Check the Box: Considerations for Selecting Dispute Resolution Methods in Construction Contracts

Time, cost, and quality are usually top of mind when parties are negotiating construction contracts. But, in today's increasingly litigious world, it is important for parties to consider their dispute resolution options before "checking the box."

Most parties are familiar with the AIA A201-2017's claim procedure, which includes mediation, and the AIA A102-2017's dispute resolution provisions, which allow parties to select either arbitration or litigation. This post defines four major dispute resolution options and outlines the items you should consider before checking the box during your next contract negotiation.

Four Dispute Resolution Methods

The four most common dispute resolution methods for construction claims, in ascending level of formality, are negotiation, mediation, arbitration, and litigation. These four methods are not mutually exclusive. For example, the AIA A201 and A102 assume that the parties will engage in mediation as a condition precedent to arbitration or litigation.

Negotiation is a strategic discussion between parties, with or without counsel, that aims to reach an agreement or settle a dispute. It is often assumed that parties will attempt to negotiate course of construction issues such as requests for information that give rise to changes before utilizing a contract's claim procedure. Sophisticated parties working on complex projects can benefit from including negotiation language in their construction contracts. If the parties can work together, negotiation is a fast, cost-effective way to resolve claims before they hinder a project's progress.

Mediation is a privileged negotiation between the parties with the assistance of a third-party neutral, a mediator. Parties usually participate in mediation with the assistance of counsel. Parties can engage in multiple rounds of mediation throughout the dispute resolution process. Mediation is commonly used as a fact-gathering exercise to effectuate settlement of the parties' claims after an arbitration demand or lawsuit has been filed.

Arbitration is a more formal dispute resolution method, where the parties select one or more impartial persons to serve as arbitrators to hear the parties' claims and render a reasoned decision. Arbitration is similar to litigation because the parties are able to present their case. However, depending on the contract language, the arbitrator's decision may or may not be binding. Some of the advantages of arbitration include enhanced privacy, an expedited timeline, and the ability to select decision makers who have the expertise to dissect nuanced construction issues.

Litigation is the most formal dispute resolution method. It allows the parties to discover and present their claims in court in accordance with the rules of civil procedure. The trial court's decision may be appealed. Most states have a suit limitation, meaning after filing a complaint, the case must go to trial within a time certain. As a result, a lawsuit and subsequent appeals can take up to about five years.

What to Consider

Because negotiation and mediation can be used throughout the dispute resolution timeline, the parties need to focus on whether they want to arbitrate or litigate. Some parties believe that arbitration is less expensive simply because of the expedited timeline. This is not always true. Organizations that provide mediation and arbitration services such as the American Arbitration Association and Arbitration Service of Portland Inc. have their own cost schedules that must be taken into account, on top of the parties' legal fees and costs.

If a contract favors one side over the other, the party with the upper hand may want to select litigation. For example, if a developer's claims are well supported by the parties' contract, the claims might be ripe for a quick win through litigation and dispositive motion practice. Conversely, if a developer's claims are not well supported, it may want to litigate and preserve its right to appeal the trial court's decision.

Parties should confer with their counsel and make informed decisions about their construction contracts and the impact they may have on their future construction claims. Having a thoughtful plan for how to handle claims can help prevent issues from escalating into expensive, time-consuming disputes.