Understand Alternative Dispute Resolution Procedures
Before Agreeing to Them
by David Mendes

Every construction company owner has heard horror stories about pursuing project-related claims in court cases that last for years, sapping much-needed cash from projects. When subcontractors are able to specify alternative dispute resolution (ADR) procedures, subcontractors may be able to avoid some of the expense and other downsides of litigation. Not all ADR procedures are appropriate for all subcontractors, however. When evaluating dispute resolution options, subcontractors need to pay special attention to subcontract agreements.

Common ADR procedures include American Arbitration Association (AAA) arbitration and mediation procedures, as well as contractually specified procedures such as submission of disputes for review by Dispute Review Boards, senior executives, project engineers, architects or construction managers. A white paper published by the American Subcontractors Association (ASA), "Dispute Resolution: The Procedure," explains some of the advantages of ADR, and examines what kinds of contract provisions are appropriate when ADR procedures will be used to resolve subcontractor claims.

One of the biggest potential advantages of ADR is that it can reduce time-consuming and expensive procedures associated with litigation. For example, in litigation of claims, subcontractors pay a substantial sum for collection of evidence and preparation of legal arguments even before the trial begins. ASA's white paper explains that the AAA rules for mediation encourage "a realistic assessment of the likelihood of ultimate success before extensive discovery and trial preparation have begun" and focus on getting the parties to present the merits of their arguments. If the dispute is not settled in mediation and moves to arbitration, the AAA "Construction Industry Arbitration Rules" disfavor expensive and time-consuming forms of discovery. In addition, the Federal Arbitration Act virtually guarantees that there will be no lengthy and costly appeals process once the arbitration is complete.

Another possible advantage of ADR procedures is that the parties to the dispute may be able to specify a facilitator who is familiar with the construction industry. This potentially addresses the common complaint in litigation that the judge or jury is not familiar enough with the industry to render a fair decision.

Understanding the possible advantages of ADR procedures and benefiting from them are two different things, however. ASA's white paper points out that subcontract agreements can be used to specify ADR procedures that put subcontractors in a weak position.

For example, subcontract agreements often "flow down" the rights and responsibilities of prime contractors to subcontractors. If the prime contract agreement contains a provision requiring a Dispute Review Board, project engineer, architect or construction manager to render an "advisory" or "initial" decision on disputed claims, then the subcontract agreement may (unless modified) subject the subcontractor's claim to a decision by these parties, who may not be familiar with the subcontractor's arguments or concerns. Another example is language requiring that the subcontractor's dispute be stayed until another dispute, such as a dispute between an owner and prime contractor, is settled or decided.

ASA's white paper recommends that subcontractors consider specifying ADR procedures to avoid the downsides of litigation, but urges subcontractors to be aware of the potential limitations of ADR procedures as well.

Learn more about alternative dispute resolution. Visit ASA's Web site at www.asaonline.com and click on "Stand Up! for Subcontractors," or call ASA at (703) 684-3450. Founded in 1966, ASA serves 5,000 member companies and is dedicated to improving general business conditions for all subcontractors through unified and cooperative actions. ASA's vision is to be the united voice dedicated to improving the business environment in the construction industry. ASA provides its members with advocacy, leadership, education and networking.

Visit ASA's Web site at www.asaonline.com

Contact: David Mendes
(703) 684-3450, Ext. 1335
dmendes@asa-hq.com