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Alternative dispute resolution has become increasingly popular in construction contracts. The two primary methods of alternate dispute resolution are mediation and arbitration.

Many contractors will argue that alternative dispute resolution is faster and more cost effective then litigation. There is truth in that belief but in order to understand the benefit and limitations of mediation and arbitration it is important to understand how the methods differ from one another.

Mediation

Contractors will find mediation provisions in a variety of construction documents. In some instances, a contract document will include an obligation to mediate a dispute before it can go to arbitration or into litigation.

In its basic terms, a mediation is a discussion between the parties with the assistance of a neutral third party called a mediator. In a mediation, the parties meet with the mediator and each side is provided an opportunity to explain their position and their desired relief. The mediator listens to both sides and then attempts to resolve the dispute in a mutually agreeable manner. Most mediations are informal proceedings usually held in the mediator’s office or at another mutually agreeable location.

For example, if a property owner believes that a contractor has over charged him for construction materials, the parties may desire to resolve the dispute through mediation. Assume that the owner believes the contractor has overcharged him by over $100,000. That owner will explain his position to the mediator and submit evidence or backup to support his argument. The contractor will do the same and the mediator will try to reach an amicable agreement between the two of them. It is important to note that while the parties may bring documents and evidence to the mediation, the mediator is not a judge or arbitrator and will not weigh the importance of the evidence in the same way. In fact, the mediator does not decide anything. Rather the mediator suggests solutions to the dispute.

In the example above, the mediator might suggest to the owner that he accept a $2,000 credit from the contractor. Assuming that the contractor is agreeable to that solution the parties can resolve their dispute.

Mediation is non-binding. This means that a decision or resolution that is reached in the mediation cannot be legally enforced. It is rather a suggested course of action that the parties must both agree to follow. If one party believes that the proposed resolution is unjustified, that party can simply leave the mediation and pursue alternate avenues to resolve the dispute. A mediator does not produce an order or a ruling. He or she simply offers opinions and suggestions towards resolution.

Arbitration

Arbitration is a separate animal. While the procedural aspects of an arbitration are similar to those in mediation, the primary distinction is that an arbitration ruling is binding and fully enforceable.

If the parties have agreed to arbitrate a dispute they each have an opportunity to present evidence to the arbitrator or a panel of arbitrators, depending upon the arbitration agreement. Unlike a mediator, the arbitrators review, analyze and weigh the impact of evidence submitted and use it to form the basis of their ruling. Following the submission of documentary evidence, the parties have an opportunity to present their cases to the arbitrator. It is akin to an informal court hearing.

Once each party has presented its case the arbitrator issues a ruling. Using the prior example above, assume the owner again believes the contractor has overcharged him for materials to the tune of $100,000. If the arbitrator believes that the contractor did in fact overcharge the owner, he may issue a ruling requiring the contractor to reimburse the owner the full disputed amount. The contractor must now abide by the findings of the arbitrator. The contractor cannot simply disagree and refuse to pay. An arbitration ruling is legally binding and can be enforced by the courts.

It is important to note that is very difficult to appeal an arbitration ruling. Typically, an arbitration award can only be appealed in circumstances where the arbitrator was biased or fraud was involved. Thus, if a construction contract contains an arbitration clause it is important for the contractor to understand that the arbitrator’s ruling generally cannot be challenged and must be abided by.

It is important to note that some states have created mandatory non-binding arbitration procedures for various negligence actions. These state-created programs are not typical and do not follow the traditional arbitration models. In states like NJ, contractors are often confused by the courts' non-binding arbitration procedures. These programs are not to be confused with traditional arbitration proceedings which are binding.

Alternative dispute resolution can save contractors time and money but can also be detrimental if it is not properly understood and approached. Many times, contractors go into mediation and spend a significant amount of time and money only to leave the mediation with the dispute unresolved. Similarly, a contractor may enter an arbitration and be displeased with the arbitrator’s award but has no option to appeal. Contractors should consult their attorneys prior to entering any contract, especially contracts that contain complicated or ambiguous alternative dispute resolution clauses.