Mediation and Arbitration 101 for Architects, Engineers and Contractors

By Gary L. Cole AIA, Esq.

[Gary L. Cole AIA, Esq. is Chica­go-based Illi­nois and Flori­da-licensed attor­ney and Illi­nois-licensed archi­tect. He prac­tices con­struc­tion law, is a con­struc­tion and com­mer­cial arbi­tra­tor and medi­a­tor, and is an his­toric preser­va­tion attor­ney and expert wit­ness and con­sul­tant.  He can be reached at www.garylcolelaw.com]

With civ­il litigation’s ris­ing costs, medi­a­tion and arbi­tra­tion are grow­ing in pop­u­lar­i­ty as poten­tial­ly quick­er and more cost-effec­tive alter­na­tive dis­pute res­o­lu­tion forums. Archi­tects, engi­neers and con­trac­tors who incor­po­rate well-con­sid­ered medi­a­tion and arbi­tra­tion claus­es into their con­tracts and ser­vice agree­ments may have an advan­tage over those who do not, and, who lat­er find them­selves embroiled in cost­ly and pro­tract­ed litigation.

Medi­a­tion and arbi­tra­tion, how­ev­er, dif­fer fun­da­men­tal­ly in their approach­es and some con­flicts may be bet­ter resolved in one forum over the other.

Medi­a­tion Basics 

Broad­ly speak­ing, medi­a­tion is a more infor­mal dis­pute res­o­lu­tion process than arbi­tra­tion in which a neu­tral par­ty – a medi­a­tor – assists two or more par­ties in reach­ing a nego­ti­at­ed set­tle­ment on their own.

Medi­a­tion is pri­vate, con­fi­den­tial and gen­er­al­ly non-bind­ing; unless a set­tle­ment agree­ment is entered into by the dis­put­ing par­ties. Many con­tracts, espe­cial­ly design and con­struc­tion agree­ments, con­tain require­ments that par­ties attempt to resolve any dis­putes through medi­a­tion as a pre­req­ui­site to purs­ing arbi­tra­tion and/or litigation.

Medi­a­tion can occur through a process known as facil­i­ta­tive medi­a­tion, in which par­ties … pro­pose their own solu­tions and a medi­a­tor serves more to facil­i­tate pro­duc­tive com­mu­ni­ca­tion toward reach­ing a set­tle­ment. Or, when request­ed by all par­ties, the medi­a­tor may express an opin­ion regard­ing a pos­si­ble solu­tion in a process known as eval­u­a­tive medi­a­tion.

But medi­a­tion has its lim­its. Like any nego­ti­a­tion, suc­cess­ful medi­a­tion is depen­dent on the par­ties’ good faith in seek­ing a mutu­al­ly agree­able res­o­lu­tion to their dis­pute. But as a prac­ti­cal mat­ter it is unlike­ly that dis­put­ing par­ties will approach medi­a­tion with exact­ly the same con­cil­ia­to­ry atti­tude, so it is the mediator’s role to facil­i­tate and main­tain a pro­duc­tive dia­logue with that goal in mind.

Arbi­tra­tion Basics

In dis­putes where par­ties are unlike­ly to arrive at a mutu­al­ly agreed upon solu­tion to their dis­pute, arbi­tra­tion may be the bet­ter forum. Arbitration’s pro­ceed­ings are more for­mal than medi­a­tion, but typ­i­cal­ly less so than civ­il litigation.

How­ev­er, unlike medi­a­tion, dis­putes in arbi­tra­tion are not resolved by the par­ties, but by a neu­tral – an arbi­tra­tor — (or some­times a tri­bunal of arbi­tra­tors), who, in the case of bind­ing arbi­tra­tion, ren­ders a bind­ing judg­ment, much like a judge in tra­di­tion­al litigation.

Arbi­tra­tion is gen­er­al­ly con­duct­ed through a for­mal hear­ing in which the arbi­tra­tor hears the argu­ments of the dis­put­ing par­ties. In advance of the hear­ing, the par­ties and the arbi­tra­tor con­duct one or more con­fer­ence calls to agree on the date of the hear­ing, dis­cov­ery scope, dead­lines and oth­er rel­e­vant issues. Dis­cov­ery may include sub­poe­nas for the pro­duc­tion of doc­u­ments and wit­ness­es to appear at the hear­ing for exam­i­na­tion and cross-examination.

Fol­low­ing the hear­ing, which can be accom­plished in as lit­tle as a day, the arbi­tra­tor may request addi­tion­al infor­ma­tion from the par­ties. Once all post-hear­ing issues are resolved, he will then ren­der his judg­ment, known as an award. And, absent a clear show­ing of fac­tors such as an invalid arbi­tra­tion agree­ment, or cor­rup­tion, fraud, par­tial­i­ty, or mis­con­duct by the arbi­tra­tor, it is unlike­ly that an award will be vacat­ed if appealed.

Medi­a­tion and Arbi­tra­tion in Practice

Like every busi­ness, design and con­struc­tion are vul­ner­a­ble to dis­putes, some fore­see­able, many not. It is pos­si­ble for archi­tects, engi­neers and con­trac­tors to have long and pro­duc­tive prac­tices and nev­er be drawn into legal con­flicts. Unfor­tu­nate­ly, design, engi­neer­ing and con­struc­tion pro­fes­sion­als some­times make mis­takes. But even when not at fault, absent a con­trac­tu­al require­ment for medi­a­tion and/or arbi­tra­tion, prov­ing so may require archi­tects, engi­neers and con­trac­tors to first endure lengthy and expen­sive legal battles.

But as the say­ing goes: “The best defense is a good offense,” and design, engi­neer­ing and con­struc­tion pro­fes­sion­als should con­sid­er under­stand­ing how to plan prop­er­ly for dis­putes using medi­a­tion and arbi­tra­tion claus­es in their con­tracts and ser­vice agreements.

Con­tracts and Ser­vice Agreements

It is rarely a good idea to pro­vide design or con­struc­tion ser­vices with­out a writ­ten con­tract, whether it is an indus­try-stan­dard form agree­ment, some­thing home­grown, or even a let­ter agree­ment. But regard­less of the form used, many archi­tects, engi­neers and con­trac­tors focus more on an agreement’s busi­ness terms that affect them in the present: scope of work, deliv­er­ables, fees and pay­ment sched­ule, mile­stones, etc.; than the risk man­age­ment pro­vi­sions that may affect them in the future, such as insur­ance, lim­i­ta­tions of lia­bil­i­ty, war­ranties, indem­ni­ties – and, of course – medi­a­tion and arbi­tra­tion clauses.

Con­tracts for design, engi­neer­ing and con­struc­tion ser­vices can be thought of in two ways: (1) as busi­ness plans for gov­ern­ing the inter­ac­tion between par­ties work­ing togeth­er toward a defined out­come; and/or, (2) pre-arranged bat­tle plans in the event a dis­pute aris­es. And it is a mis­take to think that just because a dis­pute doesn’t arise between the time of a contract’s exe­cu­tion and a project’s com­ple­tion that it nev­er will. Stat­ues of lim­i­ta­tions can extend the peri­od of poten­tial legal lia­bil­i­ty for many years.

All ser­vices archi­tects, engi­neers and con­trac­tors pro­vide har­bor poten­tial dis­putes; all well-draft­ed con­tracts and ser­vice agree­ments ensure that some pro­tec­tions against dis­putes are in place. But regard­less of the type of agree­ments used, it is impor­tant to remem­ber that a form is just a form and can be mod­i­fied near­ly any way that’s agree­able to par­ties in an arm’s length trans­ac­tion. This includes whether and how agree­ments pro­vide for medi­a­tion or arbitration.

Indus­try-stan­dard own­er-archi­tect agree­ments often con­tain care­ful­ly craft­ed dis­pute res­o­lu­tion pro­vi­sions, but dif­fer in their approach. For exam­ple, the Asso­ci­a­tion for Licensed Architect’s (ALA) OA3-2002 Short Form Owner/Architect Agree­ment (http://www.alatoday.org/), pro­vides in rel­e­vant part:

“Should any claim arise between the Own­er and Archi­tect, the par­ties agree to sub­mit such claim to medi­a­tion, as a con­di­tion prece­dent to lit­i­ga­tion. Medi­a­tion shall be con­duct­ed by and under the rules of the Asso­ci­a­tion of Licensed Archi­tects, unless the par­ties mutu­al­ly agree oth­er­wise. Should the par­ties fail to resolve the claim through medi­a­tion, the claim may then be lit­i­gat­ed.” [ALA OA3, Sec­tion 9.0]

Notice that the par­ties are required to try and resolve their dis­pute through medi­a­tion as a con­di­tion prece­dent (pre­req­ui­site) to lit­i­ga­tion. And I say try because medi­a­tion may fail – the par­ties may not come to an agree­ment – in which case the drafters of the ALA’s form agree­ment wise­ly skipped requir­ing arbi­tra­tion as a pre­req­ui­site to lit­i­ga­tion. I say wise­ly because the threat of lit­i­ga­tion can be a pow­er­ful moti­va­tor for the par­ties to ami­ca­bly set­tle their dis­putes in medi­a­tion. But even if medi­a­tion fails, and absent an express require­ment to arbi­trate in their con­tract, dis­put­ing par­ties can gen­er­al­ly still agree to pur­sue bind­ing arbitration.

How­ev­er, the Amer­i­can Insti­tute of Architect’s (AIA) B141 – 1997, Own­er-Archi­tect Agree­ment (http://www.aia.org/), takes a dif­fer­ent approach by requir­ing – unless the par­ties agree oth­er­wise — medi­a­tion as a con­di­tion prece­dent to arbi­tra­tion under the Con­struc­tion Indus­try Medi­a­tion Rules of the Amer­i­can Arbi­tra­tion Asso­ci­a­tion (AAA) (http://www.adr.org/). And if medi­a­tion fails, then the dis­pute “shall be decid­ed by arbi­tra­tion” — unless the par­ties decide oth­er­wise — under the AAA’s Con­struc­tion Indus­try Arbi­tra­tion Rules.

Of course, the AIA form is just a form, and dur­ing the con­tract nego­ti­a­tion phase the par­ties are free to strike the medi­a­tion require­ment and pro­ceed imme­di­ate­ly to arbi­tra­tion, or strike the arbi­tra­tion require­ment and pro­ceed to lit­i­ga­tion, or sim­ply fol­low the ALA’S approach and require medi­a­tion as the only con­di­tion prece­dent to litigation.

Rec­og­niz­ing that dis­putes are com­mon occur­rences dur­ing con­struc­tion projects, con­tracts pro­duced by Con­sen­sus­DOCS – a coali­tion of more than thir­ty con­trac­tor and engi­neer­ing orga­ni­za­tions – take a lit­tle dif­fer­ent approach to dis­pute resolution.

The Con­sen­sus­DOCS Doc­u­ment 200 — Owner/Contractor Agree­ment & Gen­er­al Con­di­tions (Lump Sum) (http://consensusdocs.org/), requires the par­ties to first attempt res­o­lu­tion infor­mal­ly through direct dis­cus­sions with their respec­tive busi­ness rep­re­sen­ta­tives. If direct dis­cus­sions fail to resolve the issues, the par­ties have the option of pro­ceed­ing through a project neu­tral or dis­pute res­o­lu­tion board — who were pre-select­ed dur­ing the contract’s nego­ti­a­tion — to mit­i­gate con­flicts, while con­struc­tion con­tin­ues unabated.

Fail­ing res­o­lu­tion of dis­putes through direct dis­cus­sions or mit­i­ga­tion, the par­ties then pro­ceed to medi­a­tion. If medi­a­tion fails to pro­vide a solu­tion, the par­ties then pro­ceed to one of two venues for dis­pute res­o­lu­tion – bind­ing arbi­tra­tion or lit­i­ga­tion – depend­ing on which option they pre-elect­ed pri­or to con­tract execution.

The dif­fer­ences between the dis­pute res­o­lu­tion pro­ce­dures in the design pro­fes­sion­al-dri­ven agree­ments and in the con­trac­tor and engi­neer­ing dri­ven-con­tracts is that the former’s pro­vi­sions appear to con­tem­plate a more for­mal­ized process invoked when pro­fes­sion­al ser­vices have been ter­mi­nat­ed, and the lat­ter seeks to resolve dif­fer­ences as they occur as a way of con­tin­u­ing the con­struc­tion and pos­si­bly avoid­ing a com­plete project melt­down. But, as stat­ed before, par­ties to design, engi­neer­ing or con­struc­tion agree­ments are free to craft dis­pute pro­vi­sions as they see fit – there is no one size fits all approach to alter­na­tive dis­pute res­o­lu­tion planning.

Regard­less of the type of form con­tract used, the effec­tive­ness of alter­na­tive dis­pute res­o­lu­tion will depend on a vari­ety of fac­tors such as the nature of the dis­pute and the rela­tion­ships of the par­ties, but also on how medi­a­tors and arbi­tra­tors are selected.

Fac­tors When Con­sid­er­ing Medi­a­tion or Arbitration

Prop­er plan­ning is the key to hav­ing con­trol over the forum used to resolve a dis­pute. As dis­cussed above, absent con­trac­tu­al pro­vi­sions that require par­ties to medi­ate or arbi­trate, or some lat­er agree­ment to do so, most irrec­on­cil­able dis­putes stand a good chance of end­ing up in court. In prepar­ing con­trac­tu­al medi­a­tion and arbi­tra­tion claus­es, there are a num­ber of fac­tors that archi­tects, engi­neers and con­trac­tors should con­sid­er, with a few of them as follows:

▪ What’s the like­ly nature of any dispute?

▪ Is it like­ly, or even desir­able, that a busi­ness rela­tion­ship with the oth­er par­ty be sal­vaged in the event of a dispute?

▪ What’s the best venue (loca­tion) for the medi­a­tion or arbitration?

▪ What spe­cif­ic rules should gov­ern the medi­a­tion or arbitration?

▪ Who selects the medi­a­tor or arbitrator?

▪ What’s the time­frame for com­menc­ing and com­plet­ing the medi­a­tion or arbitration?

▪ What are the asso­ci­at­ed costs and fees?

▪ What pro­fes­sion­al expe­ri­ence is required of a medi­a­tor or arbi­tra­tor, includ­ing the extent of their under­stand­ing of design and con­struc­tion issues?

This last con­sid­er­a­tion is one of the most impor­tant — whether a medi­a­tor or arbi­tra­tor has the prop­er train­ing and expe­ri­ence in design, engi­neer­ing and con­struc­tion mat­ters to under­stand the com­plex­i­ties of a con­struc­tion-relat­ed dis­pute. Even a dis­pute as seem­ing­ly straight­for­ward as breach of con­tract for non-pay­ment may require a medi­a­tor or arbi­tra­tor to under­stand not just whether a par­ty deliv­ered the ser­vices they con­tract­ed to pro­vide, but whether the non-pay­ment occurred because of alleged defec­tive design work or engi­neer­ing, improp­er exe­cu­tion by the con­trac­tor, oth­er fac­tors, or a com­bi­na­tion of all. How effec­tive will a medi­a­tor be in help­ing the par­ties reach an agree­ment, or how effec­tive will an arbi­tra­tor be in ren­der­ing a fair award, if they’re unable to grasp the sub­stance and sub­tleties of the par­ties’ claims because of a lack of knowl­edge and expe­ri­ence in the design and con­struc­tion industries?

There’s no way for archi­tects, engi­neers and con­trac­tors to com­plete­ly pre­vent dis­putes from ever occur­ring, but han­dled cor­rect­ly dur­ing con­tract prepa­ra­tion, medi­a­tion and arbi­tra­tion may pro­vide quick­er and more cost-effec­tive solu­tions than tra­di­tion­al lit­i­ga­tion, and archi­tects, engi­neers and con­trac­tors can get back to the busi­ness they’re best at – design­ing, engi­neer­ing and building.

© Copy­right Gary L. Cole AIA, Esq. 2024

[Author’s note: Noth­ing in the fol­low­ing arti­cle should be con­strued as legal or busi­ness opin­ions or advice. Read­ers should always con­sult their legal or busi­ness pro­fes­sion­als for spe­cif­ic advice and information.]

Gary L. Cole AIA, Esq.

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