EFFECTIVELY RESOLVING CONSTRUCTION DISPUTES

By Peter M. Good, Esquire

SMIGEL, ANDERSON & SACKS, LLP

 

            A.        Claims Recognition.

There is a good chance that a claim could be coming from the owner, contractor, subcontractor or supplier when any of the following are present:

            *The work has fallen behind schedule;

            *Subcontractors are not getting paid;

            *Suppliers are not getting paid;

            *The owner is not paying the contractor on time or in full;

            *Arguments arise over items on progress payment applications;

            *Defective or deficient work is found by the architect/engineer or owner;

            *Numerous questions are arising concerning the plans and specifications;

            *The plans and specifications are confusing, vague or incomplete;

            *Weather has delayed progress;

            *Materials or workers have become unavailable, costly or hard to locate;

            *National, political, worldwide events have impacted construction or its timing;

            *Unusual or unexpected problems have been found at the construction site;

            *The contractor's costs are running beyond what was anticipated;

*There is a significant change in the amount of documentation and correspondence between the parties;

            *There has been an accident or injury on the site or related to the project;

            *A governmental entity has imposed a new regulation or changed a previous                  regulation that impacts the project.

 

When warning signs are present, it is time to take even more care than normal to be sure your files are up to date, you are in compliance with the contract and appropriate steps are being taken to preserve all related documents and evidence.

 

 

 

 

 

            B.        How to Prepare Claims.

                        1.         The Contract.

            As in all things relating to the relationship between the parties in a construction project, it is vital to understand the contract's provisions regarding claims and required procedures before there is any hint of a dispute on the job, and hopefully before you have signed the contract.  Many contracts will have notice provisions or other prerequisites that must be followed before an owner will be required to consider a claim.  In the typical case the contractor will be required to give the owner notice of an event that may lead to a change order request or a claim within a relatively short period of time, such as 7 or 10 days, after the event has occurred.  The contract usually then provides a longer period of time for the contractor to assemble evidence and supporting documentation to justify the claim and the amount.

            Often when there has been a failure to follow proper claims procedures, the party that has failed to comply with the procedures will argue that the parties' practice has created an amendment to or waiver of the terms of the contract.  If there is evidence that the parties have in fact ignored the contract's procedures, a court or other fact finder may agree that there has been an amendment to the contract or a waiver of the need to comply with such provisions through the parties' conduct; however, one should not assume that such will be the case.

            Parties should follow contractual procedures at all times to avoid losing a claim for a simple failure to follow procedures.  Additionally, to avoid an interpretation that claim procedures or other contractual provisions have been waived or amended by the parties' actions, the parties should insist on adherence to the terms of the contract.

                        2.         Project documents.

            Again, before the contract has been signed or the project even started, all parties should be sure that they have appropriate and customary procedures in place to document the events taking place on the project.  Such procedures should include reports as to what is occurring on the job on a daily basis, the employees present, equipment being used, work progress, weather conditions, daily temperatures, etc.  Contractors should have procedures established to show, not just the amount of actual costs incurred for a project, but a persuasive way to demonstrate that such costs actually were incurred in the performance of the work at issue and are being allocated properly to the project.  This is especially true for items such as overhead expenses or unusual cost items.

            Scheduling can be an important issue, especially where a component of the claim is related to delays or increased costs to accelerate work to maintain a planned schedule.  Not only should a proper base line or planned schedule be in place before the work is stated, but the schedule should be updated regularly to show any changes in the sequence or timing of the work and to reflect the actual progress of the work.

            It is important to be sure that documentation is kept from the beginning of the project and throughout the entire construction phase.  The party that maintains the most appropriate type of documentation to the best level of detail throughout the project will be able to present the more credible and persuasive case to the fact finder should a claim arise.

            Once the decision is made to assert a claim, or once it becomes necessary to defend a claim, the parties then will be required to assemble the relevant documents and data to tell the story of what occurred, why it occurred, its impact on the job and the appropriate economic resolution to the situation.

                        3.         Claim Consultants.

            Depending on the size and nature of the claim, it may be advisable to retain the services of a construction claim consultant.  Such an individual will examine the documents discussed above and discuss the matter with the individuals involved.  The consultant then can bring his or her knowledge of industry standards and claim procedures to assist the party in preparing their side of the claim.  They also can provide "expert" opinions regarding industry standards, whether the party asserting the claim in entitled to recover and if so, what the proper amount for such a claim really is.  Actual costs attributed to the claim may or may not be the standard for recovery.

            While there is cost involved, retaining a claim consultant early in the process may actually be a very economical decision.  A well documented and carefully prepared claim or defense will persuade not only the ultimate decision maker, but the other side and his or her legal counsel as well and could lead to an early and more advantageous settlement.  Additionally, if the claim cannot be resolved, the background work for submitting an expert opinion to support the claim will be completed.

            The opinion of an independent expert may not only be persuasive, but is required when a claim for negligence is brought against a licensed professional (PA. R.C.P. 1042.1 et seq.).  A certificate stating that an expert has been consulted and has determined that the claim is not groundless or without merit must be filed with the court in such a case very early in the process.  It therefore is good practice to consult with an independent professional early.

            C.        Negotiation and Settlement.

            Again, knowledge of the applicable contractual terms is essential.  Many contracts will have procedures, not only concerning the presentation of claims, but also for claim resolution.  Independent Design Review Boards are becoming common on larger projects.  Often it is the practice to select the members of such a board as soon as the project begins so that disputes can be resolved quickly.

            D.        Mediation and Arbitration.

                        1.         Mediation.

            Many contracts will require mediation or arbitration of disputes.  Mediation is a process whereby an independent or neutral person knowledgeable in the industry will review the background of the claim and, through a series of meetings with the parties together and independently, attempt to get the parties to reach a negotiated settlement.  Mediators have no authority to force a resolution on the parties or to decide which side prevails in the dispute.  They serve only as facilitators to help the parties reach their own settlement.

            An effective mediator must be knowledgeable, skilled and experienced, not only in the substantive area of law and construction at issue, but also in helping the parties reach an agreement.  Mediation can be extremely effective when the facilitator can show the parties an independent, honest and persuasive evaluation of their position and the likelihood of success or failure of their position.  While mediation costs can be expense, the parties generally share the costs of the mediator equally.  A day or more of a mediator's time also is far less expensive than preparing for a conducting a lengthy trial or arbitration.

            Mediation is most effective when the facts and evidence have been sufficiently developed such that the mediator can make a full and fair evaluation of the strengths and weaknesses of each side's positions.

                        2.         Arbitration.

                                    i.          Basics.              Arbitration is a process similar to a trial where one or more individuals hear testimony, review evidence and make a decision in the same way as a judge or jury would in a trial.  Arbitration can either be binding, whereby the arbitrator's decision is the final resolution of the claim, or non-binding, which leaves the parties free to pursue other remedies if they are unsatisfied with the arbitrator's decision.

Pennsylvania has adopted its version of the Uniform Arbitration Act, which can be found at 42 Pa.C.S. § 7301-19.[1]   Common law arbitration has also been codified in PA at 42 Pa.C.S. § 7341-42.

I.  Arbitration governed by Statute.

The general rule for statutorily governed arbitration is, where there is an agreement to arbitrate which is in writing, it is legally enforceable and valid under Pennsylvania law. 

An agreement to arbitrate a controversy on a nonjudicial basis shall be conclusive presumed to be an agreement to arbitrate pursuant to Subchapter B (relating to common law arbitration) unless the agreement to arbitrate is in writing and expressly provides for arbitration pursuant to this subchapter or any other similar statute, in which case the arbitration shall be governed by this subchapter.

42 Pa.C.S. § 7302(a).

 

(a) Requirements. 

In order for arbitration agreements to be enforceable under PA’s statutory arbitration rule, two requirements must be met: 1) they must be in writing and 2) the written agreement must expressly provide for arbitration under the Act.  Midomo Co. v. Presbyterian Hous. Dev. Co., 739 A.2d 180, 183 (Pa. Super. 1999) (citing, Dearry v. Aetna Life & Casualty Ins. Co., 610 A.2d 469, 471 (Pa.Super. 1992). Contracts containing arbitration provisions are valid, enforceable, and irrevocable under PA law once these two elements are met. 42 Pa.C.S. § 7303.

(b) Courts and Interpretation. 

PA courts favor arbitration as a method of resolving disputes.  Quiles v. Fin. Exch. Co., 879 A.2d 281, 285 (PA Super. 2005).  The interpretation of what an arbitration agreement covers, or whether one exists, is similar to the method courts use in interpreting contracts; the same principles apply.  Id.  Courts will look at whether the agreement is specific enough, and whether there has been an expressed offer and acceptance by parties to the terms.  Id. The scope of what the arbitration agreement covers will also be determined by the intent of the parties in accordance with the rules governing contracts generally.  See Henning v. State Farm Mut. Auto. Ins. Co., 795 A.2d 994, 996 ( Pa.Super. 2002).

The PA Arbitration statute sets forth rules which govern the general procedures of arbitration.  Parties have a right to be represented by counsel, arbitrators are permitted to issue subpoenas in accord with general rules for the attendance of witnesses, and also request the production of books, records, documents and other evidence. Arbitrators have power to take depositions and administer oaths.  42 Pa.C.S. § 7309(a)-(c). 

In order for an arbitrator’s award to become binding, a party must apply to the court for confirmation of the award.  42 Pa.C.S. § 7313.  Once is done, the court will only modify or correct the award for reasons discussed above and outlined in 42 Pa.C.S. § 7315. Judgment is then entered by the court confirming the order per 42 Pa.C.S. § 7316.

(c) Whether arbitration awards are binding; what governs reviewing, modifying or vacating awards.

Usually the findings and awards of the arbitrator are final and binding unless upon showing of misconduct, ultra vires by the arbitrator, or the like.  “Arbitrators are the final judges of both the facts and the law and their decision will not be disturbed for a mistake of fact or of law. “  Symons v. Schuylkill County Voc. Sch., 884 A.2d 953, 957 (Pa. Commonw. Ct. 2005) (citation omitted). The Pa Arbitration statute sets forth the standards upon which a court can review, modify, correct, confirm or vacate an arbitrator’s award at 42 Pa.S.C. § 7313-14 and the court’s review of an arbitration award will an abuse of discretion standard. As governed by 42 Pa.S.C. § 7302(d)(2).

The court does not inquire into whether the arbitrator's decision is reasonable or even manifestly unreasonable; rather, the question is whether the award may in any way be rationally derived from the agreement between the parties.  A court’s standard of review, in reviewing an arbitration award, is abuse of discretion. When we review a trial court's decision to affirm, modify or vacate an arbitration award… [a] [c]ourt may reverse only for an abuse of discretion or an error of law."

O'Connor-Kohler v. United Servs. Auto. Ass'n, 883 A.2d 673, 676-77 (Pa. 2005), (citing Rudloff v. Nationwide Mut. Ins. Co. 806 A.2d 1270, 1272 (Pa.Super. 2002)).

 

Under this language, it is clear that arbitration awards are usually final and difficult to overturn.

 II. Common law arbitration.

 

Where an agreement to arbitrate does not provide for statutory arbitration and there is no evidence to any agreement providing for statutory arbitration, then common law arbitration applies.  Vogt v. Liberty Mut. Fire Ins. Co., PA Super 124, 5 (2006).

Judicial review of a common law arbitration award is very narrow. Id. at 10. Arbitrators are the final judges of law and fact and their award will not be disturbed for mistakes of either. Id. Such awards are binding and may not be vacated or modified "even if blatantly at odds with the contract involved absent a showing of a denial of a hearing or fraud, misconduct, corruption, or similar irregularity leading to an unjust, inequitable, or unconscionable award." Id. Citing Runewicz v. Keystone Ins. Co., 383 A.2d 189, 192 (Pa. 1978).   

Common law arbitration is the favored means of resolution in labor disputes and courts are discouraged from playing a major role in that arena.

A fortiori, courts should play an extremely limited role in resolving such disputes. Indeed, frequent judicial disapproval of the awards of labor arbitrators would tend to undermine a system of private ordering that is of the highest importance to the well-being of employer and worker alike. For this reason, it is the very deferential standard of review that is the essence test that is to be utilized in analyzing an arbitrator's award, and a court will vacate that award only where it indisputably and genuinely is without foundation in, or fails to logically flow from, the collective bargaining agreement.

Office of the AG v. Council 13, AFSCME, 844 A.2d 1217, 1222 (Pa. 2000).

Once again, a court will only vacate a common law arbitration order if fraud, misconduct, corruption, or other such irregularities are found that result in an unjust, inequitable or unconscionable award.  Sherman v. Amica Mutual Ins. Co., 782 A.2d 1006, 1008 (Pa.Super. 2001).  The only exception to this general rule of deference to arbitration rulings is in collective bargaining agreement cases where the essence test may be used.  The essence test “requires a two-part inquiry. First, the court shall determine whether the issue, as defined, comes within the terms of the [collective bargaining agreement] and, second, if it does, whether the award is rationally derived from the [collective bargaining agreement].  SEPTA v. Transp. Workers Union, Local 290, 880 A.2d 731, 734 (Pa. Commw. Ct. 2004).  Otherwise, arbitration awards hold great weight regarding finality on the matter.

            E.         Litigation.

            When informal settlement and mediation fail and if the contract either does not require arbitration or it is waived, litigation may be pursued.  Often seen as a last resort, if the claim has been analyzed and documented properly, the appropriate experts engaged to support the parties' positions and the arguments prepared, litigation, which has been our main dispute resolution vehicle for centuries, remains available and should be approached with confidence.