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Using Mediation to Resolve Construction Disputes and Adjusting for Pandemic Impacts

March 06, 2022 (17 min read)


1. What is mediation and how does it differ from litigation and arbitration?

Mediation is a private dispute resolution process in which the disputing parties work with a mediator to negotiate a settlement to their dispute. The mediator is a neutral party who has no vested interest in the outcome and is trained to facilitate a settlement between the parties. In addition, for construction disputes, the mediator usually has experience in the construction industry.

A mediator cannot bind the parties to any outcome. In mediation, the parties are the decision makers and only they can reach a mutually satisfactory agreement and find solutions that facilitate the resolution of a dispute regarding a completed project or a dispute regarding completion of a project still under construction, while preserving relationships for future construction projects. This contrasts with litigation and arbitration, where control of the dispute is relinquished to a court or arbitrator that has no interest in facilitating timely completion of a project or preserving relationships.

2. Mediations are traditionally conducted in person. Given the frequent social distancing requirements, how are mediations being conducted during the COVID-19 pandemic?

Mediations continue to be held during the pandemic using video conferencing technology, which allows the parties, their counsel, and the mediator to individually participate from the safety of their home or office. Zoom video conferencing appears to be the most prevalent and widely accepted video conference system. In particular, Zoom’s breakout room feature allows the mediator to assign each party and its counsel to a private breakout room, which acts like a separate conference room in an in-person mediation. The mediator can then move back and forth between each party’s breakout room to have a private caucus with the parties. When the mediator leaves a breakout room, a party and its counsel remain in the breakout room and can have confidential conversations among themselves. Upon reaching a point in the mediation when the parties have to draft the settlement agreement, the mediator can close the breakout rooms, resulting in a joint session with the parties, counsel, and the mediator all appearing on the video screen. As with an in-person mediation, the mediator can decide to start the mediation with a full joint session, abbreviated joint session, or immediately go to private caucuses.

3. Do you think that after the COVID-19 pandemic abates, mediations will return to being held largely in person or that some parties will continue to conduct their mediations remotely? Do you see any downside to conducting mediation remotely?

Some mediators and attorneys prefer in-person mediations. They think it is more effective when the parties are face to face. However, I believe a mediator who is skilled in managing video conference technology can conduct an effective and successful mediation. Also, if the parties and counsel are in different states or cities, the avoidance of travel is one less hurdle to overcome if the mediation is held by video. Lastly, for the more complicated disputes, which may require multiple mediation sessions, it may be helpful and economical to have the early mediation sessions by video conference and the later mediation sessions held in person. The initial mediation sessions may involve the trading of information between the parties under the guidance of the mediator, and the later mediation sessions would involve the trading of settlement offers and be in person. In summary, I think remote mediations will continue to be an effective tool to get the parties together to talk. I do not see any downside to conducting mediations remotely other than a party or counsel preferring an in-person mediation. Since you want to make both parties comfortable during the mediation, in that instance I would have the mediation in person.

4. Why is mediation so prevalent in the construction industry, and when does mediation take place in a construction dispute?

Disputes among owners, contractors, and subcontractors are very common on construction projects and a construction dispute can be mediated while litigation or arbitration is ongoing or while the project is still being constructed. As the construction industry has looked for ways to avoid or minimize disputes and the financial and time costs arising from litigation and arbitration, it has found mediation to be a very effective process for the resolution of these disputes.

Some construction projects take years to complete, and involve layers of contractors and subcontractors, and hundreds, if not thousands, of workers. Efficient conflict resolution is important in the construction industry because of the importance of maintaining the relationships between all those entities and people who must continue to work with each other on a project that may be midstream in its schedule when conflicts arise. In addition to maintaining a good relationship on a project under construction, the parties want to maintain their relationship for future projects.

Mediation is also faster and less expensive than litigation or arbitration. Mediation sessions usually take no more than a day or two, compared to a court trial or arbitration hearing that can take weeks. Mediations can be scheduled as soon as the parties are ready, while arbitration hearings and court trials often take years to be scheduled. This time advantage is particularly important when the mediation takes place while a project is still under construction, because resolution of disputes clears the way for more cooperation between the project participants.

5. Are there other reasons why construction disputes are frequently mediated?

Recognizing the effectiveness of mediation in resolving construction disputes, many construction industry standard contracts require that the parties make a good faith attempt to settle their dispute through mediation prior to instituting litigation or arbitration.1

Some of the organizations that administer arbitrations have rules that require or encourage the use of mediation while the arbitration proceedings continue.2 In addition, it is common for courts handling construction disputes to refer a case to court-administered mediation programs since many judges find the complexities of construction disputes amenable to mediation.

Notwithstanding its benefits, mediation is only effective if both parties want to settle the dispute. If one of the parties is only participating in the mediation because of contractual requirements, arbitration, or court rules and is not interested in settling the dispute, mediation will not be effective.

6. What kinds of construction disputes are most frequently mediated?

In my experience, the kinds of construction disputes that are most frequently mediated include:

  • Contractor’s or subcontractor’s defective work
  • Architect’s defective plans and specifications
  • Delays in project completion
  • Payment issues
  • Changes to the scope of work
  • Differing site conditions
  • Property damage to the project
  • Disputes arising from termination of a contractor or subcontractor

However, this list is not exhaustive.

7. How does the mediation process work?

After the parties agree on a mediator, a pre-mediation conference call is held by the mediator and counsel for all the parties. The mediator and the parties set a date for the mediation and the mediator will request that each party submit to the mediator a confidential pre-mediation statement. The mediator and counsel also discuss who should attend the mediation.

Usually, at the beginning of the mediation, the mediator conducts a joint session with all the parties present. During this joint session, the mediator will introduce the parties and their counsel and explain the mediation process, including the purpose of joint sessions and private caucuses. The mediator will also discuss the confidential nature of the mediation process and explain that any information given during a private caucus will not be disclosed to the other party without permission.

Next, the mediator asks each party to make a presentation to the mediator and the other party to the dispute. The presentation is usually made by counsel. Sometimes a party will make its own presentation in addition to the one made by its counsel. Venting by a party during opening statements is not unusual in construction mediation. This gives the parties their day in court.

Based upon approach and style, some mediators do not hold an initial joint session with the parties and start the mediation with private caucuses only. Such mediators hold joint sessions only when the parties are close to a settlement. However, most mediators believe the ability of the parties to talk to each other and express their positions early in the mediation is important. Also, if the parties are hostile to each other, the mediator may eliminate the joint session and start the mediation with private caucuses. This is particularly true when animosity is so high and tempers are flaring that joint sessions will not work. Also, if the parties are hostile to each other, the mediator may eliminate the joint session and start the mediation with private caucuses.

If the mediator holds a joint session, the mediator will next conduct private caucuses. When conducting private caucuses, the mediator meets and discusses the case with each party in separate conference rooms. The mediator exchanges information and proposals that he or she has received from the other party, with the ultimate goal of narrowing the differences in proposals and ultimately reaching settlement of the dispute.

8. Is the mediation process private and is any settlement arising from the mediation private?

In general, mediations are private and confidential and (unless the parties agree otherwise) everything discussed during the mediation and any settlement offers that are exchanged cannot be used in court or in an arbitration if the parties do not settle their dispute. Since mediation is a facilitated settlement negotiation between the parties, mediation is covered by court evidentiary rules protecting communications between parties regarding settlement.

At the beginning of the mediation, the parties typically sign a confidentiality agreement. If the mediation is conducted pursuant to a court-sponsored mediation program, it is likely that the court’s rules will require execution of a confidentiality agreement, and the mediator will not be permitted to discuss the mediation with the court. The only communication the mediator may have with the court is to advise the court if the case was settled or not.

In addition, if the parties settle their dispute, they can write a confidentiality clause into the settlement agreement. 

In contrast, court decisions resolving construction disputes are public. This is particularly important to an owner of a project who makes a payment to a contractor and does not want to appear to be an easy target for other contractors on future projects. Similarly, a contractor making a settlement payment to a subcontractor does not want to appear to be an easy target for other subcontractors it frequently hires.

9. What is the difference between a facilitative mediator and an evaluative mediator? Which type is better suited for a construction dispute?

All mediators in construction disputes are trained to facilitate a settlement and help the parties reach a mutually satisfactory resolution. However, in many instances the mediator must take an evaluative approach, particularly when a party has an unreasonable interpretation of the facts or unrealistic expectations about a settlement outcome. The mediator needs to provide his or her opinion about the strengths or weaknesses of a party’s case and legal arguments if the case is going to be settled. The mediator’s opinion helps to manage that party’s expectations about the outcome if the case is tried or arbitrated and can also help the party to understand what a reasonable and feasible settlement might look like.

Because of the complexities of construction disputes and the importance of understanding how construction projects work, I recommend that parties to a construction dispute retain an evaluative mediator who has a reputation of offering useful assessments of the parties’ cases and can help develop realistic settlement proposals between the parties. For a mediator to take such an evaluative approach to mediating a construction dispute, the mediator should be knowledgeable of the construction industry. Without this frame of reference, I believe the mediator will not be able to properly evaluate the facts and suggest constructive solutions.

10. How is the mediator selected in a construction dispute?

If the parties choose to mediate a dispute that is not in litigation or arbitration, the parties’ attorneys will usually suggest mediators that they have used before and who are experienced in the construction industry. Also, the American Arbitration Association, JAMS, and other dispute resolution entities maintain lists of mediators that have experience mediating construction disputes.

Courts have embraced mediation to reduce their backlog of cases. Many courts have mediation programs with a roster of trained and experienced mediators that are available to parties. The court employee responsible for administering the mediation program will assign the case to a mediator from the court’s mediation panel who has expertise in construction disputes.

If the parties do not want to use the court-appointed mediator, they may use a mediator not affiliated with the court’s mediation program. However, one advantage of using a court-appointed mediator is that, depending on the court’s rules, the mediator may provide the first few hours of his mediation services for free and the mediator’s hourly rate is often less than what a mediator might be paid outside the court’s program.

11. What traits should a mediator for a construction dispute have?

In addition to being knowledgeable of the construction industry, I believe a mediator must have traits that are important for all kinds of disputes, such as:

  • The ability to listen
  • Impartiality
  • The ability to explore solutions
  • Flexibility
  • Persuasiveness
  • Patience
  • The ability to explore and explain complex issues
  • The ability to manage parties and their emotions
  • Comfort with evaluating and discussing the parties’ positions in caucus

12. Who should attend the mediation?

Counsel and a representative of the parties who is familiar with the facts in dispute and has full settlement authority should attend the mediation. Sometimes this requires a party to send two or more employees to the mediation, including project managers, project schedulers, accountants, and possibly experts who will not be testifying if the dispute is tried or arbitrated.

13. Should experts attend the mediation?

Experts that a party intends to use as testifying expert witnesses should not attend the mediation or review the other party’s mediation statement. Courts have precluded experts from testifying at trial and stricken their expert reports on the grounds that such experts participated in the confidential mediation process and that the information provided by the other party during the mediation may inadvertently be used during the expert’s testimony or in the expert’s report. To allow the expert to testify or their reports to be entered into evidence could prejudice a party who made a disclosure during the confidential mediation process.

14. What should a mediation statement contain?

In cases that I mediate, I request the parties to provide me with a memorandum that sets forth their understanding of the facts and what they believe is not in dispute. The memorandum should also state the party’s position on liability and damages and how the case might be settled including at what dollar amount. This memorandum is confidential and is only for the mediator. It is not exchanged with the parties or the court or arbitrator. I usually ask that the memorandum not exceed 10 pages and that it be provided to me no later than 10 days before the scheduled mediation date. Of course, depending on the nature of the case, these limitations may vary.

15. Does mediation reduce or eliminate discovery?

Mediation will not eliminate discovery if a dispute is in litigation or arbitration, but it will reduce discovery. Limited discovery is needed for the parties to have a full grasp of the facts surrounding the dispute so they can better assess their vulnerability or chances of success in court or in an arbitration. In addition, with some discovery, the parties are better able to assess and clarify their positions and possibly will be more inclined to settle their case at the mediation. Court-sponsored mediation programs often have rules allowing the mediator to suggest that some limited discovery and exchange of documents occur prior to the first mediation session, to allow the parties to assess their positions better. Therefore, I recommend that parties exchange project documentation before the mediation of a construction dispute.

The mediation’s timing is crucial because if the mediation is scheduled too early in the dispute process, the parties may not have sufficient information to make a good business decision. However, waiting too long to mediate can result in entrenched positions making a dispute difficult to settle.

16. By agreeing to limited discovery before the mediation, am I allowing a fishing expedition by my adversary?

No. Court rules allow liberal discovery. Anything that you would produce in a mediation would be provided under a court’s discovery rules anyway.

17. How should an attorney prepare for a mediation of a construction dispute?

An attorney should prepare for the mediation and not just show up. Each attorney should be fully familiar with the facts in dispute and should bring any documents that may support a client’s position. Such preparation does not have to be as thorough and time consuming as preparation for a trial or arbitration hearing but should be sufficient to explain the client’s position to the mediator and the other party and have a meaningful discussion.

18. How does an attorney prepare his client for the mediation of its construction dispute?

Managing a client’s expectations is an important part of preparing a client for mediation of a construction dispute. Experienced participants on construction projects are familiar with the inflammatory posturing and venting often taken by owners, contractors, and subcontractors during the course of a project. It is not unusual for such posturing to take place during a mediation. Particularly at the beginning of mediation, it is not unusual for a party to make an extreme offer to or demand of the other party. This posturing can also take the form of venting by the parties, despite efforts by the mediator to control it. An attorney should prepare the client for these possibilities and explain that extreme early offers and demands and venting are just part of the mediation process and do not mean the dispute will not settle later that day or the next day. It is not unusual for a party to storm out of a mediation session after hours of frustrating negotiations and claim that the other party is not negotiating in good faith. I have seen this type of contentious behavior numerous times, and often the dispute is amicably settled in a few days or weeks as the mediator shuttles settlement offers back and forth between the parties by phone. However, the client should also be advised that if it should posture, vent, and make unreasonable demands, such conduct will likely result in an impasse prolonging the mediation and delaying a possible settlement.

19. Do you recommend a settlement agreement be signed before the parties conclude a successful mediation?

Particularly for a construction dispute, settlement terms can be more than a lump-sum dollar amount paid by a certain date. There can be payment schedules, agreements for work to be completed by a certain date, and other terms that can too easily be forgotten between the conclusion of the mediation and drafting the settlement agreement. Therefore, I recommend that, to the extent possible, the settlement agreement either be finalized and signed before the conclusion of mediation, or at least written in the form of a term sheet signed by both parties. 

Leonard M. Kessler is an experienced attorney, arbitrator, and mediator with a background in complex construction and commercial disputes including cases involving contracts, torts, negligence, environmental matters, property damage, and professional liability. He also has a bachelor’s degree in Electrical Engineering. Len has experience with disputes involving general contractors, trade contractors, suppliers, developers, architects, engineers, and sureties in connection with private and public (federal, state, and municipal) projects for the construction of office buildings, hotels, museums, casinos, roads, bridges, tunnels, condominiums and apartment buildings, hospitals, schools, shopping centers, stadiums, arenas, airport terminals, courthouses, power plants, paper mills, and other large-scale civil and mechanical construction projects. He has also been involved with disputes regarding environmental and hazardous waste remediation projects. In addition, Len has represented clients in contract drafting; negotiation and administration; and teaming agreements, joint ventures, and shareholder agreements.

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1See AIA® Document A201™ — 2017 (Construction Contract General Conditions, Sample Form), Section 15.3 “Mediation.” 2See American Arbitration Association Construction Industry Arbitration and Mediation Procedures Rule 10 “Mediation,” which requires mediation of all disputes in excess of 100,000.