Wisconsin Lawyer
Vol. 81, No. 6, June 2008

Mediating Complex Construction Claims

by Roy E. Wagner & Terry F. Peppard

Sidebar:

• Resources Available from Construction & Public Contract Law Section

espite the current weakness in the national economy, construction spending in the United States still accounts for more than $1 trillion annually, or more than 8 percent of the country's total gross domestic product of nearly $14 trillion.¹ Many building projects, whether fully completed or still under construction, generate disputes. And while the law affecting the industry continually evolves even as project owners' and their advisors' expectations as to the performance of builders grow more sophisticated, the flow of construction claims disputes continues unabated. This is especially the case with large and complex ventures.

Resolving large and complex construction claims cases presents significant challenges for lawyers and mediators. Such cases typically involve up to 20 or more parties, millions of dollars in claims, complicated factual and legal issues, and intricate insurance coverage questions. They also contain a witches' brew of conflicting motivations and perspectives. Project designers worry that their best laid plans have not been faithfully executed. Owners are troubled that they have not received the quality or timeliness they paid for. Builders are concerned that no one understands the difficulties they have faced from unpredictable weather and the need to coordinate the activities of many independent subcontractors and suppliers, some of whom may have been imposed on them by designers or owners.

The successful resolution of such cases through mediation therefore requires sophisticated insight into the norms of the construction industry, detailed knowledge of related legal standards, an exceptional degree of mediative skill and diligence, and the application of a mediation process tailored to the unique circumstances these disputes present. Construction claims counsel must be prepared to advise their clients not only how to provide for mediation in their contracts, but whether and when to mediate, what mediation styles to employ, what mediation process to follow, and who their mediator(s) should be.

Although no two construction claims cases are precisely alike, some broad lessons can be gleaned from previous complex multiparty cases.

Why Mediate

One of the ways in which large and complex construction claims cases tend to differ from other business cases is that parties involved in a building project frequently have long and continuing relationships that transcend the immediate situation. The desire, even the need, to preserve those vital relationships tends to suggest the wisdom of using mediation instead of a costly and disruptive trial to resolve the parties' dispute.

Roy E. Wagner, Marquette 1978, practices with von Briesen & Roper s.c., Milwaukee, chairing the firm's Construction Law Section. He concentrates his practice in construction law counseling and related claims litigation. He is also a mediator and arbitrator in construction cases and currently chairs the State Bar Construction & Public Contracting Law Section.

Another difference between the construction claims case and the typical business case is that quite often disputes will arise among owners, design professionals, builders, suppliers, and subcontractors while a construction project is ongoing. When this occurs, it may be imperative that the parties' differences be resolved as quickly as possible. Mediation offers the speed and flexibility necessary to achieve such a result.

In addition, large construction claims cases may test the financial strength of parties who must fund completion efforts or repairs while simultaneously prosecuting or defending expensive litigation in which legal liability and insurance coverage responsibility are determined over many months or years. Because time is money in the construction industry, an accelerated mediation process promises relief from the fiscal stresses that inhere in construction claims cases.

Providing for Mediation

Only a single brief contractual sentence is required to permit the parties to a construction project to provide for mediation if a dispute arises. If such a provision is included in a contract entered before a dispute has arisen, the provision usually is called a "pre-dispute mediation clause." A pre-dispute mediation agreement (or clause) can take the following form: "If a dispute arises out of or relates to this contract, or the breach thereof, and if the dispute cannot be settled through direct negotiation, the parties agree first to try in good faith to settle the dispute by mediation before resorting to arbitration, litigation, or some other dispute resolution procedure."

Even when no such clause exists, the parties still may employ mediation after a dispute has arisen, and this agreement to mediate normally is called a "mediation submission agreement." A mediation submission agreement may take the following form: "The undersigned parties hereby agree to submit to mediation a dispute that has arisen between them with regard to [here briefly describe the nature of the dispute]."

When to Mediate

Traditional mediation doctrine argues that the best time to mediate a dispute is as soon as possible, preferably even before formal claims are filed. In construction disputes, including large and complex ones, this is preferred, even essential, if the project out of which claims arise is still underway or if the parties deem the relationships among themselves to be worth preserving. On the other hand, if the project is substantially completed when disputes surface, or if the parties' relationships are not highly valued or have diminished in importance, it may be best for them to acquire a sufficient quantum of evidence through the traditional litigation discovery process before mediating. Using the discovery process helps to ensure that everyone involved can, before sitting down at the bargaining table, effectively evaluate the nature, scope, strengths, weaknesses, and economic value of their respective claims and defenses.

Terry F. Peppard, U.W. 1973, is a commercial and construction claims arbitrator and mediator with offices in Madison. He is past chair of the State Bar Alternative Dispute Resolution Section and author of Arbitration and Mediation of Business Disputes, published by State Bar CLE Books. He also teaches negotiation and mediation at the U.W. Law School.

Indeed, the ideal time to mediate a large and complex construction claims case in which the project has been completed, or when the parties lack a relationship they judge worth preserving, may be immediately after the close of discovery, with only weeks or, at most, a few months remaining before the scheduled trial date. The parties, their counsel, and insurers should by then have acquired the information they need through the discovery process, and all concerned can focus on weighing the benefits of a mediated resolution against the costs and risks of trial.

Mediation Styles

Should the mediator in a large and complex construction claims case employ a facilitative style or instead an evaluative style, which often is appropriate in a litigation claims setting?² Facilitative techniques frequently offer the best opportunity for the parties to preserve their valued relationships, while evaluative methods enable them to have the benefit of an expert parsing of the issues in the case without risking the costs or consequences of a public trial. Experience teaches that in large and complicated construction cases the parties usually want an expert evaluation of the issues as well as traditional facilitated negotiation. Therefore, the best approach is for mediators in such cases to use a blend of both facilitative methods and industry-specific evaluative methods.

The Mediation Process

Traditional practice is to follow a standardized format during a mediation session. This normally means beginning in a plenary (or joint) session with all parties and counsel present for opening statements by the mediator(s) and counsel. The plenary session is customarily followed by a series of private caucus sessions³ in which the mediator(s) confidentially explore with each party and the party's counsel their interests, needs, and settlement options. Once the caucus process has produced an agreement, the custom is to reassemble the parties and counsel for a brief signing ceremony to memorialize the essential terms of the agreement reached in the mediation, with a more detailed formal agreement to follow.⁴ In a large and complex construction claims case, however, it may be best to significantly modify the standard mediation process to optimize the prospects for its success.

One modification is for the mediator(s) to conduct separate preliminary caucus sessions with each party a few days before the scheduled plenary mediation session. This technique has the advantage not only of allowing the mediator(s) to become personally acquainted with all parties and their counsel in advance of the plenary session but also of ensuring that all participants, including the least-involved suppliers and subcontractors, have a chance for their concerns to be heard. The use of preliminary pre-session caucuses also reduces the expensive down time otherwise experienced by parties and attorneys left waiting for their individual caucuses with the mediator(s) when all parties are assembled simultaneously. By the conclusion of these pre-session caucuses, the mediator(s) should be able readily to organize the information thus gleaned from the parties in a manner that will greatly facilitate, and abbreviate, the normal caucus process that customarily follows the plenary session.

Another helpful modification to the mediation process is for the mediator(s) to conduct separate caucus sessions with each insured party and with each insurer. This technique gives the participants the opportunity to obtain from the mediator(s) the evaluative input they often desire. It allows all concerned parties to explore with the mediator(s) both the coverage issues and the merits of the claims and defenses affecting each party without compromising the conflicting positions often taken by insurers and insureds.⁵

Yet another effective technique is for the mediator(s), with the informed consent of all parties, to assemble a blind settlement pool from financial contributions made by each participant without the participants knowing how much the others have contributed.⁶ The blind pool method helps to minimize the tendency toward a kind of comparison shopping among contributors to the pool, based on the parties' various perceptions of comparative liability or financial wherewithal of the several members of the construction "team," a tendency which often prevents an effective settlement. To address this problem, all contributions to the settlement pool can be deposited to a trust account maintained by the mediator(s), from which settlement distributions are made, thus preserving the confidentiality of the individual contributions.

The deft use of techniques such as these has been shown to be effective in resolving the most intractable construction cases, including those in which prior use of more routine mediation methods has failed.

Who Should Mediate

One of the lessons learned from mediating large and complex construction claims cases is that mediation often is best done by a team of two mediators. Experienced comediators, especially those who have proven to work well together, add value to the mediation process by pooling their strengths, dividing tasks efficiently, and vetting their evaluative assessments within the team. Experience shows that effective comediators save the parties time, and therefore money, by streamlining and expediting the mediation process.⁷ The use of comediators with the right mix of industry expertise and mediation process skills also gives the parties and their attorneys confidence that they will not need to waste time educating their mediator(s) about the intricacies of the construction business or related legal principles.

The argument for comediation in large and complex construction claims cases has been succinctly summarized by commentators:⁸

• With comediation, chances are improved that settlement negotiations can be concluded within a normal working day."
• "The cost savings from a more efficient co-mediation process easily outweigh the relatively small added expense of utilizing a second mediator when there are more than five or six parties and the issues are relatively complex."

For these reasons, comediation is used increasingly in large and complex construction claims cases across the United States.

With this in mind, in today's practice environment, any construction claims case with seven or more parties and an amount in controversy of seven figures or more (the "pair-of-sevens" test) is a natural, indeed a prime, candidate for comediation.

Selecting the Mediator(s)

A particular challenge for counsel in the large and complex construction claims case is to select a mediator or mediators with the best mix of industry expertise and mediation skills for the task at hand. The best mediators for a large and complex construction claims case will have the ability to understand the competing perspectives of all participants because they possess a broad experience in construction law, the economics of the building industry, claims litigation, insurance coverage, and mediation methodology. In addition, the right mediators will have shown the capacity to both design and execute a successful mediation process for large and complex cases and will have demonstrated a commitment to distribute fairly the inevitable discomfort of the mediation process.

Conclusion

For the reasons described above, mediation is the tool of choice for resolving large and complex construction claims cases. Lawyers who represent parties in such cases can do much to advance their clients' interests by taking account of the character of large multiparty construction claims and applying suitable mediation techniques.

Endnotes

Wisconsin Lawyer