stage 5: binding dispute resolution

Introduction to Construction Dispute Resolution

Feniosky Peña-MoraGilbert W.Winslow Career Development Associate Professor of Information Technology and Project ManagementMIT Room 1-253, Phone (617)253-7142, Fax (617)253-6324Email:[email protected]

Intelligent Engineering Systems LaboratoryIntelligent Engineering Systems LaboratoryCenter for Construction and Research EducationCenter for Construction and Research Education

Department of Civil and Environmental Department of Civil and Environmental EngineeringEngineeringMassachusetts Institute of Technology Massachusetts Institute of Technology

Stage 5: Binding Dispute Resolution

2Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Definitions WHAT

• “…referral of a dispute to one or more impartial persons for final and binding determination. Private and Confidential, it is designed for quick, practical, and economic settlements.” (American Arbitration Association)

WHO• A Panel of Three Arbitrators

WHY• Impartial, Final and Binding Decisions Issued by

Knowledgeable Experts

HOW• Follow the Steps in the Contract to Reach a Binding

Decision

• Review the Contract for the Appropriate Procedures

• File the Necessary Forms and Select the Arbitrator

• Prepare your Case Relevant to the conflict


Reservoir Project Project Scope: Upgrading a Water Reservoir in an

Environmentally Sensitive Zone Fixed Price Contract

• US$6 million Bid Price

• 480 Days for Completion

• US$ 1,000 Per Day For Liquidated Damages

Major Participants• Owner (Public Agency)

• Designer

• Contractor (Lowest Bidder)

Problematic• Widening for a Temporary Access Road For Equipment

• Owner’s Complaint: The Impact on 35 feet of Environmentally Sensitive Area

• Delay Claim Issued by Contractor

• Arbitration


Outline

Mediation/Arbitration (Med/Arb)

Adjudicator/Expert Determination

Arbitration

• Single Arbitrator

• Baseball Arbitrator

Shadow Mediation


Mediation/Arbitration (Med/Arb) Least Adversarial Binding DART

Same Third Party Neutral Acting as Mediator and Arbitrator if No Mediated Settlement Was Reached

Disadvantages (As Compared to Mediation)

• Commitment of Parties to Proceed to Arbitration if Mediation Failed

• Difficulty in Divulgating All Confidential Information to Neutral Third Party in the Mediation Phase


Med/Arb : A Worldwide Practice East: Highly Encouraged

West: Preference of an Unbiased Judge

Asia: Conciliation Prior to Arbitration , Highly Encouraged

Australia:

• Pre-Trial Motions Set by Arbitrators in an Attempt to Promote Early Settlement

• Proceeding to Arbitration if Failure to Reach Settlement


Outline


Adjudication/Expert Determination

Arbitration



Shadow Mediation


Adjudicator/Expert Determination Expert With His/Her Own Inquiries and

Investigations

Award by the Expert, Binding If Enforced by Contract

Characteristics of the Expert Adjudicator: Fast, Decisive, Binding


Adjudicator Procedure in the UK

NOTICE OF DISPUTE

APPOINTMENT OF ADJUDICATOR

BINDING DECISION FOR THE REST OF

THE PROJECT.It can be submitted to arbitration after final

completion.

7 days 28 days, which can be extended once for another 14 days if the parties agree to do so

Peña-Mora et.al, 2002


Adjudicator Procedure in the UK Main Features

• Unilateral Procedure Initiated by One of the Parties

• An Interim Decision that Can be Reviewed or Appealed in Arbitration Upon Project Completion

Disadvantages

• Very Limited Timeframe (7 Days) for the Joint Selection of a Knowledgeable and Reliable Adjudicator

• Limited Time for the Adjudicator to Gather Information (2 Months)


Outline



Arbitration



Shadow Mediation


Arbitration Characteristics

Decisions Are Impartial.

Decisions Are Final and Binding on All Parties.

Decisions Are Issued by Knowledgeable Experts in the

Field of Dispute.

The Contract Specifies the Size of the Arbitration Panel,

the Codes and Regulations, the Organization

Administering the Procedures, the Location…


Arbitrator’s Attributes

Impartiality and Objectivity

Dispute Management Skills

Experience With Arbitration Proceedings

Strong Academic Background and Professional

or Business Credentials


Classification of Arbitration Cases Decline in the Usage of Arbitration Since 1991

New Classification of Arbitration Cases by AAA

(1999) and Implementation of New Sets of Rules

• Fast Track Rules for Cases up to $75,000

• Regular Track Rules for all Other Cases

• Large Complex Track Rules for Cases Involving in

Excess of $1,000,000


Outline



Arbitration

Single Arbitrator


Shadow Mediation


Single Arbitrator

One Expert Presiding Over the Hearings

Instead of a Panel

Need to Weigh the Cost Savings Against the

Risk of Having One Single Viewpoint


Outline



Arbitration

Single Arbitrator

Baseball Arbitrator

Shadow Mediation


Baseball Arbitrator

A Single Neutral Advisor Is Selected.

Each Party Presents Its Offer for Settlement.

The Arbitrator Selects One of the Two Offers.

Disadvantages:

• Lack of Flexibility

• Absence of Alternative Solutions


CN Oil Refinery Project Construction of a Refinery Complex for Heavy

Crude Oil in Venezuela

Contractor Experiencing Disruptions Due to Unforseen Labor Conditions

Total Number of Man-hours Growing From 1,500,000 to 3,000,000, Total Project Duration Growing From 18 to 28 Months

Some of the Labor Conditions

• Labor Strikes

• Shortage of Skilled Labor

• Overcrowding and Trade Stacking

• Extensive Overtime and Shift Work


CN Oil Refinery Project Contract Between Contractor and EPC Excluding Labor

Strikes in the Force Majeure Clause

Contract Requiring Dispute Settlement Via Arbitration After Project Completion

Contractor Hiring an Independent Auditor Halfway in the Job for an Independent Third Party Review

Benefits of Auditor

• Objective Analysis and Review Performed by an Expert

• Organization of All Documentation in One File

• Establishment of Key Variables to Assess the Impact on Productivity

• Establishment of a Cost Structure to Track Costs Deviations From Initial Estimates


CN Oil Refinery Project

Major Advantage of Third Party

• Provision of Valuable Document for Claim Settlement

for Only 0.07% of the Original Contract Amount

On-Going Negotiations Between Contractor

and EPC, Last Step Before Arbitration


Outline



Arbitration

Single Arbitrator

Baseball Arbitrator

Shadow Mediation


Shadow Mediation

Mediator Present During Arbitration Proceedings

Advantages

• Parts (or All ) of the Dispute Can Be Removed From Arbitration and Settled Through Mediation

• Shadow Mediator Recommends Possible Settlements Options Faster Than Arbitration


Reservoir Project Sources of Conflict

• Environmental Concern

• Misunderstandings and Unrealistic Expectations of the Owner

Contractor’s Arguments

• Bid Price Based on Ability to Modify Access Roads

• Impact of Lack of Access on Schedule

• Damages Exceeding US$1.0 Million

Owner’s Arguments

• Request of Access Road After the Permit Was Issued

• Contractor Involved During Request for Use of the Road

• Contractor Aware of Environmental Sensitivity of the Area

• No Proof in Bidding Documents That Bid Price Was Based on the Access Road

Results: Arbitration and Judgment in Favor of the Owner


Outline



Arbitration

Single Arbitrator

Baseball Arbitrator

Shadow Mediation


Summary Common Characteristics Between Arbitration and Litigation

• High Costs

• Time Consumption

• Strains in the Relationship Among Parties

• Increased Formality

• Decrease in Control by the Parties and in Flexibility of Outcome

• Adversarial Stance

• Win/Lose Outcome

Valuable Trait

• Reliance on Knowledgeable Third Party Neutral

Other Binding Procedures as Modification of Arbitration

• Mediation-Arbitration and Shadow Mediation : Increasing Mediation During Binding Procedures

• Adjudicator and Baseball Arbitration: Rapid Closure of Dispute, Less Communication , win/lose outcome


References [AAA, 2000] : American Arbitration Assiociation. A Guide to Mediation and Arbitration for Business People 2000.

[Beresford Hartwell, 1998] : Beresford Hartwell, Geoffrey M., (1998). The Relevance of Expertise in Commercial Arbitration. " Arbitration Procedures: Achieving Efficiency Without Sacrificing Due Process." Last Update: 22 June. Paris. Downloaded from the web on April 5, 1999 www.ciob.org

[Crowter, 1998] : Crowter, Harold, (1998). Chartered Institute of Arbitrators. Chairman's Address Member Lunch, Butchers Hall. June 23, London. Downloaded from the web on April 5, 1999 www.cioa.org

[DRT, 1997/1998] : Dispute Resolution Times, (1997/1998). AAA Partnering Boosts Jail Project in San Diego. p. 7 Winter

[ENR, 7/11/1994] : McManamy, Rob. Industry Pounds Away at Disputes. Engineering News Record. McGraw-Hill, New York. pp. 24-27. July 11, 1994.

[Fenn et al., 1994] : Fenn, P., and Gould, N., (1994). Dispute Resolution in the United Kingdom Construction Industry. October 1994. University of Kentucky. p 1-17.

[Fizel, 1994] : Fizel, John L., (1994). Play Ball Baseball Arbitration After 20 Years, Construction Dispute Prevention Comes of Age. Dispute Resolution Journal pp. 42-47, June

[Gould, et al.,1998] : Gould, Nicholas and Cohen, Michael. ADR: Appropriate Dispute Resolution in the U.K. Construction Industry. Sweet & Maxwell, London. Vol. 17. April 1998.

[Hollands, 1989] : Hollands, David S. FIDIC Provision for Amicable, Settlement of Disputes. International Construction Law Review. Issue 1. pp. 33-43. 1989

[Latham, 1994] : Latham, M. Constructing the Team: Final report of the Government/Industry Review of Procurement and Contractual Arrangements in the UK Construction Industry. HMSO London. 1994.

[Myers, 1994] : Myers, James. Task Force, Survival Kit for Complex Construction Arbitration in the 1990's. Dispute Resolution Journal. pp 53-57. September 1994.

Peña-Mora et al, 2002] : Peña-Mora, F., Sosa, C., and McCone, S. Introduction to Construction Dispute Resolution. Prentice Hall, New Jersey, 2002.

[Staniforth et al., 1998] : Staniforth, Alison and Taylor Kathryn, (1998). Building and Engineering Disputes: Reasons to be Worry Part II. Credit Control Hutton. Vol. 19 (2) pp. 12-13. 1998.