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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 recent construction mediation mediated by Construction Mediation Inc in New York City. In four hours the parties reached settlement in a typical construction dispute that had survived a year of intense negotiations which broke off when they concluded, "we cannot resolve this."

The Participants

A construction mediator was mutually selected by the parties to help them break the impasse. Participation by all is voluntary. Any party, and the mediator, may terminate the mediation at will, at any point. A mediator, unlike an arbitrator or judge, has no power over the participants except the power of persuasion, engendered after a mediator skilled in process has demonstrated absolute objectivity and construction expertise. Expertise in the subject matter enables a construction mediator to play devil's advocate to each side's positions. Such a role-playing is critical to success in the majority of construction mediations because it cultivates compromise in the parties, the main ingredient in a mediated settlement.

The mediation was initiated by a contractor to collect extra costs, allegedly the result of over-inspection on one of his subcontractors on a project built for a NYC municipal agency. 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 facing the Agency's team of five: its change order chief, head architect, project manager, the project's Construction Manager (an independent contractor) and a field inspector from a testing firm hired by the CM for the Agency. Neither side had a lawyer; the Agency's excludes its legal staff if the other side is not represented by counsel. The mediator was not an attorney.

The Joint Meeting

Unlike many construction mediations, congeniality was apparent in the mediation room. It later developed that the contractor and sub were highly regarded by the Agency by virtue of work they had done on previous Agency projects. Such a relationship, which each side wanted to maintain, is the backbone of the construction business. A mediated settlement of a dispute encourages a continuation of this relationship vs. arbitration/litigation : a cooperative resolution instead of a hostile, take-no-prisoners, war resulting in a decreed decision.

Proceedings began with an explanation of the ground rules. Each side then made a presentation of its case. The mediator, already familiar with each party's basic positions based upon information each submits prior to the first meeting, interjected questions and comments during the presentations, in part to gain the party's confidence in his understanding of the issues. This is often done 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 previously. Each side was given the opportunity to ask questions and make comments after the other side had spoken.

A mediator must be able to identify and uncover interests. On the face of it, it would have been 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 to refute the alleged over-inspection. His firm, hired by the Agency to keep costs down, hired the inspector. He did not want to be associated with a double waste of municipal funds - the additional cost of the over-inspection and the sub's claim - in a City under a budget crunch.

And it is not unusual, after a mediation gets underway, that unanticipated interests are identified. Sometimes participants on the same side of the table have interests that are at odds. Interests, if explored by the mediator, as with devil's advocate questions, are made during the private caucuses, never during a joint meeting. A mediator must not expose weaknesses in one side's case in the presence of the other side.

The subcontractor claimed in its presentation the work specification had been misinterpreted by the field inspector. He claimed his performance had been held to a higher standard than the spec and industry standards required. Additionally, he claimed he was over-inspected. The combination of the two resulted in additional material and labor costs that had not been anticipated in his bid.

After the sub spoke, his expert went into an in-depth analysis of the specification and an explanation of the work performance customs in the industry that prevailed in the sub's trade. He concluded with an analysis that showed how the inspector's demands on the sub's work far exceeded both criterion.

The Agency's presentation, with contributions from each of its five-man team, alleged that the quality of work demanded and the amount of inspection that occurred were in compliance with the job specification and industry standards. The chief architect concluded with, "that's what we bought and that's what we were entitled to."

A discussion between the parties, moderated by the mediator, ensued. The mediator's main role is to clarify the issues and help the parties narrow their differences keeping the exchanges focused and orderly, a task whose difficulty is directly proportional to the number of people, their diversity of interests and how many are outspoken - in construction disputes, the majority. Neither side would budge from its initial position so when the discussion did not blaze new ground the mediator adjourned the joint session and the first round of caucuses, first with the contractor, began.

Caucuses with the Contractor and the Agency

After some discussion, the sub and its expert agreed that the specification could be interpreted more favorably to the Agency than they acknowledged during the joint session. The mediator also pointed out that their lost productivity and damages were calculated in a summary manner, without backup, and would have to be much more detailed (and expensive) if the dispute ended up in a courtroom. They agreed the cost of litigation (arbitration was not in their contract) would wipe out a successful lawsuit.

This "cost to collect" dilemma faces every contractor and subcontractor with a claim which is not for big dollars that faces a stubborn opponent with deep pockets or an in-house, on the payroll, legal staff. 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 lasted longer and was more delicate. The mediator again 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 three Agency staff displayed confidence in the Agency's position, each with an enthusiasm directly proportional to their personal involvement in the project.

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 statements made by the sub in the previous caucus who said his 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 called it from the mediation room.

The mediator showed the chief architect an excerpt from a local construction case decision which 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." The architect, who had praised the contractor's and his sub's previous work for the Agency at the joint meeting, read it without comment.

The project manager was concerned that if the claim was given merit word would get out resulting in similar claims by subs on other Agency projects. He was reminded, and all had agreed, that a condition of mediation is that everything that transpires is confidential. The only thing that would survive the proceedings would be, hopefully, a settlement agreement.

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 received it from the Agency along with other pertinent documents requested by the mediator when he was appointed to the case. As it was not clear who the document was distributed to, it had not been shown to the contractor's people nor was it discussed during the joint meeting or the preceding caucus. Neither side mentioned it during the joint meeting.

Surprisingly, but not unexpected, neither the C.O. officer nor the chief architect had seen the memo. Senior staff in large municipal agencies, and in private companies with numerous projects under construction do not see every document enerated, even one, as this, which seemed so important and relevant to the dispute.

The author of the memo, the Agency's director of field inspection was summoned to the caucus to review it. He disavowed its conclusion, saying, with obvious discomfort, that it was a mistake and incorrect. The chief architect declared the memo an "internal document, not subject to discovery if the dispute were litigated, and, in any event, its conclusion was ambiguous."

Thereupon the C.O. officer, the Agency representative authorized to sign off on a settlement agreement, advised the mediator that he wanted to meet in private with his team.

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 and wanted to hear the sub's arguments once again.

The contractor's team was 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 to settle the claim.

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 and no doubt will be doing business, once again, in the future.

Gary Morgerman
Construction Mediation Inc.
334 West 84 Street, #2
New York, NY 10024

phone: 212.721.1410
fax: 212.873.3029

This article is copyright Gary Morgerman.
Printed here by permission.

(the generic footer information applies only to the Mediation Essay Collection and is not a claim of any interest in this article -- other than the friendly interest that led me to request and post it here).

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