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.