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By Gary Morgerman, founder of Construction Mediation Inc.
In the newly discovered and fastest growing method of resolving
construction disputes, construction mediation, where contentious parties
and representatives with little experience in process or expertise in
the subject matter of the dispute is not to be unexpected, the mediator
must be prepared to abandon the traditional role of not making
suggestions or verbal judgements on the parties' settlement proposals.
And if the mediator has to assume this non-traditional role, to be
optimally effective the mediator must have expertise in construction and
construction claims and experience in construction arbitration and
litigation. The non-traditional mediation described below follows a
technique developed by Kenneth R. Feinberg, the court appointed Special
Master who successfully mediated the Agent Orange, Dalkon Shield and
Shorham cases, among others.
Neither side wanted to mediate and each thought it a waste of time.
The only members of the disputing parties who could speak civilly to
each other were the attorneys, one of whom had never been involved in a
construction case or a mediation. The opposing attorney had two
mediation experiences, both bad.
The dispute arose from the erection of one school building and the
renovation of an adjoining one for a university in New York City. A
trade contractor was the claimant. The respondent was the University.
Each was represented by an established, first-rate law firm. Somewhat
less than $1,000,000 was in dispute. Mechanic's liens had been placed
against the buildings. The writer was the mediator.
The dispute had two elements: an unpaid contract balance and a
monetary claim for lost labor productivity alleged to be the result of
excessive change orders, stacking of trades, defective drawings and poor
planning on the part of the University's construction manager. The
University refuted the productivity claim citing the contract's 'No
Damage for Delay' clause by which the contractor waived 'any claim for
damages on account of any delay, obstruction or hindrance for any cause
whatsoever...and agrees that its sole right and remedy...shall be an
extension of time fixed for completion of the Work.' The University
claimed offsets against the contract balance but acknowledged they were
Silence that was deafening and hostility that could be cut with a
knife pervaded the mediation room. Each side seemed to be sitting on
their hands so they would not attack each other. The University was
represented by its director of plant operations and outside counsel.
The contractor's group included the company's president, the project
superintendent and project manager, the president of a construction
claims consulting firm and a construction attorney.
After the mediator makes introductory remarks, explains the ground
rules and fields questions, each side makes a presentation of its case.
Usually the attorney makes a short statement of the facts, the law and
sums up the reasons why their party's position should prevail and the
other side's should not. Customarily the claimant goes first.
The contractor's attorney was a battle-tested and savvy construction
litigator well versed in construction and construction law. So it was
surprising when the claims consultant rose and put on an elaborate dog-
and-pony show complete with multi-colored schedules, charts and graphs
describing the lost productivity damages. The University showed nothing
but contempt for the presentation. It was now the University's turn.
Its attorney rose. 'No Damage for Delay means no damages, period.' He
In construction mediations with hostile participants, mediators
should frown upon exchanges and the questioning of one side by the other
both during and after the presentations. They usually turn into verbal
fisticuffs and this group needed no encouragement. Immediately,
therefore, I commenced the next phase of the mediation, separate,
private meetings with each party and its representatives.
The First Round of Caucuses
The first caucus is usually with the claimant but the University's
curt presentation evidenced a stridency or lack of experience that
demanded immediate attention. The caucus revealed that the University's
attorney knew nothing about construction and little more about
construction disputes and construction law. His firm had a 'no
arbitration' policy, mediation was new territory for them and they were
wary. The mediation clause had been put in the contract by the
University's construction manager who negotiated the construction
contract with the contractor and who went bankrupt before construction
To achieve settlement each party has to make concessions from its
opening position, usually after the mediator plays devil's advocate and
raises legitimate doubts as to the validity and viability of their
positions and explores with them the costs if the road to litigation or
arbitration is taken and the risks if the case is decided in either
venue. However, if one side cannot appreciate the mediator's arguments,
little movement toward settlement is likely to occur. If this mediation
were to have any chance of success, therefore, the University and its
attorney would have to allow me to enlighten them about construction,
construction claims and construction litigation and the contractor would
have to give me the necessary time.
Most of the first day, therefore, was spent with the the University's
people cultivating their trust and convincing them their mediator was
knowledgeable about construction and construction disputes. They were
advised that the consultant's presentation was not uncommon in
construction disputes, that lost productivity claims were not without
validity and despite their position that the 'No Damage' clause
protected against such claims, similar lost productivity claims have
been successfully litigated.
Caucuses with the contractor, many less and much shorter than those
with the University, were devoted to diplomatically deflating its lost
productivity claim. Their consultant had overreached and the analysis
contained a flaw, i.e., lost productivity compensation was claimed on
change orders in which the contractor had tallied the hours after the
item of work was completed and then paid. The contractor was also being
counseled that the owner's inexperience in construction disputes would
prolong any hope for a settlement.
An Unusual Proposal
At day's end the parties were assembled for another joint meeting.
Rarely should parties in an angry commercial dispute be allowed to meet
again the first day because innocent remarks can ignite volatile
temperaments undoing a day of progress.
Immediately the two sides started trading nasty barbs. Before things
escalated they allowed me to make the following proposal: If they gave
me a month to review the project documentation and speak with project
personal, I would analyze the contractor's claim and the University's
defenses, the law, the risks and costs to each if there were no
settlement and I would report back with a settlement figure I deemed
appropriate. This number would be my best assessment of a settlement
fairest to each side all things considered, a number designed to give
each an immediate opportunity to settle the case, not one to be used by
either as a platform for further negotiations. It was an unusual, non-
traditional suggestion for a mediator to make - proposing a settlement
number - but they agreed to it and a meeting was scheduled one month
Educating the University
During the next month, project documents and the consultant's claim
books were reviewed and there were discussions with the University about
construction, construction law, case precedents and the concept of lost
The attorney was cautioned: if a case like this went before a judge,
the judge would pressure the attorneys to have it heard by an
arbitration panel of construction experts where unpredictable equitable
considerations by the arbitrators could replace strict 'No Damage' legal
interpretations by lay judges and juries.
An examination of the change orders revealed one every other day
during the course of the contractor's work, a job condition that fosters
labor and management inefficiency, a prima facie lost productivity
situation. Most were revisions to the original contract drawings, a
project being designed as it was being built, in effect, a 'Fast Track'
job, one, the University's attorney was advised would have invited
higher bids, had it been bid that way, to take into account the chaotic
work conditions that often occur on Fast Track jobs.
The University's architect was interviewed and acknowledged excessive
change orders, defective drawings, hidden conditions and poor
performances by other contractors and the University's construction
manager created a stop-and-go work situation that resulted in the
project's eight months delayed completion. The University's attorney
was so advised so he could confirm this information.
The Mediator's Suggested Settlement
We all met a month later. The contractor and his attorney were
advised that although he had a legitimate lost labor productivity claim
that was not mooted by the 'No Damage' clause, it was not fairly priced.
Defects and overreaching reduced its value considerably and I explained
the settlement range I had calculated and thought appropriate. This
settlement range vs. the costs in time and money and the chances for a
successful litigation were discussed. They huddled and agreed to accept
a settlement within my narrow dollar zone if such was offered by the
A meeting was then held with the University's representative and its
attorney. They were not advised as to the contractor's reaction to the
suggested settlement range but if the University accepted it as well, it
would have been a simple matter to shuttle back and forth between the
parties to reach an agreement on a hard number within the suggested
The University had now accepted the legitimacy of a lost productivity
claim and the attorney was not so strident that the 'No Damage' clause
gave them blanket protection. We went over the lost productivity damage
analysis done by the mediator, and we had the same cost of litigation
vs. risk of not settling discussion, this time from the owner's
perspective. The University's representative and the attorney talked
briefly and requested ten days to consider the suggested settlement.
The contractor was advised of the University's request and agreed to
wait, forbearing any legal action.
A 'Nuisance' Offer
Two weeks later the University's attorney offered 1/3 of the amount
at the bottom end of my suggested settlement range. He still was not
convinced that the 'No Damage' clause did not completely protect the
University and thought I was too generous to the contractor in my lost
productivity analysis. It was characterized as a 'nuisance' number to
get the contractor out of the University's hair. But the University
advised they might up the ante if their offer was refused; they wanted
to keep the mediation alive. I knew, however, that if that paltry offer
was transmitted to the contractor, the mediation would be dead.
The contractor's attorney was told an offer had been made but 'We
weren't there yet.' As is the mediator's prerogative, the number was
not disclosed but I said we were making progress. After all, something
is infinitely more than nothing. More time was needed and I thought it
would be imprudent to break off the mediation. His client was consulted
and agreed to go forward.
The next month I sent the University several more analysis of the
contractor's claim to support my contention that the amount of hours and
the inefficiency rates used to arrive at the mediator's suggested
settlement range had been more than fair to the University. We reviewed
the change orders, continued our 'No Damage' debate and discussed the
risks and costs involved in litigation and arbitration.
The University doubled its offer. It would be rejected but was
enough to merit the contractor's consideration and a further indication
of progress. The offer was conveyed in typical mediator language: 'What
would you do if they offered.....?' It was refused but both sides
wanted to keep the mediation alive.
A few weeks later the University made an offer at the bottom of the
suggested range. Some shuttling back and forth and the parties agreed
on a higher number within the range. It seemed we were home free since
all that remained was the contract balance issue.
The Dean Intervenes
The parties agreed on the first day that if the lost productivity
claim was settled but there was no agreement on a closeout number on the
contract balance, they would allow me to decide on a number. But the
mediation could not be concluded until the University's representative
made his evaluation of the contractor's closeout number. The rep,
however, refused to make the evaluation despite repeated requests from
his attorney and the mediator.
The contractor, impatient with the University's failure to act, was
threatening to withdraw from the mediation and commence a lawsuit. It
was time to turn up the heat.
The University's representative was bypassed and I went directly to
the Dean of the University. He was told that it would be unfortunate
if, because of a lack of attention on the part of the University to a
few remaining items, an expensive and time consuming legal war broke out
when the real battle - the lost productivity issue - was over, peace was
at hand and all that remained was a little mopping up on the contract
balance and backcharges.
A Done Deal
Two days later a settlement agreement was forthcoming. Although the
settlement number was blank the University's attorney guaranteed that
the director of plant operations, at the Dean's gentle urging, was
completing his evaluation of the contract balance issue and an offer
would soon be on the table. The agreement was forwarded to the
contractor's attorney for review.
The next day an offer was made which was within $5000 of the
contractor's requested closeout payment. It was conveyed to the
contractor and accepted. The settlement agreement was executed, the
liens were released and the mediation was over.
In cases not as complex with participants not as contentious a
settlement should be achieved 90% of the time in two or three days of
meetings. But even with the most hostile and apprehensive parties the
success rate can be the same if the mediator can gain their trust as to
his objectivity and their confidence as to his expertise in the subject
matter of the dispute. If the mediator can accomplish this without
having any of the hostility between the disputants being directed at
him, a settlement is attainable in the most difficult of cases at huge
savings in time and money vis-a'-vis arbitration or litigation.
Beyond achieving a settlement some say the real litmus test for a
successful mediation is either two parties who are happy or two parties
who are unhappy with the settlement. In this case hostile parties
became happy campers. The contractor, astonished that the University
agreed to a settlement, confided that he would have taken less. The
University later told me privately they would have paid more!
Abstracted from the 01/96, 'Anatomy of a Construction Mediation.'
E-mail: [email protected] for a copy or to contact the author.
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