what procedural rules will apply? Though formal administration has many benefits, it also comes with a financial cost and organizational philosophy that may not align with the parties’ specific interests.
• What rules will govern discovery and how will discovery disputes be resolved? Will the parties use a specialized discovery master for eDiscovery disputes?
• Where will the arbitration or court litigation be held?
• How will the arbitrator(s) be paid?

Discovery is one area where the parties may particularly benefit from up-front agreement. While limited discovery is a perceived benefit of arbitration, the opposite may be true for disputes that arise from large or complex projects. In those cases, the amount at stake almost always justifies document discovery to the full extent permitted by either the local state or federal court. Thus, the parties would likely benefit from an up-front agreement that discovery will be governed by the Federal Rules of Civil Procedure.

Attorney Fees

The inclusion or omission of an attorney fees provision is another area that is often overlooked by parties rushing to strike a deal. There are three ways that attorney fees typically are — or are not — addressed in construction contracts: (1) a “prevailing party” fee provision, in which the party that prevails in any dispute is awarded its attorney fees and costs; (2) a “no attorney fees” provision, in which it is expressly agreed that each party is responsible for its own attorney fees and costs; or (3) silence on the issue of attorney fees, in which case the parties are typically entitled to their attorney fees and costs only if specifically allowed by statute.

Because many statutory remedies available to contractors (or designers) typically allow them to recover their attorney fees — prompt payment statutes for one — it is usually in the owner’s interest to include a variation of either a “prevailing party” provision or a “no attorney fees” provision. This approach tends to place the owner and contractor (or designer) on more equal footing in the event of a dispute.

Conclusion

There is no single approach for dispute resolution that fits every project or even every dispute on an individual project. But by carefully negotiating a dispute resolution provision that is properly tailored to the project and the types of disputes that can be reasonably anticipated, the parties can increase their chances of obtaining an efficient, fair, and prompt resolution.

Originally published as “Reimagining the dispute resolution provision in contracts” on December 19, 2018, by the Daily Journal of Commerce.