Introduction

There is a consensus in the burgeoning literature on Alternative Dispute Resolution ("ADR") that certain kinds of disputes are very suitable for resolution by means other than traditional litigation. One hears frequently that domestic disputes are best settled by mediation, since mediation can help preserve the underlying relationship of the parties, teach the parties to negotiate with each other, and save the parties the costs and time which litigation would otherwise impose on them. There is a good deal written about securities arbitration and its suitability for resolving disputes in that industry. Because of the technical nature of the securities industry, so the argument goes, using arbitrators with an understanding of the modus operandi of the industry will result in more acceptable resolutions than ones which could be expected from a jury of twelve people with no background in the purchase and sale of stock. And in some industries there is historical precedent for the use of ADR. The maritime industry, for example, has long included New York or London arbitration clauses in charter parties, the contracts by which shipowners lease or charter their vessels to another entity. There are organizations of "commercial men" (arbitrators) in both of those great maritime centers whose members possess considerable experience and knowledge in the practical interpretation of the sometimes arcane language of the typical charter party.

Certain principles can be gleaned from the literature on ADR in these various industries. ADR is more successful than litigation in preserving the underlying relationships of the parties. ADR is less costly and more expeditious than litigation. ADR is particularly appropriate where technical questions are involved which are out of the realm of knowledge and experience of the ordinary fact-finder, be it judge or jury. And ADR is successful in some industries where it has enjoyed a long acceptance and use in the resolution of certain kinds of disputes. All of these principles apply to the construction industry and to the kinds of disputes which can arise out of the typical construction contract.

Construction projects often involve business and contractual relationships which remain in effect over a period of time. The parties depend on each other to varying degrees to purchase or supply goods or services in a competitive marketplace. In many cases, even where disputes arise in the course of a project, the parties may anticipate that they will again be doing business with each other at some point in the future. ADR procedures, in theory, can help settle disputes on a reasonable, commercial basis without necessarily forever damaging the business relationship that gave rise to the dispute in the first place.

There is no question that construction disputes can be highly technical. What is the old saying about trying a complicated construction case: "Identify your 30 most important issues and then discard 25 of them!" What construction lawyer does not wonder how to present complex issues to a jury: technical construction techniques, the Eichleay formula, CPM charts and delay damages, and on and on? With ADR, the parties have the opportunity to appoint a mediator or an arbitrator with a background in construction, someone who from a legal standpoint, an industry standard, or both, understands the issues and follows the arguments of the disputants, without having to undertake a basic education in construction law beforehand.

Statistics are somewhat equivocal on the comparison of costs in litigation versus arbitration in the construction industry, but there is a consensus that the arbitration process can produce a final award and a resolution of a dispute in much less time than can the judicial system. There is also a consensus that mediation saves both time and money for the construction industry.

Finally, as most of you know, the construction industry has long embraced arbitration as a means of settling disputes. Since 1937, the AIA form of contract between owners and contractors has contained an arbitration clause. The American Arbitration Association, founded in 1926, developed its arbitration rules for the construction industry in 1966. And today, it can be safely said that the construction industry is at the forefront of the ADR movement, initiating and experimenting with new ways not only to settle construction disputes, but also to try to prevent them from arising in the first place. These pre-dispute techniques are a good place to start this overview of ADR in the construction industry.
Partnering and Dispute Review Boards

The concept of partnering is a recent development which has become more and more common on larger construction projects. The idea is that owners and general contractors are typically thrown together on projects of extended duration, on a day-to-day basis, often without fully understanding what it is that each wants to achieve from the project. Personalities clash, interests compete, disputes arise, and distrust abounds. What should have been a cooperatively completed project can often turn into an adversarial situation that explodes into claims and counterclaims as the project nears its end. Partnering is meant to avoid these pitfalls.

Owners and contractors who wish to engage in partnering enter into a partnering agreement. In this agreement they attempt to set out more clearly what their interests are, how the owner wants to achieve the construction of a quality project in a timely manner for a reasonable price, and how the contractor hopes to produce a well-built project, on time, at a reasonable profit. The partnering agreement may cover progress meetings, communications, and the resolution of minor disagreements. It may contain financial incentives for both parties to induce them to cooperate with each other. It will frequently provide that the partnering relationship begins with a retreat.

Typically, the partnering retreat will be facilitated by a third party, usually an individual skilled in communications and consensus-building. He will lead the representatives of the parties through various exercises over a weekend, for example, which bring them to the table ahead of time to discuss problems that they anticipate will arise out of the project and how they should go about resolving them. The principal representatives of the parties get to know one another outside of the time pressures of a large construction project and, hopefully, they establish at the outset a working relationship that will lead to more consistent cooperation when the project gets started.

The experience of the construction industry with partnering has been very positive. It is believed that very few, if any, of the projects which have employed partnering techniques in the last few years have given rise to litigation.

Now an accepted feature of many construction projects, the Dispute Review Board ("DRB") was first used in a major project in 1975. The DRB functions essentially like a standing arbitration panel. Usually consisting of three members, one appointed by the owner, one appointed by the contractor, and one appointed by the other two members of the panel, the DRB is constituted at the outset of a project to resolve disputes which arise in the course of construction. The board receives project records and periodic updates on the status of the project in order to keep informed. They may hold regularly scheduled meetings at the job site. When a dispute arises, the contracting parties present their cases to the DRB and the board will quickly render an advisory opinion on a commercially reasonable way to resolve the problem. Many contracts providing for DRB's have disincentives built into them, so that if a party refuses to accept the recommendation of the board, the recommendation would later be admissible at trial or in arbitration.

It is believed that there has been no litigation involving substantive disputes in projects where dispute review boards have been appointed. As a matter of fact, experience has shown that the number of disputes submitted to DRB's has been relatively small. It appears that because owners and contractors know they will have to present their differences to a knowledgeable panel for a quick decision, they are more willing to work out their disputes on their own initially, thereby obviating the need for the board. What this experience tells us is that even the existence of a DRB is helpful in avoiding disputes in major projects.

Although DRB's are normally put in place in connection with a general contract for construction, there is no reason why they cannot be used in a subcontract or a supply contract. The concept is the same. The concept could also be modified somewhat to provide for the appointment of a single standing neutral, accepted by both parties, who could function like a DRB or who could attempt to mediate disputes as they arise. As in the case of the DRB, the parties might work a little harder at overcoming their differences and find that they have very few occasions to resort to the formal use of the neutral.

Mediation

More and more Superior Courts in Georgia are adopting mandatory mediation programs. And for those who do not have mandatory programs, there is no hesitancy on the part of the judges to order the parties to engage in mediation. Many judges do not feel the need to send simple or routine cases to mediation. In some courts, the more complicated the case, the greater the chance that a judge will order it to go to mediation. Since construction cases often involve complicated and technical factual and legal issues, it would not be surprising in the future to see judges referring more and more of them to mediation.

How do parties get to mediation when a dispute is not yet in suit? Quite simply, they have to agree to go to mediation, either by virtue of a mediation clause in their contract or by a post-dispute decision to resolve their differences through mediation. Contractual mediation clauses can be as simple as: "Any dispute arising out of this agreement shall be resolved through mediation pursuant to the Mediation Rules of the [American Arbitration Association]," or they may be more detailed, naming the mediator, the locale for mediation, the handling of the mediator's fees, etc. Post-dispute mediation agreements are essentially the same, except that in the context of a pending lawsuit, they may be more difficult to hammer out. Many agreements to mediate are simply oral agreements between the attorneys for the parties.

What happens if one party is not interested in mediating or there is some interest in mediation, but the one-year statute for filing suit on a lien claim is about to expire? These are two different questions with the same answer. File suit. There are no cases in Georgia which indicate that mediation, or arbitration for that matter, tolls the statute of limitations. After suit is filed, it may be possible to bring the reluctant party into a mediation process by moving the court for an order referring the case to mediation. While there is a good likelihood of getting such an order, there is no way for a court to order parties to engage in the mediation process in good faith. It is questionable, then, whether forcing a reluctant party into mediation will produce a positive result.

The mediation process is very flexible, and it ensures to the participants a good deal of control, especially in comparison to the lack of control the parties experience in trial. Most mediators commence a mediation with an opening session in which the mediator lays down the ground rules for the session and counsel for the parties summarize their respective positions. If the mediation is scheduled prior to arbitration or prior to suit being brought, the parties have the opportunity to do more than summarize their positions; they may want to make a more detailed presentation of their case for the benefit of the decision-maker on the other side. There are virtually no restrictions on the parties in the opening session of a mediation. They may present charts, video tapes and project records. They may have their expert witnesses walk through a delay claim or discuss with him reasons for finding that materials supplied did not meet specifications. If the sum in dispute is large enough or if the issues are complex, or if it involves multiple parties, they may set aside two days for the mediation, with the understanding that the first will be predominantly spent on the presentation of the parties' cases, and the second would be devoted to the mediator's efforts to bring the parties together.

In order to make maximum use of the process, the parties should choose a mediator who has had some experience with construction cases and provide him ahead of time with the documents which will be the subject of discussion during the mediation session. If the subject matter of the dispute is highly technical, the parties can authorize the mediator to retain an expert in the field to assist as a neutral, helping with the mediation process, acting as an "agent of reality," and suggesting creative solutions or helpful fixes.

In order for mediation to work, it is imperative that each side bring to the table representatives with both knowledge and authority to settle the dispute. The mediation can certainly start off on the wrong foot if the material supplier brings its president to the session and the contractor brings its project manager. There is the sense in that situation that the contractor is not taking the mediation as seriously as its opponent. Moreover, problems can arise when the project manager has to make calls to an absent decision-maker. Invariably, there will be times when contact is delayed and all the parties to the mediation are left waiting impatiently. Parties can avoid this problem by letting one another know ahead of time who will be at the mediation, and by stipulating that certain individuals be present.

If the parties are able to reach an agreement through mediation, it is advisable to have a memorandum of that agreement at the end of the day. The parties should not leave any of the essential terms of the agreement to be hammered out later on; to do so might endanger the enforceability of the agreement.

The Court of Appeals addressed that issue in Moss v. Moss, 463 S.E.2d 9 (Ga. 1995). This was a divorce case that went to mediation. The parties settled the case, they thought, but agreed that a certain piece of property owned by the husband would be appraised in a method to be agreed upon by the attorneys for the parties. The husband changed his mind about the deal because he did not like the tax consequences of what he had agreed to in mediation.

Applying basic principles of contract law, the Court found that the method to be used to appraise the property was an essential term of the contract, and that because an essential term of the agreement was missing, there was no enforceable contract. This basic principle of contract law should be borne in mind during the mediation of a construction dispute. Since these disputes often involve multiple issues and detailed settlements, allocating settlement funds to various change orders, payments to subcontractors or materialmen, etc., counsel should insist that all of the essential terms of any agreement reached through mediation be reduced to writing and signed by representatives of all the parties.

The latest edition of the AIA form of Agreement Between Owners and Contractors now contains a provision requiring mediation prior to arbitration, pursuant to the dispute resolution rules of the American Arbitration Association. The AAA has consolidated its mediation and arbitration rules and designated them as dispute resolution rules, in part to respond to the anticipated amount of mediation which will occur as a result of the change in the AIA form. The AAA maintains a panel of mediators who are experienced in construction matters and are familiar with the types of disputes typically arising out of construction contracts. See Section 4.5 of the AIA General Conditions for the Contract of Construction.
Arbitration

Courts cannot require parties to engage in arbitration. To do so would be a violation of the Seventh Amendment right to jury trial. Some courts have mandatory non-binding arbitration programs where the parties submit their dispute, usually in an abbreviated form, to a panel of arbitrators for a decision. The panel often consists of local attorneys who are acting as volunteers. If the decision of the panel is acceptable to the parties, it will be made the judgment of the court. If the decision is not acceptable to one of the parties, that party must file an objection within a certain amount of time and the case will be returned to the court's docket. Such non-binding procedures function as settlement tools, especially if upper-level management attends the arbitration hearing.

Most often, however, parties engage in arbitration because they have agreed to do so contractually. In their simplest form, arbitration clauses stipulate that disputes arising under the contract will be submitted to arbitration pursuant to the Construction Industry Arbitration Rules of the American Arbitration Association or the rules of some other provider of ADR services. The AAA recommends the following arbitration clause for future disputes:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Construction Industry Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

The AIA form of general contract has a more detailed arbitration clause setting forth the role of the architect in resolving disputes, when arbitration may be demanded, what claims may be joined in the arbitration, when claims are timely made, and where judgment may be entered.

Since the most common forum for arbitration of construction disputes is the AAA, it is important that counsel representing parties in AAA arbitration be familiar with its rules and procedures. The arbitration process commences with a demand for arbitration served by the claimant on the respondent and filed with the AAA. The demand may be on an AAA form. It should contain the name and address of the parties, a summary of the basis for the claim, a statement of the relief sought, and a copy of the arbitration provision in the applicable contract. In addition, it should request a hearing locale.

The respondent serves an answer to the demand on the claimant and files it with the AAA. The next order of business is the appointment of an arbitrator. From a list of potential arbitrators circulated by the AAA, the parties rank their choices. The AAA checks with the potential arbitrators to be sure there are no conflicts and that they are willing to serve, then notifies the parties of the appointment of a sole arbitrator or a panel of three. If the arbitration clause provides for a different method of appointing the arbitrator(s), the AAA will follow the dictates of the clause.

Once the arbitrator is chosen, the AAA works with the parties to schedule a hearing date and, if necessary, to schedule a preliminary hearing by telephone at which the arbitrator takes up questions the parties may have about the extent of discovery, the conduct of the hearing, the exchange of witness and exhibit lists, the subpoenaing of witnesses, and any other matter which the parties would like to discuss. Other preliminary hearings may be scheduled if necessary.

The question of the extent of discovery is sometimes problematical in arbitration. In theory, the parties have agreed to arbitration in part to avoid the time and expense of litigation. There may, therefore, be resistance to extensive discovery, and the arbitrator may be called upon to umpire any disagreement. On the other hand, if the parties can agree to the extent of discovery, they need not involve the arbitrator at all. Discussions with the arbitrator are not permitted, except with the knowledge and/or participation of the AAA.

The arbitration hearing is conducted less formally than a trial, but in a more adversarial mode than a mediation. Each party presents its evidence, live witnesses, deposition testimony, and documents, usually under a relaxed application of the rules of evidence, and the arbitrator has thirty days after the close of the hearing to render a decision. In some cases, arbitrators render written findings of fact and conclusions of law; in most they simply issue a brief award setting forth the amount of the award. The longer the opinion, the more possibility there is that one party or the other might find a basis for overturning the award. The AAA distributes the award to the parties after collecting the arbitrator's fees and any administrative fees due it.

Generally, arbitrations administered by the AAA proceed very smoothly, efficiently, and with dispatch. Arbitration can, however, be expensive. If the parties are called upon to bring witnesses and documents to an out-of-town location in order to present their cases, and the issues in dispute are complex, involving both claims and counterclaims, the hearing can take weeks, even months. In such mammoth cases, it would be difficult to say that arbitration is substantially less expensive than litigation. The benefit, however, is that arbitrators are skilled at resolving construction disputes and the parties can obtain a final result much more quickly than through litigation.

The Federal Arbitration Act, 9 U.S.C.A. § 10, governs the arbitration of disputes which involve interstate commerce. Many states also have arbitration acts. Under both federal and state law, arbitration awards can only be overturned on very limited grounds. The federal act provides, for example, in Section 10, the following grounds for vacating an award:

1. The award was procured by corruption, fraud, or undue means;

2. There was evident partiality or corruption by the arbitrators;

3. Arbitrators were guilty of misconduct or other misbehavior that has prejudiced the rights of a party;

4. The arbitrators exceed their powers or so imperfectly executed them that a mutual, final, and definite award upon the subject matter was not made.

The grounds set forth in the Georgia Arbitration Code are similar. O.C.G.A. § 9-9-13(b) provides that an award will be vacated on the following grounds:

1. Corruption, fraud, or misconduct in procuring the award;

2. Partiality of an arbitrator appointed as a neutral;

3. An overstepping by the arbitrators of their authority or such imperfect execution of it that a final and definite award upon the subject matter submitted was not made; or

4. A failure to follow the procedure of this part, unless the party applying to vacate the award continued with the arbitration with notice of this failure and without objection.

The Georgia Arbitration Code was amended in 2003 to include a fifth ground for vacating an arbitration award, "the arbitrator's manifest disregard of the law." O.C.G.A. § 9-9-13(b)(5). Georgia is the only state with such a statutory provision for setting aside an arbitration award based on manifest disregard. The Georgia Court of Appeals recently referred to this additional ground in Brown v. Premiere Designs, Inc., 2004 WL 434239 (Ga.App. 2004), however, the Court explained that the ground was inapplicable because the action had been filed before July 1, 2003, the effective date of O.C.G.A. § 9-9-13(b)(5).

The Georgia Court of Appeals in its 1995 decision in Hundley v. Greene, 218 Ga. App. 193 (1995), created considerable concern in both the ADR community and the construction industry. The court overturned the award of an arbitrator on the grounds that there was no evidence to support it. This was not one of the grounds set out in the Code. It was feared that this decision would undermine the efficacy of arbitration because it appeared to invite courts to examine the evidentiary basis for an award, thereby creating a sort of de novo review on appeal.

Fortunately, the Supreme Court of Georgia granted certiorari and overturned the Court of Appeals' decision. Greene v. Hundley, 266 Ga. 592 (1996). Justice Sears' opinion holds that the four grounds set out in O.C.G.A. §9-9-13(b) provide the exclusive basis for vacating an arbitration award. There is no requirement in the Code that the arbitrator enter written findings of fact or explain the reasoning behind his award. "The authority of the arbitrator gives her the ‘inherent power to fashion a remedy as long as the award draws its essence from the contract or statute.'" Id.

The Court recognized that allowing an appellate court to review the sufficiency of the evidence would "frustrate the purpose of arbitration," which is, in part, the expeditious and final resolution of disputes by means which are outside of the traditional judicial system. A creature of statute in Georgia, arbitration is not subject to normal appellate standards, but only to appellate review on the basis of the standards set forth in the Code. With this opinion, the Supreme Court has fortified the use of binding arbitration in Georgia by upholding the finality of it.

With respect to materialmen's liens, the question arises: "Should a material supplier go ahead and file its lien even when the applicable contract contains an arbitration provision?" The answer is ‘yes'. The Court of Appeals of Georgia in HRH Prince LTC. Faisal M Saud v. Batson-Cook Company, 161 Ga. App. 219 (1982), held that the materialman did not waive his right to arbitrate by filing his materialman's lien and his complaint of foreclosure, where he at the same time consistently sought to enforce his right to arbitrate under the contract. In that circumstance it was clear that the materialman had no intention of waiving such a right. If the materialman had flagrantly disregarded arbitration as a contractual prerequisite, and filed a claim of lien and a complaint of foreclosure without attempting to enforce his arbitration rights, "a waiver of the arbitration provisions of the contract may have occurred." What this means is that the materialman should file his lien, demand arbitration and, within the one-year statutory limit, file a complaint of foreclosure. The trial court should stay the complaint of foreclosure and allow the parties to proceed to arbitration. Under those circumstances, the materialman's lien should be protected.
Conclusion

There are other ADR techniques which can be employed in resolving construction disputes. Summary jury trials and mini-trials involve the submission of the parties' cases to a jury or judge in an adversarial setting. Like non-binding arbitration, these procedures function as settlement tools; the presence of upper-level management creates a forum for settlement negotiations after the trials.

ADR procedures can be used in conjunction with one another or serially. For example, mediation can be required as a condition precedent to binding arbitration or suit. The great benefit of these procedures is that they can be applied creatively, flexibly, and cheaply. Most of all, they can assure that the parties retain a greater degree of control over the resolution of their disputes. In this age of increasing administration of litigation by the courts, it is no wonder that parties are finding ADR to be a better way to resolve their differences.


BIBLIOGRAPHY

A good place to start for more understanding of the various ADR techniques available is Douglas Yarn's Alternative Dispute Resolution: Practice and Procedure in Georgia (Norcross, 1992). It will remain the primary reference on this subject for Georgia lawyers for some time. Judge Jack Etheridge's book, Coming to the Table (Daily Report Books, 1994), provides a fine complement to Yarn's treatment of the subject.

If you are interested in delving further into the theory and practice of mediation, you might enjoy Mediation: A Comprehensive Guide to Resolving Conflicts Without Litigation (New York, 1991) by Jay Folberg and Alison Taylor, and The Mediation Process: Practical Strategies For Resolving Conflict by Christopher W. Moore. You might also be interested in a recent publication by Robert Bush and Joseph Folger entitled The Promise of Mediation; Responding to Conflict Through Empowerment and Recognition (San Francisco, 1994), which deals with the transformative potential of mediation.

ADR: A Practical Guide To Resolve Construction Disputes, edited by Alan E. Harris, Charles H. Sink and Randall W. Wulff (Dubuque, 1994), contains chapters authored by some of today's top authorities in construction ADR practice. It is published under the auspices of the American Arbitration Association, which accurately advises that the book is "ideal for construction attorneys, owners, contractors, subcontractors and neutrals."