Construction Mediation Really Works

The use of mediation to resolve disputes between members of the construction community is finally taking hold in the industry as word of its effectiveness, efficiency and economy spreads. Following is the story of a construction mediation mediated by Construction Mediation Inc last week in New York City. In four hours the parties were able to reach settlement of a typical construction dispute, one that had survived a year of intense negotiations after which they had concluded, "we cannot resolve this issue."

The Participants
The mediation was initiated by a contractor to resolve a claim for additional costs, alleged to be the result of over-inspection, incurred by one of his subcontractors on a project built for a NYC municipal agency. As in every mediation, participation by all is voluntary. The mediator is invited by the parties to assist them in resolving their dispute. Any party, and the mediator, may terminate the mediation at will, at any point The mediator, unlike an arbitrator or judge, has no power over the participants except the power of persuasion, an empowerment which occurs after the mediator has demonstrated absolute objectivity and construction expertise. Expertise in the subject matter allows the mediator to foster compromise in the parties by playing devil's advocate to each side's positions, a role critical to success in the majority of construction mediations.

The contractor's party of three: the contractor, the sub and an expert in the sub's field of work, sat on one side of the mediation table. Opposite them was the Agency's team of six: its change order chief, head architect, project manager, director of field inspection, the project's construction manager (an independent contractor) and a field inspector from a testing firm hired by the CM for the Agency. The mediator sat at the head of the table. Neither side had a lawyer, the Agency's policy excludes its legal staff from participation if the other side advises that it will not be represented by counsel at the mediation. The mediator was not an attorney.

The Joint Meeting
Unlike many construction mediations, a spirit of congeniality was apparent in the room from the outset. It later developed that the contractor and sub were highly regarded by the Agency, the result of work they had done on previous Agency projects. Such a relationship, and the continuation of it, is the backbone of the construction business and each wanted to maintain it. Mediation promotes this vs. arbitration/litigation : a non-contentious, voluntary attempt at resolving differences vs. hostile warfare.

The proceedings began with an explanation of the ground rules. Each side then makes a presentation of its case. The mediator is familiar with each party's basic positions based upon written statements and information each submits prior to the first meeting. The claimant goes first. The presentation, who, and how many make it, is up to each party. Each side is requested not to interrupt the other's presentation, all would be given the opportunity to ask questions and make comments after both sides have spoken. A construction mediator, however, may interject questions and comments during the presentations. This is to gain the party's confidence in his understanding of the issues, often by rephrasing statements made from a different perspective. This also allows each side to see issues from a point of view they may not have considered or understood clearly.

Identifying Interests
The mediator must be able to identify and uncover interests. On the face of it, it was in the best interest of the inspector, paid by the hour, to have inspected as much as possible. And if the claim had merit, it would be in the best interest of the Agency's CM, whose firm was hired by the Agency to keep costs down and who hired the inspector, not to be associated with a double waste of funds - the additional cost of the over-inspection and the sub's claim - on a municipal project in a city under tight budget restraints.

Sometimes interests exist between participants on the same side of the table that are at odds. And it is not unusual, after a mediation gets underway, that unanticipated interests are identified on both sides of the table. Interests, if explored verbally by the mediator, as with devil's advocate questions to each party, are made during the private caucuses with that party, never during a joint meeting. A mediator must not be responsible for giving one side ammunition against the other.

The Contractor's Case
The subcontractor claimed the specification which controlled his work had been misinterpreted by the field inspector who the Agency and CM had looked to for guidance. The sub claimed his performance had been held to a higher standard than required by the spec and the standards of the industry. In addition, he claimed he was over-inspected. The combination of the two resulted in additional material costs and a loss of productivity that had not been anticipated when he put together his bid.

After the sub spoke, his expert went into an in-depth discussion of the specification and the customs of the construction industry that prevailed in the subcontractor's trade, concluding with an analysis of how the inspector's demands on the sub's performance far exceeded each.

The Agency's Rebuttal
The Agency's presentation, with contributions from each of its six-man team, each from his own perspective, stood behind its position that the quality of work demanded and the amount of inspection that occurred were in compliance with the job specification. The chief architect concluded the presentation with, "that's what we bought and that's what we were entitled to."

The parties exchanged thoughts on their respective positions, a discussion moderated by the mediator whose main role is to keep things focused and orderly, the difficulty of which is directly proportional to the number of people in the room, how many are outspoken and speak at the same time (in construction disputes, the majority) and the diversity of interests. Despite their mutual respect and good will, neither side would budge from its initial position. When the discussion did not blaze new ground the mediator adjourned the joint session and started his first round of private caucuses with each side.

A number of questions had to cleared before the mediator met with the Agency, whose position, in his estimation, was more problematic than its opponent. This opinion was based upon a document received before the mediation and statements made at the joint meeting.

Caucusing with the Contractor
After some discussion, the sub and its expert agreed that the specification could be interpreted in a more favorable light to the Agency than they have argued during the joint session. The mediator also pointed out the summary manner in which lost productivity and damages were calculated. They would have to be much more sophisticated than as submitted to the Agency if the dispute ended up in a courtroom. They were reminded that the costs of litigation (arbitration was not in their contract, nor could the Agency agree to it) would wipe out a successful lawsuit. This 'cost to collect' dilemma faces every contractor and subcontractor that may have a valid claim which is not for big dollars that faces an unscrupulous or stubborn opponent with deep pockets or an in-house legal staff. Underlying mediation, however, is the principle that both sides come to the table with a wiliness to compromise if reasonable and logical arguments are presented that have merit. In that spirit, the sub agreed to be reasonable and was prepared to lower his demands. The contractor, whose only financial stake in the outcome was his overhead and profit markup on the sub's claim, concurred.

The Caucus with the Agency
The caucus with the Agency lasted longer and was more delicate. As with the contractor, the mediator played devil's advocate with the Agency's interpretation of the specification. At the outset, the inspector was adamant and outspoken, the CM silent. The four Agency staff displayed confidence in the Agency's position, each with an enthusiasm directly proportional to their personal involvement in the project. But it was a united front.

Why was the inspector's inspection so intense? He reiterated that the spec demanded it, and even if it did not, he had observed defects in the sub's initial performance that justified a continuous, close scrutiny of the sub's performance. This was contrary to caucus statements made by the sub and the contractor who said the work was done without criticism, nor correction, by the inspector. The inspector was so advised and when asked if he could produce inspection reports to support observations of defective work, he could not, nor could his office when he checked back with it.

The mediator showed the chief architect an excerpt from a court decision quoted in a chapter about specification interpretation in a construction claims book. It stated: "the courts will seek the meaning that would be attached by a reasonably intelligent bidder...who would be expected to have the technical and trade knowledge of his industry and know how to read and interpret technical engineering specifications and perform construction work in accordance with such specifications." He read it without comment.

The project manager was concerned that if the claim had merit would word get out resulting in similar claims by subs on other Agency projects. He was reminded, as all were reminded at the opening session, that all had agreed, as a condition of the mediation, that everything which transpired was confidential, whether revealed in a joint meeting or in a caucus. The only thing that would survive the proceedings, and should survive, hopefully, would be a settlement agreement.

The "Internal" Memo
The caucus concluded with a discussion of an Agency memo, whose conclusion regarding the specification and inspection, the mediator thought, supported the subcontractor's position. The mediator had received it from the Agency as part of a request for documents that mediators often make some weeks before the first session. As it was not clear whether or not it was an internal Agency document, it had not been shown to the contractor's people nor discussed with them during the joint meeting or the preceding caucus. Nor did either side mention it during the joint meeting. Neither the C.O. officer nor the chief architect had seen the memo. That was a little surprising, but not unexpected. Senior staff in large municipal agencies, and in private companies with numerous projects under construction do not see every document generated, even one, as this, which seemed so important and relevant to the dispute.

The author of the memo, summoned to the caucus to review it, disavowed its conclusion, saying it was a mistake and incorrect. The chief architect declared it be an "internal memo, not subject to discovery if the dispute were litigated, and, in any event, its conclusion was ambiguous."

The Agency Meets in Private
At the outset of every mediation, the mediator has to make sure that each side has a participant who has the capacity to sign off on a settlement, if one is agreed to. For the Agency it was the C.O. officer who was signaling that he wanted to meet in private with his team. Before leaving the mediator relayed their opponent's commitment to be reasonable and bargain accordingly.

Another Joint Meeting
No long thereafter, the mediator was called back into the mediation room by the Agency. The C.O. officer said they wanted to meet with the other side. They wanted some additional questions answered while they heard the sub's arguments once again. If they could convince the Agency, the second time around, that the inspection had gone beyond what was required, the subcontractor would be reimbursed for its reasonable costs and the contractor for its overhead and profit markup.

This was relayed to the contractor's team as they were accompanied back into the mediation room. The expert and the sub again made their case, this time to a more open, less defensive audience. After a short, but intense discussion of the issues by all present, the sub and the C.O. officer began negotiating hard dollars. The mediator's main object was to keep this exchange focused without disruption by the others present. He did not interject nor comment on the offers and counteroffers being made. Within minutes they agreed on a number.

A written settlement agreement was draw up and executed by the sub, contractor, the Agency's C.O. officer and witnessed by the mediator. Both sides appeared satisfied with the outcome. They went their separate ways in the same spirit of good will and cooperation that was present at the start of the mediation.

Gary Morgerman
Construction Mediation Inc.
334 West 84 Street, #2
New York, NY 10024
212 721 1410 TEL
212 873 3029 FAX


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