Notwithstanding the care exercised by the association in negotiating a construction contract, and despite the reputation and quality of the contractor, disagreements can arise. Some of the factors that give rise to these disputes are well known:
In the bidding process, the contract price is driven down to a point where the work cannot be completed without change orders. Change orders are then disputed.
There are inconsistencies between the plans and specifications, that cause conflict between the owner and contractor.
Job delays occur, and a dispute arises concerning whether liquidated damages may be assessed.
The contractor becomes insolvent and mechanics liens are recorded against the property.
It is important for the Association to anticipate such disputes at the time of contracting and to make a considered election concerning the method by which the disputes will be resolved. These can include negotiation, mediation, arbitration and litigation. The following sample clause is illustrative:
Recognizing the expense and time associated with litigation, the parties mutually agree that in the event of any dispute or controversy arising out of or connected with this agreement, the parties will participate in mediation to be conducted by John Jones, Mediator Extraordinaire. The parties further agree that in the event either party files suit prior to submitting the dispute to mediation as provided herein, that the Superior Court may issue an order staying or dismissing the proceeding until mediation has been completed.
Alternative Dispute Resolution
Negotiations, mediation and private arbitration are forms of alternative dispute resolution. Parties sometimes obligate themselves to conduct alternative dispute resolution in the event of a claim of breach of contract because of perceived advantages of the process. These include the following:
The proceedings are private, in contrast to litigation in the Superior Court where the pleadings are a matter of public record.
Depending on the structure of the contract clause, the proceedings may be voluntary.
Again, depending on the structure of the dispute resolution clause in the contract, the alternative dispute resolution process may be scaled to the magnitude of the dispute.
The alternative dispute resolution process may be faster and less expensive than litigation.
Alternative dispute resolution affords the opportunity of a resolution that is more flexible than litigation. Instead of “winner takes all”, a business solution can be reached that has advantages to both sides.
The construction contract may contain a clause requiring that, in the event of a dispute between the parties, the parties meet and confer in good faith in an effort to resolve the issues. The following language is illustrative:
Recognizing the time and expense associated with litigation, the parties agree that in the event of any dispute or controversy arising out of or in connection with this agreement, the parties shall first endeavor to resolve the controversy or dispute through good faith negotiations. In the event such negotiations are unsuccessful, the parties further agree as follows:…
The successful resolution of a construction dispute through negotiation requires careful preparation. The parties should develop a careful understanding of the facts, chronology of events, and pertinent contract clauses. For example, in a dispute concerning whether a roofing contractor is entitled to a change order for extra labor and materials, because the job was larger than specified in the bid, each side must have good factual information concerning the actual size of the project. The parties must also understand whether the contract provisions allow for a change order under these circumstances, or instead, whether the contract price was fixed based on the actual size of the project, which was available for inspection and measurement by the contractor before he bid.
Contract dispute negotiations often benefit by the presence of not only legal counsel for each side, but representatives from the Board and the contractor. In addition, the construction manager and/or project architect may be helpful in providing information and recommendations concerning the issues.
There are volumes written on the process of negotiation. Experience has shown that a mastery of the facts and honesty and integrity are the key factors in successful persuasion. A good negotiation is a process of mutual education, and from this platform of information a better business judgment will be made by each side, recognizing the potential positive and negative consequences of resolving the claim or proceeding to another form of alternative dispute resolution.
California law encourages parties to be candid in their settlement negotiations. An evidentiary privilege extends to offers of compromise made in the negotiation. Evidence Code Section 1152(a).
Settlements consummated through a negotiation should be immediately confirmed in writing. An interim record can and should be made, and signed by the parties, pending the completion of a formal settlement agreement. Needless to say, the settlement agreement should be specific and comprehensive since the parties disputed the terms of their original contract.
It is often helpful to attach to the settlement agreement relevant documents. For example, the contractor and Association may attach a change order to the settlement agreement, identifying it as one that will be issued, but the agreement may also state that there will be no other change orders on the project concerning the issue that has been resolved.
The parties to a construction contract may agree that in the event of a dispute, they will submit their matter to mediation. Mediation is a settlement negotiation facilitated by a neutral third party. The mediation agreement may specify that if negotiations and/or mediation are unsuccessful, the dispute will then be resolved through binding arbitration. Alternatively, the agreement may provide that under those circumstances the parties are free to litigate their dispute in the Superior Court.
The mediator does not have the ability to decide the dispute between the parties. Instead, the mediator exercises a unique skill set which enhances the prospect of a resolution of the dispute between the parties through a negotiation process. In construction contract disputes, the mediation will typically be attended by representatives of the association and the contractor, as well as attorneys for both sides. The mediator often will meet with both sides jointly and then have the parties break out into separate areas where the mediator can meet privately with each, to assist in the evaluation of the claim. The mediator generally has a neutral role in the mediation, but in some instances may provide his or her opinion concerning the valuation of the claim. The parties also can agree in advance that if the mediation is not successful, the mediator will make a binding decision (“med-arb”).
Mediation has been highly successful in the resolution of contract disputes. Some of the reasons that mediation is favored for this purpose are:
The parties have control over the outcome.
The business relationship between the parties can be preserved.
Mediation encompasses a solution that is focused on resolution, not designating blame.
Mediations are private and confidential. Evidence Code Sections 703.5, 1115 and 1152.
The mediation process can avoid problems inherent in direct negotiations.
Mediations are faster and cheaper than litigation.
Mediations generally begin with a confidentiality agreement confirming the private and confidential nature of the process. If successful, the settlement agreement specifies that it is admissible in evidence, is enforceable in the court of law, and may be disclosed outside of mediation.
Although construction contracts requiring binding arbitration of disputes are enforceable under California law, it is presently unclear whether an agreement mandating mediation before litigation is enforceable. Since courts cannot compel parties to participate in mediation, there is no effective remedy if a party breaches this aspect of the construction contract, unless the court will stay or discuss a lawsuit pending mediation.
The parties to the construction contract can agree that disputes will be resolved through an arbitration process. That process may be binding or non-binding. It may involve
one or more than one arbitrator. It may refer to the rules of an arbitration service, such as the Construction Industry Rules of the American Arbitration Association or the Comprehensive Arbitration Rules and Procedures of JAMS/Endispute.
Contractual arbitration shares many of the advantages of mediation. These include:
Potentially faster results than through Superior Court litigation.
Potentially less costly dispute resolution than in Superior Court.
Control in the selection of a decision maker or decision makers who may have more specialized knowledge of the industry.
Although arbitration of construction disputes is often successful from the perspective of both sides, there are distinct disadvantages to the process. These include the fact that some arbitrations have proven to be slower and more expensive than traditional litigation. Also, arbitrators are not obligated to follow the law, and instead may make a decision based upon their own sense of justice and fair play. Even if the arbitrator makes a clear mistake, it is difficult or impossible to set aside an arbitration award, depending upon the structure of the arbitration. There generally is no right to discovery, so preparation for the hearing is limited. In general, third parties who did not sign the agreement are not bound by it. Therefore, a dispute involving a third party, such as a subcontractor, is difficult to resolve in an arbitration between the homeowners association and general contractor only. Finally, there is anecdotal information that arbitrators tend to make compromise decisions, rather than issue a decisive award in favor of a party who is entitled to it.
The limited grounds to vacate or correct an arbitrators award include exceeding the arbitrators power, fraud, failure of the arbitrator to disclose matters indicating possible bias, actual bias, evident partiality, failure to determine necessary issues, and prejudicial refusal to continue the arbitration or hear evidence.
Therefore, the inclusion of a mandatory arbitration clause in a construction contract should be very carefully considered. Many lawyers routinely advise against binding arbitration clauses. They reason that when a dispute arises, the parties can always mutually agree to binding arbitration. However, at that time they will know the scope and character of the controversy, so an intelligent decision can be made regarding whether or not to waive the rights of discovery, the right to a jury trial, the right to appeal, and other important legal rights. If binding arbitration is included in the contract, in contrast, those rights would all be waived regardless of the size and importance of the dispute.