Michael S. Zicherman | Peckar & Abramson
Disputes
Courts and tribunals
Are there any specialised tribunals that are dedicated to resolving construction disputes?
With very few exceptions, in most states there are no special courts or public tribunals dedicated exclusively to the resolution of construction disputes. However, the federal government and various states have tribunals dedicated to resolving disputes against public entities, and given the volume of construction-related disputes in the public sector, these tribunals have developed a particular specialisation in such claims.
Under the Federal Claims Act, a contractor has the choice to challenge a contracting officer’s final decision in the USCFC or before a board of contract appeals (BCA). The USCFC is the single and central court in which contract claims brought against the federal government are heard. A BCA is a quasi-court within the federal agency that hears disputes resulting from the issuance of a contracting officer’s final decision. At present, there only are three BCAs: the Civilian Board of Contract Appeals (CBCA), the Armed Services Board of Contract Appeals and the Postal Service Board of Contract Appeals. The CBCA will hear challenges brought in all the civilian government agencies.
Some states also have special courts that hear claims brought against that state. For example, the New York Court of Claims is the only court that hears contractual and other claims brought against the state of New York. In addition, some state and municipal governments have established specialised boards to hear disputes, similar to the BCAs at the federal level. Further, in New York, some state agencies (such as the Metropolitan Transportation Authority) have established boards to hear disputes, as have some city agencies (such as the New York City Department of Environmental Protection). Accordingly, knowing whether or not there are any specialised courts or other tribunals to resolve construction disputes at the state and municipal level requires enquiry in the particular jurisdiction.
Dispute review boards
Are dispute review boards (DRBs) used? Are their decisions treated as mandatory, advisory, final or interim?
The use of DRBs is increasing. Major, high-profile projects, such as Boston’s ‘Big Dig’ project and Florida’s I-595 PPP project, have used DRBs. Typically, they are used on major infrastructure projects rather than building projects. There is no particular reason for this distinction, other than the manner in which the use of DRBs has developed.
DRBs have succeeded in avoiding substantial post-completion litigation on complex projects. A wealth of data has been assembled by the Dispute Resolution Board Foundation (DRBF) to measure the success of DRBs and is available at www.drb.org. By the end of 2006, over 2,000 projects worldwide, worth over US$100 billion, had used DRBs, and had resulted in the settlement of more than US$90 billion in construction disputes. The worldwide use of DRBs is growing at a rate of in excess of 15 per cent per year with over 200 construction contracts with DRBs, worth over US$7 billion, commencing every year. An estimated 200 disputes are settled each year through the use of DRBs. More importantly, it often is reported that more disputes are avoided by ongoing interaction with the DRB than are actually heard.
DRBs are often referred to as ‘real-time’ dispute avoidance or resolution. Hearings are typically conducted on the project shortly after the dispute arises and while the construction is ongoing. Relationships are preserved and construction delays are kept to a minimum. The North American experience has been that 58 per cent of the projects were ‘dispute-free’ (ie, no disputes requiring hearings before the DRB) and 98.7 per cent of the projects were completed without resorting to traditional dispute resolution methods, such as arbitration or litigation.
Like other dispute resolution processes, some DRB participants walk away extolling its virtues, while others decry its failure. However, the data assembled by the DRBF indicates, overall, that DRBs have been hugely successful and appear to be gaining in popularity and acceptance by the construction industry.
Mediation
Has the practice of voluntary participation in professionally organised mediation gained acceptance and, if so, how prevalent is the practice and where are the mediators coming from? If not, why not?
Mediation in the US is defined best as negotiations facilitated by a qualified and trained neutral (the mediator). It is a voluntary process that relies upon the good-faith commitment and desire of the parties to reach a settlement and the skill of the mediator in guiding the parties to that settlement. Crucial to the effectiveness of mediation is that it is a confidential process, which benefits from the application of legal principles of privilege that protect the parties from the disclosure of what is said during the process.
Mediation has become the most favoured alternative dispute resolution technique. The common perception is that 85 per cent of all disputes that are mediated settle during mediation, which explains the popularity of the process. As a result of that popularity, a significant number of specialised and trained construction-dispute mediators have emerged and are available to assist parties seeking to achieve a settlement of their disputes. The majority of mediators are experienced construction lawyers and other industry members.
Mediation is commonly sought, if not mandated by contract, as a pre-litigation or pre-arbitration process. However, even when the process is mandated, the mediator is not a fact-finder, has no authority to impose his or her views upon the parties and cannot dictate settlement terms. Thus, when some use the term ‘binding mediation’, it only means that the parties either are obliged to engage in mediation or are ‘bound’ by the terms of the settlement mutually agreed to during the mediation, which typically is memorialised in a signed memorandum.
Confidentiality in mediation
Are statements made in mediation confidential?
Mediation, by necessity, is a confidential process, as it encourages parties to be candid with each other and disclose information that the other party might not otherwise have found out. Thus, the law in most US jurisdictions provides that mediation is confidential and that statements made and documents exchanged in mediation, as well as admissions of fault or liability, may not be used in an arbitration or judicial proceeding. Nonetheless, parties to mediation are still well advised to enter into a written mediation agreement that clarifies the confidentiality of the process, particularly if they plan to exchange expert reports that support their position.
While neither a party nor a mediator can be compelled to testify in court or arbitration about a disclosure made in mediation, the adversary is free to seek and use the information, data and testimony in arbitration or trial if it is obtained from other independent sources or if it was ordinarily obtainable as part of the binding dispute resolution process. The reason for this exception is to prevent a party from engaging in mediation as a tool to bar the admissibility of evidence that its adversary was likely to discover anyway.
Arbitration of private disputes
What is the prevailing attitude towards arbitration of construction disputes? Is it preferred over litigation in the local courts?
Arbitration is certainly a frequently employed means for resolving construction disputes, but it is not necessarily preferred over in-court litigation. The preference of one process over the other will depend on the facts and circumstances of the dispute. Each procedure has its advantages and disadvantages, and it is important to understand these differences in choosing a particular forum.
One advantage of arbitration is the ability to select one or more arbitrators that are experienced in construction or construction law to decide the merits of the dispute. In traditional litigation, a judge cannot be chosen, and it is rare to get a judge (not to mention a juror) with construction experience, whose decision will then be based solely on a battle of the experts. Though arbitration is thought to be cheaper and faster, this is not always the case. It largely depends on the complexity of the dispute. For example, arbitrators are paid by the hour or day. Judges and juries are free. Both forums permit differing levels of pre-hearing or pretrial discovery procedures. Also, it may be difficult to schedule arbitration hearing dates, since the competing schedules of the parties, their attorneys and perhaps three arbitrators must be accommodated, whereas the court simply dictates the trial dates. One often-touted advantage of litigation over arbitration is that the parties have the right to appeal unfavourable rulings, whereas an arbitration award can only be vacated by the courts where there is demonstrable fraud, partiality, mathematical mistake or if the award exceeds the arbitrator’s authority, thereby making an arbitrator’s decision virtually sacrosanct. However, some arbitration organisations, such as the American Arbitration Association (AAA), have issued optional appellate arbitration rules, allowing for a limited right of appeal within the arbitration process, if the parties adopt those rules as part of their contractual dispute resolution process. The ultimate arbitration award, though, still must first be converted to a judgment by a court of competent jurisdiction before it can be legally enforced.
Notwithstanding, contractors generally favour arbitration because of its finality and because of their ability to plead their case to someone who understands construction, while many lawyers prefer litigation, as they perceive that there is greater control, more structure and because it provides a greater comfort zone.
Governing law and arbitration providers
If a foreign contractor wanted to pursue work and insisted by contract upon international arbitration as the dispute resolution mechanism, which of the customary international arbitration providers is preferred and why?
The International Chamber of Commerce (ICC) is probably the best known of the international tribunals for construction contract disputes and has been considered by many to be the most favoured provider. However, the International Centre for Dispute Resolution, which is part of the AAA, has gained recognition and acceptance as a reliable entity for arbitration among international parties, if for no other reason than it is less expensive than ICC arbitration. If the project is performed in the US, the foreign contractor should anticipate that US contractors will insist upon arbitration before the AAA pursuant to its Construction Industry Arbitration Rules and often will seek to have the law of a particular state apply to the dispute. This is particularly so if the contract form is derived from one of the familiar standard forms that are generally well understood by US contractors and designed to reflect US legal principles.
The International Federation of Consulting Engineers contract forms are widely used abroad but are rarely used in domestic projects. Further, the US contractor often specifies that the venue for any arbitration be in the US to minimise the cost of the arbitration, since most or all of the necessary witnesses would be located here and the project site would be more readily accessible for a site inspection if that were necessary.
Dispute resolution with government entities
May government agencies participate in private arbitration and be bound by the arbitrators’ award?
The concept of sovereign immunity applies equally to the arbitration of disputes as it does to suits in court, in that arbitration cannot be commenced against a public entity unless that entity has agreed to arbitration as the procedure for the resolution of disputes. Claims against the federal government are generally brought pursuant to the CDA, which requires that claims be filed before the Civilian Board of Contract Appeals or the USCFC. However, under certain circumstances the federal government has agreed to arbitration as a means of resolving disputes arising under various treaties, such as the North American Free Trade Agreement (NAFTA) or under one of the many bilateral investment treaties between the US and other sovereign nations. If an investor’s rights under the treaty are violated, it may seek recourse against the US by way of an international arbitration. Such disputes are often resolved under the auspices of the International Centre for Settlement of Investment Disputes, rather than suing the host state in its own courts. Individual states and local governments in the US are not subject to federal treaties and, thus, cannot be compelled to arbitrate unless there is a specific state statute that compels or permits arbitration. An example of such a statute is New Jersey’s Local Public Contracts Law, which requires that all construction contracts with local governments provide that disputes arising under the contract shall be submitted to a method of alternative dispute resolution practices, such as mediation, binding arbitration or non-binding arbitration. If a state or the federal government has agreed to arbitrate a dispute, any arbitration award entered against them would be enforceable in the United States pursuant to either the Federal Arbitration Act or the analogous state arbitration act.
Arbitral award
Is there any basis upon which an arbitral award issued by a foreign or international tribunal may be rejected by your local courts?
The US is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), which has been incorporated into the Federal Arbitration Act. As such, a US court is obliged to honour and enforce foreign arbitration awards to the same degree, and in the same way, as other signatory countries. However, a US court will not enforce an arbitration award issued by a foreign tribunal where the award was voided by a court of the country under whose law the arbitration was brought, or if, upon a party’s assertion, the US court finds that the arbitration award does not meet the standards set forth in article V of the New York Convention, such as for lack of capacity to arbitrate, lack of notice to a party, the issues were outside the scope of the arbitrator’s authority or improper appointment of arbitrators.
Limitation periods
Are there any statutory limitation periods within which lawsuits must be commenced for construction work or design services and are there any statutory preconditions for commencing or maintaining such proceedings?
There is generally no specific limitation period applicable solely to construction disputes; many different statutory limitation periods may apply. Which period applies depends on various factors such as the nature of the legal claim (eg, tort or contract) and the party being sued. Further, there are no uniform limitation periods among all the states, but periods typically range from between two and six years from the accrual of the cause of action. Suits against public entities for breach of contract, such as against the federal government under the CDA, often have a very short limitation period of only one or two years. The consequence of failing to commence a lawsuit or arbitration within the applicable time frame will bar the party’s claims.
If a party commences a lawsuit against a design professional for negligence or malpractice, some states also require that the party commencing the action file with the court an affidavit of merit either by, or supported by, an independent professional attesting to the merit of the claims asserted against the designer. The affidavit of merit must usually be filed within a specified number of days after the action is commenced or the designer files its answer. Failure to timely file an affidavit of merit as required will result in a dismissal of the lawsuit, which cannot be cured by refiling the action.