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© 2019 by Jerome F. Rock

Case Study 2

Quick Overview
  • Case initially filed as Demand for Arbitration with AAA

  • Parties agreed to Med-Arb Process to resolve multiple disputes, remaining issues to be Arbitrated

  • Mediator, as Standing Neutral, held funds in Escrow and disbursed according to Settlement Agreement

  • Parties used Jointly Retained Neutral Technical Experts

Background on the Case:  Contractor filed a Demand for Arbitration against the building Owner for non- payment, the Owner counter-claimed with allegations of multiple construction defects and breach of warranty.  The parties agreed to Mediation with the encouragement of the AAA Case Manager (When matters are initially filed in Arbitration, Case Managers will inquire if the parties desire to initially participate in Mediation, holding the Arbitration process in abeyance, and the parties select the Neutral as Mediator.  Rule M-2, Invitation to Mediation of the Construction Industry Arbitration Rules and Mediation Procedures, eff. 7/1/15).  

 

Mediator Leadership:  At the initial Management Conference, the parties invited the Mediator for a site visit, and separate meetings were scheduled with each side at the project site.  The Mediator sensed that many of the issues could be effectively resolved through Mediation, but there were two major defects that required additional investigation and might be difficult to resolve voluntarily.  At this first meeting, the Mediator explained the options for dealing with mediation and arbitration of issues and the parties enthusiastically proceeded with a Med-Arb process.  The Mediator also recognized the opportunity to suggest that Neutral Experts (one for standing seam metal roofing defects, and a geotechnical engineer to address the under slab flooding resulting from a defective underground fire suppression connection to a main water line) could provide much needed objectivity to the negotiations. 

Outcome:  The parties agreed to the terms of settlement at the conclusion of the Mediation Hearing.  The Mediator acted as Escrow Agent holding the settlement funds from both the owner and the contractor, and served as Arbitrator to verify the sufficiency of the corrective action specified in the Settlement Agreement, and disburse funds accordingly. 

Insight:  Although the under slab flooding was covered by a the fire suppression subcontractor’s insurance to remediate the direct flooding and clean up, the Owner was concerned about the erosion of the sub base below the concrete slabs that had been raised several inches and then resettled, as a result of the water pressure under the floor.  The Owner needed verification that there was no erosion of the sub base while the insurance adjuster considered the request excessive and demanded a full release before disbursing funds.  Neither would move.  The Mediator provided recommendations on candidate Geotechnical Experts, assisted with the development of the agreed upon scope of work, and the format for the report. The Mediator convinced the insurance adjuster, whose insured was not a party to the Arbitration, to fund ½ of the Geotechnical Expert investigation, with the balance shared by the parties.  When the concrete core borings and engineering analysis confirmed that the sub base was intact, the intractable position of the owner changed and the process continued. 

Contractor’s  Counsel:   David Russell, Foster Swift, Collins and Smith, Lansing, MI

Owner’s Counsel:  Scott Fraim, Henneke Fraim & Dawes, Flint, MI

Postscript:  The Mediation transitioning to Arbitration is fraught with ethical issues, for the Neutral and Counsel.  Full transparency, effective disclosure and informed consent and waiver are necessary foundations for successful Med-Arb.  have prepared a Med-Arb Agreement that provides the principals, counsel and the Neutral with a structure to manage the ethical, disclosure and consent issues, by establishing a series of “opt -In” and “opt-out” decision points as the matter transitions from facilitative mediation to binding arbitration with the same Neutral.