Introduction to Construction Dispute Resolution Feniosky Peña-Mora Gilbert W.Winslow Career Development Associate Professor of Information Technology and Project Management MIT Room 1-253, Phone (617) , Fax (617) Intelligent Engineering Systems Laboratory Center for Construction and Research Education Department of Civil and Environmental Engineering Massachusetts Institute of Technology Stage 5: Binding Dispute Resolution

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

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

Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al Outline  Mediation/Arbitration (Med/Arb) Adjudicator/Expert Determination Arbitration Single Arbitrator Baseball Arbitrator Shadow Mediation

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

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

Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al Outline Mediation/Arbitration (Med/Arb)  Adjudication/Expert Determination Arbitration Single Arbitrator Baseball Arbitrator Shadow Mediation

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

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

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

Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al Outline Mediation/Arbitration (Med/Arb) Adjudication/Expert Determination  Arbitration Single Arbitrator Baseball Arbitrator Shadow Mediation

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

Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al Arbitrator’s Attributes Impartiality and Objectivity Dispute Management Skills Experience With Arbitration Proceedings Strong Academic Background and Professional or Business Credentials

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

Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al Outline Mediation/Arbitration (Med/Arb) Adjudication/Expert Determination Arbitration  Single Arbitrator Baseball Arbitrator Shadow Mediation

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

Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al Outline Mediation/Arbitration (Med/Arb) Adjudication/Expert Determination Arbitration Single Arbitrator  Baseball Arbitrator Shadow Mediation

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

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

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

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

Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al Outline Mediation/Arbitration (Med/Arb) Adjudication/Expert Determination Arbitration Single Arbitrator Baseball Arbitrator  Shadow Mediation

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

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

Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al Outline Mediation/Arbitration (Med/Arb) Adjudication/Expert Determination Arbitration Single Arbitrator Baseball Arbitrator Shadow Mediation

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

Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al References [AAA, 2000] : American Arbitration Assiociation. A Guide to Mediation and Arbitration for Business People [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, [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, [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 July 11, [Fenn et al., 1994] : Fenn, P., and Gould, N., (1994). Dispute Resolution in the United Kingdom Construction Industry. October University of Kentucky. p [Fizel, 1994] : Fizel, John L., (1994). Play Ball Baseball Arbitration After 20 Years, Construction Dispute Prevention Comes of Age. Dispute Resolution Journal pp , 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 [Hollands, 1989] : Hollands, David S. FIDIC Provision for Amicable, Settlement of Disputes. International Construction Law Review. Issue 1. pp [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 [Myers, 1994] : Myers, James. Task Force, Survival Kit for Complex Construction Arbitration in the 1990's. Dispute Resolution Journal. pp September Peña-Mora et al, 2002] : Peña-Mora, F., Sosa, C., and McCone, S. Introduction to Construction Dispute Resolution. Prentice Hall, New Jersey, [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