Using Arbitration and Mediation in Construction Cases

Miles Mediation & Arbitration
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Miles Mediation & Arbitration

Whether it’s a custom-built home, a large housing development or a high-rise condominium or office building, legal disputes related to construction issues can be complicated. The number of primary defendants and third-party defendants alone may mean that weeks or months, not hours, are spent in discovery. To save time and money, many contracts in the construction industry contain binding arbitration clauses or stipulate a mediation first then arbitration second approach.

While homeowners are sometimes suspicious of the requirement that they settle disagreements using arbitration or mediation (or both), the reality is that arbitration — especially mediation during arbitration — can save everyone time and money. Furthermore, contrary to belief, homeowners are not at a disadvantage when they settle disputes outside of a courtroom. All parties have more control in arbitration than they do resolving disputes in court, and mediation provides the most control. Mediation can also occur between primary and third-party defendants before an arbitration starts.

This article will cover how mediation and arbitration can be used together to resolve these types of cases, and how arbitration and/or mediation is often preferable to allowing a judge and jury to decide on the outcome.

What makes construction cases so complex?

Before diving into mediation and arbitration, it’s important to understand why construction cases are byzantine in nature. The complexity of a particular dispute will depend on the type and number of claims involved. Regardless, most construction cases are complicated for several reasons:

Rules, regulations and laws –– In construction disputes, local building codes (city and/or country), state statutes, and rules regarding the standard of care and proper methods of construction are always involved.

Number of people involved –– Whether it’s a housing development or an office building, the number of potential parties involved can be greater than non-construction cases. They include, but are not limited to:

    • Developers/Builders/Owners
    • General Contractors
    • Construction Managers
    • Subcontractors
    • Design Professionals
    • Material Suppliers
    • Homeowners Associations (HOAs) owner
    • Homeowners

Types of disputes and theories of liability –– Another level of complexity in these cases involves the type of dispute and specific theories of liability.

    •  Breach of contract
    • Breach of express warranty
    • Breach of implied warranty of workmanship and habitability
    • Breach of fiduciary duty/breach of the covenants, conditions and restrictions (CC & Rs)
    • Negligence/negligence per se
    • Negligent misrepresentation/consumer fraud/fraud
    • Third-party beneficiary
    • Strict liability
    • Public/private nuisance

Furthermore, there can be third-party litigation claims on the part of the developer vs. the general contractor or a subcontractor, or a dispute between a contractor or subcontractor and a design professional, e.g., the architect. 

Are there multiple types of complaints/disputes?

In spite of the differences in laws and the number or parties involved in these cases — even in cases involving multiple complaints from multiple plaintiffs — the nature of the disputes is almost always about the same issue or issues, usually one or more construction defects. For example, in a large case in Florida, involving over 130 homes, multiple homeowners filed claims against the developer involving multiple construction issues from poor placement of a stucco on the sides of the homes to roofing deficiencies and other problems.

Like other types of liability disputes, there’s a potential for substantial verdicts in construction industry cases –– sometimes approaching $100 million or more. Added to the enormous judgements are the costs associated with taking a construction claim to trial. The expense can quickly bankrupt businesses or become prohibitive for plaintiffs to pursue and the risks are great to either side.

Why are construction cases particularly suited for a combination of mediation and arbitration?

The COVID-19 pandemic has only made matters worse for taking construction-related cases to trial. In most instances, courts across the U.S. haven’t been able to try any construction cases. However, arbitrations and mediations have continued. By making necessary adaptations, including holding arbitrations or mediating disputes over video meeting apps, such as Zoom, neutrals have carried on resolving claims despite the pandemic.

Aside from the pandemic, both mediation and arbitration contain multiple advantages over litigating construction suits in court.

Arbitration

At trial, neither party has authority over who gets to judge their case or when hearings are scheduled. With arbitration, the plaintiff and the defendants have more control over a number of factors than they do in court. Most arbitration agreements allow both parties to choose the arbitrator or arbitrators, base the schedule around everyone’s calendar and stipulate the rules of the arbitration.

Additionally, during the arbitrator appointment process, the arbitrator or arbitration panel must disclose the types of cases they’ve worked on and their decision history, etc. If either party objects to any answers and can give a valid reason, they can reject an arbitrator.

In smaller construction cases, both parties might agree to a desk arbitration where a single arbitrator rules on a claim. The lawyers send all their evidence and depositions to the appointed arbitrator, and no one appears in front of the arbitrator.  This type of arbitration saves time and money over traditional arbitration, with many disputes resolved in just a few months.

Larger construction cases usually can’t be resolved via desk arbitration and must take a more traditional approach. This type of arbitration can take months or years to resolve, particularly if there are multiple claims against the same group of defendants from multiple plaintiffs. The costs can creep up, but still are usually less than the extended time and expense involved to litigate the same cases at court.

Regardless of the type of arbitration, neither party can appeal the decision of the arbitrator once they’ve ruled on the case.

Mediation

In mediation, the neutral mediator does not decide on a case. Instead, they act as a facilitator that listens to all sides and works to help them settle their dispute. Like arbitration, all parties usually weigh in on the choice of neutral who will mediate the disagreement. In mediations, everything is confidential, and the mediator won’t share information that one side shares with the opposite side, unless they have permission to do so.

If both parties reach a mediated settlement agreement, that signed agreement cannot be appealed. However, if not, then the dispute usually goes to arbitration and sometimes to litigation, depending on what the original contracts stipulate or what the parties agree on during the course of the mediation.

Combining mediation and arbitration

Combining mediation and arbitration to resolve construction industry disputes isn’t uncommon. There are multiple instances where mediation is used in conjunction with arbitration.

  • Mediation contract clause –– Sometimes a contract requires all disputes go to mediation first, then arbitration if no resolution can be agreed on by both parties. In those situations, when mediation isn’t successful, a different neutral is chosen as arbitrator, or an arbitration panel is appointed.
  • Primary vs third-party defendant mediation –– When there are also disputes between primary and third-party defendants or disputes between subcontractors, the arbitrators will try to get them to agree to resolve those disagreements via mediation. The mediator is again a separate neutral, and the mediation is independent of the existing arbitrations going on regarding the same construction project or development.
  • Med-arb/arb-med –– Med-arb and arb-med refers to combining mediation and arbitration or arbitration then mediation together, using the same neutral as both mediator and arbitrator. The practice is more common in family-law cases and isn’t used as much in construction cases. There are some advantages to this practice, including having one person act as mediator-arbitrator, which can save time. However, it might be difficult for the same person to remain impartial when they have heard privileged information as a mediator and must then arbitrate the case and make a decision.
  • Conversion to mediation –– Sometimes during arbitration, especially on large cases, the parties can be encouraged to try mediation again. When some of the parties can settle their cases this way, the rest of the claims can move forward with arbitration. The mediator is a separate neutral, and the arbitrator or arbitration panel would only be advised that there was a mediated settlement but would not be provided with any details.

Whether a construction dispute is resolved via mediation, arbitration or a combination of both methods, all parties can save time and money by not going to court, in most cases. The number of people involved in the same construction dispute, or multiple disputes related to the same project, makes those disputes ideal candidates for mediation and/or arbitration.

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