CONSTRUCTION DISPUTE RESOLUTION IN CALIFORNIA
written by Ernest Brown

BY ERNEST C. BROWN. ESQ., PE
Mediator & Arbitrator
www.ernestbrown.com

When negotiation and compromise fail, some form of litigation may become necessary. This chapter lists the documents required for that litigation.

Arbitration clauses are common in public works contracts (such as under the State Contract Act, specifically California Public Contract Code § 10240, et seq. Note that time for initiating arbitration is now reduced to 90 days, Public Contract Code § 10240.1 (amended 1998)). Litigation and arbitration may be slow and expensive; mediation is a more cost and time effective procedure.

Judicial arbitration may be required before a case can proceed to trial pursuant to California CCP Section 1141.10-1141.3. Claims with an amount in controversy less than $50,000 per plaintiff generally require mandatory arbitration.

LITIGATION, ARBITRATION, MEDIATION, AND JUDICIAL ARBITRATION

If a claim or dispute cannot be resolved within the three phase approval discussed in Claims Section, above, then some form of litigation may be necessary, as outlined below.

§ 15.1 LITIGATION

Most everyone would agree it is in the best interest of all the parties involved in a public works contract dispute to settle their differences through negotiation and compromise, and to avoid litigation. However, if litigation is necessary, documentary evidence is very important. The key documents generated during a project are contracts, plans, specifications, revisions, bids, progress payment requests, detailed job costs reports, change order forms, schedules, daily reports, correspondence, and testing reports. Because of the complicated nature of construction, it is essential to present the claim in a manner that both the court and the jury can understand.

Construction litigation involves the same familiar stages as any other type of litigation: discovery, pretrial motions, trial, post-trial motions, and appeal.

§ 15.2 ARBITRATION

A public works contract may provide an arbitration clause, whereby the parties agree to resolve potential disputes by means of an arbitrator. Public Contract Code § 10240 provides that all claims under the State Contract Act are subject to arbitration.368

Many form agreements require arbitration according to the American Arbitration Association guidelines (some require mediation, see below).

An agreement to arbitrate may be made either in advance of a dispute (e.g., in the contract) or after the dispute has arisen.369 The California Arbitration Act370 and the Federal Arbitration Act371 enforce arbitration provisions in contracts. California courts and public policy favor the resolution of commercial disputes through arbitration “to promote judicial economy, and to settle disputes quickly and fairly.”372 Thus, courts will generally enforce such contractual provisions.373

Construction disputes are often extremely complex, and because arbitration involves many of the same drawbacks as litigation, it may not be the best alternative. For example, arbitration can be slow and expensive. But there may be efficiencies, in part because discovery rules do not apply, proceedings are informal, and it is not necessary to follow formal rules of evidence.374

There are numerous recent developments in arbitrator disclosure and conflict of interest rules. Ethical rules for neutral arbitrators are found in California Code of Civil Procedure 12 and in California Rules of Court, DIVISION VI. Ethics Standards for Neutral Arbitrators in Contractual Arbitration. The California Rules of Court state in Standard 1. Purpose, intent, and construction:

(a) These standards are adopted under the authority of Code of Civil Procedure section 1281.85 and establish the minimum standards of conduct for neutral arbitrators. They are intended to guide the conduct of arbitrators, to inform and protect participants in arbitration, and to promote public confidence in the arbitration process.

(b) For arbitration to be effective there must be broad public confidence in the integrity and fairness of the process. Arbitrators are responsible to the parties, the other participants, and the public for conducting themselves in accordance with these standards so as to merit that confidence.

(c) These standards are to be construed and applied to further the purpose and intent expressed in subdivisions (a) and (b) and in conformance with all applicable law.

If the claim is governed by the State Contract Act, Public Contract Code § 10240.9, provides for joinder of any party who consents, and is necessary to avoid the risk of the joined party being subjected to inconsistent obligations or decisions.

A major source of guidance in the resolution of disputes is The Construction Industry Dispute Resolution Procedures (Including Mediation and Arbitration Rules) Amended and Effective September 15, 2005. This is the overview of the Regular Procedures for Construction Arbitration:

The rules contain Regular Procedures that are applied to the administration of all arbitration cases, unless they conflict with any portion of the Fast Track Procedures or the Procedures for Large, Complex Construction Cases whenever these apply. In the event of a conflict, either the Fast Track procedures or the Large, Complex Construction Case procedures apply.

The highlights of the Regular Procedures are:

• Party input into the AAA’s preparation of lists of proposed arbitrators;
• Express arbitrator authority to control the discovery process;
• Broad arbitrator authority to control the hearing;
• A concise written breakdown of the award and, if requested in writing by all parties prior to the appointment of the arbitrator or at the discretion of the arbitrator, a written explanation of the award;
• Arbitrator compensation, with the AAA to provide the arbitrator’s compensation policy with the biographical information sent to the parties;
• A demand form and an answer form, both of which seek more information from the parties to assist the AAA in better serving the parties.

A significant consideration to keep in mind is whether any specific proceeding will be impacted by the arbitrator’s expertise and/or possible bias. Or, certain cases are stronger on the equities of the claim, rather than the law, and may thus have greater appeal to the arbitrator’s sense of fairness, resulting in a more favorable decision than in a judicial setting.

The major considerations in arbitration are the selection of the actual arbitrators, dealing with the lack of substantial discovery in arbitration, and the significant barriers to appealability. On the other hand, arbitration is generally faster, less expensive and uses a specialized panel of experts with considerable industry understanding and knowledge.

The preparation for an arbitration is similar to that of a jury trial, including extensive use of graphics, photographs, drawings and factual summaries. Often, the arbitration panel will read a great deal of the exhibits and other materials before the case begins, streamlining the overall presentation. Further, preliminary issues, such as the nature of a construction process, the delineation of design and construction responsibilities and other matters are generally well understood by the panel that focus upon the specific project contracts and events that make up the controversy before the panel.

Generally, arbitration panels must render a decision within a set period, e.g., 30 days, after the close of hearings. This is often a major delay in bench trials that is avoided in the typical set of arbitration rules. While the relief that may be granted by arbitration panels is generally quite broad, such thorny Issues such as disqualification of counsel, continuing injunctions, and punitive damages are generally reviewable by Superior Courts in California.

At present, the most likely route to overturning an arbitration verdict, especially under the new California disclosure requirements, is the lack of full disclosure of any material facts or relationship by one of the arbitrators that may have created bias or unfairness in the arbitration proceeding.

§ 15.3 MEDIATION

Parties to litigation often turn to other expedient forms of resolving disputes in an effort to avoid the high cost of litigation or arbitration. One such method is mediation. The parties may decide to resolve their dispute by way of private mediation. The parties agree to employ a private mediator who assists and facilitates negotiations or settlement of a dispute in an informal manner.

The mediator typically identifies the strengths and weaknesses in each party’s case and attempts to find a fair resolution of the dispute.

Ethical rules for mediators involved in court related mediations are found in the revised California Rules of Court, MEDIATOR ETHICAL STANDARDS, PART 1. Rules of Conduct for Mediators in Court-Connected Mediation Programs for Civil Cases, Title V, Special Rules for Trial Courts—Division III, Alternative Dispute Resolution Rules for Civil Cases—Chapter 4, General Rules Relating to Mediation of Civil Cases—Part 1, Rules of Conduct for Mediators in Court-Connected Mediation Programs for Civil Cases, adopted effective January 1, 2003.

The majority of sophisticated contracting parties and their legal counsel regularly employ mediation as an effective method of resolving construction disputes.

There are two often cited rules regarding construction mediation: It is voluntary and the discussions regarding of settlement are confidential. It is also a huge money saving tool. It offers absolutely gigantic savings over the discovery and trial process. It satisfies the desire to end disputes with a handshake. It turns adversaries into future customers and bidders.

There is one MAJOR problem with mediation. Everyone assumes that the necessary people, knowledge and documents will be readily available during the proceeding. Unfortunately, during the course of mediation the parties and/or their legal counsel realize that an essential party, document, or other piece of key information is not present. It can leave a gaping hole in the settlement process and keep the parties from reaching agreement.

In that case, a great deal of time and effort is expended in rescheduling. Even then the parties may discover a new missing party, document or item of information. Mediation is great. But it can become an expensive waste of time if the parties are not fully prepared to wholeheartedly participate.

The following Mediation Checklist covers the information and materials the mediator will require to resolve a construction case. Furthermore, the mediator should get these materials well before the mediation:

Parties:

1 Are All Parties present? (Owner, General, Subcontractors, A/E)
2 Do they have ultimate authority?
3 Are their insurance carriers (past and current) present with authority?
4 Are company owners present?
5 Will the responsible elected officials be present?
6 If not, can a committee chair attend?

Initial Presentation:

1 Can each side present its case in 30 minutes?
2 Are there blowups of project photographs?
3 Is an as-built and as-planned schedule available?
4 Are the daily reports and financial records available?
5 Are the most credible witnesses present?
6 Are the testifying experts in attendance?

Disputes:

1 Have all claimants exchanged written claims and demands?
2 Are all claims detailed and supported by reports and documents?
3 Has each defending party responded to the claims in writing?
4 What are the:

a) original contract/lease amounts,
b) agreed adjustments,
c) paid amounts,
d) outstanding claims,
e) asserted backcharges,
f) punchlists, and
g) retentions?

Pleadings:

1 Are the basic pleadings in place?
2 Have all parties answered?
3 Are there further parties?
4 Are all parties served?
5 Are there any jurisdictional issues?
6 Is there a bankruptcy stay on any party?

Claim Analysis:

1 Are full copies of the contracts available?
2 Who had primary responsibility?
3 What subcontracts assigned that responsibility?
4 What are the contract defenses?
5 Who is indemnified for the loss?
6 Who is entitled to attorney's fees and costs?
7 What is the venue for the dispute?
8 Have inspections and testing been completed?

Insurance Coverage:

1 Have all parties tendered to past and current carriers?
2 Are the carriers accepting defense and coverage?
3 If not, have all carriers provided reservations of rights letters and detailed coverage opinions?
4 Are full copies of insurance contracts available?
5 Do the principals have coverage counsel?
6 Are the policy limits and deductibles known?
7 Is there a chart of the additional insureds?
8 What is the total amount of insurance?
9 Are sureties on notice and fully informed of their risks?

Legal and Expert Costs

1 Do the insurers and principals have an estimate of defense costs?
2 Are there defense costs that are uninsured?
3 Can the carriers later seek to recover those costs?
4 Are experts a recoverable cost?
5 Is there any False Claim allegation?
6 Is there Bad Faith by any Carrier or Surety?

Damages:

1 Is there an itemized and complete written claim?
2 Is it supported by written documentation?
3 Is there an independent expert report on causation?
4 What is the economic rationale for the damages?
5 Is there a remediation or rehabilitation plan?
6 Did the parties mitigate their damages?

Strategy and Planning

1 Are the parties and their carriers informed?
2 Do the principals know the case, or only the lawyers?
3 Do the parties have readily available funds?
4 Are the key factual, contractual and legal positions known?
5 What are the likely alliances among the parties?

Settlement Mechanics

1 Can the case settle piecemeal or only globally?
2 Are the parties emotionally and financially prepared for settlement?
3 Is there a financing mechanism available?
4 Are there any personal problems that foreclose settlement?
5 Does one party wish to punish another party?
6 Is there anyone who can not compromise from their position?
7 Can the uncompromising individual be removed from the process?
8 Can the parties agree on a settlement draft?

The Mediation Facility

1 Are the mediation facilities adequate?
2 Do the parties have private meeting rooms?
3 Can the adversarial parties be physically separated?
4 Are there lunch, refreshments and A/C?
5 Can the parties communicate via telephone, fax and e-mail?
6 If there are separate languages spoken, do the parties need a translator?
7 Can the parties and their counsel stay late?

The Mediation Process

Construction and real estate mediations are generally conducted over one or two full days.

A typical set of guidelines for construction mediation are as follows:

1. Prior to the mediation, counsel for the parties will submit a very short brief (5-8 pages) on the main points of the dispute. It is extremely helpful if these materials include the critical documents, such as copies of letters, documents, checks, meeting notes or other helpful materials that will help the mediator understand the issues.
2. The briefs should be submitted at least five days before the mediation. If the parties have confidential information to present, they may do so informally during the mediation. It is not necessary to copy other counsel, but many mediators find it helpful to the mediation process if the parties agree to do so.
3. The mediator will generally circulate a confidentiality sheet with various terms and conditions for the Mediation that also serves as a sign-in sheet.
4. The principal parties and any person whose approval is needed for resolution must attend unless other arrangements are made in advance with the mediator. Failure to have the ultimate decision makers personally present will quite probably result in failure of the mediation.
5. The mediator must disclose any prior relationships with the parties as well as the law firms, especially if the mediator has conducted a mediation for either firm or party in the past.
6. The mediation generally proceeds as follows:
First, there will be a joint session, in which the attorneys for the parties will introduce everyone and the mediator will explain the process to the participants.

Second, the attorneys, or their principals, will present a 15-20 minute presentation on their side of the case, with all parties present. At the conclusion of that session, the mediator will summarize his understanding of the positions of the parties. The parties may also ask the other side key questions, as might the mediator.

Third, the parties will meet separately with the mediator for sessions of 30-45 minutes each. These are confidential sessions. It is, however, important that any particularly sensitive information be discussed in the context that the material should not be revealed to the other side.

Fourth, the mediator will eventually advise the parties whether the matter is not ripe for settlement, or that the matter can be settled, and upon what terms.

Fifth, the parties and their counsel will draft a simple, enforceable settlement agreement that the parties shall sign. A more formal settlement agreement may follow, but the fundamental points shall be included in the settlement agreement.

The foregoing list is a generalized checklist for construction and real estate disputes.

Careful thought by the parties and their counsel will result in supplementing or trimming these items for individual cases. Experienced legal counsel will assist their clients in ensuring that they are fully ready for an effective mediation experience, and full and final case resolution.

§ 15.4 Judicial Arbitration

Judicial arbitration is different from the contractual arbitration discussed in item 2 above. Judicial arbitration is governed by Code of Civil Procedure §§ 1141.10 - 1141.3, which provides that a case may be required to go to arbitration before it can proceed to trial. Mandatory submission applies to all at-issue civil cases in a superior court with more than 10 judges if, in the opinion of the court, the amount in controversy will not exceed $50,000 for each plaintiff.375

§ 15.5 Dispute Review Boards

A growing trend among public agencies engaging in large projects is the use of Disputes Review Boards (DRB’s). These boards typically consist of three senior, or retired, construction and public works professionals with broad experience in the type of work being undertaken. The DRB meets regularly, often once a quarter, and keeps abreast of the course of the project, as well as issues advisory decisions on any trends, controversies, or claims that may arise.

The recent language used by the California Department of Transportation (Caltrans) for the establishment of such DRB's reads, in part, as follows:

“5 1.11 DISPUTES REVIEW BOARD

To assist in the resolution of disputes or potential claims arising out of the work of this project, a Disputes Review Board, hereinafter referred to as the "DRB", shall be established by the Engineer and Contractor cooperatively upon approval of the contract.

The DRB is intended to assist the contract administrative claims resolution process as set forth in the provisions of Section 9 1.04, "Notice of Potential Claim," and Section 9 1.07B, "Final Payment and Claims," of the Standard Specifications. The DRB shall not be considered to serve as a substitute for any requirements in the specifications in regard to filing of potential claims. The requirements and procedures established in this special provision shall be considered as an essential prerequisite to filing a claim, for arbitration or for litigation prior or subsequent to project completion.

The DRB shall be utilized when dispute or potential claim resolution at the job level is unsuccessful. The DRB shall function until the day of acceptance of the contract, at which time the work of the DRB will cease except for completion of unfinished dispute hearings and reports.

After acceptance of the contract any disputes or potential claims that the Contractor wants to pursue that have not been settled, shall be stated or restated, by the Contractor, in response to the Proposed Final Estimate within the time limits provided in Section 9 1.07B, "Final Payment and Claims," of the Standard Specifications. The State will review those claims in accordance with Section 9 1.07B, of the Standard Specifications.

Following the completion of the State's administrative claims procedure, the Contractor may resort to arbitration as provided in Section 9 1.10, "Arbitration," of the Standard Specifications.

The DRB shall serve as an advisory body to assist in the resolution of disputes between the State and the Contractor, hereinafter referred to as the "parties". The DRB shall consider disputes referred to it, and furnish written reports containing findings and recommendations pertaining to those disputes, to the parties to aid in resolution of the differences between them. DRB findings and recommendations are not binding on the parties."

Depending on the project language, the Disputes Review Board's recommendations may, or may not, be admissible in later proceedings, such as arbitration or court proceedings. In the context of Caltrans Special Provisions, the DRB's findings are admissible in any later arbitration between the parties. It is expected that due to the expertise of the DRB panel and their significant involvement during the course of the project, DRB findings generally will be given significant weight in any later arbitration or judicial proceedings.

15.6 Fact Finding

A relatively recent development is the creation of panels devoted to neutral fact finding, such as the American Arbitration Association Rules for Fact-finding (2002). This involves an individual or group of appointed team members that carry out an independent investigation, then report their findings to all concerned parties.

Fact-finding can assist the parties in establishing common ground, or likely results, if the matter is litigated, as well as a factual basis for settlement. It is faster than the normal discovery or court process, as the fact finders are generally expected to have full and complete access to the parties, witnesses, documents, physical evidence, job site, party selected expert witnesses and other records.

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