Mediation: An Engineer’s Tool to Control Project Cost

Years ago, by custom and contract, engineers were the initial arbiters of disputes between contractors and clients. They assisted in the resolution of disputes in ways that minimized the use of lawyers and courts. Under the standard forms, the decision of the engineer was a precondition to arbitration or litigation. With a more litigious society and their changing roles in the construction process, engineers have largely lost their influence in dispute management to an external legal system over which they have little control.

Too many modern disputes are resolved using the expensive and time consuming binding processes of arbitration and litigation utilizing strangers as decision makers. Parties choose these binding processes in the mistaken belief that their position will be vindicated by a judge, jury, or arbitrator. They are disappointed that the cost of these processes, in both human and financial terms, often results in Pyrrhic victories. Negotiated settlements often do not occur because of the difficulty of predicting outcomes of decisions handed down by strangers. The costs of the proceedings are also difficult and hard to control. When cases using the binding systems do settle, it is often long after the dispute arose and after significant amounts have been expended in the legal system.

The manner in which disputes are resolved can have a major impact on the economic success of projects from the point of view of the owner, the contractor, or the engineer. The owner’s costs are obvious. Even if the disputants are only the owner and contractor, the engineer may feel compelled, because of business considerations, to support the client, often without full compensation. At worst, the owner (or its insurer) feels compelled to join the engineer in the proceeding. Even a client’s success can damage the reputation of the engineer with the losing parties and their business community. The binding processes seldom add value to either a company or individuals, and often destroy relationships.

However, the engineer has a tool to make a major impact on the cost and outcome of project disputes. The tool is for the engineer to recommend the use of nonbinding mediation, prior to litigation or arbitration. Achieving this inclusion should not be difficult since there is a contractual requirement for mediation included in all the standard forms of agreement published by EJCDC, AIA (including the proposed 2007 editions), AGC, DBIA, and CMAA. These forms incorporate the widely accepted mediation procedures of the perhaps misnamed American Arbitration Association. The engineer should monitor the inclusion of a mediation clause in all the project documents and insure that it is not stricken. The same mediation clause should be included in not only the prime agreements, but also those of the various tiers of contractors and design professionals. An example of a standard mediation clause provides:

If a dispute arises out of or relates to this contract or the breach thereof and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Procedures before resorting to arbitration, litigation, or some other dispute resolution procedure.

Parties will often prefer negotiation as a first step. However, unsuccessful negotiations without the presence of a mediator can create polarization, making the dispute even more difficult. Mediation is essentially a facilitated negotiation. The process adds to the negotiation a neutral facilitator with whom parties can speak confidentially for advice on options. Lawyers may be involved, but do not need to be. Unlike the adversarial binding processes, mediation allows for a cooperative exchange of relevant information. It gives the parties an objective evaluation of reality and clarifies the options that are in the best interests of the parties. Mediation is a client-centered rather than a lawyer-controlled process. It brings the stakeholders into a process that has previously been dominated by the persons who originated, but cannot resolve, the dispute. Mediation allows these stakeholders the opportunity to confront the reality of comparing their settlement options with proceeding with the binding processes. Good mediators often conclude even complex disputes in one day. Mediation is not expensive.

There is no one formula that applies to every mediated process. Selection of a good mediator with a track record in construction is critical. Custom design by the mediator is essential to success of the process. If mediations are to be successful they must be designed to consider the nature of the dispute, the personalities of the disputants, and the company stakeholders.

While contrary to the spirit of the standard industry forms, the modern tendency is for potential project claims to accumulate until the end of the project. The reasons are numerous. Parties wish to avoid further confrontations during the completion of the project. There is a reluctance to “legalize” disputes by moving them into the binding processes. Also, parties who believe resolution will be eventually negotiated may want to increase their leverage by allowing the size of claims to grow. However, this tendency to avoid early resolution should be avoided. The earlier the dispute is resolved, the better it is for the project and all the parties. Mediation encourages early resolution, because the atmosphere in a well-designed mediation is collaborative and not adversarial. The mediators help the parties to find creative ways to solve problems and not to create them.

However, having a mediation clause is useless unless it is properly and timely implemented. Besides insuring a contractual requirement, this is another area where the engineer can exert control, often before polarization by lawyers begins. The engineer should be prepared to recommend mediation when disputes are contractually referred to the engineer, or when the engineer sees trouble ahead. Mediation can be suggested either because it is required by the parties’ contract, or just because it is a good idea.

Most engineers are not properly trained to effectively use their role to encourage the use of mediation. Considering the significant impact that it can have on project administration, undergraduate, postgraduate, and continuing educational programs need to elevate the importance of this important subject.

By assuring the implementation of a well designed mediation process, the engineer can once again assert influence in the resolution of disputes and the economic success of projects.