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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.

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PREMIUM LEGAL RESOURCES LEGAL FORMS ASK A LAWYER

By Gary Morgerman, founder of Construction Mediation Inc.

Preface

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.

Background

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

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 minor.

Hostile Participants

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 sat down.

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 was completed.

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 hence.

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 productivity.

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 University.

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 range.

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.

Halfway There

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.

Summing Up

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.

Postscript

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!
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Abstracted from the 01/96, 'Anatomy of a Construction Mediation.' E-mail: cminc@pipeline.com for a copy or to contact the author.

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