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Construction Contracts: Provisions Regarding Dispute Resolution

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October 04, 2018
Author: Alvin M. Cohen
Organization: Benjamin, Bain, Howard & Cohen, LLC


A. CONTRACTUAL PROVISIONS REGARDING CLAIM DOCUMENTATION.
1. Schedule.
Delays are pervasive in construction and a fertile source of construction litigation. Given that, it is surprising that there are few standard contract provisions in the private sector governing the (a) construction schedules and (b) support for time related claims.

a) Construction Schedules.
Like most construction contracts, the AIA form (Section 3.10) requires that the Contractor maintain a construction schedule, which must be "revised at appropriate intervals." Governmental agencies, such as CDOT and Federal agencies, have more detailed requirements. The salient features of virtually all such clauses consist of a requirement of the submission of an initial schedule, periodic updates, and review and approval by the contracting officer. Of course, governmental contracts are not negotiable. But, in the private sector, there are several features of a scheduling clause which warrant attention in connection with the drafting or review of contracts: i) The most important is “approval” by the owner. A requirement of submission and “approval” is virtually universal. However, this begs the question of, "What does approval mean?" Certainly, it means that the owner is bound by it. If the schedule includes government performance, with respect to, e.g., delivery of government supplied equipment, relocation of utilities, etc., it probably means that the government is bound to perform by the scheduled date. More difficult is the issue of the meaning of “approval” of periodic schedule updates. If the update shows a delay and allocates the delay to the actions of the owner, has the owner agreed that it caused the delay? If the owner refuses to approve the schedule, does that mean that the contractor must proceed with an unapproved schedule, in breach of the contract?

Beyond question, if a dispute arises, the judge or arbitrator will give considerable weight to the project schedules in existence at the time of the delay-causing event, as opposed to a schedule developed for the trial. “Approval” of a contemporaneous schedule will add to the weight given to the updated schedule when the delay occurs. These issues can be addressed directly by defining exactly what “approval” means. From the owner’s perspective, it would be prudent to include a provision stating, in substance, that “approval” does not mean agreement with any of the means and methods of the contractor, the schedule logic or the durations of the activities, and that “approval” constitutes only permission to proceed with the schedule.

ii) The construction contract can dictate whether the schedule can be a simple bar chart or a more complex, critical path schedule. While a critical path schedule has become far more commonplace, whether it is required should depend on the size and complexity of the project.
iii) Some governmental owners go so far as to dictate certain aspects of the substance of the schedule. For example, the contact may limit the duration of any one activity to no more than 10-15 days. Whether the owner wants to include in the contract requirements about how the schedule will be constructed depends, in part, on the degree to which the owner is willing to get involved in the scheduling.

b) Delay Disputes.
Some contracts go further and require, in the construction contract, the use of various types of critical path analysis. CDOT has included such provisions in the past. Also, the Veteran’s Administration uses a Master Construction Specification, Section 01311, dictating how the schedule analysis will be conducted for a delay claim. Although there are various types of critical path analyses, the VA virtually requires use of the planned impacted schedule analysis technique. The U.S. Army Corps of Engineers’ Modification Impact Evaluation Guide is equally detailed in the analysis which must be used, and effectively requires use of a time impact analysis technique.

Even apart from contractual provisions, in order to prove a time related claim, some type of schedule analysis is needed. That analysis supplies the evidence of causation, i.e., that the delay causing event did, in fact, cause a delay in the ultimate completion of the project. The courts have, on numerous occasions, accepted, and even insisted on, a critical path analysis to prove a delay claim. E.g. Natkin & Co. v. George A. Fuller Co., 347 F. Supp. 17 (W.D. Mo. 1972); E.C. Ernst, Inc. v. Koppers Co., 476 F. Supp. 729, affd in pat, rev'd in part, 626 F.2d 324 (3d Cir. 1980). Morrison Knudsen Corp. v. Fireman's Fund Ins. Co., 175 F.3d 1221, 1232-33 (10th Cir. 1999), described the critical path method, as follows:

Essentially, the critical path method is an efficient way of organizing and
scheduling a complex project which consists of numerous interrelated
separate small projects: Each subproject is identified and classified as to
the duration and precedence of the work. (e.g., one could not carpet an
area until the flooring is down and the flooring cannot be completed
until the underlying electrical and telephone conduits are installed.) The
data is then. analyzed, usually by computer, to determine the most
efficient schedule for the entire project. Many subprojects may be
performed at any time within a given period without any effect on the
completion of the entire project. However; some items of work are
given no leeway and must be performed on schedule; otherwise, the
entire project will be delayed. These latter items of work are on the
critical path. A delay, or acceleration,. of work along the critical path will
affect the entire project.

The courts are explicit in requiring a critical path schedule analysis in proving the element of causation. Morrison Knudsen, supra, 175 F.3d at 1244. In order to "prove that it is entitled to an equitable adjustment, a contractor must show liability, causation and injury." Id. It is not enough for the contractor to show a loss. Rather, a "causal link" must be established between liability and the loss suffered. As explained in Morrison Knudsen:

[The contractor] must prove that the government somehow delayed, accelerated, augmented, or complicated the work, and thereby caused the contractor to incur specific additional costs. The contractor must not only prove that the government specifically caused its increased costs, but must prove that those costs were reasonable, allowable, and allocable to the contract. The contractor bears the burden of proof on all of those factors. [emphasis added; citations omitted] As stated in City of Westminster v. Centric-Jones Constructors, 100 P.3d 472 (Colo. App. 2003), "even in complex situations that may involve multiple parties, the plaintiff must prove not only that he or she was not liable for the extra costs in this situation but that the defendant was responsible." Accord, Denny Construction, Inc. v. City and County of Denver, 170 P.3d 733 (Colo. App. 2007), rev’d on other grounds, 199 P.3d 742 (Colo. 2009); Boyajian v. United States, 191 Ct. Cl. 233, 423 F.2d 1231, 1235 (Ct. Cl. 1970) ("Recovery of damages for a breach of contract is not allowed unless acceptable evidence demonstrates that the damages claimed resulted from and were caused by the breach. The costs must be tied in to fault on defendant's
part").

Before turning the critical path analysis itself, there are two types of contact clauses one might consider in order to affect the analysis.

i) First, is the issue of who owns the float. This is a subject much debated among scheduling experts. To prevent the contractor from receiving the full benefit of the “float” in its schedule, some owners have inserted contract clauses to affect the outcome. A typical one might provide: “Float is not time for the exclusive use of, or benefit of, either the Owner or the Contractor. If additional time is sought for a change, time will be extended only to the extent the equitable time adjustment for the activates affected exceed the total float along the construction path involved at the time the change was implemented.
ii) The second issue concerns concurrent delay. Under Colorado law, where the owner and the contractor are both responsible for a delay, the owner cannot recover liquidated damages, and the contactor cannot recover delay damages, during that period of delay. Medema Homes, Inc. v. Lynn, 647 P.2d 664, 667 (Colo.1982); City of Westminster v. Centric-Jones Constructors, 100 P.3d 472, 481 (Colo. App. 2003). There are cases in other jurisdictions finding this view to be antiquated, holding that the damages should be apportioned. E.g. U.S. ex rel. Belt Con Const., Inc. v. Metric Const. Co., Inc., 314 Fed. App'x 151, 158 (10th Cir. 2009) (applying California law). Although some commentators have found cases such as Medema to be out-of-step with modern jurisprudence, many courts, including the U.S. Court of Federal Claims, still hold that neither party can recover for concurrent delays. R.P. Wallace, Inc. v. United States, 63 Fed. Cl. 402, 409-10 (Fed. Cl. 2004). As stated there:

Concurrent delay is not fatal to a contractor's claim for additional time
due to excusable delay, but precludes the recovery of delay damages.
“If a period of delay can be attributed simultaneously to the actions of
both the Government and the contractor,” this court has stated, “there
are said to be concurrent delays, and the result is an excusable but not
a compensable delay.”

If, however, this is not satisfactory, the result can be changed by a contractual provision expressly allowing apportionment where there is a concurrent delay.

c) The Critical Path Analysis.
Perhaps because of its widespread use, too many parties and their lawyers turn to a CPM analysis without careful thought being given to what it can, and cannot, accomplish. Accordingly, one must consider not only the uses, but also the limitations of a CPM analysis.

As many of you know, the CPM schedule shows each construction activity, its early and late start and finish dates, and the interrelationship between the activities. There are four steps to preparing a CPM schedule:
i) Identification of the work activities needed to complete the project.
ii) Determining the sequential relationships or logic among the activities.
iii) Presentation of the activities and the relationships between them in the form of a network diagram.
iv) Assignment of a duration to each activity.

The path of construction activities which is the longest, and which therefore will impact the ultimate completion of the contractor's work, is called the "critical path." Simply stated, a CPM analysis must show that the actions complained about delayed work on the critical path and, therefore, delayed completion of the contractor's work. Where a contractor claims that its work was extended because preceding and necessary work was not available, a CPM analysis is helpful. Typically, this consists of a comparison of the as-planned and as-built schedules. If the event occurred on the critical path, then the increased duration of the follow-on activities will cause a corresponding delay in project completion. While the intricacies of a CPM analysis are beyond the scope of this paper, this basic principle should always be kept in mind.

Ideally, the contractor should update the CPM schedule periodically so that monthly updates will reflect the extended duration of affected activities. The updates will also include new activities which represent the impact of an owner's actions. When this is done, there will be a contemporaneous record showing the impact of specific events on project completion.

However, most contractors, particularly on modest sized projects, do not maintain and update the schedule. In these circumstances, a schedule analysis will require the scheduler to reconstruct an as-built schedule based on other project records. The task can be daunting. For example, the scheduler may have to review countless payroll records or daily diaries to determine when work was started and completed on hundreds of activities. Even then, the records may not contain enough information and the scheduler may have to rely on the recollection of the project superintendent.

Once the analysis is complete, it still must be presented to the other party. While dozens of pages of schedules and hundreds of pages of back-up may look impressive, they do little to persuade unless the contractor focuses its presentation on the precise issue. This focus can often be provided by converting the information on the network diagram to a bar chart, which is far easier to understand. Small portions of the network can also be highlighted.

Finally, and most importantly, one must be alert to the possibility of manipulation and error outside a CPM analysis. On a project with thousands of activities, these possibilities are endless. The existence of errors, however, may render the entire analysis worthless. A few of the most frequently encountered problems are set forth below:

i) Most obviously, one can increase or reduce the effect of a particular delay by increasing or decreasing the durations of project activities. As the duration of the as-planned activities increases, float decreases and the criticality of the delay increases. If a court determines that the anticipated durations were not reasonable, it can make its own determination regarding duration or reject the analysis altogether. C.H. Leavell & Co., 70-2 BCA 18,437 (1970); E.C. Ernst, Inc. v. Koppers Co., 476 F. Supp. 729, affd in pat, rev'd in part, 626 F.2d 324 (3d Cir. 1980).

ii) In addition, the status of the job at the time of the delay can be manipulated. In order to establish the impact of the owner's actions, one must examine the impact in light of the status of the job at the time of the delay causing event. Edwin J. Dobson Jr., Inc. v. Rutgers, 384 A.2d 1121 (N.J. App. 1978). Although progress payment records may be helpful in identifying the status of the job at a particular time, they are often not precise enough for a CPM analysis. Rather, a fair amount of judgment is necessary to determine project status, and that judgment is subject to manipulation.

iii) The schedule must be complete in order to be useful. For example, many schedules ignore equipment procurement in the network, yet delays in equipment procurement can obviously affect the remaining durations and logic. Other areas where activities are sometimes not shown are shop drawing submission and approval and delivery of material.

iv) Further, the scheduler must be able to substantiate the durations on the schedule. It is not enough to include durations on an impressive looking schedule. Rather, the scheduler should be able to point to demonstrable support for those durations. Chaney & James Construction Co., 66-2 BCA 6,066 (1966); Lane-Verdugo, 73-2 BCA ¶ 10,271 (1973).

v) Finally, the logic must be supportable. It must reflect how the contractor actually planned to prosecute the work and must be consistent with physical constraints on the project.

In addition, there are inherent limitations in a CPM analysis. For example, the network will not graphically show other work sequences which the contractor could have employed in order to mitigate the length of the delay. In addition, the sequential logic shown on the diagram does not always reflect how work proceeded in the field. For example, more field work occurs simultaneously than can be effectively shown on a network diagram.

Strictly speaking, a CPM analysis is useful only for a delay analysis. Yet, many claims concern not an extension of project completion, but inefficiencies caused by the disruption of the flow of work. Diagrams can be quite helpful in proving the fact of the disruption. For example, one can compare (1) a bar chart showing the start and completion dates for each major activity with (2) a bar chart showing when work was actually performed, in order to demonstrate a constant starting and stopping of the work. Of course, the ability to prepare such an analysis is dependant on the contractor's records showing when work was performed.

2. Spoliation.
With the growing use of electronic mail to communicate, including on construction projects, a growing issue concerns the requirement that the contractors maintain those records as soon as litigation is foreseeable. Otherwise, the contractor may be held to have destroyed evidence, and severe sanctions could be ordered. A “party has a duty to preserve evidence” once it “knew or should have known, that litigation was imminent.” E.g. Burlington Northern and Santa Fe Railway Co. v. Grant, 505 F.3d 1013, 1032 (10th Cir. 2007). The Colorado standard is somewhat broader than the Federal standard and permits sanctions, “so long as the party knew or should have known that the destroyed evidence was relevant to pending, imminent or reasonably foreseeable litigation.” Castillo v. Chief Alternative, LLC, 140 P.3d 234, 236 (Colo. App. 2006). Bad faith is not required for a spoliation order. Aloi v. Union Pacific Railroad Corp., 129 P.3d 999, 1003 (Colo. 2006). While willfulness is required, willfulness may be shown where the party had notice that the documents would be relevant to litigation before they were destroyed. Id. Sanctions for not preserving evidence can be severe, and can include striking claims and defenses or instructing the jury that they can draw adverse inferences from the spoliation of evidence. Id. Principles to be followed in the preservation of evidence were developed by The Sedona Conference of judges, lawyers and technical experts, and can be found at www.thesedonaconference.org. In sum, a party must undertake reasonable and good faith efforts to retain electronic data once litigation is pending or threatened.

B. CONTRACTUAL LIMITATIONS PERIODS.
As most practitioners know, there is a two-year statute of limitations for construction defect claims, with the two years commencing upon discovery of the "physical manifestation" of the defect. C.R.S. § 13-80-104. A six-year statute of repose is also provided for in this statute. This statute applies only to defect claims, and other types of breach of contract claims arising out of construction projects are governed by the three-year statute of limitations. C.R.S. § 13-80-101. In Hersh Companies Inc. v. Highline Village Associates, 30 P.2d 221 (Colo. 2001), the Supreme Court held that the three year period applies to warranty claims. Specifically, the Court held that the "contractor's statute was not intended to apply to claims for breach of warranties to repair and replace" and that a cause of action for breach of warranty was "held to accrue when the plaintiff discovers or should have discovered the defendant's refusal or inability to comply" with the warranty. 30 P.3d at 225. See also, Stiff v. Bilden Homes, Inc., 88 P.3d 639, 642 (Colo. App. 2003) (warranty claims “accrue upon discovery of defendant’s failure to remedy the defects, rather than discovery of the defects themselves.”)

The parties are, of course, free to alter these limitations through contract, and they often do. A particularly important effort is contained in the 2007 version of AIA Form A201. Under new Article 15, all disputes are subject to an initial decision by an "Initial Decision Maker," which can be the Architect, or can be another person on which the parties agree. Under Article 15.2.5, the "initial decision shall be final and binding on the parties but subject to mediation and, if the parties fail to resolve their dispute through mediation, to binding dispute resolution." However, Article 15.2.6.1 contains strict time limitations on the pursuit of mediation or a de novo trial before an arbitrator or in court:

Either party may, within 30 days from the date of an initial decision,
demand in writing that the other party file for mediation within 60 days
of the initial decision. If such a demand is made and the party receiving
the demand fails to file for mediation within the time required, then
both parties waive their rights to mediate or pursue binding dispute
resolution proceedings with respect to the initial decision. [emphasis
added]

It is important to emphasize that homebuilders are no longer allowed to alter the statute of limitations by contract under the “Homeowner Protection Act of 2007.” C.R.S. § 13-20-806(7)(a) provides:

. . . any express waiver of, or limitation on, . . . the ability to enforce
such legal rights, remedies or damages within the time provided by
applicable statutes of limitation or repose, are void as against public
policy. [emphasis added]

Accordingly, a homebuilder may not shorten the statute of limitations in the purchase agreement. Another aspect of the law which affects the time to sue a construction professional is contained in the Construction Defect Action Reform Act (“CDARA”). Under C.R.S. § 13–20–805, a CDARA claim tolls the statute of limitations until the end of the CDARA notification process. However, the prime contractor must be mindful that the statute of limitations is tolled only between it and the owner. If the prime contractor has a claim against a subcontractor for the alleged defect, it cannot necessarily wait until the end of the litigation to bring that claim. In Shaw Const., LLC v. United Builder Servs., Inc., 296 P.3d 145, 151 (Colo. App. 2012) cert. denied, 2013 WL 119979 (Colo. Jan. 7, 2013), the court held that a CDARA notice from the owner to the prime does not toll the statute of limitations on claims between the prime and a subcontractor. Rather, the prime must send its own CDARA notice to the subcontractor in order to toll the statute of limitations.

C. NOTICE AND OPPORTUNITY TO CURE.
Most contracts contain stringent time limits for providing notice for any type of claim. For example, Section 4.3.2 of AIA Form A201 provides that "claims by either party must be made within 21 days after occurrence of the event giving rise to such claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim . . ." Section 4.3.5 also requires notice of the claim "before proceeding to execute the Work."

The notice is typically quite short and need only be sufficient to put the owner on notice about the problem. These provisions are often not enforced if the owner is not prejudiced by the lack of notice. Such prejudice can consist of, for example, a lost opportunity to modify the schedule in order to mitigate the impact of a delay, the impairment of the owner's ability to gather evidence needed to evaluate the claim, etc. Oddly, Section 13.3 of AIA Form A201 requires that all "written notices" be "sent by registered or certified mail." This is a rarely followed provision, and the parties should consider its deletion.

Apart from the contractual requirement, there are also very practical consequences of a failure to provide notice:

1. Postponement of notice of a claim until the project is over impairs the credibility of the claim. Such delay often creates the impression that the claim was manufactured to turn a losing contract into a profitable one.

2. In addition, once the project is completed, there is less incentive on the owner's part to quickly resolve claims. During construction, the owner may fear that a delay in claim resolution will result in a disgruntled contractor performing lower quality work. In addition, if claims are postponed until after job completion, the owner may fear that the contractor will find a way to contend that all cost overruns were the result of impacts caused by the owner.

3. Further, if a contractor intends to present a constructive acceleration claim, it will not be able to prove that the owner failed to grant additional time if the owner was not notified that an excusable delay had occurred. E.g. Johnson Controls, Inc. v. National Valve & Mfg. Co., 569 F. Supp. 758 (E D. Okla. 1983). See also, Fraser Construction Company v. United States, 384 F.3d 1354, 1361 (Fed. Cir. 2004), where the Court stated that the "elements of constructive acceleration" include "that the contractor made a timely and sufficient request for an extension of the contract schedule." Related to notice is the opportunity to cure. Many contractors simply assume that they have a right to cure alleged defects in their work. However, case law requiring such an opportunity is sparse. Accordingly, the contractor will want to examine the contract documents to see if there is an opportunity to cure requirement. Section 12.2.2.1 of AIA Form A201 contains such a requirement with respect to defects found within one year of substantial completion. Under that provision, the owner must give prompt notice to the contractor of defective work, and the "Contractor shall correct it promptly after receipt of written notice from the Owner to do so unless the Owner has previously given the Contractor a written acceptance of such condition." Further, "if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the right to require correction by the Contractor and to make a claim for breach of warranty."

The Construction Defect Action Reform Act of 2003, C.R.S. § 13-20-801, et. seq (“CDARA”), broadens the requirement of notice, but not of the opportunity to cure. Under C.R.S. § 13-20-803.5, "no later than seventy-five days before filing an action against a construction professional, or no later than ninety days before filing the action in the case of a commercial property, the claimant shall send or deliver a written notice of claim to the construction professional." An opportunity to inspect must also be provided. The construction professional has the right to make an offer to settle by paying a sum certain "or by agreeing to remedy the construction defect." Unlike the contractual provision discussed above, however, the claimant has the right to reject the offer and then commence litigation. Accordingly, while the claimant must give the construction professional the right to offer to remedy defects, there is no requirement that the construction professional be allowed to actually remedy the defect. Under Homeowner Protection Act of 2007, the notice provisions in CDARA cannot be waived. This Act was plainly a response to lawsuits brought by buyers against builder vendors without giving the defendant the chance to repair alleged problems. However, it is written broadly and it will likely have an impact on commercial projects and on the relationship among the owner, prime contractor and the subcontractors. For example, a "construction professional" is defined to include a "contractor, a "subcontractor," a "developer," etc. The question may arise about whether a party may sue for a construction defect if notice was not provided and the conditions were changed after the defendant left the job site, thereby effectively destroying evidence. This could be deemed the spoliation of evidence.

Another question on a commercial project is whether 75 day written notice must be provided by a prime contractor to the subcontractor where the subcontractor refuses to correct the defect and where the defect must be corrected for the project to continue. Certainly, CDARA was not intended for such circumstances, but the language of the statue is quite broad. In sum, the participants in all construction projects would be well-advised to consider the effect of the Act before commencing litigation or arbitration for alleged construction defects, and before correcting defective conditions.

D. ARBITRATION.
Arbitration is the most common means of alternative dispute resolution. Arbitration is a consensual means of dispute resolution, i.e. it must be agreed to by all parties. Until 2007, many construction contracts, including AIA Form A201, required arbitration. In 2007, Form A201 was changed to require that the parties choose, at the outset, whether final dispute resolution will be through court or through an arbitrator. Without a contract clause, the parties would have to agree on arbitration after the dispute arises, which can be difficult. With all of the changes effected by the Homeowner Protection Act, the statute affirms the right to require arbitration in the purchase agreement. C.R.S. § 13-20-806(7)(e). But, it should be noted that, even where the developer puts an arbitration clause in the Declaration, the Homeowner's Association can later amend the Declaration to remove it. See, Eagle Ridge Condominium Ass'n v. Metropolitan Builders, Inc. 98 P.3d 915 (Colo. App. 2004).

In practice, arbitration consists of a trial which is conducted much like a court proceeding, except that the judges consist of one or three private individuals hired by the parties to decide the dispute. It is generally less expensive than a court proceeding, although this advantage can be overstated since the parties still have to prepare and present their case in an adversary setting. In addition, the arbitrators must be paid. The primary advantages of arbitration are as follows:

1. First, arbitration is far faster than litigation. Trials typically do not take place until one year or longer after a complaint is filed. Even then, court scheduling conflicts and appeals may substantially delay a final resolution. By contrast, although the AAA rules do not specify when the hearing must be held, it typically will be within 6 months. The time for a hearing may be fixed by contract.

2. Second; arbitration is less expensive, primarily because it attempts to eliminate the two areas of litigation which tend .to drive up costs.

a) The first is discovery, such as interrogatories, document requests and depositions. Under the AAA rules, the arbitrator may direct "the production of documents and other information." In practice, this usually means an exchange of project records and damage calculations. Without mutual consent, depositions were traditionally not ordered although there has been a trend in recent years of arbitrators allowing depositions, particularly in larger cases. Plus, Colorado's Uniform Arbitration Act gives the Arbitrator broad discretion with respect to discovery, including depositions. C.R.S. § 13-22-209. The parties may want to consider including in the construction contract a provision which sets out the ground rules for discovery.

b) Second, arbitration was intended to eliminate the "motions" practice common in civil litigation, such as motions to dismiss or for summary judgment. The AAA Construction and Commercial Rules, however, allow for a "preliminary hearing" at which a party may "specify the issues to be resolved." On occasion, parties use the preliminary hearing to raise the same type of issues which could be raised by motion in court. More importantly, the Construction Rules, in R-33(b), provide that the "arbitrator shall entertain motions, including motions that dispose of all or part of a claim . . ." There is growing evidence that a motions practice is increasing in the arbitration context.

3. Third, the decision-maker in arbitration will typically be a specialist in construction matters. This will result in a cost savings, since the arbitrators will not have to be educated on the basics of the construction industry. In addition, the result may also be more rational, and recognized by the parties as such, since the decision will be made by a person knowledgeable in the industry. In addition, arbitration eliminates the possibility of a jury trial.

4. Fourth, arbitration proceedings are not public, thereby avoiding publicity about the dispute.

5. Fifth, arbitration eliminates the possibility of punitive damages.

6. Finally, arbitration is frequently considered less formal, although this advantage can be overstated. While the arbitration forum allows for a more flexible examination of the issues, in practice most arbitrations resemble a court proceeding, complete with trial briefs, opening statements, direct examinations, cross examinations and closing arguments. There are, however, certain significant drawbacks to arbitrations.

1. Most importantly, arbitration normally does not allow all parties to the dispute to participate in a single proceeding. As noted above, arbitration is a consensual proceeding, and each participant must consent to arbitrate with the other. Accordingly, an arbitration provision in the prime contract allows only for the arbitration of disputes between the owner and prime contractor. Absent arbitration provisions in their contractors, subcontractors and design professionals will often not be allowed to participate in that proceeding.

This can cause very real problems. For example, in a delay claim by an owner against a prime contractor, the prime may seek to place the blame on the designer or other contractors. Yet those parties may not be able participate in the owner/prime arbitration. If they have an arbitration provision of their own, the 2007 version of Form A201 has new, and more flexible, consolidation procedures (Article 15.4.4). If the other parties have not signed arbitration agreements, then there is no chance of all potentially responsible parties being in a single proceeding. The result is several arbitrations, with the attendant risk of inconsistent results and increased cost. This problem does not exist in court litigation, where all potentially liable persons can be made parties.

In private construction, this problem can be solved where the owner uses an arbitration clause requiring that all parties participate in a single arbitration proceeding if the claims arise out of the same set of facts. The prime contract will have to require that a similar clause be included in each subcontract. However, most owners prefer that all disputes be solely with the prime. As a result, one rarely sees this type of contracting. Rather, when one uses an arbitration clause, it often means that all parties will not be present in a single arbitration hearing. Moreover, with respect to government contracting, it is impossible to require that the subcontractor litigate its claims in the same forum with the government, since only the prime has standing to bring claims against the government.

2. Second, discovery is not a foregone conclusion in arbitration. As noted above, although the Uniform Arbitration Act gives the arbitrator broad discretion to allow some discovery, including depositions, discovery is not a matter of right as it is 300 in court. If discovery is not allowed, the lack of discovery may impair a party's ability to present its claim. For example, where a subcontractor pursues a claim based on the prime contractor's interference with its work, the subcontractor's case may be strengthened by evidence of similar interference with other subcontractors. Absent discovery, however, a subcontractor has no access to communications between the prime and other subcontractors. Also, where the prime contractor pursues a delay claim but does not have complete project records, the owner's project records may be quite helpful. Even if the arbitrator allows some document discovery, depositions may be essential to interpret the records, to prove oral direction or to prove that the owner was not prejudiced by lack of notice due to its independent knowledge of the claim. Increasingly, arbitrators are allowing deposition discovery for larger claims. However, this is an issue which should be addressed directly in the contract, if possible.

3. Third, there is no right to appeal arbitration awards. The arbitrator is the final judge of both facts and law. Even if the award were demonstrably wrong, under the Uniform Arbitration Act, C.R.S. §13-22-201, et seq., it can only be set aside if it was procured by corruption, fraud or if the arbitrators exceeded their powers. As to the latter point, arbitrators may be found to have exceeded their powers where there was a manifest refusal to apply the legal standard agreed upon by the parties. Giraldi v. Morrell, 892 P.2d 819 (Colo. App. 1996). However, errors of law are insufficient to set aside an award. In addition, a trial judge normally must make detailed findings of fact and conclusions of law in order to facilitate appellate review. Not only does this assist in the identification of errors on appeal, but it also encourages a more rational and thoughtful decision-making process. The AAA discourages the use of such detailed reasoning, although it has become increasingly common. As to the standards for enforcing arbitration awards under the Federal Arbitration Act, see Hall Street Associates, LLC v. Mattel, Inc., 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008). Sometimes, parties are tempted to put in their contracts a provision, which states that errors of law may be reviewed by the district court. The U.S. Supreme Court found such provisions unenforceable under the Federal Arbitration Act. Hall Street Associates, LLC v. Mattel, Inc., 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008). The court reasoned that the parties are without power to expand the jurisdiction of the courts in proceedings to affirm arbitration awards. However, it is important to note that the Hall Street decision was based on the Federal Arbitration Act. At least one state court recently refused to apply that ruling to state arbitration law. Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334, 1339, 82 Cal. Rptr.3d 229, 235 (Colo. 2008), where the court held that a contract provision calling for judicial review of an arbitration award for legal error is enforceable under state law.

It is also important to note that the AAA has instituted a "fast track" procedure for claims of less than $50,000. In those cases, a hearing must be held within 30 days of the confirmation of the arbitrator's appointment. Extensions of time are granted only under "extraordinary circumstances." In addition, no discovery is allowed, except in "extraordinary cases" and by order of the arbitrator. As is well known, it is difficult to litigate a modest construction claim on a cost efficient basis. The AAA's fast track procedures provide a very useful means of quickly and inexpensively resolving those claims.

Occasionally, one party will try to keep its options open on arbitration and change the requirement in the AIA form that the parties "shall" arbitrate to state that they "may" arbitrate. Also, some parties insert clauses which gives one party alone the option to arbitrate or not. Such provisions may not be enforceable. For example, in Block 175 Corporation v. Fairmont Hotel Management Co., 648 F. Supp. 450 (1986), Judge Kane held that arbitration was mandated under such a clause, reasoning that the clause would have little meaning if arbitration was totally discretionary. The case is consistent with a long line of cases around the country in the labor law context. In light of these cases, it is very hard for one party to keep its options open with respect to arbitration, and the parties may have to choose one way or the other when the contract is signed.

However, in Lowry Assumption, LLC v. Am. Int'l Specialty Lines Ins. Co., 2011 WL 1321952 (D. Colo. 2011), the same court reached a different result based on the particular permissive arbitration provision before it. In Lowry, the court held that the provision was ambiguous and, therefore, denied a motion to compel arbitration unless the ambiguity was resolved at an evidentiary hearing. Lowry has been subsequently criticized. Smith v. AHS Oklahoma Heart, LLC, 2012 WL 3156878 (N.D. Okla. 2012) report and recommendation adopted, 2012 WL 3156877 (N.D. Okla. 2012). It is important to note that the AAA form was itself changed dramatically in 2007 to make arbitration optional. Under the new provision, in Article 15.3, the parties must choose whether to require arbitration at execution of the contract. Once the party selects arbitration, then arbitration becomes mandatory.

Another issue that the parties should address at the contracting stage is the issue of attorneys' fees in arbitration. There is much to be said for the inclusion of an attorneys' fee provision since it encourages the settlement of disputes and provides full compensation to the prevailing party. However, there are some issues about which the parties should be aware, and which they may want to draft around.

1. The first is how the "prevailing party" is determined. Under Dennis I. Spencer Contractor, Inc, v. City of Aurora, 884 P.2d 326 (Colo. 1994), the prevailing party is determined on the basis of liability alone. That means, if a contractor sues an owner for $500,000 for a change, and the contractor wins on liability but recovers only $5,000, the contractor is entitled to its attorneys' fees. The parties may want to consider drafting around this holding, by redefining the "prevailing party" as one who "substantially prevails," or one who prevails on a predetermined percentage of the claim. In addition, while the law is still evolving in this area, it appears that, when neither party got all it was entitled to, the court or arbitrator cannot decide that no one prevailed. Rather, “when each party prevails in part, the trial court generally must select one party as the overall winner for purposes of the fee-shifting agreement.” Bedard v. Martin, 100 P.3d 584 (Colo. App. 2004). See also, Lawry v. Palm, 192 P.3d 550, 569- 570 (Colo. App. 2008); Brock v. Weidner, 934 P.3d 576 (Colo. App. 2004). However, the court can, in a proper case, rule that neither party prevailed and award no attorney’s fees. Id.

2. The second issue concerns the award of attorneys' fees in arbitration. Several Colorado cases have held that the arbitrator does not have jurisdiction under the Uniform Arbitration Act to award attorneys' fees solely because of the presence of a standard fee shifting provision. Compton v. Lemon Ranches, 972 P.2d 1078 (Colo. App. 1999); Camelot Investments, LLC v. Landesign 973 P.2d 1279 (Colo. App. 1999). However, amendments to the Uniform Arbitration Act, C.R.S. §13-22-221, the “arbitrator may award reasonable attorney fees and other reasonable expenses of arbitration if such an award is authorized . . . by the agreement of the parties to the arbitration proceeding.” Another issue which should be addressed at the contracting stage is venue.

Under most contracts, including the AIA Form A201, venue is not directly addressed. Rather, the contract refers to the Construction Arbitration Rules of the American Arbitration Association. Those rules provide only that the "arbitrator shall set the date, time, and place for each hearing." Where the issue is addressed, the contract will typically provide that venue will be where the project is located. However, the parties can contractually change such a requirement and pick a mutually agreeable forum. Under Colorado law, "forum selection clauses are enforceable." Vessels Oil & Gas Co. v. Coastal Refining & Marketing, Inc., 764 P.2d 391, 393 (Colo. App. 1988). There is an issue under House Bill 1338 whether a venue provision, which requires venue in an inconvenient location, is a “limitation” on the “remedies” of the homeowner. C.R.S § 13-20-806(7)(a).

Finally, the parties must be mindful of a few ramifications of various terms in the arbitration provision.

1. If the arbitration provision requires that the arbitration be conducted by the American Arbitration Association pursuant to its rules, then those AAA rules become part of the arbitration agreement. E.g. Taubman Cherry Creek Shopping Center, LLC, v. Neiman-Marcus Group, Inc., 251 P.3d 1091 (Colo. App. 2010); BFN-Greeley, LLC v. Adair Group, Inc., 141 P.3d 937 (Colo. App. 2006).

2. Second, the parties should be mindful of the scope of the arbitration provision. One way for an arbitration award to be set aside is if the arbitrator exceeds his powers. Accordingly, use of a broad provision, such as is included in AIA Form A201, is helpful.

3. One issue which occasionally arises is whether a court or arbitrator decides on the scope of the arbitration clause and, therefore, the arbitrator's powers. Under the Uniform Arbitration Act, the court determines arbitrability. C.R.S. § 13-22- 206(2). However, the arbitrator may determine arbitrability if the "parties plainly and unambiguously agree." Taubman Cherry Creek Shopping Center, LLC, v. Neiman- Marcus Group, Inc., 251 P.3d 1091, 1093 (Colo. App. 2010); BRM Constr. , Inc. v. Marais Gaylord, LLC, 181 P.3d 283, 286 (Colo. App. 2007). Since 1999, Rule R-7 of the AAA Commercial Rules provides that the arbitrator decides arbitrability.

Accordingly, if the arbitration clause incorporates the AAA rules, then the arbitrator decides on the scope of his or her own powers. Taubman Cherry Creek, supra., 251 P.3d at 1094. Some parties have turned to a combination of arbitration and mediation to resolve the dispute. Here, the parties appoint a mediator who meets informally with the parties to resolve the dispute. If a settlement is not reached, the parties immediately commence an arbitration before the mediator, now acting as the sole arbitrator. The advantage of med-arb is that the parties will resolve the dispute quickly, even if they are unable to reach a settlement. In addition, there is some cost savings since the parties will not have to pay to educate new arbitrators if the mediation fails. However, these advantages are more than outweighed by the disadvantage of using the same person as mediator and arbitrator. To be effective, a mediator must have the full confidence of the parties and must be able to talk candidly and confidentially to them. Once the parties know that the mediator may later act as a decision-maker, this candor is severely compromised.

E. DISPUTE RESOLUTION IN PUBLIC WORKS PROJECTS.
For those contractors who work in the public sector, they should be aware of the very different dispute resolution mechanisms to which they will be subject. Several examples are detailed below:

1. First, the City and County of Denver utilizes a means of dispute resolution which is fairly unique. Under its contracts, all disputes must be resolved pursuant to D.R.M.C. Section 56-106. Under that Code section, disputes are resolved by the Manager of Public Works or the Manager's representative. Typically, the Manager of Public Works appoints an individual from the private sector to act as his or her representative in order to conduct the hearing. The representative's decision is binding. Recently, the Denver Water Board adopted a similar procedure.

There are obvious concerns about the impartiality of a hearing officer appointed by, and paid by, one of the parties to the dispute. However, the Supreme Court held that this procedure did not violate due process. City and County of Denver v. District Court, 939 P.2d 1353 (Colo. 1997); Kiewit Western Co. v. Denver, 902 P.2d 421 (Colo. App. 1994). The law has long allowed the parties to appoint any person to resolve their disputes. Indeed, the well-established Boards of Contract Appeals in the Federal sector had their origin as appointed representatives of the Department head. As a practical matter, however, a wide separation has developed between those Boards of Contract Appeals and the Departments whose disputes they resolve. There is plainly less separation between the City's Manager of Public Works and the hearing officer appointed to resolve the particular dispute. This is a risk that a contractor signing a construction contract with the City, and the subcontractors, need to take with their eyes open.

2. The Colorado Department of Transportation ("CDOT") is responsible for a significant percentage of the construction contracting in Colorado. CDOT's dispute resolution procedures have varied considerably over time. The current process is a rather lengthy and expensive one. After all of the levels of administrative review, the dispute is then considered by a Dispute Resolution Board (consisting of non-agency personnel), which makes a recommendation after holding an evidentiary hearing. If the contractor is dissatisfied with the DRB recommendation, it can appeal for a de novo hearing in either court or arbitration. The choice between arbitration and court must be made "at or prior to the preconstruction conference." Accordingly, if the contractor does not accept the DRB recommendation, it will have to pay for two full evidentiary hearings: (a) one before the DRB; and (b) a second one in court or arbitration. Fortunately, the DRB process has been reasonably successful in avoiding further proceedings.

3. With respect to Federal contracts, judicial resolution is conducted outside of the District Courts. Under the Contract Disputes Act of 1978, 41 U.S.C. §601, et seq., the contractor has a choice of appealing the Contracting Officer's Decision to either the Board of Contract Appeal's for the affected agency, or appealing to the United States Court of Federal Claims. Appeals to the Boards must be filed within 90 days of the Contracting Officer's decision; whereas court appeals must be filed within12 months of the decision. In either forum, the appeal is de novo. Unfortunately for Colorado contractors, the Court of Federal Claims sits in Washington, D.C. The Boards of Contract .Appeal also normally sit in the Washington area; although there is a possibility for hearings elsewhere. For example, the Armed Services Board of Contract Appeals regulations provide: "Hearings will be held at such places determined by the Board to best serve the interests of the parties and the Board.” Most non-military procurements are now heard before a consolidated Civilian Board of Contract Appeals, whose rules mirror, in many respects, the rules of civil procedure.

For subcontractors, the pursuit of claims can be particularly difficult in the public contracting context. Virtually all public entities insist in their contracts that all disputes be strictly between the government and the prime contractor. Private owners also generally seek to limit their dealings to just the prime contractor. However, where disputes are heard in civil court, the subcontractor has the right to join in the proceeding in its own name, and thereby protect its own interests. The ability of a subcontractor to participate in arbitration is discussed above. In most public disputes, however, it is far more difficult for subcontractors to participate. In Federal projects, the subcontractors have no standing to appear in the Court of Federal Claims or the Boards of Contract Appeals. A similar situation exists with respect to disputes with the City and County of Denver. In such situations, the subcontractors have a few options:

1. First, the subcontractor and prime contractor can enter into a "liquidating agreement" under which the subcontractor essentially borrows the prime's name. Under those agreements, even though the claim is brought in the prime's name, the subcontractor maintains complete control over the claim and bears the expense of the claim. The key provisions of a liquidating agreement include:

a) Complete control of the claim by the subcontractor;
b) Payment by the subcontractor of all costs of the claim;
c) Indemnity of the prime for all costs and all counterclaims which may be brought;
d) Representation and warranty that there has been no action or inaction by the prime which has compromised the claim;
e) Agreement on how the proceeds are to be divided. Sometimes, the prime will still want its mark-up on the claim.

This works well only in the following circumstances:
• First, it is helpful if there are no remaining claims between the prime and subcontractor. If there are, it will be difficult for the subcontractor's lawyer to enter an appearance as counsel for the prime in the dispute proceeding between the prime and the government, in light of the ongoing dispute between subcontractor and prime.
• Second, it is helpful if the prime also does not have additional claims it needs to bring to obtain compensation for its own losses. If it does, the hearing officer or judge is not likely to allow two different sets of lawyers for the prime to appear and present separate claims.

2. Alternatively, the subcontractor could take an assignment of the claim from the prime. Many contracts contain anti-assignment clauses. However, under Colorado law, "the right to receive money due or to become due under an existing contract may be assigned even though the contract itself may not be assignable." Interbank Investments, L.L.C. v. Vail Valley Consolidated Water District, 12 P.3d 1224, 1228 (Colo. App. 2000). See also, Scott v. Fox Brothers Enterprises, Inc., 667 P.2d 773, 774 (Colo. App. 1983) ("the law favors the assignability of contractual rights."). As long as the contract does not specifically prevent the assignment of a right to receive money, then the claim should be assignable, at least under Colorado law.

However, the City and County of Denver contracts now typically contain this very broad type of anti-assignment clause.

3. A subcontractor may attempt to separate itself from the prime on a Federal project by bringing a Miller Act claim directly against the surety and the prime. The problem here is where there is a pay-when-paid or pay-if-paid clause in the subcontract. As many of you know, under the Miller Act, 40 U.S.C. § 270b(a), prime contractors on Federal construction projects are required to furnish a payment bond. Where a subcontractor has not been paid, it has the right to sue on that payment bond. There is an issue about whether the Miller Act case can go forward in the face of a contingent pay clause. The cases are divided on this issue. In United States v. Miller's Mutual Fire Insurance Co, 942 F.2d 946, 949, n.6 (5th Cir. 1991), the court held that the pay-whenpaid clause was insufficient to waive a subcontractor's Miller Act rights:

We briefly dispose of the issues raised by [the surety] in its cross
appeal. First, the "pay-when-paid" clause in the Subcontract does
not preclude [the Subcontractor's] recovery on its contract work and
change order claim because under the Miller Act, the liability of the
contractor is to the subcontractor, despite nonpayment by the
government to the contractor.

Accord, Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 717, (4th Cir. 2000). See generally, Kanzier and McCarter, “The Effect of a Disputes Clause and Pay-If-Paid Provision on Miller Act Claims,” 21 Construction Lawyer 28 (2001), where other cases are cited.

However, there are contrary cases. In BMD Contractors, Inc. v. Fid. & Deposit Co. of Maryland, 679 F.3d 643, 656-57 (7th Cir. 2012), the court directly responded to the Moore Bros. decision cited above:

Moore Bros. cannot overcome the countervailing weight of authority.
First, the decision is weak on the merits. The main point made by the
Moore Bros. majority was that it would “defeat the very purpose of a
payment bond” to let the surety assert the pay-if-paid clause as a
defense against recovery. This mistakenly assumes that the purpose of
a payment bond is to insure subcontractors against nonpayment under
any circumstances, rather than when payment is in fact due under the
relevant contract. As Judge Wilkins noted in partial dissent, “[t]he
simple fact here is that someone—either [the contractor], the
Subcontractors, or [the surety]—had to bear the risk that [the owner]
would not pay [the contractor]. Virginia law specifically allows
subcontractors to bear that risk, and the Subcontractors here agreed to
do so.” [citations omitted].

Accord, Faith Technologies, Inc. v. Fid. & Deposit Co. of Md., 2011 WL 251451 (D. Kan. 2011); Wellington Power Corp. v. CNA Sur. Corp., 217 W. Va. 33, 614 S.E.2d 680 (2005). As to the enforceability of a pay-if-paid clause under Colorado law, and the difference with a “pay-when-paid” clause, see generally Main Electric Ltd. v. Printz Services, Corp. 980 P.2d 522, (Colo. 1999).

F. MEDIATION.
Mediation is the process by which the parties attempt to resolve the dispute through the help of a disinterested third person. It is not binding, and the mediator has no authority to render a decision. Rather, the mediator attempts to bring the parties together through an impartial, truthful evaluation of the merits, something the parties may not hear from their lawyers and experts. The AIA contracts, as well as many others, require mediation as a prerequisite to litigation or arbitration. Even before mediation, the parties must first allow the project Architect to render an initial decision on all claims. In the 2007 AIA revisions, the parties may, but are not obligated to, appoint the architect as the “Initial Decision Maker.” An initial decision by the Initial Decision Maker remains a “condition precedent” to mediation and a final court or arbitration proceeding.

Typically, the mediator will meet briefly with the parties, after which almost all of the work is done in private meetings with each party. Private and confidential meetings facilitate the honest assessment of the case by all concerned. Of course, the mediator must respect the parties' desire for confidentiality, and statements made in mediation will not be admissible at trial. Normally, the mediation can be completed in a single day. Due to the importance of maintaining a momentum toward settlement, the parties should normally not recess until a later date.

Mediation has obvious advantages. Most importantly, the mediator can provide a neutral evaluation of each party's position. Where emotions run high, the mediator can even avoid direct contact between the parties. Second, mediation can facilitate an early resolution before substantial litigation expenses are incurred. The desire for cost savings, however, does not mean that the parties need not prepare for the mediation. A thorough and well documented claim document is still essential. Finally, the mediator can suggest alternative settlement approaches which may not have occurred to each party.

There are, however, two caveats regarding mediation:
1. First, the parties may not be ready to resolve the dispute early in the case. Time may be needed for some discovery or simply for emotions to cool. Premature use of mediation can be a rather frustrating process.
2. Second, the parties must be very careful in choosing a mediator. To work, the parties must have the utmost respect for the mediator, or else his influence will be minimal. For this reason, former judges are frequently used. In addition, there are mediators who specialize only in construction cases. The mediator must have the respect of the parties, knowledge of the construction industry, and the skills to bring the parties together. In some instances, the parties choose a mediator even before a dispute arises so that they can move quickly once a dispute arises.


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