23. Dispute Resolution
Key Words and Concepts
- Lawsuits involving important federal questions
- Diversity cases
- Federal district courts
- United States Court of Federal Claims
- United States Courts of Appeal for the Federal Circuit
- United States Supreme Court
- State trial courts
- State courts of appeal
- State supreme courts
- Venue
- Bench trials / Jury trials
- Discovery
- Depositions
- Fact witness/expert witness
- Transcript
- Plaintiff/respondent
- Cross-examination
- Findings-of-fact
- Conclusions-of-law
- Right of appeal
- Hearings before boards of contract appeals
- Arbitration / AAA arbitration / Party arbitration / Single arbitration
- Alternative dispute resolution
- Mediation
- Mini-trials
- Disputes review boards
When contracting parties cannot settle disputes themselves, the disagreement must be resolved by other means. The farther from the job level that the dispute reaches, the more likely it is to become highly adversarial, time consuming, and expensive. For instance, settling disputes by the decision of a court following a lawsuit can lead to costs that are on the order of magnitude of the most favorable judgment that can be obtained. These costs include legal representation, various consultants, expert witnesses, and so on, as well as the drain on a company’s organization. Key personnel are often tied up for extended periods preparing for trial and for actual court appearances, keeping them away from their normal revenue-producing duties.
For these reasons, alternative dispute resolution (ADR) procedures are common today. When the parties in the dispute are genuinely committed to the process, these methods can be very effective, as well as far less time consuming and expensive.
The disputes resolution clause in a contract determines the particular method of settlement to be used for that particular contract. If a particular method is mandated, it must be used unless the parties mutually agree to change it.
Courts of Law
If a dispute resolution method has not been mandated by the disputes resolution clause of the contract, a dissatisfied contractor is free to file a lawsuit in a court-of-law in the state or federal system.
Lawsuits in the Federal Court System
Unless the contract provides otherwise, lawsuits involving an important federal question will be tried in the federal district court for the geographical area in which the dispute arose. Diversity cases—those in which the parties are residents of different states—are also tried in federal district court. Appeals from a contracting officer’s decision on a federal contract may be heard by one of the government administrative boards of contract appeals or, at the contractor’s option, may be heard by the United States Court of Federal Claims (formerly the U.S. Court of Claims), a federal court established for the purpose of trying cases involving claims against the federal government. Decisions of the federal district courts and the United States Court of Federal Claims can be appealed to one of the United States Courts of Appeal for the Federal Circuit, the particular court depending on the geographical area.
Decisions of the Courts of Appeal for the Federal Circuit can be appealed to the United States Supreme Court. If the Supreme Court agrees to take the case, the appeal will be heard. The decision of the Supreme Court is final and binding.
Lawsuits in the State Court System
Lawsuits other than those involving important federal questions or diversity are tried in the first level of the state court system of the various states. The name of the first-level court, or state trial court, varies depending on the particular state. Like the federal system, there are a number of first-level trial courts based on geographical area.
Decisions of the trial courts are appealable to the state courts of appeal and decisions of the courts of appeal are appealable to the state supreme court, whose decisions are appealable to the United States Supreme Court.
Determination of Venue
Venue means the court in which the lawsuit is tried. Its determination is a legal matter, often itself requiring the decision of a court. However, in some cases, there may be a choice. In these instances, the choice of venue will be made by the attorneys representing the party filing the lawsuit.
Features of Court Trials of Lawsuits
The trial of a construction case lawsuit in a court of law is a civil proceeding as opposed to a criminal trial. The features of such trials include the following:
- The trial may be conducted by a judge sitting without a jury—a bench trial—or, on demand of either party, the trial may be held before a jury. In both cases, the purpose of the trial is to determine the facts, to which the law is then applied, resulting in the decision of the court. In a bench trial, the judge first determines the facts and then applies the law to arrive at the decision. In the case of a jury trial, the jury’s function is to determine the facts. Then the judge carefully “instructs” the jurors what the law is in that particular case and how they must apply the law to the facts to arrive at a correct decision. In both cases, the judge conducts the entire proceeding and maintains the order and decorum of the court.
- Court trials are very formal. The judge maintains complete control, and his or her procedural decisions (rulings) are final insofar as the trial is concerned, although they may be appealed. Every word that is spoken is recorded verbatim by a court reporter.
- The judge controls the quantity and type of exhibits and testimony that go into the trial record as evidence. There are strict rules defining what is admissible and what is not. See for instance, the parole evidence rule and hearsay rule discussed in Chapters 20 and 21, respectively.
- The process of discovery prior to the trial will be afforded both sides. Discovery gives each side the right to examine and make copies of all pertinent files and documents possessed by the other side. Certain types of documents claimed to be privileged may be excluded by the judge from the discovery process. Included among these are communications between the parties and their attorneys and all attorney work-products.
- As part of the discovery process, each side also has the right to take the deposition of employees of the other side and whomever the other side intends to call as a witness at the trial, either as a fact witness, a person who has been involved in the project and has firsthand factual knowledge or as an expert witness, an expert in the field of the lawsuit who offers an opinion based on his or her knowledge and experience. At the deposition, the witness must truthfully answer all questions asked. A fact witness will speak from his or her own knowledge of the facts in the case, whereas an expert witness must reveal all opinions held and the basis for them. A verbatim record of the questions and answers is recorded by a court reporter who prepares a transcript that may be used by attorneys for either side when questioning that witness on the stand at the trial.
- At the trial itself, each side is allowed to present its case starting with the plaintiff, the party who instituted the lawsuit followed by the respondent, the party being sued, who presents a rebuttal. The plaintiff then responds to the rebuttal with a surrebuttal at which point the trial usually ends, although the judge may permit another round of presentations. During each presentation, each side introduces trial exhibits in the form of various documents, explanatory charts, and so on, and each of the side’s witnesses offer oral testimony under oath.
- At the end of each witness’s testimony, the opposing attorney has the right to conduct a cross-examination of the witness. The purpose of cross-examination is to give the opposing attorney every reasonable opportunity to discredit or impugn the testimony of the witness. Cross-examination of an opponent’s witnesses is one of the fundamental rights of a litigant in our legal system.
- In the case of bench trials, the judge may issue written findings-of-fact and conclusions-of-law along with the decision of the court, although this is not common in the lower courts, where the trial initially occurs. The appellate courts usually issue findings-of-fact and conclusions-of-law. These writings state the facts that the court found to be true and the principles of law that the court applied to these facts to arrive at the decision. The collective body of these writings constitute what has previously been described as case law, which will then be cited by judges and lawyers in future cases. No findings-of-fact and conclusions-of-law are issued in jury trials, only the jury’s decision, which is announced immediately following the jury’s deliberation at the conclusion of the trial. In bench trials, many months may elapse, sometimes even years, between the conclusion of the trial and the decision.
- Finally, a most important feature of court trials is the right of appeal—that is, the decisions of the trial court can be appealed by either party to an appellate court. If the appellate court agrees to hear the appeal, it reviews the trial court’s decision, either affirming it, overturning it, or affirming in part and overturning in part. The appellate court’s decision can then be appealed to the state or federal supreme court, as the case may be.
Hearings Before the Federal Boards of Contract Appeals
The federal boards of contract appeals have been established by the various agencies of the federal government to hear and render decisions on contract disputes arising from construction contracts administered by the particular agency. Typical federal boards include the Armed Forces Board of Contract Appeals, the Corps of Engineers Board of Contract Appeals, the Department of Transportation Contract Appeals Board, and many others. At least one state, Maryland, has established a state board of contract appeals. These boards consist of judges experienced in construction contract law who are appointed by the agency concerned. A contractor dissatisfied with the final decision of the contracting officer of a federal agency on a matter arising from a federal contract may appeal that decision either directly to the United States Court of Federal Claims or to the administrative board of the agency involved.
Hearings before the federal boards of contract appeals are conducted in a manner similar to court trials, except that the proceedings will always be conducted by a sitting judge. There is no jury. Following the hearing, the board will issue a written decision supported by findings-of-fact and conclusions-of-law. As with bench trials in courts of law, many months or even years may elapse prior to the board’s issuing its decision. The decisions of the federal boards of contract appeals may be appealed to the United States Court of Federal Claims.
Arbitration
Arbitration is a third method of dispute resolution. It is generally faster and less expensive than court trials or hearings before administrative boards. Even so, arbitration of large, complicated cases can still be time consuming and expensive. The arbitrators, who are usually working professionals, cannot sit continuously for complicated cases, so the hearings are often fragmented, extending the time required. One arbitration in which the writer appeared as an expert witness was conducted intermittently over a period of 18 months. Most arbitration proceedings are not that long. Occasionally, however, they can last even longer.
Arbitration of a contract dispute cannot be compelled unless the contract expressly requires it. The right to arbitration is not an implied right. However, if the contract does require it, courts compel arbitration of the dispute on the demand of either party. The following cases are typical of the extensive case law on this point.
In a federal case involving a contract for construction of a sewer, the United States Court of Appeals required a city to arbitrate a differing site condition claim in spite of the city’s argument that the contract provided that the engineer’s decision would be final. The contract stated:
All claims of the Owner or the Contractor shall be presented to the Engineer for his decision, which shall be final except in cases where time and/or financial considerations are involved, and in such cases shall be submitted to arbitration if not solved by mutual agreement between the Owner and the Contractor.
When the contractor submitted a differing site condition claim for ground water that had not been anticipated, the city refused to arbitrate, alleging that the engineer had final authority in these matters and the arbitration clause did not extend to disputes of this nature. Although the court criticized the language used in the arbitration clause, it applied federal law requiring that arbitration clauses be generously construed and resolved in favor of arbitration.
In the words of the court:
Obviously, financial considerations are the heart of the instant contractor’s claim. Though we entertain some doubt whether the agreement was intended to cover the instant claim, we must enforce federal policy and come down in favor of arbitration.[1]
In another case, a project owner opposed arbitration, arguing that the demand for arbitration was not a dispute “arising out of, or relating to, the Contract Documents,” because the disputed issue involved work not authorized by the contract or by written change order. The original contract was for a stipulated sum of $592,000 and stated that, although change orders would be necessary, the total contract price was in no event to exceed $700,000. However, the contract also contained a broad form arbitration clause.
The court found that since the contract documents provided that the contract included change orders pertaining to “all items necessary for the proper execution and completion of the Work,” a dispute involving a claim for extra work necessary for completion of the project was subject to the arbitration clause. The court stressed that, in ordering arbitration, it was not establishing owner liability in excess of $700,000. Rather, the court said, the contractor’s entitlement, if any, as well as the effect of such entitlement on the contract price ceiling, would have to be determined by the arbitrators.[2]
The following three principal systems of arbitration are commonly used today for construction cases. Normally, the contract states that one or the other of these systems is to be used. If the contract does not state this, the parties must agree on one of the systems.
AAA Arbitration Under Construction Industry Rules
One system is arbitration under the auspices of the American Arbitration Association (AAA) in accordance with the construction industry rules. In this system, each party reviews a list of potential arbitrators furnished by the AAA. Persons on the list are knowledgeable professionals who have been screened and prequalified by the AAA and who have agreed to serve as arbitrators. Each party may strike from the list anyone who is not satisfactory to them. Three persons who are acceptable to both parties—that is, persons remaining on the list who have not been struck by one party or the other-are then selected by the AAA to form a panel to hear the case, one of whom is usually an attorney and who serves as chairperson. Arbitrators must disclose any material facts about themselves that could be perceived as affecting their ability to render an impartial decision, such as prior acquaintance or business dealings with any of the parties. A party may demand replacement of an arbitrator who they feel may not render a fair decision based on such disclosure. For smaller cases, the procedure is the same except that the board consists of a single person who usually is an attorney.
Party Arbitration System
A second system is the party arbitration system. Each party unilaterally selects a knowledgeable professional to serve as an arbitrator on the board. These two persons then select a third member of the board who functions as chairperson. In this system, the first two members sometimes act as party advocates as well as arbitrators, whereas the third member must always be strictly impartial. If the first two members are unable to agree on the third member, a court can be petitioned to appoint the third member.
Single Arbitrator System
The third system is one in which the parties agree on a single arbitrator to constitute the board. Such a person often is a retired judge experienced in construction cases who agrees to serve as arbitrator and hear the case.
Features of Arbitration Proceedings
The following features distinguish arbitration proceedings from court trials and hearings before administrative boards:
- Arbitration generally is far less formal. Arbitrators have broad powers to set the rules on such matters as discovery and procedural matters for the conduct of the hearing. Arbitrators usually allow discovery, but they are not compelled to do so.
- Arbitration panels are far more flexible than courts on the rules of evidence. Generally, these rules are considerably relaxed in arbitration.
- Following the hearing, which is generally conducted in a manner similar to a court trial, the panel will issue its decision. The time period between the conclusion of the hearing and the decision is generally fairly short, far less than in a court trial. Usually, only a conclusory decision is issued with no supporting findings-of-factor conclusions-of-law.
- Finally, and most importantly, there is generally no viable appeal to an arbitration decision. Only in cases where it can be proved that the arbitrators exercised bad faith or refused to permit the introduction of evidence or that an arbitrator failed to disclose information that might have prevented rendering an impartial decision is a successful appeal to a court possible.
Examples of case law on this subject include vacation of the award due to the arbitrator’s refusal to hear relevant testimony[3] and vacation of the award because one of the arbitrators failed to disclose ongoing business dealings with one of the parties to the arbitration.[4]
Alternative Dispute Resolution
In recent years, alternate dispute resolution (ADR) procedures have increasingly been used. These methods include the following:
Mediation
In mediation, the parties engage a respected, knowledgeable neutral person to serve as a mediator. This person investigates the facts of the dispute, meets with the parties jointly and separately, and listens to their arguments. The mediator then proposes a settlement, sometimes as a written report and sometimes orally. The mediator’s recommendation is not binding. Ordinarily, the mediator’s recommendations are not admissible as evidence in a later court trial if either party pursues the matter in a lawsuit.
Mini-Trials
Another procedure, called a mini-trial, is also used. In this case, the parties arrange for a hearing to be conducted somewhat like a court trial. There is no judge or jury. Instead, two senior persons with settlement authority hear the evidence, one from each party. They do not participate in the presentation of the respective cases other than to ask questions. Following the conclusion of the hearing, these two individuals have each become personally knowledgeable about the strengths and weaknesses of each side’s arguments. They then confer privately and attempt to arrive at a settlement through negotiation. This system has the advantage of speed and a less adversarial atmosphere. A number of major disputes have been settled in this manner.
Disputes Review Boards
Another form of alternate dispute resolution that is increasingly used is a contractually provided contract disputes review board (DRB). In this instance, the construction contract between the parties expressly provides for the creation of a three-member board. As soon as the contract has been signed, each party selects a knowledgeable person to serve as member of the board. These two persons then select a third member, who normally acts as chairperson. Once each party has selected a member of the board, the two selected members have no further contact with those parties, instead becoming fully independent. All contact between the board and the parties to the contract is conducted through the chairperson.
Board members are required to act impartially and are subject to the same type of conflict-of-interest disclosure requirements as arbitrators are. The board members are furnished copies of the project plans and specifications and periodically visit the project jobsite to become familiar with the project as it progresses. If the parties are unable to resolve contract disputes as they occur, either party may refer the dispute to the board. The board then holds a hearing, listens to the arguments of both parties, and promptly furnishes a written recommendation for the resolution of the dispute that contains a detailed explanation of the reasoning supporting the recommendation. The recommendation is not binding, but along with the supporting reasoning, it is usually admissible as evidence in any later court trial. Such boards are now widely used, and in most cases the parties have been able to resolve the dispute promptly with the aid of the board’s recommendations. This form of dispute resolution has the obvious advantage of great speed. Disputes are resolved quickly and inexpensively once they have been presented to the board. The continuous availability of the board, which has been kept in close touch with the project as it progresses, is a unique feature that is not present in any of the other methods of dispute resolution available to the industry today.
Model specifications to be included in the contract for the appointment and operation of disputes review boards first appeared in a publication of the American Society of Civil Engineers.[5] This was followed by a second ASCE publication[6] and, more recently, by Construction Dispute Review Board Manual.[7]
Conclusion
Dispute avoidance far outweighs the merits of any of the dispute resolution methods discussed in this chapter. Disputes will be greatly minimized, or will not occur at all, if each party to the contract fully understands both their responsibilities and their rights under the contract and truly endeavors to honor the contract. Only when one or both parties fail to do this does dispute resolution become necessary.
Questions and Problems
- What two general kinds of cases will be litigated in the federal district courts as opposed to the state courts of the state where the work was performed? Which two avenues for dispute resolution are available to a contractor for resolution of disputes arising from a federal contract?
- What is the difference between a bench trial and a jury trial? In a bench trial, who determines the facts? Who applies the law? In a jury trial, who determines the facts? Who applies the law? Do the judge’s instructions to the jury deal with the facts or the law?
- In court trials, who controls the procedure? Who rules on the admissibility of evidence? Are court trials subject to appeal?
- What is discovery? What are privileged documents? What is a deposition, and what is its purpose? What does the term fact witness mean? What is the difference between a fact witness and an expert witness?
- What do the terms plaintiff and respondent mean? Which presents its case first? What is the function or purpose of trial exhibits, oral testimony, and cross-examination?
- What are findings-of-fact and conclusions-of-law? Who issues them? With what type of court proceeding are they usually associated? What is their relationship to case law?
- Do hearings before the various administrative boards of contract appeals differ materially from court trials? Is there a jury? Will there be findings-of-fact and conclusions-of-law issued with the decisions of such boards? Are the decisions of the federal boards of contract appeals themselves appealable? To whom?
- What is arbitration? Under what circumstances can arbitration be compelled in construction cases? ls the choice of arbitration an implied right of either party to the contract? What are the three different systems of arbitration used for construction cases discussed in this chapter?
- Explain the party arbitrator system. How many panel members are there? How are they selected? Is a party arbitrator necessarily impartial and neutral? How is the chairperson selected?
- What are the four features of arbitration proceedings that were discussed in this chapter?
- Under what limited circumstances may an arbitration decision be appealed or overturned?
- What three ADR procedures were discussed in this chapter? Is mediation binding? In a mini-trial, who makes the final decision for settlement of the dispute? What are two principal advantages of the mini-trial?
- What principal feature of the disputes review board approach to dispute resolution is not present in mediation, court trials, hearings?
- Ruby-Collins, Inc. v. City of Huntsville, 748 F.2d 573 (11th Cir. 1984). ↵
- Sisters of St. John the Baptist v. Phillips R. Geraghty Constructor, Inc., 494 N.E.2d 102 (N.Y. 1986). ↵
- Manchester Township Board of Education v. Thomas P. Carney, Inc., 489 A.2d 682 (N.J. Super. A.D. 1985). ↵
- Barcon Associates, Inc. v. Tri-County Asphalt Corp., 411 A.2d 709 (N.J. App. Div. 1980). ↵
- Avoiding and Resolving Disputes in Underground Construction (New York: American Society of Civil Engineers, 1989). ↵
- Avoiding and Resolving Disputes During Construction (New York: American Society of Civil Engineers, 1991). ↵
- Construction Dispute Review Board Manual (New York: McGraw-Hill Companies, Inc., 1996). ↵
