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What to Expect: An Overview of a Typical Commercial Construction Contract Disputes Process

At SLS, we advise our clients to remain proactive in all aspects of their business. Of course, this includes knowing and understanding the process required by a contract (if any) that governs disputes, disruptions or other problems that may arise on a project. This is so regardless of your role in the design or construction of a commercial construction project.

Commercial-construction contracts typically include a provision that creates a process for resolving disputes that may arise on a project. The American Institute of Architects ("AIA") has created contract forms that remain popular in the construction industry. For example, AIA General Conditions A201-2007, § 4.4 Resolution of Claims and Disputes is a commonly used disputes clause. Typically, the disputes process contains three sequential steps: (1) submitting a dispute to the architect (or owner's representative) for a non-binding decision; (2) participating in non-binding mediation; and (3) arbitrating or litigating any remaining disputes.

In 2007, the popular AIA form-contract documents introduced the concept of an "Initial Decision Maker" ("IDM"). An IDM is a neutral third-party decision-maker that the contracting parties may select (at their option) to decide disputes other than those regarding aesthetic effect - the architect decides those disputes). If selected, the parties must present their dispute to the IDM before they can move on to mediation and then arbitration or litigation. But the parties can appeal the IDM's "final and binding" decision by continuing with the disputes process. If the parties do not identify an IDM, the architect becomes the IDM by default.

Indeed, the 2007 version of the AIA contract documents even permits parties to customize their disputes process by checking different boxes. See A101-2007 § 6.2, A102-2007 § 13.2 or A107-2007 § 5.1. In certain AIA standard-form contracts, litigation is the default process if the parties fail to select another one.

Mediation

Contracts may require the parties to mediate disputes before they can arbitrate or litigate them. Mediation is essentially "marriage counseling" for business people. Unlike arbitration and litigation, mediation is a non-binding process that does not result in a "ruling" on the merits of the dispute. Rather, the parties hire a neutral party to mediate the disputes in the hopes that he or she can facilitate a settlement. The parties are best served by selecting a mediator who understands construction and has successfully mediated other disputes. Significantly, a mediator cannot force the parties settle their disputes. Likewise, mediation communications are privileged and therefore inadmissible in any later arbitration or litigation. On the other hand, parties cannot make otherwise admissible documents inadmissible by using them in mediation. If done right, mediation can be an invaluable tool and can save substantial amounts of time and money for parties with disputes and allow them to return their core businesses.

Arbitration

Commercial-construction contracts frequently require parties to resolve their disputes through arbitration. For instance, some AIA standard-form contracts require parties to arbitrate disputes before the American Arbitration Association ("AAA"). The AAA's Construction Industry Rules establish the basic rules and procedures for the arbitration that ultimately leads to a hearing before an arbitrator or panel of arbitrators who then issue an award. Additionally, arbitration statutes, including the Federal Arbitration Act (found at Title 9 U.S.C. §§ 1-16), and similar state statutes, govern arbitration proceedings on fundamental issues such as whether (a) the parties must arbitrate a dispute, (b) an arbitrator can decide a dispute, and (c) a court can confirm or deny an arbitration award.

In an AAA Arbitration, the claimant first files a Demand for Arbitration by the Claimant, which must include a copy of the contractual arbitration provision and the appropriate filing fee. The AAA then notifies the respondent and sets a deadline for the respondent to file Answer and a Counterclaim, or both. The parties select an arbitrator or arbitration panel based on the requirements for doing so in their contract, or if their contract does not identify requirements, then from a list of AAA approved arbitrators.

Arbitration may proceed faster than litigation. An average construction arbitration may have a hearing in under a year while it is uncommon for trial to occur (other than for very small disputes) within a year. Arbitration hearings also tend to be less formal than trials given that the arbitrations may not apply the same rules of evidence that apply in court. Once the arbitrators conclude the hearings and review post-hearing briefs (if required), the arbitrator(s) consider the case and issue an award. Often, the arbitrator(s) issue a simple one-line Award indicating the prevailing party and any damages. In some instances, the parties can request that the arbitrator(s) issue a reasoned award that explains why and how the decision was reached. It is extremely difficult to vacate an arbitration decision.

Summary

This post provides a basic overview of a typical disputes process. But given the fact that each contract and dispute differ and stand on their own, companies must know their duties and obligations on every project and should have an experienced construction attorney assist them in all aspects of a project from the drafting their contacts and educating their employees to project close-out. By doing so, companies give themselves the best chance to timely and cost-effectively address the inevitable disputes that arise on construction projects.

 

Found In: Construction

Did You Know . . .

Members of the SLS trial group have tried in excess of 50 jury trials and 75 bench trials?

The SLS construction group has worked on sports stadiums across the country including Orioles Park in Baltimore and Paul Brown Stadium in Cincinnati?

The SLS construction group has worked on power plant projects across the country?

In 2007 SLS was selected for an Honorable Mention as one of the Best Places To Work in Washington DC?

Ron Shapiro, Steve Schram and Judd Lifschitz have all been selected as SuperLawyers by Law and Politics?

The SLS office building is an historic townhouse constructed in the late 1800s?

SLS has been selected by Martindale-Hubbell as a Preeminent Law Firm?

SLS trial lawyers have argued appeals in the U.S. Circuit Courts of Appeal for the 4th, 5th, 9th, D.C. and Federal Circuit?

SLS trial lawyers have been lead trial counsel in cases in Arizona, California, District of Columbia, Florida, Louisiana, Maryland, New Jersey, New York, North Carolina, Oregon, Texas, and Virginia, - to name just a few?

Virtually all the cases that SLS trial lawyers mediated have been favorably settled at mediation?

The transactional group at SLS was lead counsel on one of the largest, most complex mixed-use projects in downtown Washington, DC involving 4 lenders and 6 property owners?

In appreciation for the outstanding efforts of each of its employees during 2007, SLS gave everyone (attorneys, paralegals, and staff) a 4 day/3 night expense paid trip to Key West, Florida?

The transactional group at SLS has represented tenants in more than 200 retail leases in the Mid-Atlantic region?

Every attorney in the transactional group at SLS has at least 15 years experience?

The transactional group at SLS has represented developers in the purchase, construction, financing and/or sale of more than 75 multi-family apartment projects?

The transactional group at SLS has represented real estate investors and developers with respect to property in Pennsylvania, West Virginia, Delaware, Maryland, the District of Columbia, Virginia, North Carolina, South Carolina, Georgia, Florida, Texas, Tennessee, Michigan and the U.S. Virginia Islands?

Attorneys in the transactional group at SLS have represented eight national banks in commercial real estate loans?

Attorneys in the transactional group at SLS have represented the FDIC, the Resolution Trust Corporation and several banking institutions in loan workout transactions throughout the Mid-Atlantic region?

The transactional group at SLS has represented homebuilders and commercial real estate developers in work-outs of individual loans and also for work-outs of large portfolios involving dozens of properties in several states?

The trial lawyers of SLS have numerous reported decisions to their credit?