Using multi-stepped negotiations in construction dispute provisions
The construction industry’s best practices include a number of methods and tools for resolving contract disputes. There are generally three goals for resolution of construction disputes: settle at the earliest possible time; settle for the least overall project cost; and settle at the lowest possible management level. Disputes that linger unresolved until the end of the project, invariably get much larger and more difficult to resolve, than if they were addressed closer to the event giving rise to the dispute. To achieve these goals it is important that the dispute resolution provision include two or more required steps for direct negotiations (stepped negotiations) as the first level of effort to resolve the disputes.
Stepped negotiation provisions should provide strict time limits for considering the dispute in addition to requirements that will escalate the dispute resolution to a management level above the current dispute resolvers. Imposing time limits for negotiations (typically 15 to 30 days) and providing various levels of escalation (project managers, to seniors executives, and then to CEO’s) provides two pressure points that work well together. The pressure of time deadlines requires the individuals at that level to meet in ernest and conclude the negotiation effort in a limited amount of time. The escalation pressure is based on the reality that if the individuals are not successful, their bosses will be asked to fix the problem they could not.
If this stepped process is taken seriously, senior executives must delegate authority down to the individuals involved in the first steps. Then if the dispute reaches them, the senior executives must take responsibility and ownership, to understand the facts and issues and seek a negotiated resolution. Beyond direct negotiations, there is of course a menu of methods using neutrals that should be included in the provision, such as: mediation; non-binding advisory decisions; dispute review boards; and ultimately a binding process of arbitration or litigation. All of these methods however are more costly, more time consuming and can be avoided altogether if the parties succeed in the stepped negotiations process. When stepped negotiations are properly implemented, far fewer disputes will require outside assistance.
advisory opinions: a way to save money, time and relationships
The use of a non-binding advisory opinion from an expert third party neutral (“advisory opinions”) can be a cost effective, real time method to resolve construction disputes. It has some advantages over both mediation (which is rarely an evaluative process) and binding arbitration (which is often quite expensive and time consuming). One recent large power plant project successfully used advisory opinions to resolve disputes. The owner had entered into a single construction contract with one contractor for the entire project, so their relationship would last for several years. During the first phase site work a dispute arose over piling and foundations based on subsurface conditions.
The contractor submitted two (2) different multi-million dollar claims for differing site conditions, which the owner rejected. Following the unsuccessful settlement meeting of senior management, the contract called for mediation followed by binding arbitration. Neither of these options seemed appropriate or useful to the parties at this early stage in the project. The parties came up with a process to obtain a non-binding advisory opinion on both claims over a very short time frame. The following process was outlined in a written agreement:
1. The Neutral – A mutually agreeable single arbitrator would be selected, who was to be a construction claims expert with at least 10 years in the industry. Costs were to be shared equally, except if there were objections to the decision as discussed below.
2. Pre-Hearing Exchanges – Within 30 days the parties would exchange all materials to be relied on in the hearings. Two weeks after the exchange, position papers would be submitted and one week after that power point presentations would be exchanged. The parties were bound by their initial exchange of information and position papers.
3. Conduct of the Hearings – Strict time limits were imposed on each party with a 30 minute opening statement and a 4 hour presentation of their positions for each of the two claims. (Both sides retained experts who provided part of the testimony.) The hearing was scheduled to be completed in no more than three (3) consecutive days. There was no examination of the witnesses by the parties, and only the arbitrator could ask questions at the end.
4. Arbitration Decision – The arbitrator was to issue his decision within 10 days of the close of the hearings. The opinion was to address both claims and defenses and be no more than three (3) pages in length.
5. Effect of Decision – Following the decision, either party could object within 30 days. If there were no objections the decision would become final and binding. If a notice of objection was given, the decision would remain non-binding and be treated as confidential settlement discussions. If only one party objected, that party would pay the other party’s 50% share of the cost of the proceeding. Following an objection, the parties would follow the contract and proceed to binding arbitration.
In this case, the advisory opinions rendered included two different decisions on the entitlement for the two claims. Neither party objected to the decisions within 30 days. Thus the matter was completely resolved before the project was even 30% complete. The entire process was completed within 90 days from start to finish, compared to a minimum 12 months for a full-blown binding arbitration. The cost of the advisory opinion process was probably less than 10% of what a binding arbitration process may have cost and probably only slightly more than the cost of mediation.
As in this case, the advisory opinion can give the parties a neutral benchmark to settle the dispute, before large amounts of time, money and damage to on-going working relationships are incurred. Contract drafters should add advisory opinions to their dispute resolution menu.
“splitting the baby” and dispute resolution
In economic disputes, the phrase “splitting the baby” is often used to describe a compromise somewhere in the middle of the opposing parties’ requested demands. The phrase comes from a dispute where the literal splitting of a baby, did not actually happen. In a familiar passage from the Old Testament (1 Kings 3:16-28), King Solomon was faced with two woman claiming the same infant child as their own. Both had woman had given birth to a child in the same house. When one of the infants died in its sleep. the allegation was that the mother had switched the dead child for the living one, while the other mother slept. Solomon’s proposal was to cut the baby in half with a sword so that each could have half, as a solution to the dispute. It is unclear whether the King was bluffing or not, but when the anguished real mother gave up her demand for the child so that it could live, Solomon knew who the mother was and gave the child to her.
In arbitration or litigation splitting the baby is looked at as a very undesirable result. The parties to an adversarial process with a third party decision maker, are looking for a decision on the merits of the case. They want the decision-maker to pick a winner and a loser, and not split the baby. On the other hand, in mediation the parties do not want a decision from a third party they merely want assistance. One of the main benefits of a collaborative process like mediation, is that the parties retain control of the outcome. Even so, for the mediator the concept of proposing splitting the baby is not always a particularly useful tool, except in limited circumstances. If splitting the difference in a mediation is offered too soon by the mediator, it can have a negative impact on reaching a solution.
Parties in mediation want to be heard and want to negotiate based on real and justifiable positions as well as interests. A mediator needs to allow the parties to be heard, as well as to be challenged by the other side. The mediator needs to allow a certain level of back and forth exchanges to take place, both in a joint session and in caucusing where proposals are produced. Incremental movements are critical to the parties becoming vested in the process and committing to stay at it long enough to get a resolution.
However, there often comes a point in the mediation when the parties reach an impasse with a dollar gap between the “last and final” offers. When the incremental compromising bogs down and stops, the mediator can then make the following suggestion:
“We seem to be stuck. I would hate to not get this resolved, when we have made so much progress. Without asking you to commit yet, I want you to consider the following proposal. If I can get the other side to agree to $xxx [an amount somewhere in the middle of the remaining difference], would you be willing to settle for that? Don’t give me your answer yet but think about it, and let me go ask the other side the same question.”
My experience is that at a late stage impasse in the mediation, when the gap is narrowed, a proposal by the mediator to consider “splitting the baby” very often works. However allowing the mediation process the time to work through its evolution, and giving each side time to think about it first, are critical factors for success. Without applying these factors, the knee jerk reaction by the parties to splitting the baby, is usually a no!
Use of a “neutral” in public-private partnerships (P3s)
There is a continuing funding crisis for the country’s infrastructure due to the shortfall in public funds and the aging condition of our assets. This crisis is fostering a new importance for collaboration in forming public-private partnerships (P3s) which can 
make a significant contribution to the problem. P3s can attract new funding sources and improve project delivery, cost efficiency, performance and schedule by utilizing innovative contracting frameworks. This new framework can benefit by the use of neutrals in forming and implementing the P3 agreement.
Procurement on P3 projects can be a very complex, expensive and time consuming process. Time is definitely money and for a $1 billion project, a delay in starting work might increase the costs by as much as $1 million a week. A Neutral P3 Facilitator (“P3F” or “neutral”) of either an individual or a firm, could be very useful in improving the efficiency and duration of the process. The P3F would be approved by all the parties to act in his or her capacity with limited authority to manage and facilitate the process of expediting the procurement and reaching agreement.
A neutral can also be better positioned to sort through common interests and objectives of both the public and private sectors, without any particular bias or stake in the eventual outcome. On P3 projects each party is often represented by their own extensive set of advisors and advocates, who pursue and maximize their party’s relative interests and positions. Proposal development and transaction costs are often in the 10’s of millions of dollars for large projects. The public sector’s consultants and advisors involved in the procurement in addition need to evaluate various alternative technical proposals, which need to be compared among each of the bidders. A P3F could offer benefits to the process by fostering a more collaborative process.
Mediation concepts of neutrality, identification of interests, joint problem solving and confidentiality can help with the collaboration and thus reduce transaction costs. The benefit of using a neutral is especially present with P3s that involve a long term relationship and shared responsibilities, risks and rewards between the public and private sectors. Partnering workshops are often required in P3s to foster mutual trust and communication, which could be implemented by the P3F. The neutral’s scope could include some or all of P3 agreement phases including: financing; development; design and construction; and operations. The P3F’s involvement could continue through project completion.
Once the P3 agreement is executed, the P3F could also function as a mediator in helping to resolve any contract disputes over the course of the project. The neutral will have the benefit of knowing the history of the development of the agreements, as well as knowing the major participants. If the neutral is contracted to visit the project and meet periodically with the participants, there can be early access for resolution of conflicts, before disputes escalate and relationships sour. The P3F would thus assist the parties in reaching agreements in a timely and efficient manner, while maintaining focus on relationships and the long term interests.
In summary, since “collaboration” is the current trend in the engineering and construction industry and certainly the goal of true P3s, the role for neutrals should be expanded and formalized to assist in expanding and insuring the benefits of these new processes.
Storm water run-off disputes – resolving “neighbor wars” (Part 3 of 3)
compromise solution
In this final post let me describe how the matter was resolved by mediation. My approach and practice in these type disputes is to start the mediation with a joint session with everyone on the same room, which in this case lasted about 2 hours. This allowed each side to present their position and have a chance to rebut the other side, thus “being heard” which is a critical component in resolving disputes. There was a critical acknowledgement in the joint session by all, that temporary structures had not been put in final form, since all the housing units had not been completed. It was further acknowledged that this fact contributed to an increase in flow conditions.
However there was no agreement at the outset of the mediation on how to fix the problem. The developer’s expert recommended a simple solution involving completing the drainage structures that were designed for the development site when the project had been completely built out. In addition they offered to add in a few upgrades the cost of their solution was only about 1/10th the price of the other side’s design. The farmers totally lacked confidence in the as-designed plan. Their expert recommended completely re-routing the storm water by putting a ¼ mile drainage pipe under a paved road to discharge directly in the creek downstream, at a cost of several hundred thousand dollars.
The final phase of the mediation included caucusing with each side separately. For this case this phase lasted about 4 hours with the mediator encouraging proposals and shuttling back and forth. The two initial solutions were pretty far apart. After much back and forth, the mediator identified an intermediate solution that no one had focused on. It involved burying a drainage pipe through the farmers’ property exactly where the water was running. The benefits to this technical solution were multiple:
- It involved a much shorter distance and a reduced cost somewhere in between the two solutions that were presented.
- The cost was within the range of the available contribution from the insurance companies.
- It didn’t require digging up a paved county road, with all the costs and potential liability issues associated with that solution.
- It offered an opportunity of repairing the earlier damage to the farmers land at the same time the new pipe was installed this saving cost.
- Since the pipe was routed underneath the natural path of the water flow that caused the damage, it provided a good grade for the pipe to flow naturally.
- By chance there was an existing easement for a water main that happened to be in the same location.
The concept from the mediator was presented independently to each side and tested in private. Neither side wanted it to be considered their idea (which it wasn’t) until they received the other side’s reaction. In addition, these farmers had owned the farms for generations and felt before agreeing to any such changes on their property, they would have to get approval from their adult children who lived in other states. This family approval was obtained and everyone tested the solution, before all parties finally accepted the fix and settled the case.
Lessons Learned – There are several reason why this matter settled through the mediation process. First, there are many times a dispute needs a gentle (or not so gentle) shove towards a different way to resolve the dispute. Thanks to the court’s directive at an appropriate time in the case, the parties & lawyers although skeptical, moved forward to mediation. Secondly the technical experts were hired to find technical solutions, and not to testify at trial. Thus they were much more open to factual agreements and creative thinking. When experts are hired to testify in trial they become necessarily very opinionated and adversarial, since that is what they are being paid to do. In this case their assignment was to find a mutually agreeable solution.
Finally, although a mediator’s skills are often much more important than the mediator’s subject matter knowledge, this case was different. Since coming to agreement on the technical solution was the predominant interest, the mediator’s technical background was critical and related directly to the substance of the dispute. The mediator in fact, was certainly not as knowledgeable as any of the other engineers involved. Indeed there also may have been flaws in the suggested solution, but fortunately it held up to scrutiny from both sides. Having a neutral involved provides someone in the room with a much different perspective and view of the problem and solution, and the ability to see things the disputants cannot see.
Storm water run-off disputes – resolving “neighbor wars” (Part 2 of 3)
This is a continuation of my last post, concerning mediating a dispute
unexpected “wetlands”
over storm water run-off from a residential development onto adjacent farmlands. After years of complaining, the farmers ended up suing the owners of the residential development for damages caused to their farms. The case proceeded through a year of discovery and pre-trial posturing, costing time and money, but not getting closer to solving the problem. When the judge in the case finally ordered all parties involved to take 60 days and try mediation, everyone was at least open to the possibility of finally looking for a collaborative solution.
The farmers’ wanted most of all to find a technical solution. Their properties continued to experience the damage of increases in water flow, although they were assured by the developers that there was no increase in flow and the water management plan was approved by the county. The lawyers sought a mediator who also had a technical understanding of the problem and could help the parties evaluate and find a solution. I was selected because in addition to being a mediator and a lawyer, I was a licensed engineer. Among other things my background included training early on in the U.S Army Corps of Engineers where we were taught about engineering for storm water run-off as well as designing drainage structures.
Once the mediator was selected, a process was agreed to by the mediator, the lawyers and the parties. Both sides were to use technical experts to identify the exact nature of the problem, as well as a solution. Prior to the mediation both sides exchanged their analysis and technical solutions. Conference calls were held together and also individually to insure a clear understanding of each side’s position. This pre-mediation work also gave the mediator the opportunity to develop the trust and confidence of all sides. Although both sides were somewhat skeptical after years of fighting, fortunately everyone remained open-minded and prepared in good faith for the mediation.
Storm water run-off disputes – resolving neighbor wars
Storm water run-off is a condition that can create serious “neighbor wars” when changes occur unexpectedly. Personal animosity arises quickly when one neighbor’s development or renovation of its property, creates new or increased flow of surface water that damages its neighbor’s property. The end result is often litigation and undying resentments that last for years. Yet these disputes can be perfect candidates for collaborative dispute resolution. If the parties can focus on a mediation process that looks for a reasonable technical solution, they will be far better off and problems solved in a much quicker and cost effective manner.
The conditions created by development and the resulting change in water flow and absorption patterns are summarized in the attached diagram. As vegetation and natural landscapes are changed to impervious materials by construction, surface flows increase potentially creating problems for downstream neighbors. If appropriate structures required by proper engineering and regulations are included in the projects, these impacts can be mitigated or eliminated. However this can be a somewhat imprecise science and the nature of storm conditions has also been changing over the years.
One recent experience involved farmers and a residential development in a county in Pennsylvania. After years of frustration and attempts to seek help from the county government, the farmers ended up suing the home owners’ association and the developer for damages caused to their farms by increased storm water run-off. The development had allegedly increased the water flow onto the adjacent farms even though the water management plan was approved by the county and showed no change in run-off. The farmers experienced erosion, increased mud patches as well as the formation of potential new “wetlands”. One major concern was that endangered turtles would inhabit the new conditions, which would dramatically change the land use requirements on the farms.
My next post will describe how this matter was resolved in a mediation process that focused primarily on searching for a technical solution that all the parties and their experts could agree to.
Storm water run-off disputes – resolving neighbor wars
increasing storm water run-off
The conditions created by development and the resulting change in water flow and absorption patterns are summarized in the attached diagram. As vegetation and natural landscapes are changed to impervious materials by construction, surface flows increase potentially creating problems for downstream neighbors. If appropriate structures required by proper engineering and regulations are included in the projects, these impacts can be mitigated or eliminated. However this can be a somewhat imprecise science and the nature of storm conditions has also been changing over the years.
One recent experience involved farmers and a residential development in a county in Pennsylvania. After years of frustration and attempts to seek help from the county government, the farmers ended up suing the home owners’ association and the developer for damages caused to their farms by increased storm water run-off. The development had allegedly increased the water flow onto the adjacent farms even though the water management plan was approved by the county and showed no change in run-off. The farmers experienced erosion, increased mud patches as well as the formation of potential new “wetlands”. One major concern was that endangered turtles would inhabit the new conditions, which would dramatically change the land use requirements on the farms.
My next post will describe how this matter was resolved in a mediation process that focused primarily on searching for a technical solution that all the parties and their experts could agree to.
Using dispute review panels on complex engineering and construction projects.
Dispute review boards, standing neutrals, and other forms of third party neutral evaluations can be a powerful tool in promoting collaborative dispute resolution. These processes are particularly helpful in complex engineering and construction projects when the opinions can be advisory, non-binding and made in real time during project execution. Projects such as power plants, dams, highways, rail transit and tunnels are often great candidates for these techniques. The application of this method of dispute resolution should always include the following:
1. The parties to the contract should mutually agree at the outset of the project both to selection of the neutrals and the process itself. This way the system and the individuals are in place before any disputes arise. The atmosphere at this stage is often one of cooperation and trust and the structure will help maintain that atmosphere.
2. The neutrals need to have the required expertise involved in the project, but also need to be experienced in the process of rendering neutral (as opposed to adversarial) opinions. They need to be in a position to offer very timely decisions, since delays can cause an escalation in disputes and in the costs involved in resolving the problem.
3. In the case of a dispute review board, typically there are 3 members: one member would be picked by each party; and the third member, who is often the chairperson, would then be picked by the two party-appointed members.
4. Neutrals must not have been employed or retained by either party for a given number of prior years to avoid conflict or the appearance of conflict. Once appointed the best practice is for all members, regardless of who appointed then, to adopt a completely neutral position with respect to disputes.
5. The neutral individual or panel must keep up-dated with the progress of the work as well as issues that arise, before they become disputes. The mere presence of the neutral decision maker(s) often, in and of itself, is additional motivation to have the project managers work things out at their level.
The Dispute Review Board Foundation is an excellent source of neutrals, case studies and the procedures for this dispute resolution method.
Lincoln on litigation and lawyers-as-peacemakers
If mediation had been considered a method for resolving litigation in the 1800’s, as it is by most courts today, Abe Lincoln would have likely been a big proponent. Lincoln’s “Notes on the Practice of Law” written in 1850 (fn-1) contains many of Lincoln’s impressions and opinions during the time he was a practicing lawyer. One often referred to section is Lincoln’s opinion regarding litigation. This passage reads as follows:
“Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often the real loser—in fees, and expenses, and waste of time.”
The arguments made back then against litigating, certainly hold true today, in particular for commercial disputes. In 1989 Supreme Court Chief Justice Warren E. Burger, quoted Lincoln’s comment above in the forward to American Law Institute Study on Paths to a “Better Way”- Litigation, Alternatives, and Accommodation, (see 1989 DUKE L.J. 808, 809). Many would say the Chief Justice’s endorsement, was the beginning of the serious movement toward alternative dispute resolution in America which continues today.
Another quote in the same section had to do with the role of lawyers as peacemakers. “As a peace-maker the lawyer has a superior opportunity of being a good person. There will still be business enough.” For those of us who are practicing lawyers or mediators committed to collaborative methods of dispute resolution, Lincoln had an positive vision for a lawyer-mediator’s business plan.
The painting pictured above is entitled “The Peacemakers”, by George P.A. Healy and was made in 1868 after Lincoln had died. A copy is displayed in the White House. The painting shows Lincoln in March of 1865 with his two main Army Generals (Grant and Sherman) and a Naval Admiral (Porter) planning decisive military efforts to end the war. In contrast to the paintings title, these military leaders all helped end the conflict through use of force, not compromise. There are some issues where a negotiated compromise doesn’t work – and to Lincoln the preservation of the Union was such an issue.
fn-1 – see the book The Living Lincoln, 1955, and Abraham Lincoln, Speeches and Writings 1832-1858, 1989, The Library of America, pages 245-246
engineer lawyer mediator 