A construction dispute that began after a leak in a warehouse roof caused $6,000,000 in damages eventually resulted in a lawsuit naming 11 parties. The case was in litigation for 5 years and generated $350,000 in legal fees, due in large part to the taking of 45 depositions. Some 25 depositions remained to be taken. Two judicial settlement conferences had failed to bring the parties to an agreeable solution. A trial date had still not been scheduled. The 11 parties then agreed to try private mediation and were able to schedule the mediation conference the same month. The case settled for a 7-figure sum after 3 days of mediation. The mediation fee was $7,800. The parties were all satisfied with the outcome. And of critical importance in the construction industry, their relationships remained intact. They were quickly discussing a new project on which they could collaborate.

Mediation may serve a variety of purposes, including providing the opportunity for parties to define and clarify issues, understand different perspectives, identify interests, explore and assess possible solutions, and reach mutually satisfactory agreements. The advantages of mediation are many, including speed, economy, privacy, choice of neutral, expertise of neutral, flexibility, informality and finality. Civil litigation is often an inefficient, lengthy, expensive process. Commendably, the construction industry has led the way in the use of alternative dispute resolution (ADR) through its willingness to take a step away from the courthouse and submit disputes to mediation.

The construction industry provides challenges for resolving disputes between the parties. The information contained in this chapter will assist attorneys in their capacity as counselors by using mediation as a settlement tool to achieve the best results for the client.

§ 5.1.2 What Is Mediation?

In mediation a neutral third party assists the disputants in reaching their own mutually acceptable agreement outside of the context of the court. The mediator helps the parties organize and exchange information, identify their interests, examine their positions, set realistic goals, and work out a solution. In most cases, mediation (unlike the litigation) process affords the parties an opportunity to actively participate, and therefore it may serve as an emotional outlet.

Mediation can be described as a combination of reality therapy and shuttle diplomacy.

§ 5.1.2.1 Mediation Is Non-binding

The purpose of mediation is for the parties to arrive at a mutually acceptable resolution. Unlike a judge or arbitrator, the mediator has no authority to impose a binding decision upon the parties.

§ 5.1.2.2 Mediation Is Immediate

Most mediation conferences take less than a day although construction disputes can last longer. A meeting can be set as quickly as the schedules of all participants will allow. Due to the nature of construction claims and relationships within the construction industry, disputes arising during or after construction need to be resolved as soon as possible to minimize any negative impact on the project as well as other engagements in which the parties may be involved. Mediation allows disputants to avoid lengthy litigation. Mediation minimizes disruptions in the work environment and reductions in productivity. Mediation early in the dispute can also avoid “front-loaded” litigation expenses. However, mediation may also be effective immediately preceding a trial, when principals are confronted with the shortcomings of their respective cases and the strong points opposing them, as well as the risks associated with trial. While emphasis is placed on early dispute resolution through mediation, mediation can be an effective tool at various points in a dispute. Accordingly, counsel should strategically evaluate mediation throughout the course of the dispute.

§ 5.1.2.3 Mediation Is Economical

Litigating a complex construction dispute is expensive in both costs and resources. Parties face the costs and disruptions of depositions, interrogatories and other pre-trial discovery, including possibly electronic discovery processes. Attorneys’ fees, expert fees, and witness fees, add to the expenses, which may not be recoverable. Litigation and arbitration demands require significant client involvement. Employees are required to gather and prepare materials in discovery and prepare for and participate in depositions and trials. The litigation and arbitration processes divert personnel away from their employment duties and increase overhead costs.

Mediation is generally more cost effective than litigation or arbitration. Limiting discovery and eliminating the adversarial procedure processes associated with litigation and arbitration, including motion practice, mediation costs are a fraction of the costs of litigation and arbitration. Mediation can be especially appealing in smaller cases where the amount in dispute is less than the attorneys’ fees and costs to contest the dispute. In addition, saving time saves money for the client. In nearly every case, mediation costs are negligible when compared to the costs of litigation, or even arbitration.

§ 5.1.2.4 Mediation Is Flexible

Mediation can be adapted to a particular situation to suit interests of the parties. Mediation can even be scheduled at the job site and while the facts are fresh and documents and witnesses are available. Mediation may be particularly beneficial in circumstances where quickly and effectively resolving disputes can prevent a work stoppage. Conducting mediation conferences immediately or on site can save the time and money that would be required to reconstruct the situation months or years later before a jury or an arbitrator.

The mediation process may be designed to suit the details of the dispute. Either detailed memorandum and exhibits or brief statements on the basic underlying facts and issues can be submitted to the mediator before the mediation. The mediator sometimes starts the mediation by meeting with all parties in a joint session. This meeting may be used as an opportunity for each party to summarize its position and to exchange facts, though such rarely occurs. This is not a formal evidentiary hearing so witnesses generally do not attend. However, if the presence of witnesses is necessary on certain issues, they can express their opinions and observations without the rules of evidence or legal objections to hinder this exchange of information.

After the joint session, the mediator meets individually with each party in a private and confidential caucus. Acting as a confidante to each side, the mediator probes for common ground, explores solutions, and provides suggestions and insights. Without advocating a particular position, the mediator may play the devil’s advocate and point out risks and weaknesses in each party’s position. The mediator typically shuttles back and forth in private caucuses conveying only the information that each party has agreed to share with the other side. The parties often will not meet face-to-face again until an agreement is reached or a clarification is needed that requires another joint meeting. In most cases, the terms of the agreement are reduced to writing and signed by the parties.

The “Mediation Procedures” at the end of this section are an example of the guidelines parties may choose to use.

§ 5.1.2.5 Mediation Is Private

The success of mediation hinges on the comfort of parties to be open and honest about their positions and underlying interests. What party (or mediator, for that matter) would participate in mediation if statements made to the mediator were subject to discovery and could be entered as evidence into a later proceeding? A.R.S. § 12-2238 explicitly provides that the mediation process is confidential and may not be discovered or admitted into evidence. This privilege extends to statements made during, and documents prepared for, the mediation. This is to encourage parties to honestly evaluate their positions and actively engage to resolve the dispute, without fear of repercussions in the litigation.

While mediation communications are privileged, there are, of course, strategic elements in what is revealed to the opposing party. Candor with the mediator is particularly critical in identifying interests and assessing risks in the dispute. Mediators will not disclose information obtained during the private caucus to the opposing party without the consent of the disclosing party. It is important to be clear with the mediator what information shall and shall not be disclosed to the other side.

§ 5.1.3 When to Mediate

A settlement may be made at any stage of the proceeding, even before a claim is filed. Mediation can be beneficial even when the disputants believe they could not possibly lose at trial. If both parties to the same lawsuit have a “slam dunk” mentality, they must admit that one of them will be terribly disappointed. When there is risk, mediation is a valuable negotiation tool.

When the dispute arises in the midst of a construction project, important continuing relationships can quickly be damaged. Mediation can allow such relationships to continue uninterrupted. The nature of the construction industry is such that parties involved in a dispute will often be working together on future projects. Accordingly effective and efficient resolution of disputes has long term implications; facilitating a continuing relationship is critical.

In July, 1997, the American Institute of Architects (“AIA”) standard documents were amended to include a standard “mediation is required” clause. This approach was carried forward in the 2007 revisions to the AIA standard documents. In November 2007, AIA released a new set of standard contract documents. The new AIA standard documents, specifically A201-2007 and A101-2007, include substantive modifications to the dispute resolution processes within construction contracts. Among the most significant changes in the new standard contract forms is the introduction of the position of “Initial Decision Maker” (“IDM”). The IDM is intended to provide neutral and independent oversight of the construction project. The IDM does not eliminate other dispute resolution procedures but rather provides oversight and resolution during the course of a project. The AIA mandates that the parties mediate claims before pursuing relief through arbitration or litigation.

Mediation should be considered as part of the standard case analysis for every attorney and should be regularly evaluated throughout the life of the case. Ideal situations for mediation are those where the parties have a continuing relationship, the evidence is complex and litigation will be lengthy and expensive, or when the outcome at arbitration or trial is too unpredictable to risk an all-or-nothing verdict.

It is impossible to predict the outcome of construction litigation due to the complexity of the subject matter and the large volume of information to be weighed in each case. There will undoubtedly be expert testimony that will conflict, and it is often difficult to say which side’s expert will be believed by the fact finder. Mediation offers the parties a chance to exercise some degree of control over the final result. Many cases that have been fully prepared for trial or arbitration are settled “on the courthouse steps” because the parties are ultimately unwilling to risk a binding decision made by a third party. Settlement at an earlier time could have resulted in substantial savings of costs and resources. Good business practice dictates that the possibility of settlement be explored as soon as the parties have sufficient knowledge of the facts and continue to be explored as the strategies and positions of the parties shift. Parties may also agree to mediate a matter at some point in the future, such as after limited discovery has taken place.

§ 5.1.4 How the Process Works

The mediation process can be tailored to the circumstances and details of the dispute. A general overview of the mediation process and key considerations in the process design include selecting the mediator, mediation party representatives, mediation tactics and strategies (including discovery), and accountability of the parties.

§ 5.1.4.1 Selecting the Mediator

Mediators are usually selected on the basis of their neutrality, reputation and expertise in the subject matter. Mediators may be lawyers or professionals in a relevant field. Construction cases typically involve complex issues requiring the analysis of a formidable body of job-specific documents and data. For example, having a contractor, architect, engineer, or construction attorney who is experienced in the subject matter of the dispute, can shorten or expedite the process because the mediator is educated as to the industry practices and industry standards.

Obviously, a mediator shall avoid a conflict of interest or the appearance of a conflict of interest during or after a mediation. Before accepting a mediation, the mediator must make a reasonable inquiry to determine whether there is a conflict of interest and shall disclose, as soon as practicable, all actual and potential conflicts of interest. The disclosure obligations of mediators are ongoing. After accepting a mediation, a mediator must disclose any information that comes to light that may raise a question about the mediator’s service or may create a potential or actual conflict of interest. Upon disclosure by the mediator, the parties may agree to proceed with the mediation or may terminate the mediator’s engagement.

§ 5.1.4.2 Authority to Settle

A person with full settlement authority for each party should be present during the mediation. However, this may not always be possible. Public entities must ultimately report back to a city council or board of directors. The decision-maker in these cases should be someone who has sufficient knowledge of the ruling body’s objectives and enough influence for the recommendation to be accepted by that ruling body. Sometimes such an entity can provide authority parameters for the party representative, including a settlement range and/or discretion for other accommodations.

The parties should consider giving primary responsibility for negotiating a settlement to people who have had no direct involvement in the event that led to the dispute. Often the people who directly participated in the presenting events have personal interests in defending their own actions. Emotion can cloud objectivity and be an obstacle to resolving the matter in the best interest of the party.

§ 5.1.4.3 Written Settlement Agreements

When agreement is reached in mediation, it is important to record the salient terms and have all parties sign a written agreement. It does not necessarily have to be an exhaustive document but rather may be a preliminary agreement setting forth fundamental terms of agreement. Final and formal agreement details may require additional research or calculations, or approval of additional authorities or parties. In such circumstances, the mediation agreement should allocate responsibility and set forth a schedule for achieving a final resolution.

§ 5.1.4.4 Discovery in Mediation

Many construction disputes center on ambiguous or inconsistent contract terms. Vague and subjective language creates opportunities for controversy. Another prime cause of disputes is lack of knowledge. While one of the objectives of mediation is to shorten the expensive discovery process, parties must know enough about the strengths and weaknesses of the case to assess risks and interests. When agreeing to mediate, parties should also establish a process for exchanging information or conducting limited discovery. If mediation is undertaken before litigation commences, parties should consider an informal exchange of documents. Parties may wish to conduct witness interviews rather than transcribed depositions. Parties may agree to joint interviews or to share interview memoranda or materials. Arizona law requires that all parties to a lawsuit disclose and exchange all relevant documents and intended witnesses. Early disclosure of documents serves as a constructive step toward resolving the dispute in mediation.

If parties agree to mediation after a lawsuit has been commenced, the parties may establish a schedule or agree to limited use of the formal discovery procedures in litigation as part of the mediation process.

Parties are affirmatively required to disclose all information that may be calculated to lead to the discovery of admissible evidence. The parties are, most importantly, required to reveal to each other in writing all negative or damaging facts that they know about their case, even if it damages their lawsuit. Candor in the disclosure and discovery processes may help to facilitate settlement by permitting parties to accurately assess their respective interests and risks.

§ 5.1.4.5 Mediation Strategies and Practices

Capitalize on the flexibility of the mediation process. Examples of mediation practices and strategies that may be used to facilitate resolution include:

• Partial Mediation or Partial Settlement. Ideally, mediation will include all parties to a dispute working toward a resolution on all elements of a dispute. This is not always practicable. In complex disputes, parties may resolve portions of the dispute and leave other decisions for the court or the arbitrator. For example, parties may agree on an apportionment of liability but leave the question of damages for the fact-finder. Mediation between some of the parties involved in a dispute may also be an effective tool. Resolving a portion of the claims in the dispute or reaching a resolution among some of the parties still goes a long way in reducing the costs and resources required by litigation.

• Multiphase Settlement. In complex cases mediation may take several days or even weeks. It is important in extended mediation negotiations to set goals so that the process advances toward settlement. For example, the parties may establish a schedule and negotiate specific claims or issues on designated dates. Tailoring the process this way permits the parties to be adequately prepared and reduces the drain on resources by targeting attention and participation on a particular issue.

• Site Visits. Construction disputes often offer unique tangible evidence and results. Conducting inspections or mediation conferences on site may provide for easier access to information and party representatives and foster efficient communication and consideration of possible resolutions.

• Use of Experts. Parties may agree to use experts in mediation. For example, parties may agree on an expert with particular technical knowledge to conduct an assessment. Agreeing on and engaging a single expert may help to foster the mediator’s understanding of key issues, provide a neutral assessment of the parties’ respective risks, and facilitate a resolution. Such assessments can be done by a single expert or a panel of experts. Such use of experts avoids the “battle of the experts” that is common (and costly) in litigation.

• Alternative Outcomes. Litigation outcomes often involve payment of damages or specific performance requirements. Mediation is not limited to these conventional outcomes. Sometimes a party’s liquidity, stakeholder interests, or debt obligations are obstacles to settlement. Creative outcomes can help to overcome these obstacles. For example, settlements might include providing for ownership interests in a business entity, project, or product; agreements for joint ventures; option contracts; agreements for future engagements discounted or higher compensation rates for future engagements; shared information; or other non-monetary value.

• Mediator Proposals. If the parties are unable to reach a compromise or settlement, a mediator may propose a resolution. Usually mediator’s proposals are offered at the point in mediation where the parties reach an impasse and are based on the mediator’s assessment of the parties’ respective risks and interests and the status of negotiations. Mediator proposals generally do not permit counter-offers or further negotiation between the parties but rather must be accepted or rejected as they are proposed,

Mediation is limited only by the imagination of its participants. The process and outcomes can be designed to best serve the needs of the parties. Doing so requires an honest and comprehensive assessment of not only the parties’ position in a specific dispute, but also future interests, business strategies, and continuing relationships.

§ 5.1.4.6 Mediation Clauses

The best time to address a dispute is before it happens. Make provisions for mediation in the contract. When ADR is not proposed until after a dispute arises, it is difficult to get the disputants to even agree upon a process. The engagement contract should provide a workable ADR process that obligates and enables the parties to address disputes in the most effective and efficient manner.

Mediation initiated by a contract clause can lead to a “win-win” resolution and an on-going profitable relationship. A party may be able to propose settlement to the opposing party without fear of being perceived as weak or vulnerable for doing so.

§ 5.1.4.7 Other Resolution Concepts

Dispute review boards (“DRBs”) and partnering programs are commonplace in the construction industry, primarily on projects involving federal, state, and municipal agencies. Both are structured means of direct negotiation to resolve disputes. DRBs are appointed and partners are selected prior to commencing work on the project. Because the owner, designer, and builder have many interests in common, they must work cooperatively from the beginning of the project. The goal is to deal with current and potential problems rather than resolving disputes after they occur. The attorney’s role is one of prevention.

With DRBs, the parties each select a board member, subject to the approval of the other party. These two board members then choose a third who serves as chairperson of the board and is subject to the approval of both the owner and the contractor. This non-binding arbitration panel then conducts regular meetings at the job site. DRBs emphasize avoidance of claims, leading to a reduction of project costs.

The construction industry is unique in seeking to foster early resolution of problems involving contracting parties. Contractors, subcontractors and other professionals partner on projects. This approach promotes early identification of potential problems and encourages resolution at the lowest level in the chain of command. Under partnering, whoever discovers a problem initially attempts to handle it with his counterpart, the partnering representative of the other party. The key to partnering is matching up cooperative personnel from the general contractor and as many of the various subcontractors on the project as possible. These individuals work together for the good of the entire project by keeping the avenues of communication open.

Partnering goes beyond total quality management to include dispute resolution. Many parties have chosen to set up partnering contracts that contain mediation and binding arbitration provisions for those matters they are unable to resolve. Mediation, unlike litigation and arbitration, can foster dispute resolution in a collaborative rather than adversarial process. The collaborative and participatory nature of the process benefits the parties’ continuing relationship.

A combined Mediation/Arbitration approach (Med/Arb) is useful when the parties want to be assured of a final resolution after making every reasonable effort to reach a settlement through mediation. Under this paradigm, any issues that remain unresolved are then automatically referred to binding arbitration. The person who serves as the mediator can also serve as the arbitrator. The parties must weigh the risk of revealing their respective bottom lines in mediation to someone who may later be asked to render a final award in arbitration. However, this risk is balanced against the time and cost of engaging a new arbitrator who must be educated as to the parties’ positions and interests, as well as the facts of the dispute

§ 5.1.4.8 Confidentiality Agreements

Although A.R.S. 12-2238 (B) provides for confidentiality in mediation, many parties opt to sign a confidentiality agreement prior to participating in a mediation session to avoid potential problems. Most organizations that provide mediation services require the parties to agree not to subpoena the mediator to testify or produce records in any future proceedings. Arizona law specifically prohibits subpoenaing the mediator to testify about information learned in the mediation.

§ 5.1.5 Conclusion