WHAT SMALL AND EMERGING

CONTRACTORS NEED TO KNOW

UNDERSTANDING DISPUTE
RESOLUTION OPTIONS IN THE
CONSTRUCTION INDUSTRY

© COPYRIGHT 2017 NASBP

Dispute Resolution in the Construction Industry

Disputes and claims are common in the construction
industry.

There are a number of methods to resolve such disputes.
Dispute resolution can be costly in terms of time, emotional

energy, business relationships, and finances.

It is critical to the health of your construction firm that you
understand dispute resolution options.

This presentation focuses on the four most common
methods of dispute resolution in the construction industry:
litigation, negotiation, mediation, and arbitration.

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Selecting and Negotiating Dispute
Resolution Methods
 The best time to select dispute resolution methods is
during contract formation.
 Sometimes the dispute resolution procedure is developed
and agreed to later by the parties.
 Standard form construction contracts have dispute
resolution provisions, some of which allow for election of
methods (by checking a box).
 Sometimes contracts provide for several steps the parties
must take before the final dispute resolution method
(typically, litigation or arbitration) is commenced.
 These provisions can be modified by revising the
contracts before signing.

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Selecting and Negotiating Dispute Resolution
Methods (cont.)
 Always review and, if necessary, negotiate the
dispute resolution provision in contracts before
signing.
 When acting as a subcontractor or supplier, you
may be bound to a dispute resolution method in
the prime contract; therefore, always review the
prime contract provisions.
 Your bond producer can help you spot dispute
resolution issues in your contracts.
 Your construction attorney can advise you on and
negotiate the provisions in your contracts.
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Selecting and Negotiating Dispute Resolution
Methods (cont.)
 When agreeing to a dispute resolution process,
whether in the contract negotiation or after the
dispute has arisen, you must weigh the benefits
and limitations of each available dispute
resolution method.
 All alternative methods of dispute resolution are
voluntary and must be agreed to by all parties.
 They are, therefore, often more successful
methods of resolving a dispute in a timely and
cost-effective manner.

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Four Primary Dispute Resolution Options in the
Construction Industry
Litigation—traditional method of formally resolving a
dispute through the court system, beginning with the
filing of a lawsuit in a state or federal court and
continuing the process until the court enters
judgment in favor of one party (or the parties
withdraw the lawsuit).
Alternative Dispute Resolution (ADR)—any method
of resolving disputes other than by litigation:
Negotiation
Mediation
Arbitration

6
 Litigation
Some parties insist upon their “day in court.”
Parties are represented by attorneys.
Common for construction cases to involve multiple parties
Parties lose autonomy to shape their resolution.
Virtually unlimited discovery rights (document requests,
interrogatories, requests for admission, depositions, expert
reports and depositions) and robust motions practice
Outcome is difficult to predict.
Judges and jurors, who often do not have expertise in the
construction industry, shape the decision.
Legal remedies are available but less creativity is involved in
resolution than with ADR.

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 Litigation (cont.)
Very expensive in terms of costs, especially costs associated
with exchanging information (in this era of emails and
electronic documents)
Requires lots of time from both attorneys and project personnel
and representative principals of the firm.
Usually highly adversarial
Business relationships are seldom salvaged.
Even after a lawsuit is filed, parties can try to resolve the
dispute using ADR methods, any time before a judgment is
entered by the court.
Broad rights of appeal from an adverse judgment.
Litigation documents are made public.

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Key ADR Methods Developed to Address Criticisms
of Litigation
Negotiation
Mediation
Arbitration

These ADR methods are listed generally in order of

increasing cost to reach resolution, formality of the
process, degree of hostility between the parties, and
extent that a third party imposes a decision on the parties.
Standard form industry contracts often require the parties
to attempt mediation before resorting to either litigation or
arbitration.

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Negotiation
Parties try to negotiate resolution of the dispute.
Least adversarial method of dispute resolution.
Focus is on problem solving and reaching a
satisfactory agreement.
Negotiations are usually unassisted by a third party.
Parties typically are not represented by counsel, as
presence of attorneys can raise the level of
adversarial behavior.
Very low cost and typically not time-consuming
Voluntary process, with the parties controlling the
outcome
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 Negotiation (cont.)
Resolution is by voluntary agreement of the parties.
Parties are free to fashion any solution that might not be
available to a court or arbitrator.
Parties can often maintain a continuing business
relationship during and after the negotiation.
The resolution can be confidential.
Successful negotiations depend on the parties
understanding the issues in dispute and in approaching
the negotiation with an open mind and good faith desire to
resolve the issues in dispute.
A party representative who has authority to settle and enter
into a binding resolution should participate.
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 Mediation
Non-binding ADR where disputing parties use a neutral
third party, a mediator, to help them reach a settlement.
Parties can select a mediator, who should have expertise
in the construction industry.
Mediator does not act as a judge but “referees” a
settlement between the parties.
Low cost and less time-consuming than litigation and
arbitration (no discovery, motions, or depositions)
Parties may select procedures for disclosure of positions
and evidence.
The disputing parties control the outcome and fashion
their own solutions to the dispute.
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 Mediation (cont.)
Most mediations involve a one- or two-day session, which
may or may not result in settlement.
The settlement agreement between the parties should be
made into an enforceable, written contract.
Parties often maintain a continuing business relationship
during and after mediation.
Resolution is usually confidential and is written into the
settlement agreement.
Success often occurs when parties enter the process with a
good faith intention to attempt to settle the disputes.
A party representative who has authority to settle and enter
into a binding resolution should participate.
Generally, parties should be represented by an attorney.
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 Arbitration
Can be less expensive and time-consuming than litigation
but . . .
In worst case, can also be as expensive and time-
consuming as litigation
Resolution occurs through the issuance of an “award” by
a single arbitrator or arbitration panel (3 arbitrators).
Parties can select the arbitrator(s), who should have
construction expertise.
Arbitrator(s) decides the outcome after a hearing, lasting
one day to many weeks.
More structured than negotiation and mediation
Quasi-judicial in nature but more flexible than litigation.
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Arbitration (cont.)
Parties may, within limits, select certain
procedures and the schedule.
Discovery rights depend on the rules selected and
arbitrator discretion.
The “award” is final and binding; grounds to
appeal the award are extremely limited (such as
bias or fraud).
Proceeding is usually confidential.
Arbitration is highly adversarial.
Parties should be represented by an attorney.
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How is the ADR Process Administered?
The ADR process may be administered by individuals who
serve as mediators and arbitrators or by various
organizations whose function it is to administer and manage
ADR cases.
The American Arbitration Association (AAA) is a well-
respected organization that provides such administrative
services, including assisting in appointment of mediators
and arbitrators, setting hearings, and providing users with
information on dispute resolution options.
AAA is named as a provider of mediation and arbitration
services in construction industry standard form contracts.
AAA maintains a national list of ADR neutrals with a broad
range of construction and surety industry experience.
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Key Points to Consider About Dispute Resolution
Options
Is the option mandatory or voluntary?
What is the financial cost of the option?
What is my time commitment?
What is the time period to conclude?
Do I have the right to select the decision-maker?
What rules and procedures will be imposed on me or will I be able to
select?
Will I have any control over the outcome or will it be imposed on me?
Is it advisable to use my construction attorney?
Is the result final and binding or appealable?
How adversarial is the option: is the option likely to allow me to
maintain the business relationship?
Will the final resolution be confidential?

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 suretylearn.org
provides valuable resources and
information on growing your small
construction business and on positioning
your business to qualify for surety
credit.