FEATURE
Five Steps to Resolving
Construction Disputes--
Without Litigation
Richard H. Steen
Disputes are a reality in every construction
project. Without a means to address them, minor
issues can fester and grow, with crippling conse-
quences for proiect participants. The rising cost,
delay and risk of litigating construction disputes
has prompted the construction industry to look
for new and more efficient ways to resolve these
disputes outside of the courtroom.
Within the past decade, the industry has tak-
en steps to avoid litigation and control disputes
by developing and employing various mecha-
nisms for alternative dispute resolution (ADR)
that can be used during nearly any stage of a
construction project. These mechanisms range
from simple negotiation to binding arbitration.
Experience has shown that when resolution
occurs sooner rather than later, and when reso-
lution is relatively unconfrontational, there is a
much better chance that litigation can be avoid-
ed. Waiting until the end of a project to address
a dispute inevitably makes it harder and more
expensive to resolve. Parties involved in a con-
strncfion dispute, or indeed any commercial dis-
pute, generally prefer to retain control over the
outcome and maintain business relationships.
There are five key steps to take to resolve
construction disputes without litigation. Two
deal with contract provisions: equitable alloca-
tion of responsibilities and risks, and proce-
dures for dealing with contract disputes. The
third step involves building teams and estab-
lishing objectives. These first three should be
taken before a dispute even occurs. Step 4 pro-
vides for a neutral forum to resolve disputes
throughout the life of a project. Step 5, the "last
resort," is binding ADR,such as arbitration.
Step 1: allocating fair contract risk
It comes as no surprise that parties to a con-
tract often include contract language designed
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to shift risk to the other party, so that the basis
for claims and disputes is eliminated. For ex-
ample, making a contractor responsible for the
impact of unanticipated site conditions may ef-
fectively preclude recovery of additional costs
caused by such conditions. Similarly, contract- THE ARRAYOF
dispute clauses can be drafted so that submit-
ring a valid claim is nearly impossible, which
i TECHN
QUESFOR
actually encourages litgafion. I ALTERNATIVE
Such contract provisions, however, do not pre-
vent disputes from occurring. Often, they only
DISPUTERESOLUTION
create fractious relationships among the parties
involved in the project. Constrnction-project own-
INCLUDESEVERYTHING
ers generally have two concerns when they shift FROMSIMPLE
unanticipated risks to a contractor: The first is
that the contractor will build a contingency into
NEGOTIATIOTO
N
the price to cover the risks; the second is that the
contractor will not have a contingency and will
BINDINGARBITRATION,
get into financial trouble. Unfair shifting of risk
can result in a party having to spend time and ef-
fort looking for ways to stay alive on the project,
usually to the detriment of the project itself.
As the costs and risks of construction con-
tinue to rise, more construction-industry pro-
fessionals are turning to a fair allocation of risk
among all parties involved--the planner, archi-
tect/engineer, owner, contractor and subcon-
tractors. Fairness is an elusive concept, but the
objective is to have the party who is best able
to control a risk be responsible for that risk.
The federal government has recognized the in-
equity in requiring competitive bids while sad-
dling contractors with unquantifiable risks, and
has long included equitable adjustment provi-
sions in government contracts.
An equitable contract serves as the first step
in building cooperation and close coordination Richard H. Steen is vice
president of Hill Interna-
among the project participants, providing a tional, Willingboro, N.J.,
strong foundation for working out the in- where he concentrates on
the resolufion of complex
evitable disputes before they lead to divisive construction disputes.
JOURNALOF MANAGEMENTIN ENGINI~ERING/JULY/AUGUST 1994 / 19
 change orders as explicit provisions for resolv-
ing disputes as they arise during the course of
the project. For example, provisions for binding
resolution can include dispute resolution by ar-
bitration under the American Arbitration Asso-
ciation (AAA) construction-industry arbitration
rules.
Contractual provisions should at a minimum
require before resorting to arbitration, parties
will first try to settle all disputes by some non-
binding technique, such as mediation.
The American Institute of Architects, the As-
sociated General Contractors of America and
AAAhas each published suggested guidelines
and model contract terms for such provisions.
The guidelines can be helpful in tailoring the
dispute-resolution provisions of a contract to
your specific needs.
Establishing procedures for dispute resolu-
tion at the start of a project can save consider-
able time and cost later. Like fair allocation of
risk, including dispute-resolution provisions in
a contract can help retain focus on the success
of the project, and not the success of litigation.

Step 3: building teams

Team building is another dispute-resolution
technique that can be instituted at the begin-
ning of a construction project to help allow for
better cooperation and coordination among all
parties.
One such process, partnering, has gained in-
creasing popularity in recent years. It involves
an extracontractual understanding among all
parties to form a partnership of sorts to achieve
mutually determined goals and objectives as
well as minimize disputes and claims.
This agreement is often reached through a
partnering workshop, wherein all parties agree
to take specific steps to work together, fairly al-
locate risk and responsibilities, and recognize
their common goal--a successful project.
Although partnering may require more
manpower and effort up front, its payoff can be
invaluable, creating a more harmonious, less
confrontational process--and at completion, a
successful project without litigation and claims.
Other team-building concepts such as total
quality management are also popular methods
of preventing disputes.
claims that can negatively impact the schedule
and cost of construction. Step 4: providing for a "neutral'
Even the most careful planning can't always
Step 2: drafting dispute clauses prevent disputes and this step is the last
In addition to identifying responsibilities and chance to resolve a dispute before resorting to
allocating risk, a contract also should contain a binding settlement. Providing for a neutral
language for addressing disputes and claims at party to analyze issues and facilitate dispute
the earliest possible stage in a project. This in- resolution should negotiations fail is an impor-
cludes provisions for handling and processing tant step to minimizing the problems caused by
20 /JOURNAL OF MANAGEMENTIN ENGINEERING/JULY/AUGUST 1994

Downloaded 17 Feb 2011 to 129.128.253.36. Redistribution subject to ASCE license or copyright. Visithttp://www.ascelibrary.org
disputes. This technique involves a preselected
independent "neutral" to serve the parties as an
observer, fact finder and dispute resolver
throughout the construction process. Ideally, a
neutral is selected at the inception of the con-
struction phase of the project to act immediate-
ly to resolve disputes that cannot be otherwise
settled.
Although procedures for establishing a neu-
tral vary and can be tailored to meet the specific
needs of a project, they involve a few basic ele-
ments, including:
* At the outset of the project, the parties select
one or more neutrals in whom they have trust
and confidence to serve throughout the course
of the project. The neutral can be a firm with
experienced dispute-resolution professionals,
or a technical expert who will participate in
fact-finding and issue analysis. The neutral usu-
ally must be acceptable to and compensated by
both parties, and must be both independent
and impartial.
* Depending on the wishes of the parties, the
role of the neutral will be to manage the dis-
pute process, to mediate the dispute, or to ren-
der either a nonbinding or a binding decision.
9 The neutral is initially given an introduction
to the nature, scope and purpose of the project
and is furnished contract documents. The neu-
tral often is then required to visit the project
site and meet with key project personnel on
project progress, even if there are not existing
disputes. The neutral may attend project meet-
ings and be kept appraised of project progress.
9 Whenever the parties are unable to resolve a
dispute, it may be immediately referred to the
neutral for a prompt, nonbinding recommenda-
tion or binding decision.
9 If the neutral is empowered to make only
nonbinding recommendations and its recom-
mendation is challenged by either party, the
r e c o m m e n d a t i o n can be admissible as evi-
dence in a subsequent ADR proceeding or in a
court of law.
Because the neutral is readily available and
knowledgeable about the project, he or she of-
ten can help mediate or encourage prompt res-
olution of disputes. In addition, the time and
cost saved by immediately addressing disputes
can help preserve the relationships among the
parties and project focused on mutual goals.
Neutrals can be used in a variety of ADRtech-
niques. One of the most commonly used is the
three-person dispute-review board in which the
contractor and owner each select an expert to
sit on the board and those two then select the
third member. Other innovative ADR schemes
include "rent-a-judge," in which a magistrate
(usually retired) presides over a private litiga-
Downloaded 17 Feb 2011 to 129.128.253.36. Redistribution subject to ASCE license or copyright. Visithttp://www.ascelibrary.org
tion and minitrials--a structured settlement
procedure in which each side presents its case
before neutrals or senior executives of each
ONTRACT.DISPUTE
party involved in the dispute.
Step 5: using binding ADR
C CLAUSESCAN
BEDRAFTEDSO
The construction industry, more than per-
haps any other, has experience with using arbi-
THATSUBMITTING
tration for resolving disputes. Serious contract A VALIDCLAIM
disputes involving huge cost overruns, long ISNEARLY
schedule delays and complicated technical
specifications requirements are, in many cases,
IMPOSSIBLE,
best decided by experienced arbitrators. The WHICHACTUALLY
construction industry's success in moving away ENCOURAGES
from litigation is a valuable lesson to those who
today are considering ADR as a substitute for
LITIGATION.
facing litigation, given the current "crisis" in
the civil courts.
Even having taken the four preceding steps,
some disputes won't be resolved. Turning the
decision over to an arbitration panel comprised
of knowledgeable and experienced industry
professionals has many advantages over a
judge and/or jury.
Although once seen as the only option, bind-
ing arbitration is now considered a last resort,
after equitable contracting, ongoing dispute
resolution and nonbinding ADRtechniques have
failed.
As in litigation, the parties in arbitration give
up control over the decision and have to pro-
ceed in an adversarial forum, endangering fu-
ture relationships. The perception, if not the re-
ality in every case, is that arbitration has advan-
tages over litigation of lower cost, more prompt
resolution and finality.
In New Jersey, the finality of arbitration is
being questioned as a result of the state
supreme court's opinion in Perini Corp., 129
N.J. 479 (1992). In that case, the court held that
arbitrators are required to follow applicable law
and that arbitration proceedings awards are
subject to judicial review to determine whether
the arbitrator(s) made gross errors of law.
Many practitioners agree with a recent New Jer-
sey Law Journal editorial, which commented on
the potential for increased postarbitration litiga-
tion as a result of the Perini decision.
Conclusion
ADR is rapidly entering the mainstream of
business relationships and the arsenal of options
for practicing lawyers. The bar can benefit from
the successful experience of the construction in-
dustry in this area. Lawyers are assisting clients
in fashioning comprehensive ADRprograms dur-
ing initial contract formation, and counseling
and advising throughout many unique and excit-
ing ADRproceedings. 9
JOURNALOF MANAGEMENTIN ENGINEERING/ JULY/AUGUST 1994 / 21