[PODCAST] Demystifying Mediation and Arbitration Myths in the Construction Industry

In this podcast, JAMS neutrals Patricia Thompson and Bruce Edwards leverage their alternative dispute resolution (ADR) experience within the construction industry to discuss and demystify the myths pertaining to the use of ADR for construction disputes. They unpack the common misunderstandings people often have about construction ADR, explaining what leads to these misconceptions and what can be done as a result. This conversation outlines arbitration appeals as a mechanism for enhancing parties’ confidence, the role of emotions in resolving disputes, and the cost benefits and flexibility that can be reaped through ADR.

JAMS - Construction Podcast

[00:00:00] Moderator: Welcome to this podcast from JAMS. In this episode, we're discussing disputes in the construction industry, which are all too common. Unfortunately, so are misconceptions of how alternative dispute resolution can help resolve those conflicts. To help dispel some of the biggest myths about construction ADR, we have two JAMS neutrals with us, both with extensive experience, helping to resolve construction disputes: Patricia Thompson in Miami and Bruce Edwards in San Francisco.

So, thank you both for joining us. Before we recorded this episode, both of you provided us with several myths you've heard over the years about ADR. So, let's go over them. Patricia, let's start with you. Number one: Arbitration is a waste of money, and it has become just as expensive and time-consuming as litigation.

[00:00:53] Patricia Thompson: Statistics disprove that belief. In fact, a five-year study recently found that federal lawsuits last a year longer than arbitrations decided during the same period, and that excludes appellate time. In my experience, state court cases last even longer than federal court cases, and with a longer case, you spend more money. The more attorneys do, the more they cost, and that study found that the direct business losses accruing from those longer lawsuits resulted in more than $10 billion of costs to the companies involved concerning management involvement, having resources tied up impacts on credit worthiness and investor concerns.

So, in fact, arbitrations should not and typically do not last longer, and they are not more expensive. But if a party's experience is different, then perhaps that is because arbitrations, famously, are about party choice. If parties choose to make arbitration look like litigation, then it will, unless parties have the choice to use strong managerial arbitrators who will enforce either AAA or JAMS rules that limit the amount of expensive discovery, motion practice and evidentiary issues that can make arbitrations more expensive than they need to be. Parties also can take advantage of streamlined rules that can shorten arbitrations even more.

So, if a party is to find that their experience supports the myth that arbitration is as expensive as litigation, then perhaps they should think about what they can do differently.

[00:02:57] Moderator: Yeah, good point. Well, let's move on to the second myth that you've heard. Arbitrators just split the baby, and therefore, they favor those who are in breach of contract.

[00:03:09] Patricia Thompson: You know, once again, this is simply untrue, and studies prove it. The RAND Corporation, every few years, studies thousands of arbitration awards in commercial cases and compares the demands to the amounts of the awards, and every time they do this study, they find no evidence of significant award splitting.

In fact, typically 37% of the awards are either outright denials of a claim or a small percentage of the claim, while in an overwhelming number of cases, the arbitrator's award is clearly in favor of one side or another. So, then 94% of the awards are outside the median range of 40 to 60%. But nevertheless, if your experience leads you to believe that there might be baby splitting involved, then take care as you choose arbitrators. You can talk to them, ask them what their feeling is. Do they only have to do justice, or would they follow the law? Will they give you reasons so that they have to exercise discipline and making their decisions and use claim matrices in order to focus the arbitrator on each element of a multi-claim dispute, then you will know exactly how the arbitrator arrived at their decision, and you will be able to understand that there was not baby splitting, but then it was a reason to resolve.

[00:04:49] Moderator: Let's move on to the third myth that you've discussed before. Arbitration is risky because there is virtually no right to appeal an erroneous award.

It is very easy for parties to ensure that they have a right of review of an arbitrator's award. They simply need to provide in their arbitration agreement that there will be an option for an appeal. JAMS and AAA and CPR all have rules that allow for the parties to agree either in their arbitration contract itself or after the arbitration has started that they will allow for a panel to review the award.

This is really a good idea, by the way. Not only does it give you more confidence in the accuracy of an award, but it actually will result in a more thoughtful award by the underlying panel because it has been proven that whenever someone knows their decision-making is going to be reviewed, they will go about making that decision more carefully.

In fact, parties can save money by providing for an appeal because they could have one arbitrator decide the case and then, in the event that one of the parties is dissatisfied, have the benefit of a three-arbitrator panel to review it. The JAMS rules allow arbitrators, when they're sitting on an appellate panel, to enter a final appellate award. There is no such thing as sending a case back to the arbitrator below for remand. So, on an appeal, if it turns out that the arbitrator below mistakenly prevented a party from offering evidence, then the panel can accept the evidence, hear it and enter a revised award. So that if you add an appeal to an arbitration as an option, it might not be taken—the parties don't need to appeal—but at least they will have the confidence that in the event of an error, they will be able to cure the error, and I think it will help parties be more confident that arbitration is a better way to resolve disputes.

[00:07:22] Moderator: Well, speaking of arbitration appeals, they are the subject of another myth that you've heard. Arbitration appeals are a bad idea because they only delay resolution of the dispute and defeat the finality of arbitration awards.

[00:07:34] Patricia Thompson: Well, as I said, arbitrators, when they're sitting on an appellate panel, are authorized under JAMS rules to enter a final appellate award.

They don't have to send it back, and they also have a very quick process for these appeals. The appellate deadlines are measured in days and weeks, not months. The parties also can structure the standard of review to whatever they agree to. They can also agree to a briefing policy. Maybe they want to add to the briefing surrebuttals and additional filings.

The parties can agree to that. They can agree to a two-hour-long oral argument. Whatever they want to do, they are in control of the appeal, and they can get it done more quickly and less expensively. So, consequently, appellate arbitration enhances the benefits of arbitration. It is not a waste of time and certainly not a waste of money.

[00:08:39] Moderator: All good points. Bruce, let's talk about some of the myths that you've heard about mediating construction disputes. The first myth you've heard is a pre-litigation construction mediation is a waste of time. Why is that a myth?

[00:08:55] Bruce Edwards: First of all, that statement, I think, belies industry efforts over the last 60 or 70 years to try and find creative ways to resolve construction disputes before one gets into litigation.

If you go back to the 1940s and the Army Corps of Engineers' efforts to develop partnering opportunities pre job performance, to project neutrals being brought on board, to dispute resolution boards attempting to resolve conflicts in real time before they can impact the critical path of projects. Now, with the advent of mediation, and in the last 20 or 30 years, we see an industry trend toward favoring pre-litigation mediation.

So, I've taught mediation generally, and construction mediation in particular, in over 20 different countries, and the construction audience, I think, always benefits from the message: The sooner you can begin the mediation process, the better. Very few things benefit with delay. I mean, job documents are lost, key employees and companies move on to other projects, memories fade and positions harden. It's pretty clear that the sooner you can get these disputants to the table to try and unravel this long-developing ball of string, the better, and we'll know we've arrived when litigation becomes the alternative, not mediation.

[00:10:18] Moderator: So, quick action is needed. The second myth you've heard, Bruce, is this: All you need to do to prepare for a successful construction mediation is to share your pleadings with the mediator and get a good night's sleep.

[00:10:31] Bruce Edwards: I'm not going to argue with the getting a good night's sleep part of that, but the sharing of pleadings, I think, misses the boat.

I've had the privilege of teaching over the years with a colleague who's a mediator and psychotherapist, who long ago taught me that if you help people understand the why behind something, then the how to will follow and the why behind it's important to share in advance of the mediation process itself is a recognition that it's a unique opportunity to try and convince decision-makers on the other side.

A well-crafted mediation brief, for example, will present the opportunity for somebody who's a decision-maker, who's maybe hearing things from a different perspective for the first time to reflect in the quietude of their office, well before they show up at mediation and are impacted by the emotions and other distractions in the moment, to consider the various arguments that you're putting out there.

After all, the whole purpose of the mediation process is to convince the other side that there is a different perspective, one that's worthy of consideration. Ultimately, that really begins with this mediation brief and these pre-mediation opportunities to share documents that appropriately thread the needle between forceful advocacy while demonstrating a willingness to collaborate. That's certainly not something that is involved in sharing a legal pleading.

[00:11:56] Moderator: A pre-mediation brief is important. Okay. Number three, another myth. Construction disputes only involve money, and there's no need to deal with emotions.

[00:12:06] Bruce Edwards: Well, it's true that money sometimes is the best measuring stick for many in terms of who wins and who loses. We can't for a moment overlook the important role emotions play in disputes. To sort of understand how far afield this myth is, we really have to understand a bit more about neuroscience and how our brains work. In the last 20 years, neuroscience has evolved tremendously with CAT scans and MRI imaging and other things that help us really understand the role emotions play in formatting our view of the environment around us, how we communicate with each other and even how we code memories.

So, without getting too deep into that process, I think one needs to safely assume that emotions lie, if at all, just beneath the surface of so many disputes; they are intricately intertwined with the dispute itself; and then they need to be given a proper place in the conversation. They need to be seated at the table along with facts and law and other relevant considerations. So, don't for a moment think that somehow construction disputes are antiseptic from an emotional standpoint and, just because no one was maimed or killed, that emotions don't play a role. They do, clearly.

[00:13:22] Moderator: Absolutely. Moving on to number four. It helps in mediation to play your cards close to the vest, and joint meetings with experts or attorneys are never productive.  

[00:13:32] Bruce Edwards: Well, let me start with the last part first. I think the value of joint meetings between experts and attorneys is critical to the mediation process. It's really what defines it into a large measure, unlike litigation, where people rarely have the opportunity to sit down in some measured, productive way to discuss what brought them to that moment in time. Mediation affords that opportunity, and all too often people, for a variety of reasons, want to just glide past the opportunity for a joint meeting.

In doing so, they really miss an important opportunity. Again, as I said earlier, these moments, properly managed, afford you the opportunity to sit across the table, literally, from a decision-maker on the other side and give them, perhaps for the first time, a sense of realism about what brought things to the table from your perspective and, hopefully, guide them to a mind shift that's going to be essential in creating the opportunity for not just continued dialogue, but ultimately a resolution that works for everybody's benefit. As far as the first part, holding cards close to the vest, I often ask people really what's the purpose of that.

I mean, so think about it. So, hopefully two or three years down the road, when this case finally sees the inside of a courtroom—you think in the context of sometimes what could be a six-week or six-month trial—you're going to play some email or other message up on the screen, and hopefully it's going to be the aha moment for a trier of fact.

I mean, at what cost and at what risk? And isn't it much better to sort of seize the moment and help people make informed, intelligent decisions in mediation by really revealing the evidence that should persuade them?

[00:15:14] Moderator: So, put your cards on the table earlier rather than later.

[00:15:17] Bruce Edwards: Indeed.

[00:15:17] Moderator: Number five. Spending a day in mediation means you've given it your best shot, and if the dispute isn't resolved, arbitration or litigation is inevitable.

[00:15:26] Bruce Edwards: I think with regard to the inevitability of arbitration and litigation, it's a key misnomer. Construction mediation is a process, one that involves tackling a dispute that's been long in the making—sometimes three, five, seven years in the making—and the notion that it can be a ball of string that's successfully unraveled in eight hours is really a misconception.

We start by designing a process that involves sharing documents, allowing experts to investigate then ruminate on how to evaluate problems and sometimes seeking a cost of repair. But these are disputes that involve numerous stakeholders. So, on the actual day of mediation, it's not uncommon to have owners, prime contractors, subcontractors and a litany of design professionals assembled to try and stake out their positions.

So, the notion that all of that can happen, and you can move people from those pre-mediation positions toward resolution in one day, misses the point in that it is a process. At the end of the day, it's all about patience and perseverance, because we know patience and perseverance move mountains. We know they're essential in any mediation process involving construction disputes.

So, hopefully with that patience and perseverance, parties will be rewarded with a settlement agreement that everyone can live with while getting on with what they do best, which is designing and building the structures that enhance our lives.

[00:16:51] Moderator: Patience and perseverance. A good message to end this podcast on.

I want to thank both you, Bruce, and Patricia for a really fascinating conversation. It's been very insightful. Thank you so much.

[00:17:00] Bruce Edwards: Thank you as well.

[00:17:02] Patricia Thompson: It's our pleasure.

[00:17:04] Moderator: You've been listening to a podcast from JAMS, the world's largest private alternative dispute resolution provider. Our guests have been Patricia Thompson and Bruce Edwards. For more information about JAMS, please visit www.jams.adr.com. Thank you for listening to this podcast from JAMS.