Introduction to Construction Dispute Resolution Stage 5 Binding

Introduction to Construction Dispute Resolution Stage 5: Binding Dispute Resolution Feniosky Peña-Mora Gilbert W. Winslow Career Development Associate Professor of Information Technology and Project Management MIT Room 1 -253, Phone (617)253 -7142, Fax (617)253 -6324 Email: feniosky@mit. edu Intelligent Engineering Systems Laboratory Center for Construction and Research Education Department of Civil and Environmental Engineering Massachusetts Institute of Technology

Definitions n WHAT • “…referral of a dispute to one or more impartial persons for final and binding determination. Private and Confidential, it is designed for quick, practical, and economic settlements. ” (American Arbitration Association) n WHO • A Panel of Three Arbitrators n WHY • Impartial, Final and Binding Decisions Issued by Knowledgeable Experts n HOW • Follow the Steps in the Contract to Reach a Binding Decision • Review the Contract for the Appropriate Procedures • File the Necessary Forms and Select the Arbitrator 2 • Prepare your Case Relevant to the conflict Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Reservoir Project n Project Scope: Upgrading a Water Reservoir in an Environmentally Sensitive Zone n Fixed Price Contract • US$6 million Bid Price • 480 Days for Completion • US$ 1, 000 Per Day For Liquidated Damages n Major Participants • Owner (Public Agency) • Designer • Contractor (Lowest Bidder) n Problematic • Widening for a Temporary Access Road For Equipment • Owner’s Complaint: The Impact on 35 feet of Environmentally Sensitive Area • Delay Claim Issued by Contractor 3 • Arbitration Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Outline Ø Mediation/Arbitration (Med/Arb) n Adjudicator/Expert Determination n Arbitration • Single Arbitrator • Baseball Arbitrator n Shadow Mediation 4 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Mediation/Arbitration (Med/Arb) n Least Adversarial Binding DART n Same Third Party Neutral Acting as Mediator and Arbitrator if No Mediated Settlement Was Reached n Disadvantages (As Compared to Mediation) • Commitment of Parties to Proceed to Arbitration if Mediation Failed • Difficulty in Divulgating All Confidential Information to Neutral Third Party in the Mediation Phase 5 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Med/Arb : A Worldwide Practice n East: Highly Encouraged n West: Preference of an Unbiased Judge n Asia: Conciliation Prior to Arbitration , Highly Encouraged n Australia: • Pre-Trial Motions Set by Arbitrators in an Attempt to Promote Early Settlement • Proceeding to Arbitration if Failure to Reach Settlement 6 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Outline ü Mediation/Arbitration (Med/Arb) Ø Adjudication/Expert Determination n Arbitration • Single Arbitrator • Baseball Arbitrator n Shadow Mediation 7 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Adjudicator/Expert Determination n Expert With His/Her Own Inquiries and Investigations n Award by the Expert, Binding If Enforced by Contract n Characteristics of the Expert Adjudicator: Fast, Decisive, Binding 8 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Adjudicator Procedure in the UK NOTICE OF DISPUTE 7 days APPOINTMENT OF ADJUDICATOR BINDING DECISION FOR THE REST OF THE PROJECT. It can be submitted to arbitration after final completion. 28 days, which can be extended once for another 14 days if the parties agree to do so Peña-Mora et. al, 2002 9 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Adjudicator Procedure in the UK n Main Features • Unilateral Procedure Initiated by One of the Parties • An Interim Decision that Can be Reviewed or Appealed in Arbitration Upon Project Completion n Disadvantages • Very Limited Timeframe (7 Days) for the Joint Selection of a Knowledgeable and Reliable Adjudicator • Limited Time for the Adjudicator to Gather Information (2 Months) 10 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Outline ü Mediation/Arbitration (Med/Arb) ü Adjudication/Expert Determination Ø Arbitration • Single Arbitrator • Baseball Arbitrator n Shadow Mediation 11 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Arbitration Characteristics n Decisions Are Impartial. n Decisions Are Final and Binding on All Parties. n Decisions Are Issued by Knowledgeable Experts in the Field of Dispute. n The Contract Specifies the Size of the Arbitration Panel, the Codes and Regulations, the Organization Administering the Procedures, the Location… 12 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Arbitrator’s Attributes n Impartiality and Objectivity n Dispute Management Skills n Experience With Arbitration Proceedings n Strong Academic Background and Professional or Business Credentials 13 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Classification of Arbitration Cases n Decline in the Usage of Arbitration Since 1991 n New Classification of Arbitration Cases by AAA (1999) and Implementation of New Sets of Rules • Fast Track Rules for Cases up to $75, 000 • Regular Track Rules for all Other Cases • Large Complex Track Rules for Cases Involving in Excess of $1, 000 14 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Outline ü Mediation/Arbitration (Med/Arb) ü Adjudication/Expert Determination ü Arbitration Ø Single Arbitrator • Baseball Arbitrator n Shadow Mediation 15 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Single Arbitrator n One Expert Presiding Over the Hearings Instead of a Panel n Need to Weigh the Cost Savings Against the Risk of Having One Single Viewpoint 16 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Outline ü Mediation/Arbitration (Med/Arb) ü Adjudication/Expert Determination ü Arbitration ü Single Arbitrator Ø Baseball Arbitrator n Shadow Mediation 17 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Baseball Arbitrator n A Single Neutral Advisor Is Selected. n Each Party Presents Its Offer for Settlement. n The Arbitrator Selects One of the Two Offers. n Disadvantages: • Lack of Flexibility • Absence of Alternative Solutions 18 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

CN Oil Refinery Project n Construction of a Refinery Complex for Heavy Crude Oil in Venezuela n Contractor Experiencing Disruptions Due to Unforseen Labor Conditions n Total Number of Man-hours Growing From 1, 500, 000 to 3, 000, Total Project Duration Growing From 18 to 28 Months n Some of the Labor Conditions • Labor Strikes • Shortage of Skilled Labor • Overcrowding and Trade Stacking 19 • Extensive Overtime and Shift Work Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

CN Oil Refinery Project n Contract Between Contractor and EPC Excluding Labor Strikes in the Force Majeure Clause n Contract Requiring Dispute Settlement Via Arbitration After Project Completion n Contractor Hiring an Independent Auditor Halfway in the Job for an Independent Third Party Review n Benefits of Auditor • Objective Analysis and Review Performed by an Expert • Organization of All Documentation in One File • Establishment of Key Variables to Assess the Impact on Productivity 20 • Establishment of a Cost Structure to Track Costs Deviations From Initial Estimates Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

CN Oil Refinery Project n Major Advantage of Third Party • Provision of Valuable Document for Claim Settlement for Only 0. 07% of the Original Contract Amount n On-Going Negotiations Between Contractor and EPC, Last Step Before Arbitration 21 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Outline ü Mediation/Arbitration (Med/Arb) ü Adjudication/Expert Determination ü Arbitration ü Single Arbitrator ü Baseball Arbitrator Ø Shadow Mediation 22 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Shadow Mediation n Mediator Present During Arbitration Proceedings n Advantages • Parts (or All ) of the Dispute Can Be Removed From Arbitration and Settled Through Mediation • Shadow Mediator Recommends Possible Settlements Options Faster Than Arbitration 23 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Reservoir Project n Sources of Conflict • Environmental Concern • Misunderstandings and Unrealistic Expectations of the Owner n Contractor’s Arguments • Bid Price Based on Ability to Modify Access Roads • Impact of Lack of Access on Schedule • Damages Exceeding US$1. 0 Million n Owner’s Arguments • Request of Access Road After the Permit Was Issued • Contractor Involved During Request for Use of the Road • Contractor Aware of Environmental Sensitivity of the Area • No Proof in Bidding Documents That Bid Price Was Based on the Access Road 24 n Results: Arbitration and Judgment in Favor of the Owner Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Outline ü Mediation/Arbitration (Med/Arb) ü Adjudication/Expert Determination ü Arbitration ü Single Arbitrator ü Baseball Arbitrator ü Shadow Mediation 25 Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

Summary n Common Characteristics Between Arbitration and Litigation • High Costs • Time Consumption • Strains in the Relationship Among Parties • Increased Formality • Decrease in Control by the Parties and in Flexibility of Outcome • Adversarial Stance • Win/Lose Outcome n Valuable Trait • Reliance on Knowledgeable Third Party Neutral n Other Binding Procedures as Modification of Arbitration • Mediation-Arbitration and Shadow Mediation : Increasing Mediation During Binding Procedures 26 • Adjudicator and Baseball Arbitration: Rapid Closure of Dispute, Less Communication , win/lose outcome Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002

References 27 n [AAA, 2000] : American Arbitration Assiociation. A Guide to Mediation and Arbitration for Business People 2000. n [Beresford Hartwell, 1998] : Beresford Hartwell, Geoffrey M. , (1998). The Relevance of Expertise in Commercial Arbitration. " Arbitration Procedures: Achieving Efficiency Without Sacrificing Due Process. " Last Update: 22 June. Paris. Downloaded from the web on April 5, 1999 www. ciob. org n [Crowter, 1998] : Crowter, Harold, (1998). Chartered Institute of Arbitrators. Chairman's Address Member Lunch, Butchers Hall. June 23, London. Downloaded from the web on April 5, 1999 www. cioa. org n [DRT, 1997/1998] : Dispute Resolution Times, (1997/1998). AAA Partnering Boosts Jail Project in San Diego. p. 7 Winter n [ENR, 7/11/1994] : Mc. Manamy, Rob. Industry Pounds Away at Disputes. Engineering News Record. Mc. Graw-Hill, New York. pp. 24 -27. July 11, 1994. n [Fenn et al. , 1994] : Fenn, P. , and Gould, N. , (1994). Dispute Resolution in the United Kingdom Construction Industry. October 1994. University of Kentucky. p 1 -17. n [Fizel, 1994] : Fizel, John L. , (1994). Play Ball Baseball Arbitration After 20 Years, Construction Dispute Prevention Comes of Age. Dispute Resolution Journal pp. 42 -47, June n [Gould, et al. , 1998] : Gould, Nicholas and Cohen, Michael. ADR: Appropriate Dispute Resolution in the U. K. Construction Industry. Sweet & Maxwell, London. Vol. 17. April 1998. n [Hollands, 1989] : Hollands, David S. FIDIC Provision for Amicable, Settlement of Disputes. International Construction Law Review. Issue 1. pp. 33 -43. 1989 n [Latham, 1994] : Latham, M. Constructing the Team: Final report of the Government/Industry Review of Procurement and Contractual Arrangements in the UK Construction Industry. HMSO London. 1994. n [Myers, 1994] : Myers, James. Task Force, Survival Kit for Complex Construction Arbitration in the 1990's. Dispute Resolution Journal. pp 53 -57. September 1994. n Peña-Mora et al, 2002] : Peña-Mora, F. , Sosa, C. , and Mc. Cone, S. Introduction to Construction Dispute Resolution. Prentice Hall, New Jersey, 2002. n [Staniforth et al. , 1998] : Staniforth, Alison and Taylor Kathryn, (1998). Building and Engineering Disputes: Reasons to be Worry Part II. Credit Control Hutton. Vol. 19 (2) pp. 12 -13. 1998. Introduction to Construction Dispute Resolution Chapter 8: Stage 5: Binding Dispute Resolution © Peña-Mora, et. al. 2002