Dispute Resolution
Extraction from a/e ProNet Contract Guide for Design Professionals
Design professionals generally prefer not to think about disagreements turning into formal disputes requiring resolution by third parties. Insurance brokers, insurance companies, and lawyers who represent the design professionals, however, must review every contract and every communication between parties with a keen knowledge that the outcome of an eventual dispute may depend upon the wording of that contract, document, or communication.
Although we may not want to dwell on disputes, it is helpful to the project management and risk management process to plan, execute, and document the services with the view that formal dispute resolution may one day be necessary on your project.
You should review several related issues in this book concerning disputes in order to get a more complete understanding of managing your risks to avoid disputes where possible and to facilitate the most effective and efficient dispute resolution when a dispute can’t be avoided.
Several contract clauses, in addition to the disputes clause, can significantly impact dispute resolution. These include the Choice of Law, Time Limitations, Limitation of Liability, Indemnification, Severability, and Survival clauses.
Issue 1: Reporting a Claim Against You
Your insurance policy specifically outlines what you will have to do in the event of a dispute including timely notice to your insurance company, and making no decisions and taking no actions concerning a claim that would prejudice the rights and interests of the insurance company. The policy states your rights and obligations with regard to claim reporting and claim resolution. An example from a design professional policy is quoted below:
Notice of CLAIM
In the event of a CLAIM, YOU shall provide to US prompt written notice containing particulars sufficient to identify YOU or any INSURED involved and reasonably obtainable information with respect to time, place and circumstances, and the names and addresses of any injured parties and of available witnesses. YOU further agree to send US copies of all demands or legal documents as soon as possible. All CLAIMS are to be reported to: [Insurance Company] [Insurance Company address].
No costs, charges or related CLAIM EXPENSES shall be incurred without OUR written consent which shall not be unreasonably withheld. WE shall have the right and the duty to designate legal counsel for the investigation, defense or settlement of a CLAIM. WE will not settle or compromise any CLAIM without YOUR consent. YOU shall do nothing to prejudice OUR rights under this Policy nor shall YOU admit liability or settle any CLAIM without OUR written consent. If YOU refuse to consent to any settlement or compromise recommended by US involving any part of OUR limits of liability and acceptable to the claimant, and YOU elect to contest the CLAIM, suit or proceeding, then OUR liability shall not exceed the amount which WE would have paid for DAMAGES and CLAIM EXPENSES at the time the CLAIM or suit or proceeding could have been settled or compromised.
YOU shall assist and cooperate with US in the investigation, settlement and defense of all CLAIMS made against YOU and upon OUR request shall authorize the release of records and other information, secure and give evidence, attend hearings and trials and obtain the location of and cooperation of witnesses. Any expenses YOU incur resulting from such cooperation are not considered CLAIMS EXPENSES, and are thus not recoverable under this Policy or chargeable against YOUR Deductible.
Discussion: Some important points to note from the above-quoted language are the following:
- You are to report the claim directly to the insurance company at the address indicated in the policy;
- You are not to incur claim defense costs without prior authorization of your insurance carrier; and
- You are to do nothing to prejudice the rights of the insurance carrier, nor are you to settle the claim without the carrier’s consent; and
- If you refuse to consent to any settlement or compromise recommended by the carrier and instead contest the claim, resulting in an award against you greater than what the carrier would have paid to settle the case, the carrier limits its liability to you to the amount it would have paid for the settlement.
This last clause is sometimes referred to as the hammer clause, because the design professional may potentially get hammered if it forces a matter to trial that could have been settled for a lesser amount.
Note that the notice must go directly to the insurance carrier. Design firms often first informally talk to their insurance broker about a claim before submitting a formal notice of claim to the carrier. It is important to understand, however, that pursuant to the terms of the policy, the formal written notice is to go directly from you to the company and address stated in the policy.
Issue 2: Mediation
Disputes are increasingly being resolved through mediation. Mediation, however, can be a precursor to either arbitration or litigation. It produces a non-binding result and is basically a form of settlement discussion. The contract can set forth mediation or other alternative dispute resolution procedures to precede that final binding process. Of course, the mediation can produce a settlement that becomes binding once it is agreed upon by the parties and recorded into a binding agreement.
Mediation has been so efficient and cost-effective at resolving construction and design professional disputes that a number of insurance carriers have provided a credit to the deductible to encourage the use of mediation. As mediation has become the industry standard, however, a number of carriers have ceased offering this. You may want to consult your broker about the availability of such mediation credits.
On complex or lengthy projects, there may be distinct advantages to resolving disputes during the construction process rather than waiting until project completion. This is sometimes done through Dispute Resolution Boards that are established pursuant to terms of the contract.
It is important when establishing a dispute resolution process in the design professional agreement that the parties to the contract consider how disputes between others on the project will be resolved and whether all organizations, at every tier and subtier will be included in a single dispute resolution if they have a stake in the outcome.
Discussion: Include language in the contracts between the owner and design professional, as well as between the owner and the contractors, requiring mediation as a condition precedent to either arbitrating or litigating claims. Specify that if mediation fails to resolve the dispute, the parties then are free to proceed with other binding dispute resolution, including arbitration or litigation, as set forth in the contract agreement.
An example of a mediation clause is the following from AIA B101-2017, Section 8.2.1 that provides in part:
Any claim, dispute or other matter in question arising out of or related to this Agreement shall be subject to mediation as a condition precedent to binding dispute resolution. If such matter relates to or is the subject of a lien arising out of the Architect’s services, the Architect may proceed in accordance with applicable law to comply with the lien notice or filing deadlines prior to resolution of the matter by mediation or by binding dispute resolution.
EJCDC E-500 (2014) similarly provides for a step process to dispute resolution, beginning with negotiation, and proceeding through mediation or arbitration. Section 6.09 A. provides:
- “Owner and Engineer agree to negotiate all disputes between them in good faith for a period of 30 days from the date of notice prior to invoking the procedures of Exhibit H or other provisions of this Agreement, or exercising their rights at law.
- If the parties fail to resolve a dispute through negotiation under Paragraph 6.09.A, then either or both may invoke the procedures of Exhibit H. If Exhibit H is not included, or if no dispute resolution method is specified in Exhibit H, then the parties may exercise their rights at law.”
In the next clause, the parties have agreed to include mediation provisions in all agreements with other parties involved with the project. This will avoid the situation where a subcontractor or other party that may have an interest or even causation in the claim is left out of the mediation process and opts to go straight to court instead:
“In an effort to resolve any conflicts that arise, the Owner and Consultant agree that all disputes between them arising out of or relating to this contract or the Project shall be submitted to non-binding mediation unless the parties mutually agree otherwise. The Owner and Consultant further agree to include a similar mediation provision in all agreements with independent contractors and consultants retained for the Project and to require all independent contractors and consultants also to include a similar mediation provision in all agreements with their subcontractors, sub-consultants, suppliers and fabricators, thereby providing for mediation as the primary method for dispute resolution between the parties to all those agreements.”
Issue 3: Arbitration
Issue: Although conventional wisdom has been that arbitration can be a more cost-effective and efficient means to resolve disputes than litigation, this is not always the case, particularly with complex construction disputes. With complex construction litigation, it is often beneficial to obtain full discovery of the facts through interrogatories and depositions of witnesses and experts.
The abbreviated proceedings in arbitration may not permit the parties to adequately develop and prove their case. Moreover, it may render it difficult for an insurance company to determine the basis for an arbitration decision.
If an arbitration decision is rendered with no factual and legal explanation, and the claim was based on multiple theories of law such as negligence, breach of contract and warranty, it may be impossible for the insurer to ascertain the basis for the arbitration award.
Some carriers may also be concerned that arbitration is not necessarily geared towards a fair allocation of liability based upon law and facts, but may instead split the baby in the middle, thereby penalizing the design professional.
Court Decision Shows Why it can be Dangerous to Agree to Arbitrate
An arbitrator ignored the LoL clause when it awarded damages and attorneys fees. In this dispute, the contractor filed an arbitration claim for $500,000 in unpaid fees. The Owner counterclaimed for $2.3 million. The contract had LoL clause, but also had a prevailing party attorneys fees clause. The arbitrator awarded a decision in favor of the owner, that included Owner damages and prejudgment interest totaling $699K which was the maximum amount allowed under a limitation of liability clause of the contract. But the arbitrator also awarded the Owner almost $1 million in prevailing party attorneys fees. The arbitrator ignored the LoL cap when awarding the attorneys fees because it found those fees were not a “loss” or “damages” subject to LoL clause. The court refused to set aside decision as arbitrary and contrary to law. Beumer Corp. v. ProEnergy Services, LLC, No. 17-2862 (8th Cir. Aug. 9, 2018).
Discussion: If the contract calls for arbitration in the event a dispute is not successfully resolved by mediation, it is advisable to require that any arbitration award include a detailed decision containing findings of fact and conclusions of law. This is important so that an insurance carrier may determine from the face of the award decision the basis for the damages.
When arbitration is conducted over a period of many months with the arbitrators meeting only sporadically, it is difficult to understand how they can remember the details of the case and reach a decision as well reasoned as that of a court that conducts a full hearing at one time and place. In addition, with the limitations upon document discovery and testimony and cross-examination, it can be more difficult to ascertain the genuine facts of the matter.
Another shortcoming of arbitration proceedings is the lack of Motions Practice that is available in court proceedings that permit parties to file motions for summary judgment and motions to dismiss. Whereas you might be entitled get out of a court case by filing a motion to dismiss based on the expiration of the time permitted by the statutes of limitations or statues of repose, you might not be able to use those same statutory time limitations to get dismissed out of arbitration proceedings.
Before entering into binding arbitration proceedings, be sure to discuss with your insurance broker and insurance carrier any requirements that the carrier may apply. It is entirely possible that your carrier may prefer litigation of a complex construction matter in order to obtain full discovery of the facts, including production of documents and witnesses for cross-examination. Moreover, on complex cases, it may be more efficient with regard to both time and cost to litigate rather than arbitrate.
The AIA B101-2017 provides as follows:
§ 8.3.1.1 A demand for arbitration shall be made no earlier than concurrently with the filing of a request for mediation, but in no event shall it be made after the date when the institution of legal or equitable proceedings based on the claim, dispute or other matter in question would be barred by the applicable statute of limitations. For statute of limitations purposes, receipt of a written demand for arbitration by the person or entity administering the arbitration shall constitute the institution of legal or equitable proceedings based on the claim, dispute or other matter in question.
Other Issues to Consider with Regard to Arbitration
If the contract contains a mandatory arbitration clause, consider revising it to make it a voluntary decision to be mutually agreed upon by both parties when a dispute arises. This can be done by substituting the word may for shall in the language stating that disputes shall be submitted to arbitration.
This will permit the parties to make a more informed decision concerning whether arbitration or litigation is most appropriate for a particular dispute and in their best interest. If arbitration is decided upon at that later date, a more complete arbitration agreement can be agreed upon at that time, including terms such as requiring the arbitrators to issue a detailed decision including facts and law.
Instead of agreeing to arbitrate all disputes, you might revise the contract language to require arbitration only for those disputes less than a certain dollar amount, or only for certain issues such as fee disputes or copyright infringement allegations.
Prevailing Party Attorneys’ Fees
Be careful about agreeing to “prevailing party” attorneys’ clauses. If a design firm does not “prevail” in arbitration or litigation, and its client (the prevailing party) is entitled to recover its attorneys’ fees as a result of a clause in the contract, this may be deemed a “contractual liability.” As such it is excluded from coverage under the professional policy due to the contractual liability exclusion.
Legal fees of the prevailing party could exceed the amount of actual damages recovered by that same party. The prevailing party might prevail on only 10% of its demand amount. Will you be required to pay 100% of that party’s attorneys fees when 90% of the claim is rejected? Consider eliminating the prevailing party language altogether, or perhaps in some way limiting the attorneys fees.
The preferred response to a prevailing party clause is to strike it out of the contract during contract negotiation. If that can’t be accomplished then at a minimum the term should be objectively defined so that a court has no discretion in determining who is the prevailing party for purposes of awarding attorneys fees as required by a contract. The typical clause merely states that the prevailing party is entitle to recover its attorneys’ fees from the other party. Consider, instead defining the term prevailing party such as the following:
“Prevailing party is the party who recovers at least 67% of its total claims in the action or who is required to pay no more than 32% of the other party’s total claims in the action when considered in the totality of claims and counterclaims, if any. In claims for monetary damages, the total amount of recoverable attorney’s fees and costs shall not exceed the net monetary award of the Prevailing Party.”
Issue 4: Joinder of Parties into a Single Dispute Resolution
It is important that all entities with a stake in a claim be made a part of any dispute resolution process, including arbitration or litigation.
Discussion: This is generally accomplished by including in every contract, at every tier, a joinder requirement such as that included in EJCDC E-500, Exhibit H, H6.09 A.5, which provides:
“If a Dispute in question between Owner and Engineer involves the work of a Contractor, Subcontractor, or consultants to the Owner or Engineer (each a “Joinable Party”), and such Joinable Party has agreed contractually or otherwise to participate in a consolidated arbitration concerning this Project, then either Owner or Engineer may join such Joinable Party as a party to the arbitration between Owner and Engineer hereunder. Nothing in this Paragraph H6.09.A.5 nor in the provision of such contract consenting to joinder shall create any claim, right, or cause of action in favor of the Joinable Party and against Owner or Engineer that does not otherwise exist.”
The AIA B101-2017 takes a somewhat different approach:
“8.3.4.2 Either party, at its sole discretion, may include by joinder persons or entities substantially involved in a common question of law or fact whose presence is required if complete relief is to be accorded in arbitration, provided that the party sought to be joined consents in writing to such joinder. Consent to arbitration involving an additional person or entity shall not constitute consent to arbitration of any claim, dispute or other matter in question not described in the written consent.”