As most construction industry participants know, a termination for default can be a high-risk proposition for both sides. It very often ends in a lose-lose outcome. Almost always, there are some significant disputed change orders, or extended delay issues, or both. That circumstance in turn results in issues of non-payment or withheld amounts of liquidated damages. The owner withholding of payments makes it harder for many contractors to perform. Once the default happens, a completion contractor needs to be engaged. At that point whatever the cost or remaining time to complete may have been, both are likely to increase by a large factor. An early dispute resolution mechanism can help prevent reaching these termination breaking points.
One of my first experiences using Zoom for mediation was during the pandemic, and involved a dispute on a delayed design-build school project. The project was approaching the last stages of completion activities, after a full school year had been missed due to delays. The parties were already very much adverse to each other, and communication and trust had completely broken down. On the brink of an owner’s decision to exercise a default termination, both counsel made a smart determination to exercise their contract mediation clause. It was essentially a facilitated “opportunity to cure” which is usually required under the contract, but often given short shrift.
The benefit of Zoom mediation became quite evident to me based on this experience. It offered speed and at least a virtual “face-to-face” connection within a matter of days. Counsel for both parties and the mediator were able to have virtual meetings together and individually to begin to outline a structured, phased plan for negotiating an agreement. The first phase in this situation was to figure out what it will take to avoid termination, and defer the bigger issues until the project was complete. Fortunately, the parties were able to agree on a minimal payment with reservation of rights, in order to get the final work done and inspections to begin. The parties put a 90 hold on the termination decision while the final work was being performed, in order to negotiate the next phase of agreement.
The next step in the mediation was to meet while the project was being completed, to work though and settle the remaining significant delay and scope issues. That initial payment for the completion of the remaining work made a huge difference in lowering the temperature and begin to focus on a global solution. During the second phase, the parties were able to agree to a dollar settlement contingent on a payment plan tied to milestones and occupancy permit sign-off. Had a neutral not been asked to intervene, it is likely that the relationships would have continued to deteriorate further. The dispute would have further escalated following a termination, and become more and more difficult (or impossible) to resolve without litigation.
Lesson learned – involve the mediator before deciding to be a terminator.
Chris Kane is an engineer-lawyer-mediator working in the engineering and construction industry for over 45 years. He has worked for 30 years as a distinguished neutral, successfully resolving hundreds of disputes through use of mediation, arbitration, advisory panels, min-trials & structured negotiations. His accomplishments include innovative project development and delivery of transit, resiliency, remediation, road, airport, energy, and water projects.