A general contractor is working on a lucrative project that was going great, until it wasn’t. There is a dispute. The contractor has been trying to work it out on a casual basis with the client, but what he didn’t expect was a call from the client’s lawyer.
Of course, the contractor refers the client’s lawyer to his lawyer and the circus begins. Each lawyer is beating their chest trying to gain the advantage and becoming inflexible in their stances. Work on the project screeches to a halt. Threatening letters fly back and forth and finally a lawsuit is filed.
Next comes the discovery process: document requests, interrogatories and depositions. Then pretrial motions, hearings and, finally, a trial which can often take several years!
What is the cost of such a scenario? The contractor has lost a possible repeat client, drastically decreased productivity, spent considerable time and money dealing with legal issues and had dirty laundry aired in public. The contractor may or may not have won the litigation battle, but either way he lost the war.
While some claim America has the best legal system in the world, many disagree. The system is very costly and takes forever. Lawsuits destroy relationships and as one litigator opined, “A good settlement is when both parties feel like they lost.” It is estimated that 90-95 percent of litigated cases are settled before being resolved by a judge or a jury. This being the case, why litigate (or arbitrate for that matter) in the first place? This is exactly why mediation has become so popular.
There are basically two ways to settle a dispute – have someone else settle it, whether it is a judge, a jury or an arbitrator (this is called adversarial adjudication), or the parties can resolve the matter themselves. Sometimes, however, the parties need guidance in resolving their dispute and this is where the mediator and the mediation process fits in.
A mediator is a facilitator and not a decision maker. He or she helps the parties to the dispute resolve it themselves. The mediation process is a confidential, non-binding, conciliatory process by which parties to a dispute agree to sit down and reach an accommodation before they enter into a hostile adversarial relationship like arbitration or litigation. Mediation offers a structured procedure designed to resolve problems in a manner that is acceptable to both parties and moderated by an impartial trier of fact (the mediator), knowledgeable of the industry in question and the specific issues in dispute. This typically creates a fast, flexible forum for resolving problems at significantly reduced costs.
In litigation, the case will most likely face a judge or jury who are unable to thoroughly understand and evaluate the technical issues discussed. For that reason, each side presents “expert witnesses” to explain technical matters in lay terms. Inevitably, the experts disagree, and it will be left for the inexpert jury to decide which witnesses to believe. With mediation, as with arbitration, the individual hearing the dispute can be chosen in part based on the technical knowledge required to assist the parties in reaching an accommodation.
Why Mediation Rather Than Arbitration?
While successful mediation is voluntary and designed to be conciliatory (win/win) to both sides, arbitration is compulsory and can be adversarial (win/lose). Even when a dispute is resolved quickly, the disputants may destroy a business relationship.
Mediation requires agreement by both sides, while arbitration is binding and typically affords no appeal of decisions, absent a clear showing that the arbitrator was biased or acted outside the scope of the arbitration agreement. Mediation needs no appeals process because neither party is bound to settle.
Both litigation and arbitration follow strict procedural rules. Mediation also has rules, but by comparison, they are relatively simple and relatively flexible. A contractor presents his side of the story and the other party presents its side. Interrogatories and depositions are not used, and in the rare event witnesses are called, the process is informal. The goal of mediation is to get agreement on problem resolution and keep the project rolling.
As a result of procedural simplicity and mediator knowledge, mediation can be pursued even while work on the project continues, eliminating costly delays and damages. Additionally, the time savings and lack of need for expert witnesses make the mediation process much less expensive than litigation. However, the greatest savings may be the saved business relationship between the contractor and client and his saved reputation as a high-quality, low-risk firm.
How Mediation Works
Mediation can take several forms, but in concept, the process works as follows: When a problem arises, one party calls for mediation. If the other party agrees, the process begins. A qualified mediator familiar with the issues and industry is selected. The mediator arranges for a joint session with the two parties to discuss the mediation process, how it differs from arbitration and litigation and the rules that apply. Once the preliminary issues are dealt with, each party explains its side of the dispute. This gives the mediator the chance to gather facts and evaluate the relationships and dynamics between the parties, as well as locate areas of agreement and areas of discord.
At the point where joint discussions are no longer productive, the mediator begins private meetings, or caucuses, with each of the parties. Anything said to the mediator in these caucuses is confidential and cannot be disclosed to other parties unless agreed to by the disclosing party. Sometimes, a mediator will request permission to disclose information to the other party when he or she believes it will expedite negotiations. The mediator may also comment as to what a reasonable settlement may include or whether one party’s offer is likely to be accepted.
Finally, the mediator seeks to summarize the areas of agreement and narrow the points of contention, pointing out the benefits of compromise and the consequences of no agreement. The mediator acts to concentrate the discussions on the issues at hand and helps avoid new conflicts.
Often the parties negotiate the final settlement in a joint session, allowing the mediator to verify the specifics of the agreement and make certain its terms are clear. If either party fails to accept the agreement, the mediator’s proposed resolution is non-binding and the parties are free to seek resolution elsewhere, including turning to litigation.
A Mediation Clause in the Contract
A contractor and its client do not have to be contractually bound in order to agree to mediate. Either party can suggest mediation at any time. Getting both parties to agree to mediation after a dispute arises, however, can sometimes be difficult due to the emotions involved. At least one party feels wronged and, in many cases at least one feels completely faultless and unwilling to give an inch to reach a compromise. That’s why mediation is most successful when parties have agreed to it by contract before a dispute arises.
Standard contract forms in all likelihood, already contain a mediation clause. Contractors using their own custom contracts might consider adding such a clause.
By including a mediation clause in the contract, both the contractor and client have an available means by which to inexpensively settle disputes and emerge from the process with the business relationship intact.
