Mediation Statutes And Form Contracts Point To Continued Growth In Real Estate And Construction Dispute Resolution

Saturday, April 1, 2006 - 01:00

Philip B. Ytterberg
National Arbitration Forum

Real estate disputes arising from the sale or improvement of residential or commercial real property can be complex and often involve multiple parties with important legal and financial interests at stake. Lawsuit delays can interfere with financing and disrupt project plans. Lis pendens filings can halt development or disposition of a real estate asset. Alternative dispute resolution (ADR) methods such as mediation and arbitration provide parties to real estate transactions with more efficient, affordable, and congenial dispute resolution than is available through court litigation. As a result of these factors, the real estate industry has readily accepted ADR techniques, and state legislatures have championed mediation and arbitration in a wide range of real estate and construction disputes.

This article highlights two recent positive developments in residential and commercial real estate dispute resolution. The first is the emergence of "right to repair" laws in nearly half of the states. The primary intent of these statutes is to stem the tidal wave of court litigation involving residential construction defect claims. Many of these statutes require mediation once the claimant has notified the contractor of the alleged defect, to encourage efficient and mutually acceptable resolution of a claim before litigation starts. The second development consists of recent amendments to the American Institute of Architects (AIA) Design-Build form contract documents. These popular forms have always included mediation and arbitration clauses, but parties may now specify which mediation and/or arbitration administrator will be used to resolve disputes.

Right To Repair Mediation

California's right to repair law was the first such effort in the country aimed at reducing time-consuming and expensive construction defect litigation. See Cal. Civ. Code §895 et seq. Commonly known as "SB 800" - the title of the bill introduced and signed in 2002 - the statute's pre-litigation procedure inspired subsequent measures taken by other states. Prior to commencing legal action, the claimant must provide the contractor with written notice, which the contractor must acknowledge within 14 days. §§910, 913. The contractor may then request an inspection, to be completed within 14 days, to assess the validity of the claimed defect. 916. Within 30 days of this initial inspection, the contractor can offer to repair the defect, and actual repairs must then begin within 14 days, with "every effort" to complete the repairs within 120 days. §921.

The contractor's offer to repair must be accompanied by an offer to mediate the dispute at the claimant's option. Unless otherwise agreed, the mediation is limited to four hours and is paid for by the contractor. SB 800 imposes a very strict timeline: the mediation must occur within 15 days of receipt of the mediation request. If the mediation fails, the offered repairs are completed. §919. Court litigation can only be initiated if the contractor fails to follow the statutory terms: "If the builder fails to make an offer to repair or otherwise strictly comply with this chapter within the times specified, the claimant is released from the requirements of this chapter and may proceed with the filing of an action." §920.

The State of Hawaii also has a residential construction mediation requirement. Hawaii's law provides: "If the parties are unable to resolve the claimall parties shall attempt to resolve the dispute through mediation, even if mediation is not otherwise ordered or mandated by contract or by law." Haw. Rev. Stat. §672E-7. However, Hawaii does not place any time constraints or other procedural requirements on mediation. This "hands-off" approach acknowledges that the benefits of mandatory mediation might be enhanced if the parties can control the scope and duration of the proceedings.

Other states have included mediation in their right to repair statutes. Missouri's formulation was passed in 2005 and allows either the claimant or contractor to offer mediation, which must occur within 45 days after the parties agree upon the selection of a mediator. Mo. Rev. Stat. §436.362. In Nevada, if a contractor does not make a settlement offer, or if an offer is made and not accepted, mediation must take place within 30 days with the claimant selecting the mediator. Nev. Rev. Stat. §40.680. Washington requires mediation for disputes involving "multiunit residential buildings." Wash. Rev. Code §64.55.120. Finally, the Iowa legislature is currently considering SF 381, which would require that contractor offers to repair include a mediation provision calling for mediation of up to four hours to occur within 15 days of a request to mediate.

It is simply too early to assess the full impact of the right to repair statutes on the resolution of construction defect disputes. These laws open the door to mediation, but may impose tight timelines that might be difficult to satisfy. Parties electing construction defect mediation would be wise to select a mediation administrator with a deep knowledge of the relevant law, a large panel of experienced ADR neutrals, and a clear policy of adherence to applicable statutory deadlines. Details of the National Arbitration Forum's Residential Right to Repair Mediation Programs are available at www.adrforum.com/focus/construction/.

AIA Design-Build Contract Documents

The AIA contract documents are recognized throughout the construction and design fields as industry standard contract forms for structuring transactions and managing relationships among parties involved in construction projects. Constituting more than 80 individual form contracts, the AIA documents are intended for national use and provide a solid core of contract provisions on which parties can rely to structure their legal relationships. The AIA forms originated in 1888 and have incorporated arbitration into the dispute resolution process for the past 118 years. Traditionally, AIA mediation and arbitration language exclusively specified American Arbitration Association (AAA) rules by "default." However, the new generation of AIA form contracts allows parties the freedom to designate their choice of alternative dispute resolution administrator in the original contract.

Most recently, the AIA updated the Design-Build documents and made important changes to the dispute resolution terms. The new A141-2004 Design-Build form continues to mandate mediation as a prerequisite to binding dispute resolution, as did the A191-1996 form that it replaced. However, the new form permits selection of any mediation and arbitration administrator on which "parties mutually agree." This change is important because it allows parties who use the AIA documents for construction contracts to more effectively manage project risks and customize the terms governing the resolution of any disputes arising during a project.

Parties can now easily modify the AIA contract forms to specify the National Arbitration Forum (FORUM) and its Construction Mediation Rules and Arbitration Code of Procedure or any other set of ADR rules. Another important change allows parties to choose which type of binding dispute resolution will govern the agreement. Where the old version mandated arbitration, the new version contains three checkbox options: 1) Arbitration, 2) Litigation, or 3) Other (Specify). Parties to construction transactions and their counsel should seriously consider tailoring the dispute resolution terms of contracts by taking advantage of the new flexibility offered by the AIA form contract documents. Potential benefits include reduced dispute resolution costs and delays, and increased confidence that any resulting dispute will be decided under the substantive body of law selected in the contract.

How To Customize AIA Mediation And Arbitration Terms

Mediation . In order to elect a particular administrator, such as FORUM mediation, parties should specify FORUM as the mediation administrator in §4.3.2 of the A141 Terms and Conditions. Parties should state that mediation "shall be in accordance with the Construction Mediation Rules of the National Arbitration Forum currently in effect at the time of the mediation."

Arbitration . There are now two different ways to effectively elect FORUM arbitration. Parties can mark the "Arbitration" checkbox and substitute FORUM arbitration language for the AAA language in A.4.4.1 of the form's Terms and Conditions. The only required drafting change is specifying that arbitration "shall be in accordance with the Code of Procedure of the National Arbitration Forum currently in effect at the time of the arbitration." Alternately, parties can mark the "Other (Specify)" checkbox in §6.2 of the agreement and specify arbitration under the FORUM Code of Procedure there instead of in the Terms and Conditions.

Sample construction ADR clause language suitable to insert into AIA contract documents is available at www.adrforum.com/focus/construction/. Also available on the website are the FORUM Code of Procedure and Construction Mediation Rules.

Additional Drafting Considerations

Once parties have taken advantage of AIA's invitation to select the ADR administrator and rules of their choice, they should also consider upgrading some of the default AIA dispute resolution terms. For example, the Design-Build form states that the law of the place where the project is located governs the contract. To ensure consistent enforcement of the agreement's arbitration terms, it is wise to specify that federal rather than state arbitration law applies to the arbitration clause. To make this change, simply add: "This arbitration agreement is made pursuant to a transaction involving interstate commerce, and shall be governed by and interpreted under the Federal Arbitration Act (FAA), 9 U.S.C. Sections 1-16."

It may also be wise to add severability language to the default dispute resolution terms to reduce the risk that any agreement terms found to be unenforceable will eliminate the parties' right to mediate and arbitrate. Additional language to accomplish severability should state: "In the event a court having jurisdiction finds any portion of this agreement unenforceable, that portion shall not be effective and the remainder of the agreement shall remain effective." Note that these two provisions are incorporated by reference when the parties select the FORUM Code of Procedure.

Conclusion

State legislators and real estate and construction professionals understand that complex real estate and construction disputes are time-consuming and expensive to litigate. For these reasons, mediation, arbitration, and other alternative dispute resolution processes have traditionally been widely accepted. The right to repair movement and the positive changes to the AIA dispute resolution clauses indicate that real estate and construction professionals value cost-effective and efficient dispute resolution processes.

Philip B. Ytterberg is Vice President and Assistant General Counsel for the National Arbitration Forum.

Please email the author at pytterberg@arb-forum.com with questions about this article.