Dispute resolution provisions of a contract are critical, yet often ignored. All parties must understand the ramifications of a mandated venue when negotiating and performing construction contracts.
Home Field Advantage: Venue and Choice of Law.
Most construction contracts dictate the venue for any dispute and the law that applies. Usually, the party who drafts the contract imposes their will, setting the location for any filing as the county where they are located and the applicable law as that of their home state. For instance, a typical venue/choice of law provision might read as follows: "The Parties agree that the Denver County District Court shall have exclusive jurisdiction for any action arising out of this Agreement and that the laws of the State of Colorado shall govern any such dispute."
This example makes perfect sense for a project in Colorado. However, large general contractors are often located in other states. Like arbitration provisions (discussed below), venue provisions are sometimes intended to make smaller claims cost prohibitive. It can be extremely burdensome to litigate a small payment claim on the other side of the country. How large must the claim be to warrant engaging counsel in Texas to litigate a claim arising out of a Colorado project? Often, not large enough, which is sometimes the point.
The response to an onerous venue provision is to request that the venue be set for the county where the project is located. This is inherently fair to all parties involved. Everyone agreed to avail themselves of the jurisdiction of that venue by engaging in a project in that location. This is an equitable result when comparing the hardship on the large, highly capitalized, out-of-state general contractor to that on the smaller local trades.
Many contracts include mandatory mediation provisions, which usually read something like this: "No party shall initiate litigation or arbitration prior to the completion of mediation." Courts are typically very deferential to this type of language. If a complaint is filed without submitting the matter to mediation, the result will be either dismissal or a stay of the proceedings.
Presumably, the motivation behind these provisions is to compel the parties to engage in productive settlement negotiations early in an attempt to resolve the dispute without incurring enormous litigation costs. Most civil cases settle. Most courts require mediation. Forcing everyone to come to the table early can nip many disputes in the bud.
At the same time, these provisions can be a real pain in the ass. When a party is owed money and there is no defense, these provisions can be used to stall. Scheduling mediation takes time. First, the parties have to agree to a mediator. If the parties cannot agree, then one party must make a formal demand to a dispute resolution provider (e.g., AAA, JAG, JAMS), who will then appoint a mediator. Then, that mediator must be available, which is usually a 30 to 45-day lead time. By the time the mediation actually takes place, months might have passed. This is often the goal. There are no ramifications for failing to settle at mediation. Nothing said during the mediation is admissible in court. Sometimes the intent is simply to delay inevitable litigation.
Mediation provisions should be voluntary, not mandatory. If one party does not think mediation would be productive, or if they believed the other party was simply stalling, they should be able to move forward. The wheels of justice grind slowly. The claimant should be allowed to get this show on the road. At a minimum, a mandatory mediation process should run parallel with litigation and not as a prerequisite.
More and more construction contracts mandate arbitration. The parties stipulate to waive their right to a jury trial and instead agree to submit all claims to a private arbiter, usually a retired judge or experienced lawyer. This is a double-edged sword for all parties involved.
Let's start with the good news. Arbitration is usually much quicker. The parties can agree to a timeframe, but if there is a dispute the arbiter will typically side with the party trying to move forward with speed. A fundamental goal of arbitration is to cut through the inefficiencies of civil litigation. Attempts to delay are not received well. A party with a strong, sizeable claim will prefer arbitration, especially when there is a prevailing party fee and cost shifting provision.
Now the bad news. It is expensive. State and federal court judges are paid with your tax dollars. Arbiters are private and have hefty hourly rates. The cost to get through the hearing can be enormous. Most arbiters require a large retainer just to get started. Many require a large, non-refundable retainer for administrative services. And this is often the point - to make the pursuit of claims cost prohibitive. If a contractor is owed $15,000, it is hard to justify dropping $10,000 on a retainer just to file the claim. The goal of these provisions (and the effect) is often to squeeze out smaller claims, especially where there is no prevailing party fee and cost shifting provision. Even where a fee shifting provision is in the contract, a party usually has to go the distance (through hearing) to actually recover the costs of litigation. If the claim is close, it is hard to justify the investment when there is a risk of not prevailing. But if the claim is clear, the only strategy is to make it clear from the outset that all settlement discussions will include arbitration costs and attorney fees and that the amount necessary to resolve the claim will only increase with time.