It is understandable why homeowners building a new home would be upset when things don’t go according to plan. Likely the most significant financial risk most people will experience in their lifetimes, it is a very stressful time for prospective homeowners regardless of how smoothly the work progresses. But it is not uncommon for issues to arise that extend the time of performance and increase construction costs. This increases stress and can continue to grow the longer it takes to resolve issues and complete the work. The same is true of any property owner, public or private, residential or commercial – it is their property that is being improved, usually at great expense. Owners are entitled to competency, fairness and professionalism when dealing with designers and contractors hired to improve their property. They are the ones paying for the services and who will use the property long after the designers and contractors have left the picture. This is, in part, why property owners can be very demanding and sometimes difficult to work with, even when most or all the work is routine.

On the flip side, designers and contractors who undertake the performance of their obligations in good faith and, ultimately, fulfill their contractual duties in accordance with the terms of their agreements and/or industry standards should be paid for their services. A disagreement resulting in payments being stopped can cause an extraordinary amount of stress on contractors and designers who have employees, subcontractors and others to pay. Sometimes, a disagreement can progress to a claim situation, where a contractor or subcontractor must act according to their contract to preserve claims for increased costs and time extensions. Contractors or subs also may be required by statute to perfect a lien or a bond claim, which further increases an already stressful situation.

If unresolved, such disputes can end up in litigation or arbitration (or both), sometimes involving many parties who are affected, as noted below. Unsurprisingly, the parties’ stress will continue to grow the longer it takes and the more money that is spent during this stage of the process. Lawyers must navigate these complexities when figuring out what, in fact, is at issue. This is no small task, as there is always an underlying complexity that can increase distractions, consternation and uncertainty. For example, a dispute over a simple, one-room add-on to a residence may involve only two parties (the owner and the contractor), but the work itself might require materials from multiple vendors. If the work involves components that require the services of licensed trades – such as electricians, plumbers or surveyors – even more parties are necessary for the completion of the overall work and may be implicated in a potential dispute. Commercial or public projects add further layers of involvement in the form of lenders, sureties, architects, engineers, specialty trades and many others. Where negligence claims are at issue, insurers, agents, adjusters and experts are also often part of the process.

As noted above, lawyers and their clients must also contend with multiple legal hurdles, which can increase stress. A common example occurs when a party is required by statute to perfect a claim, but work is not complete, and/or the contractual close-out process has not been finalized.[1] Indeed, the general conditions to the parties’ contract may contemplate such circumstances and instruct the parties to proceed with perfecting any such claims while going through the contractual claims resolution process.[2]

But even when handled as amicably as possible, recording a lien or perfecting a bond claim can, and often does, exacerbate the parties’ negative feelings and make resolution more difficult, even though it has little to do with the underlying dispute. In other words, a lien may upset a project owner, or a bond claim may upset a general contractor, but the real issue is whether the money claimed in the lien or bond claim is owed. That does not change, even if there are perfection problems (e.g., the lien was recorded late, notice issues with the bond claim, etc.). Yet, all too often, parties will spend considerable time arguing over procedural matters, sometimes at great cost. So while it might be necessary to file a dispositive motion on a claim or issue, clients often only see the cost rather than the benefit of using such pretrial tools, especially if they are not granted. Costs increase stress, which makes it harder for the parties to see a path to resolution that does not involve going to court or arbitration.

While a construction dispute might be complex or involve parties who are very upset, attorneys can best serve their clients by quickly separating distractions from the important issues so that informed decisions will be made on whether to settle the case or proceed to a hearing. This article aims to help that goal by providing a few best practices for mediation preparation. Incidentally, while this article is focused on construction disputes, the core principles apply in mediations of most kinds of cases.

SETTING THE TABLE

There are several considerations parties must first explore before even agreeing to mediate. Which mediator will be used? Will the mediation be conducted in person, remotely or a hybrid of the two? Is a pre-mediation demand a good idea, or should they wait until mediation? Is there any discovery to be conducted or a dispositive motion to be filed that would help the settlement process, or would those activities be counterproductive? Have all the parties been correctly named and/or joined in the proceedings? There are so many things to consider, but it all really comes down to one thing: Are the parties truly ready to try and resolve their dispute?

Avoid Premature Mediations

One of the biggest reasons mediations fail involves one or more of the parties having a one-sided mindset that they are unable or unwilling to overcome. This is not to be confused with stubborn clients who may have an initial mindset to settle on only their own terms but, nevertheless, see the benefit of early resolution. Rather, if a client sees no potential benefit to the mediation process or perceives it as a waste of time – despite your efforts to educate them otherwise – then conducting a mediation would likely fail. This can happen sometimes when mediation is ordered by a court and/or if it is a condition precedent in the parties’ agreement. However, courts and arbitrators expect the parties to engage in serious efforts to settle the dispute, or they won’t order mediation. Likewise, the American Institute of Architects, ConsensusDocs and the Engineers Joint Contract Documents Committee would not include mediation in their form contracts if they didn’t expect industry participants to seriously attempt resolving disputes before going through a protracted litigation or arbitration process. In short, clients must understand that by the time of mediation, they may have to make concessions if a resolution is to be obtained.

This is why counsel’s role in mediation cannot be overstated. While they may not agree with everything their opponents or the mediator says and certainly are not expected to capitulate whenever pressure is applied, counsel should, nevertheless, have respect for the process and communicate that respect to the client. Showing such respect often helps clients decide to give mediation a real chance. On the other hand, if counsel approaches mediation with a “check-the-box” mentality or, sometimes, if they are inexperienced or struggling with workload or other personal issues, developing realistic expectations with the client can be very challenging, to say the least. Worse, the potential for the client to see only one outcome – that of total victory – can be greatly increased when expectations have not been properly set. Still, more premature mediations usually don’t happen because counsel could have done a better job educating their clients. Rather, failed settlement efforts often involve clients who ignore the advice of their attorneys or who are not yet ready to accept uncomfortable information about their position by the time of mediation.

Select a Mediator Who Can Move the Parties

Not all mediators are the same. Some are facilitators who offer very little in the way of pushing the parties and virtually no assessment of the facts or the law of the case. In cases where there is very little in the dispute or the parties are merely looking to close a small gap, a good facilitator can often achieve a good result in a short amount of time. On the other end of the spectrum are mediators who are more evaluative, unafraid to get into the weeds with a party or counsel.

In construction cases, a mixture of facilitative and evaluative techniques tends to work better than relying too heavily on one or the other. While there are indeed many strong personalities involved in construction and/or several of the disputes turn on technical issues, which often demand a more evaluative approach, there are just as many construction disputes that the parties treat in a more transactional sense – such as where liability is not disputed or where the parties have a desire to continue doing business with one another after mediation. In such cases, a good facilitator can guide the parties through the process expeditiously rather than getting into the weeds of the dispute.

However, as noted above, emotions can run high depending on the level of risk undertaken by the respective parties and their level of experience with the construction process. In short, any construction project has the potential for increased stress, anxiety and hostility, especially the longer a project takes or a dispute goes unresolved. In such highly stressful situations, an evaluative technique is often better for assuaging parties and tamping down negative emotions, but once the parties put those things behind them, the negotiation should become more transactional.

In Person, Remote or Hybrid Mediation?

Since the 2020 pandemic, virtual mediations have become routine. There are several circumstances where virtual mediation is preferred to in person, such as where there are few, if any, emotions involved or where liability is not disputed. Remote mediation is also handy for parties, adjusters or in-house counsel from other jurisdictions who might not otherwise go to mediation due to having to travel a great distance. Finally, a remote or hybrid setting is critical for mediations involving 10 or more parties. This is primarily because of the logistics of the mediator moving from room to room, which is instantaneous in a remote setting but takes longer when handled in person.

Remote mediations should be discouraged, though, when one or more of the parties have unreasonable expectations, a client is very emotional or one or more of the parties is not focused on either the dispute or the settlement process. It is far easier to switch off a computer than it is to leave a meeting being attended in person. It is also easier in a remote setting for parties (and counsel) to conduct other business, travel or engage in social activities, which can be distracting during mediation and lower the chances of success. If a human touch is necessary, that can’t always be accomplished virtually.

PREPARING FOR MEDIATION

Assemble the Core Documents

The contract. At the heart of almost every construction dispute will be at least one agreement, and it should be the first document in the materials assembled for mediation, including any general conditions, special conditions or other terms and conditions incorporated by reference. If the contract was not in writing (yes, that still happens), then documents establishing the terms of the oral agreement should be included in your mediation materials, such as proposals, bids, estimates and correspondence.

Incidentally, there are few good reasons, if any, for not sharing your client’s contract with the mediator (or other parties). If the concern is that the contract does not work well for your client, that concern needs to be at the front and openly discussed with at least the mediator. Besides helping the mediator build rapport with the client, openly discussing the terms of the parties’ agreement(s) – the good, the bad and the ugly – will help clients be better informed and able to make the right decision when the time comes.

Also, any documents changing the contract terms – such as change orders, modifications or other similar instruments – should be gathered for mediation. If change orders are not in dispute or if the documents are so voluminous that it would dramatically increase the time and cost of mediation if produced, summaries should be provided. As discussed below, having a firm handle on the contract price, the revised contract price (after agreed-to changes) and what is in dispute is critical to maximizing any recovery or defense, and the contract documents are usually the first of the primary tools to help accomplish your clients’ goals.

Other contract documents. Plans and specifications are always part of the parties’ contract when they exist, but they are not always necessary to the mediation process. There could literally be hundreds of drawings and/or hundreds of pages of specifications, but none of that will matter if the dispute has nothing to do with the installation of the work (such as a payment dispute) or only involves a particular item of work. In cases where some discussion over the technical aspects of the work is required, gathering only the drawings or specifications at issue is recommended. Producing “everything” is usually not necessary or productive. Note: When assembling select drawings or specifications at issue, care should be taken to include any general or special notes or provisions that may apply but are found elsewhere in the plans and specs.

Correspondence. The next biggest piece of information helpful in mediation is the written communications between the parties. This includes letters, memoranda, emails, text messages and virtually anything in writing between the parties, with third persons or internal communications. Like plans and specifications, there is a potential for thousands of pages of communications to exist, and a majority of the same will not be relevant to any significant issue. Paring down communications to only those that are relevant and have the potential to help the settlement process is essential. At a minimum, correspondence about disputes, claim notices, default or termination notices, etc., should always be assembled as part of the mediation process.

Having said that, there are people who put very little, if anything, in writing when conducting their business affairs. They often default to personal discussions – on-site, remotely or over the telephone – to discuss changes or problems encountered during the performance of the work. In such cases, counsel should do their best to extract from their clients the dates and/or timeframes and content of any relevant oral discussions or meetings. Also, there may be other written documents that memorialize the parties’ discussions and conduct, as noted below.

Other documentation. Different kinds of disputes require different kinds of documentation. For example, a claim involving dirt work quantities may require surveys, delivery tickets or haul logs, whereas a structural issue might require an engineering analysis. Claims involving flooring, roofing, cladding or other integrated building systems might require the manufacturer’s literature or industry guidelines. Oftentimes, parties will be eager to get their attorneys such information, which is very helpful, but again, having the contract documents and communications between the parties concerning the issues is just as vital. Several other items are commonly used in construction disputes to substantiate or defend construction claims, such as:

• Cost estimates, bids, proposals and take-offs
• Daily logs or other progress reports, notes, photos and videos
• Requests for information
• Quality control and testing reports
• Quality assurance reports
• Certified payroll or other time records
• Vendor estimates and invoices
• Rental agreements and invoices
• Delivery tickets and haul logs
• Meeting minutes and summaries
• Project schedules and weather data

Again, this is not meant to be all-inclusive. There could be many more documents that are relevant to the dispute, and if so, they should be part of your mediation materials. While your practice might be to ask your client for everything – their entire project file – just make sure that by the time you prepare for mediation, you have pared down the information to as few documents as possible. Besides risking confusion, too much information can needlessly increase the costs of mediation.

Preparing a Timeline

Whether it is contained within the mediation statement or produced as a stand-alone document, a good timeline is invaluable to the settlement process. Once the core documents are assembled, they should be placed in chronological order to build the timeline. If there were in-person meetings, remote conferences or telephone discussions for which no written record was made, the dates of such events and summaries of the same should, nevertheless, be part of your timeline.

For attorneys, taking the time to organize project documents and using them to prepare a timeline will help reinforce the key events and allow for better representation at mediation. It will also help pare down the core information to only those things that have a significant bearing on negotiations. For mediators, having a snapshot of the timeframe and key events will help put the focus on what matters and what does not. This is especially true if, after the best efforts of counsel, there are still numerous critical documents to be included or relied upon in mediation. For example, rather than producing hundreds of documents for the mediator, a timeline summarizing the same can be provided, after which the mediator can request any specific items included in the timeline. This should help reduce the time and cost of mediation.

From a defensive standpoint, timelines can be used to communicate to the other party problems with their case. For example, a clear timeline showing the communications before, during and after the submission of a bond claim or recording a lien can help illustrate the failure to perfect such claims. The failure to follow claims or disputes procedures, issues with statutes of limitations or other similar temporal problems also can be clearly demonstrated by showing the events in a short, digestible timeline.

Summarizing Damages

As with the underlying contract, there are few good reasons, if any, not to provide a clear and concise summary of damages during the mediation process. Sometimes, your client’s damages are a moving target, which can be very frustrating to the party wanting to write a check. Worse, a moving target may give the other party an excuse to offer very little, if anything, in settlement. This can further exacerbate the parties’ hard feelings if they think the other side is “playing games,” which can frustrate negotiations. Nailing down your client’s claims well in advance of mediation should help reduce such issues and make the path to resolution easier. Naturally, that means involving your client early in the process and developing reasonable expectations.

There should rarely be disputes over the original contract amount, approved changes orders or payments made. Nevertheless, it is always good to begin a discussion of claims and/or defenses with a statement of the current contract amount (and time if timing is an issue). A simple contract accounting summary might look something like this:

Contract Price:

Original Contract Amount                                   $1,450,000.00

Change Order 1 (approved)                                $30,000.00

Change Order 2 (approved)                                $15,000.00

Revised Contract Amount                                   $1,495,000.00

Payments                                                           ($1,300,000).00

Balance Before Addressing Claims                      $195,000.00

 

Contract Time:

Contract Days:                                                    245

Notice to Proceed:                                             March 30, 2024

Original Completion Date:                                 Nov. 30, 2024

Days Granted in COs to date:                            15

Revised Completion Date:                                 Dec. 15, 2024

Claims should then be separately identified, with a short description and proposed cost/time impact for each issue. Backup documentation should be included to support the actual or estimated costs for each issue (see above for examples). This includes both claims of a contractor or subcontractor for extra work, as well as claims by an owner to correct deficiencies, repair damaged property, etc., if any. Likewise, claims for additional time should be backed up by schedules, weather data and other documents demonstrating actual or potential time impacts. If attorneys’ fees, costs and interest are available under the contract or applicable law, they should be included in the summary of damages.

Of course, what the client desires may not be allowed under the law or the parties’ agreement. Damages are generally available in an amount needed to place a plaintiff in as good of a position as they would have been had the contract not been breached.[3] So if a homeowner spends $250,000 on the construction of a new home but later sues the contractor for $1 million to remedy alleged construction deficiencies, it is very likely that such damages would be held unreasonable and, therefore, not recoverable. In the context of mediation, starting negotiations in such a manner could be a nonstarter for the contractor/seller of the home.

There could be other limitations contained within the contract. For example, your client may contend they are owed money due to job prolongation, but there is a “no damage for delay” provision disallowing such damages. There could be an exculpation clause disallowing claims for unforeseen site conditions, a consequential damages waiver or a pay-when (or if) -paid provision in the agreement. There could also be legal hurdles to overcome, such as problems with the perfection of a lien or bond claim, statute of limitations or statute of repose. In the case of property damage, the law might limit the owner’s damages to either the cost of repair or diminution in value if the cost of repair is impracticable.[4]

Including a claim that is flatly not viable can sometimes have a chilling effect on negotiations. For this and other reasons, deciding what to include in a demand should be heavily scrutinized, and reasonable expectations should be developed early. Counsel should carefully explain to their client any shortcomings when determining the list of damages versus what a negotiated compromise might look like in mediation.

Sharing Information

As paid pugilists, the job of a litigator often does not contemplate freely sharing information with opposing parties unless ordered to do so by a judge or arbitrator, statute or court rule. However, in the context of mediation, there usually are more benefits to sharing than there are to withholding information.

Providing a target. As noted above, providing clear and concise damage calculations is imperative to success at mediation. Parties who understand how much is being claimed and how the amount was calculated will be in a far better position to settle than if damages are vague. Even if they do not agree with the claim, the party expected to pay will be in a much better position to offer something reasonable if they understand what is being claimed and how it was calculated. Indeed, for the party seeking payment, arriving at a clear settlement demand is just as important as it is for the party expected to pay. Besides potentially maximizing a recovery, arriving at an opening demand is a great opportunity for counsel to work through all the issues with their client’s claims and set reasonable expectations for when negotiations begin in earnest. A good damage model should also convey to opposing parties the strengths of your client’s claims and provide a framework for what a result at trial or arbitration might look like.

Sharing backup. Unless they are voluminous, it is usually better to share with the other parties the documents gathered and the timeline prepared for mediation. When confronted with specifics backed up by contemporaneous project records, the parties’ discussion should become far more focused with fewer distractions. Besides focusing the parties on what is at issue, sharing can also have other beneficial effects, such as demonstrating a willingness to work toward a fair compromise and enabling opposing parties and the mediator to fully understand your client’s position. But again, caution must always be used to avoid providing too much information, which can lead to confusion and/or needlessly increase mediation costs.

Withholding information. Sometimes, parties or their counsel may have information that could cause problems with negotiations if shared. For example, parties are sometimes concerned with another’s potential for hiding assets, destroying evidence or other similar nefarious conduct. Sometimes, a client may be so angry with the other side that they believe they have been defrauded or cheated, even if the dispute is a legitimate one under the parties’ contract and there is no evidence of malfeasance. Raising such issues with the other side can be counterproductive, as it could exacerbate hard feelings and push the parties further into their corners, especially if allegations are unsupported. Similarly, including an unfounded or otherwise problematic claim in a damage summary has the potential to cause an opponent to not treat other viable claims seriously.

If the goal of disclosing a fact or raising a problematic claim is to embarrass, intimidate or otherwise unsettle your opponent, then disclosure to other parties is discouraged. What good will come from trying to embarrass your opponent? However, as noted herein, it may take your client some time to come to grips with hard truths about their case. For example, a project owner who has sued their general contractor for breach of contract and fraud may truly believe they were intentionally deceived by the contractor. However, if you determine there is no fraud based on your review of the evidence, should you “drop the claim” for mediation purposes? Can you even do so if your client insists on including such allegations in a mediation statement? This can be a dicey situation, especially if your client still feels cheated, despite your evaluation. One way around this conundrum is to share your mediation statement with only the mediator and not your opponent. This allows the client to vent as necessary while, at the same time, avoiding raising any issues with the other side, which could derail negotiations.

The downside to not sharing mediation materials with the other party(ies) is that you are removing a golden opportunity to advocate for your client directly to their opponent(s) without the filter of the mediator. If necessary, two mediation statements can be used: one to share with opposing counsel and the mediator and another for the mediator’s eyes only. Regardless, whether to include a problematic allegation or claim and/or when to pull such a claim off the table is up to counsel and their client on a case-by-case basis. Indeed, sometimes, clients will not be emotionally ready to remove a claim until they are well into the process (and sometimes, they never get there).

Client Preparation

By the time a mediation statement is prepared, along with the timeline, documents and damage summary, counsel should have met and/or discussed the issues with their client at least once, if not several times, depending on the complexity of the issues. Hard issues – like an agreement that excludes attorneys’ fees from being recoverable by a prevailing party, exculpation clauses or other limitations like some of those noted earlier – should have been explained thoroughly. Once the mediation statement is prepared, you should share and discuss it with your client, again confirming they understand the positions being taken as well as what the other parties are expected to argue in opposition, not to mention the risks in moving forward if a compromise is not reached at mediation.

Most mediators, especially those who place an emphasis on a more evaluative process, will raise many or all the problematic issues directly with your client. Clients who have been adequately prepared will be less likely to be surprised or embarrassed by such “bad news,” which should help with the process. After all, prepared clients will be more inclined to make a reasoned, informed decision rather than one based on emotion. Having said that, as suggested throughout this article, sometimes it is not possible for attorneys to effectively communicate with their clients through no fault of their own. In such cases, counsel should communicate early with the mediator about such problematic situations.

Mediator Preparation

If time permits, counsel should discuss the case with the mediator prior to mediation. Besides reinforcing the key points of your client’s position, pre-mediation discussions help narrow the issues and even remove some of the unhelpful ones, as noted above. Pre-mediation discussions with the mediator are also a good way to check yourself to ensure that zealous advocacy has not gotten in the way of maximizing the client’s position in negotiations.

CONCLUSION

It is always a good idea to ensure that you and your clients are comfortable and as relaxed as possible on the day of mediation. After all, while more informal than most legal settings, mediation is still a stressful time, and having a comfortable space to discuss the issues will help keep everyone focused on resolution. Also, it is highly recommended that the parties sign a term sheet or other instrument at the end of a successful mediation summarizing the terms of their agreement.

Finally, the key to a successful mediation, whether it is a construction dispute or otherwise, is early preparation. If reasonable expectations have been set with clients, and counsel and the mediator are otherwise prepared, then the negotiations should go as smoothly as possible.

---

ABOUT THE AUTHOR

Marvin Laws spent 17 years practicing before starting his current role: operating Oklahoma's only ADR practice dedicated to construction law disputes. Mr. Laws mediates more than 40 cases yearly with two to 18 parties in person, remotely or in a hybrid setting. Every year, he also arbitrates two to four cases.

 

 

 

---

ENDNOTES

[1] See, e.g., Title 42 Oklahoma Statutes §§141, 142, 142.6, 143 and 172 (Oklahoma Statutes providing for notice, recording and suit filing requirements for mechanics and materialmen’s liens on private property), and 61 O.S. §§1 and 2 and 40 U.S.C.A. §§3131 and 3133 (Oklahoma and federal payment bond statutes for public projects).

[2] See, e.g., American Institute of Architects (AIA) Document A201-2017 General Conditions of the Contract for Construction §15.2.8.

[3] See Britton v. Groom, 1962 OK 185, 373 P.2d 1012, 1015-16, and Title 23 Oklahoma Statutes. §21. Damages in all cases must be reasonable. See 23 O.S. §97. “Direct damages refer to those which the party lost from the contract itself – in other words, the benefit of the bargain – while consequential damages refer to economic harm beyond the immediate scope of the contract.” Penncro Assocs., Inc. v. Sprint Spectrum, L.P., 499 F.3d 1151, 1156 (10th Cir. 2007).

[4] See, e.g., 15 Am. Jur., Damages, Sec. 110, and 25 C.J.S., Damages, §84, and Schneberger v. Apache Corp., 1994 OK 117, ¶¶11‑12, 890 P.2d 847 (Oklahoma law limits the amount of recovery for repair and restoration costs so that damages for the cost of repairs may never exceed the diminution in value of the property).