Construction projects are not strangers to disputes. Payment disputes, workmanship disputes, scope-of-work disputes, and more can all cause projects (or parts of projects) to grind to a halt. The determination of how these disputes on a construction project will be dealt with is generally set forth by contract. Many construction contracts have tended to favor incorporating alternative dispute resolution (ADR) clauses in an attempt to provide a method for resolution outside of traditional court cases. I am a proponent of ADR clauses, and think that construction contracts are likely better off including an ADR clause for dispute – but there can be some wrinkles with ADR clauses in the construction context, and the initial out-of-pocket costs for ADR can be higher than they would be to just file suit in court (especially if small claims court could be used). Note, however, that the more complex a case or the longer it goes on, the more likely that an ADR solution will end up being cheaper.
One other cautionary note about mediation and mechanics lien deadlines: Mechanics lien deadlines are not extended by anything, ever. This includes mediation clauses. We repeat: a mediation clause cannot extend a mechanics lien deadline. Please be advised!
Benefits of ADR in Construction
Despite the potentially higher initial costs, and the issues surrounding mechanics liens, ADR can be useful in getting disputes handled efficiently. This way, the issue can be put in the past, and everybody can move on with the project or their other projects.
Some of the benefits of ADR include:
1. (Potentially) Standardized Clauses
If a construction contract contains an Alternative Dispute Resolution (ADR) provision, there’s a pretty good chance the language originally came from one of these three locations: (i) The American Institute of Architects (AIA) contract documents; (ii) The ConsensusDOCS; or (iii) The recommended provision from the American Arbitration Association (AAA). While the language can potentially be modified, a large potential benefit of these provisions is that they have been standardized and have reliable interpretations. In other words, in the case in which the provision has not been modified, the parties know what they’re getting into and can easily understand the provision and its impact.
Mediation and arbitration are private, but if you file suit in court that litigation is out there for all the word to see. While this can sometimes be a helpful lever to inducing a settlement of the dispute, there are certain circumstances in which the parties would desire privacy to the resolution of disputes related to the project.
Mediation and arbitration are generally much faster than litigating an issue in court. One big reason for this is the ability of the neutral party to avoid or smooth out procedural hiccups that could bog down litigation. Additionally, neutrals in an arbitration or mediation are generally able to give more “personalized” attention to each dispute, which can lead to a faster outcome.
In many cases, the neutral party to the arbitration or mediation can be a subject matter expert, someone who has dealt with the particular disputes at issue many times before. In a court of law, the judge you end up before is a crapshoot, and the jury (if the case is tried before a jury) is likely not going to be experts in construction or any of the potential issues surrounding construction. The ability to have the resolution of the issue guided by a party that actually knows what s/he is talking about can be huge.
Since ADR is a creature of contract, the parties must agree in the contract prior to work that ADR of some specific form will govern the disputes thereunder, and generally waive their right to litigate a dispute in court. Many of the standardized ADR clauses are widely-used in standard construction contract documents throughout the industry. Thus, it is usually pretty easy for a company to know what they are getting into by accepting an ADR clause. Further, as compared to traditional litigation, there are numerous benefits to ADR for construction disputes. Finally, though, with any type of construction dispute resolution – whether ADR or litigation – the parties must pay careful attention to how lien rights may be affected.