Resolve Your Disputes Through Arbitration

We’re now ready to begin our look at the two building blocks for all of ADR, arbitration and then mediation. So, let’s start with a question. Have you ever been involved in an arbitration? Or more specifically, the question is have you ever signed an arbitration agreement? Think about that for a second. Answer yes or no.

If you answered no, that means that you have probably never purchased auto insurance. That means you’ve probably never used a credit card.

That means you’ve probably never used Ebay.

Never used Amazon never purchased anything on Amazon. Because if you’ve done any of these things, you have signed an arbitration agreement. In other words, arbitration is embedded in a lot of our everyday transactions. That’s the fine print that you and I never read when we sign up for a service. Here, for example, is the Amazon agreement that you agreed to if you use Amazon.

What is actually involved in an arbitration? I think the best way to look at that and analyze it is to look at a video of an arbitration. This is a 15 minute video. It’s going to be a little complicated at the beginning, so let me give you a very quick briefing. What we have here is a dispute between the owner of some real estate and a contractor. The owner hired a contractor to build a building. The problem is, after the construction started, the owner made some design changes, and as a result, the contractor is claiming an additional $55,000. Also there’s a subcontractor involved who did some plumbing.

Work are hired by the contractor who also had to make changes and this cost an additional $95, 000. So the owner has refused to pay and this matter is now in arbitration. As you look at the video please keep these questions in mind which I want to address after the video. First of all, if you were the arbitrator, how would you decide the case? Second, are there any surprises in the arbitration? Is this what you expected from an arbitration? Third, does the arbitrator have to be a lawyer? Fourth, do the parties or would you have to be represented by a lawyer in arbitration? And finally is litigation procedure followed in the arbitration?

So please think of those questions as you watch this video.

Didn’t you tell me that the arbitrator is a lawyer. » Mm-hm. » I’m concerned that he won’t be able to understand what I’m trying to say in there. And that could jeopardized the who arbitration. » Yeah, if what I understand is that you want to make sure that we have an arbitrator how is knowledgable about construction. » Yeah. » I agree. Mr. Harbin knows that he’s well qualified in that regard. He was educated and he worked as a construction engineer before he ever became a lawyer and his law practices been concentrated in construction. And he was an experienced arbitrator, so that’s why we put him number one on the list of potential arbitrators that the AAA gave us.

Well, as long as he understands construction, I feel comfortable.

Good morning, everyone, I’m Steve Van Lear, the American Arbitration Association’s Tribunal Administrator on this case. It’s nice to meet you all face to face after talking so many times on the telephone. You’ve all met David Halbran, the arbitrator, so at this point I’ll turn it over to him. Mr. Halbran. » Thanks very much, Steve. And a good morning to everybody. I understand that the subcontractor has a claim against the contractor and the contractor has a claim over against the owner. I’ve read each of the claims and the answers to them, so I’m generally familiar with where we’re all starting from. I also understand that the subcontractor has a contract with the contractor.

The contractor has a contract with the owner. And that each contract has it in an arbitration agreement. But that since all claims rise out of the same set of facts, that everybody’s agreed to arbitrate both claims together. So thanks for that, and we are ready to go. As you know, this is an informal proceeding. The formal rules of evidence do not apply, and the basic rule is just common sense. So you should stick to the point and the facts that count, so we get to the meat of it all quickly and we move along. And I know you’ll all do that.

Now, I understand the last that each of you has an opening statement that tells your view of the case, and that’ll be very helpful So Mrs. Crittenden for the subcontractor if you’ll start first to claim it. And then the contractor Mr. Madison and finally the owner. We’re ready, please proceed. » Thank you Mr. Halbrin, as you know I represent Mead Mechanical, the plumbing subcontractor in connection with this project. Mead Mechanical had a contract with the general contractor to install all of the plumbing fixtures in the building.

We received a work schedule from the general contractor and were well underway in performing under the contract, when we received a stop work notice from the owner as a result of design changes proposed by the owner. At that point we got our crews off the project, got them into other jobs and waited for the design changes to be delivered. Once we received those, it was apparent that we had to go back in and re-do a lot of the work that had already been done. The cost of this additional work totaled approximately $95 thousand.

Never the less, we went back in, we got the work done in accordance with the new plans and on time and submitted our bill to the general contractor. From that point forward, we have received nothing but delays. We have not been paid. Apparently, the owner is taking the position that he is not responsible for these charges. Because none of the work would have had to have been redone if the original work schedule had been complied with. For his part, the general contractor tells us that he had the right to vary that work schedule and in fact, had the right to be ahead of schedule if that was necessary.

And they also discussed all of this with the owner before the design modifications were actually implemented. We don’t really know or care whose position is correct. We simply want to be paid for the work which we have already done. And that is why we have initiated these proceedings. » Thank you, Ms. Crittendon. » Mr. Madison, will you please call your first witness? Yes. As our first witness I’d like to call my client Mike Lunden of Lunden construction. » Mister Lunden please raise your right hand do you solemnly swear to tell the whole truth and nothing but the truth. Yes I do. » Thank you. Mr. Madison, please proceed. » Mr.

London, would you please explain to the arbitrator the substance of your agreement with the owner, Mr. Baker? » Yes. It was not a complicated project. I agreed to build Mr. Baker’s building for him, it was an office building, for a lump sum price. My price was based on the plans and specifications that he furnished us prior to bid. » Did you begin to work? » Well yes. We were given the notice to proceed and we started on the project right away with the foundations. Our subcontractor, Mead Mechanical, was also doing some of their preliminary work, and their pipe chases which are in the foundation. » How did the work progress?

Well, we were well into the subcontract and submittal phase. And we were in good shape with respect to our schedule. » Did any delay occur in the work? » Well we gave the owner our schedule and we’re beating the milestones on that schedule, when Mr Baker called us on the telephone and told us to stop work because he was redesigning some of the work. » Mike, this is Bill Baker calling. I wanted to let you know that I decided to make some structural changes on our building, and we’ll need to stop work for a while until we get it straightened out.

Bill, you know that we’ve started on the foundations and the mechanical subcontractor has got some completed work out there as well. I think based on our job walk last week, Mead has about 35% of their rough in done, and we’re forming and pouring the first half of the grade beams. Anyway I know that if any of your changed work affects the work already completed it’s going to mean some extra costs, and it’s going to have to be from your account. » Well, Mike, the changes really shouldn’t affect the work in place if this was done as the schedule shows. But in any event, if there’s a problem, you let me know what the cost will be.

I will, but I’m concerned that if the redesign takes any length of time at all it’s going to mean a delay and extra cost. I’ve scheduled some heavy mechanical equipment to be delivered and my labor agreements are coming up in June. » Well, I really don’t think that we’ll be held up too long. But in any event, you let me know, okay? » Okay, I will. It was almost four months with Mr. Baker that we received the revised drawings and structural changes.

Course we took the revised drawings and forwarded them to our sub contractor Mead Mechanical, but the structural changes required a substantial amount of the plumbing and mechanical work which had already been done to be ripped out and redone. For instance it required changes in the locations of the blockouts, grade beams and so forth. It was almost six months since the owner told us to stop work that he ordered us to resume work. In addition to our subcontractor’s claim, we incurred extra costs in the area of extra supervision and coordination of the work.

Well, would you please tell the arbitrator the costs that you incurred as a result of the six month delay and the changes that were made in the work? » I have prepared a record of our labor and material costs. It itemizes and breaks down our extra costs in the area of extra supervision, remobilization and escalation. Not including Mead Mechanicals claim, our claim and extra costs amounts to $55,000. » Mr. Halbrin, as the contractors next exhibit I’d like to submit this summary of the costs that were incurred in connection with the delay and changed work. I’ve already given a copy to Mr. Hogan the owner’s lawyer.

And I would simply like to note that this is only a record of claim cost and has no bearing on my client’s liability. » Well, I appreciate that. I’m sure we all do. And of course, you can cross examine to the extent you want with respect to the costs. Now, Mr. Matteson, do you have any more questions? » I have no more questions of this witness. » Fine. Mr. Hogan, please proceed with cross examination. » Mr. London, after you had begun work on this project, you were aware were you not, that structural redesign was being considered by the owner. » Well I seem to recall hearing something like that, but never anything from Mr. Baker.

Well, regardless of the source of these rumors, you were aware that redesign was being considered, correct? » Well as I said, I heard rumors, but it was a long time after I first heard them that Mr. Baker said anything to me. In fact, I’m sure it was not Mr. Baker who first told me about the structural redesign. » Wouldn’t it have been easy for you, sir, to call Mr. Baker and find out whether or not the rumors were true. » I suppose so. » Don’t you think that you as a prudent general contractor had a responsibility to call the owner and find out whether redesign was being considered.

Well, I am a prudent general contractor, but I’m not an architect or an engineer. I simply build a project according to the plans and the specifications that the owner gives us, and it’s up to him to make any changes that he wants to. » The work schedule that you have in front of you sir, that is the one that you prepared and submitted to the owner in connection with this project, correct? » Yes, it is. » And this is the schedule that was submitted pursuant to the agreement between you and the owner for the construction of this office building, correct? » Well, that’s what you say, but as far as I’m concerned, we were ahead of schedule.

You knew did you not, sir, that the owner was concerned about the schedule and the time when the project would be completed. » Well, I knew that he wanted the building completed on time, so he could start leasing the space and turning a profit. » Isn’t it true sir that if this schedule had been followed, none of the work done by Mead Mechanical would’ve had to be redone? » Yes. » Thank you sir, I have nothing further. » Mr. Madison, do you have any further witnesses to put on for the contractor? » No, Mr. Halbrin,, that’s all we have at this time. » Thank you, and Mr. Hogan, are you ready to proceed? » Yes.

Then please put on your first witness and put on the owner’s case. » Mr. Baker, please tell us about the reasons for the structural redesign work. » Well, the construction had barely gotten underway I had a conversation with my architect who suggested some changes to the front entrance of the building which would have involved relocation of the public lounge areas. I liked the idea, it would have improved the attractiveness of the building, so I told him to work up a design. When he did, I liked it and I decided to proceed. I immediately called the contractor to let him know what was in the works. Hello, Mike, this is Bill Baker calling.

We’ve decided that we’re going to change the front entrance to our building, which may require moving the public lounge areas. Looks like you’ll have to hold up any further work till we decide exactly what we’re going to do. » Well Bill, when we were out at the job last Friday, you saw that we had the foundations and some of the mechanical in place. I think that’s ahead of my schedule that I gave to you. You’re going to start moving things around at this point, you know there’s going to be some extra costs and I’ll have to submit them to you. » Well, I can see what you’re saying. But as I read the work schedule, which of course you submitted.

The work that you completed so far, in accordance with the schedule, shouldn’t have to be changed and there really shouldn’t be any extras. » Well, Bill, I’ll have to take a look at it, and I’ll let you know as soon as I can. » Well okay, Mike, you check it and if you think there are going to be any extras, you let me know right away, because it may change the way I go on this. » I’ll take a look at it, Bill. All right. » Did you ever authorize any extra work? » Absolutely not. » I have nothing further, Mr. Halbrin. » Thank you Mr. Hogan, Mr. Madison would you like to cross exam? » Yes, thank you Mr.

Halbrin. Mr. Baker, you understood in connection with this contract, that you had the responsibility to notify the contractor if you were going to make any changes in the work or stop the work, isn’t that correct? » Yes, I understood that. » And you understood, did you not, that the contractor had the responsibility for coordinating the work on the project » Well I knew he was in charge of construction. » You expected the contractor, did you not, to organize the work, to finish the job as quickly as possible? » Well I don’t know that, all I know is that I approved the schedule which he submitted. » Wasn’t it important to you to have the work done on time? » Yes.

Indeed, wouldn’t you have benefited if this building had been finished ahead of time? » Well, certainly not the way it turned out. » There was nothing in the contract to preclude the contractor from finishing ahead of time, was there? » No, not that I know of. » That’s all that I have. Thank you Mr. Madison. » And this witness concludes the testimony on behalf of the owner. » Thank you Mr. Hogan, I understand that each of you has now put in all of the evidence orally and in writing that you want to put in, and that each of you rests.

And accordingly, we’ll take a break for a few minutes and then after the break you can all come back and each of you can give opposing arguments. » Mr. Halbrun, we believe the evidence in these proceedings demonstrates the following. At the early stages of this construction project, the owner began to consider structural redesign. Indeed, this was while foundation work was just beginning. This fact was known to the general contractor. Pursuant to the agreement between the owner and the general contractor, a construction schedule was prepared by the contractor and approved by the owner.

Had this schedule been followed, the structural redesign would have had no impact whatsoever on this project. That is, none of Mead Mechanical’s work would have had to be redone.

During the discussion between the owner and the general contractor concerning the job shutdown while this redesign work was finalized, the owners requested the general contractor to advise if any extra costs would be incurred.

The general contractor never advised the owner of any extra costs, and indeed, none were ever authorized. Since the contractor did not advise of any extra costs, any extra work done by Mead Mechanical, or the general contractor, should be for the general contractor’s account. The owner should not be liable for any extra work done by either Mead Mechanical or the general contractor. Thank you, sir. » Mr. Halbrun, you’ve heard Mike London testify that he and the mechanical subcontractor had started work and were proceeding in accordance with the contract documents when Mr. Baker stopped the project. Unfortunately, the stop work order came so late that it impacted work already in place and was impossible to avoid extra costs.

Yes, the contractor was ahead of schedule, but time was of the essence. And it’s a central feature of a lump sum contract that the contractor have the freedom to reorganize the work as necessary in order to achieve maximum cost savings. This is what gives the contractor the incentive to give the owner the lowest possible bid in the first place. Mr. Baker’s position is totally without merit. He gave clear oral instructions to stop the work. He expected those instructions to be complied with. On previous occasions when he had made oral changes, those were paid for. He had an obligation to notify the contractor of changes in the work in a timely fashion.

He was at the job on a regular basis and could see the progress of the work. And Mr. London told him that extra costs would be involved in the changes in the work and the delays. Mr. London has correctly interpreted his obligations under the contract and both he and the mechanical contractor should be paid for the extra costs incurred. » Okay, you’ve made your positions very clear, all of you, and I’m very grateful for that, I think I have them well in mind. I’ve taken a lot of notes here, as you’ve all seen. I’d like a chance to review them and, of course, I want to think about it.

But as to the time of the award, the AAA rules do require that an award be issued within 30 days and it will be. And I’ll try hard to do it before then. So the hearing is now closed and thank you all very much.

So that concludes our look at an arbitration. And in the next segment we’re going to explore the questions that I raised earlier, along with some additional questions.