January  17, 1997

Bulletin # 12: Dispute Resolution

Acme Sheet Metal knew that it had picked the wrong job. From the beginning of the shopping center project, Acme had been bombarded with schedule disruptions and demands that its work be modified without compensation. An unclear definition of the scope of the work led to constant head-knocking with the general contractor over responsibility for controls, wall penetrations, and smoke dampering. Requests for written change orders and price adjustments were routinely rejected and the subcontractor was ordered to act on the basis of oral field directives. Progress payments were late and several subcontractors walked off the job. Disputes and claims were rising faster than the building. The subcontractor complained about its treatment on the job, but submitted formal, written claims only as the work neared its end. It was clear to Acme management that some serious battles were ahead. Acme pulled its subcontract out of the drawer and attempted to assess how the battles would be fought and what the likely outcome would be.

While this scenario is somewhat of a worst case, disputes and claims are more frequent in construction than in almost any other industry. Therefore, having an effective dispute resolution mechanism in place going into a project is critical to all parties.

Based upon years of experience with disputes, the construction industry has moved toward arbitration-based dispute resolution. Arbitration clauses are included in substantially all standard construction contracts, including the AIA and AGC contract and subcontract forms. Some modern contracts also include several tiers of dispute resolution procedures with the objective of resolving conflicts as early as possible.

For example, the AIA construction contracts require a contractor or subcontractor to refer its claims initially to the architect. A decision by the architect is generally a pre-condition to arbitration or litigation of the subcontractors claim, so long as the architect renders a timely decision (although no such pre-condition applies to mechanic’s lien claims). The architect’s decision is binding on the parties, unless one of the parties resorts to arbitration.

The AIA contracts also require that the claim be made within twenty-one days after the occurrence of the event giving rise to it. This prevents a party from "hiding in the weeds" and accruing a series of claims without the knowledge of other parties.

The AGC standard subcontract forms do not place the architect in a decision-making role, but instead require that the subcontractor give the contractor written notice of all claims. The notice must be given within five days of the occurrence of the event for which the claim is made. If the parties cannot agree on resolution of the claim, the matter may be submitted to arbitration by either party.

The AGC subcontracts also suggest (but do not require) that the parties attempt to settle their disputes through direct discussions before resorting to arbitration — if such discussions are not successful, the parties may then attempt to settle through the use of mediation (negotiations with the aid of an impartial mediator). The time limits for arbitration are extended to permit pursuit of the mediation. The mediation will lead either to a settlement of the dispute or an arbitration proceeding.

Assuming that negotiations and/or mediation have been unsuccessful, the arbitration process is commenced. It is generally perceived that arbitration is less expensive and produces results more quickly than going to court. It also allows the parties flexibility in choosing the panel of arbitrators and there is a much greater likelihood that the arbitrators will have expertise as to construction matters.

Arbitration also offers a greater likelihood of preserving confidentiality as to the dispute. Each side has the opportunity to present its case and the arbitration decision is non-appealable, except in very narrow circumstances. The arbitration ruling can be enforced through use of the courts (i.e. obtaining a payment from the general contractor that is ordered by the arbitrator). As with civil litigation, careful preparation of an arbitration case and documentation of the claim is essential to maximizing the likelihood of a successful outcome.

While arbitration is favored in the construction industry, it also is sometimes criticized. A party’s ability to force the other side to produce documents and pre-hearing testimony may be much more limited. Many arbitration panels do not issue detailed findings describing the basis for their ruling. There is also a sense that arbitrators tend to "split the baby," as opposed to ruling decisively for one party or the other. Therefore, evaluating the availability, costs, and benefits of a potential court action, as an alternative to arbitration, should be part of the planning for pursuit of a claim.

In the case of Acme Sheet Metal, the general contractor, other subcontractors, and Acme got nowhere in negotiations and the general contractor raised a number of new issues in the mediation, derailing that process.

It also claimed that Acme had waived a number of its claims by failure to deliver timely notice and accepting final payment for certain aspects of the job without written protest.

The parties ended up selecting a panel of three arbitrators and proceeded to arbitration under the Construction Industry Arbitration Rules of the American Arbitration Association. The panel of arbitrators included a retired contractor, a construction industry attorney, and an engineer. Each side presented its case and the arbitrators issued a one-page ruling disallowing certain Acme claims for failure to provide notice as required by the subcontract and ordering the general contractor to pay 70 percent of the remainder of Acme’s claims. When the general contractor still refused to pay, Acme filed a court action, had the arbitration award immediately affirmed by the court, and collected its court judgment from the general contractor’s bank.

The keys to success in resolving construction disputes are similar to the keys to success in performing a job. The subcontractor has to be familiar with the procedures in the subcontract for asserting claims. The proper notices must be delivered to the correct party within the deadlines. Documentation of each claim and its basis, as well as the notices, must be retained by the subcontractor for later use. If a decision by the architect is required as a pre-condition to arbitration, the subcontractor must follow that process carefully or the claims may later be barred. If the disputes cannot be settled otherwise, the subcontractor must decide whether the subcontract absolutely requires arbitration or affords the option of civil litigation and must choose the approach it will take.

The subcontractor should work closely with its legal counsel in documenting the claims, preparing for mediation, arbitration, or litigation, and in presenting its case. Everyone has heard of cases "thrown out on a technicality" and that is a real risk if the subcontractor is not careful in its handling of claims. However, a well-handled and valid claim should generally produce a favorable outcome for the subcontractor.


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