The Mediation of Construction Disputes and Win-Win Solutions

In the Dark Ages (that is, 30 years ago) litigation was the preferred method for resolving construction disputes that the parties themselves could not resolve — an expensive and drawn-out process. In the Age of Enlightenment (today), litigation is fast being replaced by mediation and, in some cases, arbitration.

This article explains why litigation has fallen out of favour and identifies the benefits of this paradigm shift in preference to alternative processes, specifically to mediation, for resolving construction disputes. It also provides an overview of the mediation process and how its benefits can be realized efficiently and cost-effectively.

Given the high costs, complexity and delays in fully litigating construction disputes, often mediation — a structured negotiation between the parties to such disputes facilitated by a neutral person — is the only practical method for resolving them.

Most contracts for design and construction services incorporate dispute resolution procedures that provide for mediation. The advantages of such an approach are self-evident: In mediation, the parties themselves engage in finding their own solutions — sometimes creative ones — rather than gamble on the uncertainties of a “winner-take-all” adjudication imposed by the courts. The benefits of mediation include:

• general efficiency and process control by the parties
• privacy and confidentiality
• enhanced control over costs and results
• the preservation of relationships
• the effective use of the expertise of neutral persons in assisting the parties find their own settlements.

Anyone familiar with commercial litigation knows that court procedures are cumbersome, and that compliance with them can be disproportionately expensive when compared with the amounts in dispute. Too often litigants end up exhausted and concerned with the time and expense of the trial process.

In fact, the costs associated with trials actually limit the access that construction industry participants and owners have to the courts and to justice. Voltaire summed up his experiences with the costs of litigation: “I was never ruined but twice—once when I lost a lawsuit and once when I won one.”

Why is mediation less costly than litigation? Simply, it focuses on finding solutions, not merely “winning”. To gain the advantages it offers, there are a number of things that are useful to know about it, and how to implement them in the mediation process. To begin with, you should first know whether a particular construction dispute is ready for mediating.

Construction claims are largely fact-based. Without an investigation and understanding of the facts underlying the dispute, a realistic assessment of the strengths and weaknesses of a party’s position in the dispute cannot usually be made. It is only when the factual framework of the dispute is sufficiently understood that construction mediation should be considered.

The dispute has to be “ripe” for informed negotiations to occur. When that stage is reached, and the parties are informed of the legal landscape for the dispute, the decision to mediate should be taken. That decision triggers the next step—picking the mediator.

Selecting the Right Mediator

Selecting the right mediator for a particular dispute is extremely important. Although there are exceptions, it is generally the case that the parties involved prefer a mediator with knowledge in construction and construction law. A mediator with subject matter expertise will be able to identify underlying issues and ask probing questions to assist the parties and their lawyers focus on the routes and impediments to settlement. Such a mediator is equipped to recognize the issues in disputes and assist the parties realistically assess their positions and underlying interests in order to effectively negotiate a durable settlement.

A construction mediator should be able to appreciate the technical and contractual issues engaged by the dispute and to actively assist the parties in understanding the strengths and weaknesses of their competing negotiation positions and the underlying human dynamics in play during negotiations. A knowledgeable construction mediator can usually impress upon the parties the importance of doing “reality checks” of their positions and underlying interests.

Mediation is a voluntary process in which the mediator assists the parties make their own decisions on whether to settle and on what terms. The mediator is not a “judge” or arbitrator and does not impose settlements or binding decisions upon the parties. Also, the mediator does not take sides, or show favour or bias to a party. He or she acts throughout as an impartial “neutral”. Nor does a mediator selected for subject matter expertise ignore the factual and legal framework within which the dispute and the interests of the parties should find resolution, either by the parties or, failing that, through a decision imposed upon them by a court or an arbitrator.

Mediators have different styles and approaches. An “evaluative” mediator is someone who, with the parties’ consent, will act as a “devil’s advocate” in private caucuses, tactfully encouraging the parties to realistically assess the strength and weaknesses of their respective bargaining positions.

In many instances a construction mediator selected for their subject matter knowledge will be invited by the parties to use an “evaluative” approach in the negotiation process in which the mediator may selectively:

• offer an assessment of the apparent strengths and weaknesses of positions advanced by the parties during the negotiations
• suggest possible approaches and even make “mediator proposals” for settling the dispute
• offer predictions as to possible outcomes should settlement not be achieved and the dispute is decided by a court or arbitrator.

Alternatively, the parties may select a mediator who adopts a “facilitative” model in which the role taken by the mediator is non-evaluative and is directed more to the process of negotiation. In adopting this model, the mediator may suggest that the parties remain together, rather that be separated in separate caucus rooms, and that they negotiate face-to-face with procedural guidance of the mediator. Here, the facilitative mediator will not offer an evaluation of the strength or weaknesses of the positions taken in the negotiations of the parties.

A facilitative model might be preferable to the parties when better communication between the parties is required and encouraged; one party is more informed of the underlying facts than the other; non-monetary solutions are important to a settlement; and it is important to maintain or improve an ongoing relationship between the parties (for example, when the project has not yet completed and the parties must still interact to attain common goals).

Sometimes the mediator will start with a facilitative method, only moving toward an evaluative model, if necessary, to assist the parties in later negotiation stages move beyond impasses.

During the pre-mediation conference, it is important for the parties to actively discuss with the mediator what role they wish her or him to take, and what model they think stands the best opportunity for compromise and settlement.

Whichever approach the parties wish the mediator to adopt, they will share an interest in selecting a knowledgeable construction mediator willing and able to “roll up their sleeves”, one who is helpful, persistent, flexible and energetic in assisting them reach the goal of settlement. But even if the dispute remains unsettled at the end of the formal  mediation, it is not unusual for the mediator to agree to stay involved should the parties wish further assistance in resolving the dispute.

The Mediation Process

Throughout the mediation, representatives of the parties with authority to negotiate a binding settlement and their respective lawyers and, sometimes, insurance adjusters and their representatives, are present. At a minimum the party’s or insurer’s decision-maker should attend, or be available by phone or e-mail throughout the mediation process.

At the start of the formal mediation, the mediator may convene a joint meeting or separate meetings with the individual parties and their counsel to explain the process and the mediator’s role. At the outset, a written Mediation Agreement is normally presented by the mediator, which is signed by all persons attending the mediation. The Agreement typically sets out:

• the role of the mediator as a neutral who does not provide legal advice to the parties
• the signatories’ agreement to confidentiality throughout the process
• acknowledgment that the mediation proceedings are “without prejudice”
• the granting of immunity of the mediator from legal compulsion to disclose in any subsequent proceedings, legal or  otherwise, what was said and done during mediation.

These points of agreement are designed to encourage full, candid exchanges between participants without concern that their statements could be used against them or will bind them to any position in later proceedings.

Typically in construction mediations, the parties agree to move directly to separate caucus rooms following a brief joint session in which the mediators explain the process and their role. If the parties wish, they or their counsel may make opening statements in the initial joint meeting, although this is not usually done when, as has become the norm in construction mediations, written Mediation Summaries or briefs have been exchanged between the parties in advance of the formal mediation. These documents serve to inform the parties of the positions and “facts” asserted by the parties, out of which the issues and points of disputes are communicated between them and for the benefit of the mediator.

After the joint session and introductory remarks by the mediator and, if the parties wish, brief introductory remarks by them or their lawyers, the parties with their respective legal counsel will move to separate caucus rooms, either individually or in select groups. The mediator will then engage in the process of “shuttling” back and forth between the caucus rooms and separate meetings with the parties, carrying offers and counteroffers back and forth between them. In effect, the mediator becomes the point of contact between the parties.

If this procedure is used, apart from the introductory joint presentation by the mediator, the parties themselves may not meet at all throughout the balance of the process.

This “shuttle” process is most commonly used in construction mediations of litigated cases. The process remains flexible, however, and the mediator may recommend that the parties or their lawyers leave their individual caucus rooms and meet jointly at different stages of the mediation process if deemed desirable.

The parties should work with the mediator and look for solutions as negotiations proceed, keeping in mind that persuading the mediator to one side or the other is not generally a productive use of mediation time.

The negotiation process is directed at the other side to the dispute. The messages that the mediator carries between them comprise substantive offers and responses to offers as well as the “metadata” of negotiations — subtle messages as to where one side might go as the exchanges of serial offers unfold. An experienced mediator can assist the parties interpret these messages in a constructive manner.

There will be times during negotiations where it appears that one or the other of the parties is unreasonable and intransigent, and that settlement is impossible, but it is not unusual to see the start of “real” bargaining in the late stages, and the achievement of a settlement which earlier appeared out of reach. It is to be expected that the negotiation process will not be wholly predictable and have bumps, disappointments and impasses.

Advising the mediator in caucus of recognized weaknesses or areas of probable compromise in a party’s position allows the mediator to meaningfully assist in bringing the parties together. There are different approaches to regulating what the mediator may repeat to adverse parties during the mediation. If a party wishes the mediator not to disclose certain things communicated by it in a caucus setting, it may advise the mediator accordingly. If the parties agree on an “evaluative” role for the mediator, during negotiations they may ask the mediator for the following:

• input on how and when to present an offer
• what the mediator’s view of the offer is
• what the expected response to an offer should or may be.

It is not unusual in multi-party mediations for one or more parties to want their offers to contribute to a global settlement to remain confidential and not be disclosed to other parties. The mediator will then aggregate the offers and not disclose to any other parties the amount that an individual party has offered.

Not all mediations end in a settlement, but the majority do. Sometimes some, but not all, parties to a multi-party dispute will agree to settle with one another. In such cases, special arrangements are typically made by the parties to prevent the settling party from being brought back into the global dispute by a non-settling party. Their lawyers are generally well aware of these tools. In these instances, care should be taken to ensure that the settlement terms are unambiguous and can be implemented, and that the settlement is a durable one.

At the conclusion of a successful mediation, the parties’ lawyers will typically record the terms of the settlement in a short form agreement, which is signed by the parties. These written agreements may, and usually are, followed up by more comprehensive agreements containing releases, confidentiality terms and provisions relating to the termination of all formal legal proceedings.

The timely and effective use of mediation in resolving construction disputes is now standard business practice throughout the architectural, engineering and construction sectors. Skilled construction mediators with subject matter knowledge as well as experienced construction lawyers have a key role to play in optimizing the potential benefits of mediation, and providing value-added service to owners and industry stakeholders.

For more information on resolving construction disputes through mediation and integrated dispute resolution processes, please contact Derek.