Five Ways to Resolve a Commercial Construction Dispute

Without proper conflict resolution, a seemingly minor dispute may postpone your construction project indefinitely. It can push back completion timelines, exceed allocated funds, and tarnish professional relationships. FR Law Group discussed the common causes of such disputes in a previous article. From contractual misunderstandings and payment delays to timeline issues and quality concerns, resolving these matters quickly and effectively ensures your project and company maintain professional integrity. The question is, how do you resolve them?

Types of Dispute Resolution for Commercial Construction

Choosing the appropriate resolution method depends on the nature of the dispute, all parties involved, and the desired outcome. It is common (and advisable) for a commercial construction contract to specify at least one or more of the following methods of dispute resolution:

1. Mediation

Mediation involves a neutral third party to “mediate” the situation. Mediators come from various backgrounds, including law, psychology, business, and social work. They are responsible for facilitating discussions between disputing parties and helping reach a mutually reasonable or acceptable resolution.

Benefits of Mediation

• Neutral third party: The mediator does not take sides or impose a decision. Instead, they guide the conversation and help parties understand each other’s perspectives.
• Confidentiality: Mediation sessions are private, and the details are not disclosed to the public. Confidentiality protects the reputations of all parties involved, which encourages open communication.
• Flexibility and informality: Mediation has a more relaxed atmosphere than formal legal proceedings. Parties can speak freely, explore mutually beneficial solutions, and reach an agreement tailored to their needs.

Disadvantages

• Non-binding unless an agreement is reached: Mediation does not guarantee a resolution. If parties fail to find common ground, they may need to pursue other dispute resolution methods that require additional time and costs.
• May require multiple sessions: Complex disputes often necessitate several mediation sessions to resolve. This extended process can be time-consuming and might delay the project’s progress.

Suitable Situations for Mediation

• Ongoing relationships: Mediation works well when parties have a continuing business relationship they want to preserve. Its collaborative nature fosters better communication and understanding.
• Complex disputes: Mediation is highly effective for multifaceted issues. It allows parties to discuss and address various contributing factors, including contractual obligations or communication breakdowns, to find a fair solution.
• Willingness to compromise: Mediation provides a conducive environment for reaching a satisfactory agreement, particularly when all involved parties are open to negotiation and compromise.

2. Expert Determination

Expert determination involves appointing a neutral expert to resolve specific technical disputes in a commercial construction project. The expert or professional, with specialized knowledge in the relevant field, evaluates the evidence and issues a binding decision. This method ensures a focused and efficient resolution of complex technical concerns. 

Benefits of Expert Determination

• Quick resolution: This informal system of dispute resolution settles disputes faster than arbitration or litigation (more on these methods below). The process concentrates on the technical aspects, which allows the expert to make decisions promptly and without bias.
• Industry expertise: Since the appointed professional brings specialized knowledge, the decision reflects industry standards and technical accuracy. This expertise is invaluable for resolving disputes involving complex technical issues, such as engineering standards, material specifications, or construction methods.
• Cost-effective: In many cases, expert determination is more cost-effective than formal dispute resolution methods. The streamlined process reduces legal fees and associated costs.

Disadvantages

• Limited appeal options: The binding nature of expert determination means that involved parties have limited grounds to appeal the decision. They must accept the ruling, even if they disagree with it.
• Narrow scope: This method focuses on specific technical issues and may not address the dispute’s broader contractual or legal aspects. This narrow scope might necessitate additional dispute resolution methods for comprehensive resolution.

Suitable Situations for Expert Determination

• Technical disputes: Since this process leverages industry-specific expertise to provide authoritative decisions, it is highly effective for resolving disputes involving specialized technical issues, including but not limited to material quality concerns, discrepancies in engineering standards, or deviations from agreed-upon construction methods.
• Need for quick and informed decision: Expert determination is ideal for parties requiring a swift and knowledgeable resolution to continue work without delay.
• Confidential matters: This method maintains utmost confidentiality, protecting sensitive business information and preserving professional relationships.

3. Adjudication

Adjudication is an interim resolution method for construction disputes. An adjudicator evaluates the evidence presented by parties and delivers a binding decision, which remains enforceable until the dispute reaches a final resolution through arbitration or litigation.

Benefits of Adjudication

• Speed: Adjudication delivers decisions quickly, often within a timetable of 28 days.
• Binding and enforceable: The adjudicator’s decision is immediately binding. It provides a clear path forward until a final resolution is achieved through other means, if necessary.
• Industry expertise: Similar to expert determination, adjudicators usually have specialized construction knowledge, which allows them to make decisions based on industry standards and practices.

Disadvantages

• Temporary nature: While legally binding, adjudication decisions are provisional and can be overturned or modified in subsequent arbitration or litigation. This temporary nature might lead to the continued uncertainty.
• Limited grounds for appeal: Parties have limited options to challenge the adjudicator’s decision. It is crucial to accept the outcome until the final resolution.

Suitable Situations for Adjudication

• Urgent disputes: Formal adjudication is ideal for disputes requiring immediate resolution to avoid costly delays and keep projects on track.
• Cash flow issues: In cases of payment disputes, adjudication is a quick and reliable way to help contractors and subcontractors receive funds necessary for ongoing work.
• Technical disputes: Adjudication leverages an adjudicator’s expertise to resolve conflicts involving the more technical details of construction.

4. Litigation

Litigation involves settling disagreements through the American court system. Involved parties and their commercial construction litigators present their cases before a judge (and sometimes a jury), who renders a legally binding decision. While regarded as a last resort, litigation resolves disputes when other methods fail.

Benefits of Litigation

• Formal and legally binding: Federal court decisions carry the full weight of the law. Each ruling is a definitive and enforceable resolution.
• Clear procedural rules: For fairness and transparency, litigation follows established legal processes and rules of evidence.
• Option for appeal: Unlike some other construction dispute resolution methods, litigation allows for appeals. If a party believes the court made an error in judgment, they can seek a review from a higher court.

Disadvantages

• Time-consuming and expensive: Litigation is quite lengthy and costly. It can take several months or even years to resolve. Legal costs, court fees, and the potential for prolonged proceedings add significant financial burdens.
• Adversarial nature: Court battles can be contentious. They often damage relationships and create a confrontational atmosphere that may hinder future cooperation.
• Public record: Unlike mediation or arbitration, litigation proceedings are typically public. This high degree of transparency can expose sensitive information and impact reputations.

Suitable Situations for Litigation

• Complex legal issues: When disputes involve complicated legal questions or contractual interpretations, litigation provides a thorough and detailed examination.
• High stakes: Litigation can be a comprehensive and authoritative resolution strategy for disputes with financial implications or severe contract breaches.
• Need for legal precedent: Litigation helps establish legal precedents, providing clarity for future cases and contributing to the development of construction law.

5. Arbitration

Arbitration is a structured and legally binding approach to resolving a commercial construction disagreement. In this method, opposing parties present their cases to an arbitrator or a panel of arbitrators, who then make a final decision. It combines some advantages of mediation and litigation.

Benefits of Arbitration

• Binding decision: The arbitrator’s binding and enforceable decision reduces the chances of prolonged disputes.
• Faster and less formal than litigation: In many cases, arbitration moves faster than court proceedings. It saves time and minimizes legal costs.
• Industry expertise: Parties can appoint an arbitrator or panel with industry knowledge to procure a well-informed, unbiased decision. Related resource: Republic Act No. 876, June 19, 1953.

Disadvantages

• High costs: Arbitration fees can be very expensive. For comparison, filing a court case in Arizona would cost roughly $150 to $200, depending on the court and case specifics. On the other hand, arbitration filing fees often cost several times more, and each arbitrator may demand $1,000 to $2,000 a day.
• Limited appeal options: Arbitration’s binding nature means parties have limited grounds for appealing the decision. They must accept the outcome, even if they disagree with the arbitrator’s ruling.

Suitable Situations for Arbitration

• Complex technical issues: When construction-related disagreements involve specialized technical matters (e.g., conflicts over design specifications, issues related to installation techniques, or controversies regarding foundation stability), this dispute method enables the selection of arbitrators with relevant industry knowledge.
• Need for a binding resolution: Arbitration is ideal when parties seek a final, enforceable decision without the potential for prolonged litigation.
• Desire for confidentiality: Unlike court cases, arbitration proceedings are private to help protect sensitive business information.

Understanding each of the above method’s strengths and limitations helps stakeholders find the most effective path to resolution. If you need legal representation and assistance choosing the best resolution methods for your commercial construction dispute, contact FR Law Group today. We can provide invaluable help in dispute resolution, contract drafting, and regulatory compliance, among others.

Further reading: Overview of Common Risks in Commercial Construction.