AD-A268 757 - Defense Technical Information Center

1 AD-A268 757awwxlap''IO) CONTRACT CLaIS ANDMETHODS O AVOIDING coNTRAjcT LITIGATIONT!IWUGN DISPUTE RNSOLUTION ALTERATIVEk (atctvoOFSPI CI LVIL MNI IGIPhtx ft rLnu o *zmomom1,6 VMD mc umo CU~rMITY P FL0 RID3 ,, 'fA 27R ',QUItU TOA NGAUIECSI~lIICONSTRUCTION CONTRACT CLAIMS ANDMETHODS OF AVOIDING CONTRACT LITIGATIONTHROUGH DISPUTE RESOLUTION ALTERNATIVESIIIIiBYIJOSEPH C. LAVIGNEIiIA REPORT PRESENTED TO THE GRADUATE COMMITTEEOF THE DEPARTMENT OF CIVIL ENGINEERING INPARTIAL FULFILLMENT OF THE REQUIREMENTSFOR THE DEGREE OF MASTER OF SCIENCEi UNIVERSITY OF FLORIDAi Summer 1993 IITABLE OF CONTENTSCHAPTER ONE -INTRODUCTION 1 CHAPTER TWO -CONSTRUCTION CONTRACT RISK Introduction Establishing Contract Risk Types Of Contract Risk Allocating Contract Risk Project Risk Management Benefits Of Proper Risk Management 18 CHAPTER THREE -CHANGES, CLAIMS AND CONTRACT DISPUTES Introduction Change Order Terminology Change Constructive Change Change Order Claim Dispute Changes To The Contract Change Order Categories Owner And Designer Initiated Changes Contractor Initiated Changes Other Changes 26U What Instigates Claims Classification Of Claims Design Changes And Additions Changed Site Conditions Delay Claims Acceleration, Compression.

2 ImpactAnd Ripple The American Institute Of Architects Process Issuing A Change Directive Decision Of The Architect The Disputes Process Arbitration Effectiveness Of The AIA Claim Process 36 ICHAPTER FOUR -A LEGAL FOCUS ON THE ARBITRATION PROCESS Introduction The Development Of The Arbitration Process Enforceability Of Arbitration Clauses The Legality And Validity Of Arbitration Arbitrability And Timeliness Of Claims Comparing Arbitration To Litigation 45 CHAPTER FIVE -THE ARBITRATION PROCESS Introduction Developing The Arbitration Clause Holding An Administrative Conference Selecting The Arbitrator(s) Selecting A Location For The Hearing Prehearing Procedures Completing The Arbitration Hearing Identifying The Arbitration Member(s) Waiving Formal Hearings Scheduling The Hearing Professional Conduct Of The Arbitrators Refusal To Attend Hearings Opening Remarks Evidence And Subpoena Rights Evidence Rules Witness Testimony Site Visitation Documenting The Hearing Reopening The Hearing Arbitrated Awards Awards Enforcement Judicial Review Of Arbitrated Awards 66C SIX -OTHER TYPES OF DISPUTE RESOLUTION FORUMS Introduction Mediation Assisted Negotiations Fact-Based Mediation AAA Expedited Procedure Mini Trial Referees And Special Masters Summary Jury Trials Advisory Opinions Non-Binding Arbitration Step-By-Step Disputes Resolution Disputes Review Board 76 IIUCHAPTER SEVEN -PARTNERING.

3 A COMMITMENT TO CO-OPERATION Introduction The Partnering Concept The Key Elements Of Partnering The Partnering Process Educating The Organization Making Your Partnering Intentions Known Commitment From Top Management The Partnering Workshop Facilitated Workshops Individual Roles AndResponsibilities Creating A Partnering Charter Dispute Resolution Process 933 Joint Evaluation Process Periodic Evaluation Escalation Of Unresolved Issues Final Evaluation Benefits Of The Partnering Process Benefits To The Project Owner Benefits To The Prime Contractor Benefits To The Designer And Consultants 98n Benefits To Subcontractors And Suppliers Potential Pitfalls Of The Partnering Concept 99I CHAPTER EIGHT -SUMMARY 101I BIBLIOGRAPHY 109lAe esil09 IorSt#/A, USNPS/Code 031 Ubannouned(Ms. Marsha Schrader -DSN 878-2319) Justirliat __Telecon, 27 Aug 93 -GBID illlbliy@,,Dist SIotalIICHAPTER ONEINTRODUCTIONU In recent years, construction contract claims have3 grown at an alarming rate.

4 It has become increasingly moredifficult for contracting parties to achieve bilateralI agreements in an equitable, effective and timely manner (6).Litigating disputes is being abused as a cure-all meanswithin the construction industry, generating a3 disproportionate growth in court cases. Relaying on thelegal system to judge and resolve a contractual problem is3 counterproductive to getting the job done. It is also anextremely time consuming and expensive undertaking for allparties. Therefore, it behooves every contracting party to5 strive for timely completion of the work. Resolvingdifferences "in-house" when possible and avoiding litigationat all cost is a worthwhile endeavor. This can beaccomplished through cooperation, meaningful, open-mindednegotiations and a team approach to managing the contract* purpose of this research paper is to investigate3 the reasons behind the increasing trend toward adversarialcontract relationships and claims.

5 It also looks atpossible disputes resolution techniques that can be used to3 short circuit the costly and exhaustive path to The topics covered in the following six chapters ofthis research paper discuss construction contract risk,contract disputes, arbitration and other forms of resolvingI disputes, and partnering. The material covered in thesechapters highlights possible causes for and resolution ofconstruction contract Chapter Two addresses the allocation of constructioncontract risk and it's extremely important role in theI development of contract disputes. Risk avoidance, riskallocation, risk management and some of the pitfalls ofinappropriately assigning risk to a party who can not manage3 or control it's destiny will be discussed. Chapter Threelooks at how changes, claims and disputes develop over3 numerous controllable and sometimes uncontrollablecircumstances. The prime causes of construction contractchanges and their subsequent role in generating contract3 disputes will be investigated.

6 Chapter Four focuses it'sattention on the development of judicial support for use of3 arbitration to mediate disputes, Technical differencesbetween contract arbitration and judicial litigation, andsome of the legal problems faced by arbitration. Chapter3 Five is devoted to studying the intricacies of arbitrationas a forum for contract dispute resolution. Chapter Six3 takes a cursory look at other forms of contract disputesresolution techniques in use today. Finally, Chapter SevenI is devoted to the partnering process and it's potential role2 Ufor solving the litigious nature and mounting decay of thecontractual process within the construction privately funded projects designed by an architectI incorporate standard American Institute of Architects (AIA)documents into the contract specifications. The GeneralConditions of the Contract for Construction, AIA Document3 A201, mandates arbitration between the contracting partiesto resolve contract disputes.

7 Specifically, the arbitration3 clause under Paragraph of AIA Document A201, stipulatesthat disputes, "shall be settled by arbitration according tothe Construction Industry Arbitration Rules of the American5 Arbitration Association[AAA]" (3-12).Both of these influential professional organizations3 greatly impact the way we contract for construction servicesand mitigate disputes. Though their standard procedures maynot fit every contract scenario, these two organizations arei still possibly the most prominent authorities effecting theway we execute contracts and resolve disputes Secondly, contracting through the use of a fixed price,competitive bidding strategy is still a way of life both inthe private and public sector. With these two points in3 mind, my research paper directs a great deal of attention tothe application of AIA contract requirements and AAA3 arbitration rules to fixed price, competitively The material covered within this paper by no means is* intended to exhaust the potential mechanisms or alternativesI3available today to regain control of the construction3 contracting process through disputes resolution at theproject level.

8 However, it provides the reader with a solidi understanding of the problems and possible solutions to helpcure the disputes ailing or nations' construction 4 UII3 -WOCONSTRUCTION CONTRACT RISK3 2 .1 INTRODUTIQONC ontracting for construction services is an inherentlyrisky venture for the owner, design agent and All of these parties are exposed to unanticipated risks,exposure to economic loss and unforeseen contract liabilitywhile performing under the contract (15). Riskresponsibility plays an important role in the development ofI contract disputes that arise during the construction* the risk of doing business can not be1 eliminated, proper risk management can lead to a smootheroperation and ultimately reduce the total cost of theI project for the owner, designer and contractor alike (15).3 Likewise, improper risk allocation can result in increasedbid contingencies, higher projects costs, poor working3 relationships, a higher probability of disputes and theincreased risk of judicial intervention between theI parties (15).

9 This chapter concentrates on the development,allocation and management of risk as it effects theconstruction ESTABLISHING CO1 NTRACT RISKThe owner's primary objective when planningconstruction is to obtain a complete and usable facility ina timely manner. Understanding risk allocation and properlyapplying responsible risk management techniques to theproject documents will help ensure the completed structureconforms to the quality and timeliness standards as definedby the contract documents at a reasonable price (16).Improper risk allocation in turn increases the potential forclaims, disputes and the need for litigation. Unrealistici expectations and performance demands placed on a contractorunder a competitively bid, "bargain basement" price sets theI stage for conflict from the onset of the The owner selects the contracting method used toundertake the construction project. Whether the contract is3 competitively bid, negotiated, fixed price, cost-plus-a-feeor guaranteed maximum price will play an important role ini the contractual relationships that develop between thei contracting parties (6).

10 However, nearly all publiclyfunded and many privately funded construction projects are3 awarded as competitively bid, fixed price contracts. Thissystem of contract award has been, and possibly will remain,i the primary method of obtaining construction contractorservices for some time to come (16). It is also possiblythe riskiest type of contract to undertake for theI contracting parties. Delivery of a facility based on abottom line figure has an extremely high potential forI*Ifailure. Costs are sure to escalate due to changes forwhich, in some cases, neither the owner nor the contractorwant to assume the risk responsibility for. DisagreementsI and disputes tend to be pervasive under the risk ofunarticipated cost overruns and liability exposure allowingIawsuits to permeate this high stakes The advantage of the fixed price contract method ofaward is that it provides the owner with a reasonableI guarantee of the total project cost at the time of bidopening.