Chapter XI Alternative Dispute Resolution
A. Introduction
Alternative dispute resolution ("ADR") is a dispute resolution process that is used to resolve a dispute between two or more parties. The construction industry has long led the development of alternative dispute resolution. ADR generally does not involve formal dispute resolution, i.e., litigating through the courts, and can take its shape in many different forms.1 The informality of ADR was initially designed to allow the process to generally be more flexible and cheaper, and for parties often reach a resolution more quickly. However, as the more complex matters have turned to arbitration and as legal counsel have embraced arbitration, cost for a single arbitrator or a panel of arbitrator, and agreements for discovery to be conducted, including depositions, it may not be cheaper. It may be worth the cost of not needing to educate the finders of fact.
B. Contracting to Arbitrate
Most industry standard contracts contain provisions calling for arbitration in lieu of traditional litigation. ConsensusDocs, AIA, and EJCDC standard-form contracts all contain arbitration provisions. Further, these standard-form contracts usually contain provisions either requiring or making mediation available for the parties to resolve their disputes prior to arbitration. Thus, since alternative dispute resolution has become common in the construction industry, many private contracts also contain mediation and arbitration provisions. The common reasons for choosing ADR, including cost savings and the informal nature, are well known. Before ADR is initiated, however, it is important to know the law which governs the process.
1. Enforcing Arbitration Clauses
Although a party has signed a contract expressly agreeing to arbitrate disputes that arise from their contractual relationship, they may still seek to avoid arbitration, often because of a perceived unfairness. South Carolina policy favors the arbitration of disputes.2 Any disputes involving the arbitration provision of a contract should be resolved in favor of arbitration.3 Faced with a party refusing to arbitrate, South Carolina courts summarily determine whether a valid agreement to arbitrate exists.4 When examining a motion to compel, a court should only deny the motion "where the clause is not susceptible to any interpretation which would cover the asserted dispute."5
2. Waiver
The above should not suggest that the right to enforce an arbitration agreement cannot be waived.6 When one party seeks to compel arbitration after traditional litigation has been initiated, a party asserting waiver must show prejudice through an undue burden caused by the delay in demanding arbitration.7Whether a party has waived their right to arbitrate depends on the facts of each case.8
To have a better understanding of what triggers waiver, consider the following examples. The court in General Equipment & Supply Co. v. Keller Rigger & Construction, SC Inc. ,9 held that waiver did not occur despite arbitration being demanded after nearly eight months had passed since litigation was initiated. Only routine administrative matters and limited discovery had taken place, which did not prejudice the party opposing arbitration.
The opposite holding occurred in Evans v. Accent Manufactured Homes, Inc.10 In Evans, the defendant sought to compel arbitration nearly two years after the complaint had been filed.11 The time between the filing of the complaint and the motion, is not what bothered the court; what bothered the court was the depth of discovery that had taken place.12 Not only had depositions been taken, but also extensive interrogatories had been answered.13
Additionally, the defendant took the plaintiff's deposition while its motion to compel arbitration was pending.14 Thus, the court found that the plaintiff had been prejudiced by the defendant's delay in seeking to compel arbitration under the agreement.15 However, if this case were decided today with an agreement providing for discovery, as many now due, it is most likely that the court would reach a different result.
The lesson learned from these cases is that waiver is not generally judged by the amount of time that lapses from the filing of the complaint until the motion to compel arbitration is made. South Carolina courts generally look at how deep the parties are in the litigation, which illuminates the monetary impact that would be imposed on the parties by having to essentially start over in arbitration. Two important factors influence monetary impact: (1) how much discovery has taken place; and (2) the extent of the court's involvement. The courts use discovery as the barometer because, as discussed more fully below, arbitration historically has not provided all of opportunities for discovery found in litigation.16 Thus, parties would have unnecessarily spent money conducting discovery. The same thoughts pervade looking at the court's involvement, because motion practice is also costly.17 As is discussed later in this chapter, discovery in arbitration is changing, especially in Construction, where more and more construction matters are resolved using the American Arbitration Association Construction Industry Rules and Mediation Procedure, Including Procedures for Large, Complex Construction Disputes.18
C. Mediation
1. In General
Mediation allows the parties to come together in an attempt to amicably resolve the dispute either before initiating arbitration or litigation or prior to commencement of the trial or an arbitration hearing. The mediator does not render a decision regarding the parties' case, rather, the mediator facilitates conversation between the parties and helps guide them to an amicable solution.
Many form contracts require the parties to attempt to reach settlement through mediation as a condition precedent to initiating arbitration or litigation. The ConsensusDocs 200 requires a three-step process to resolving disputes. The parties must first have direct talks before they can graduate to mediation; it is only after these two conditions have been satisfied can the parties initiate arbitration. Likewise, the AIA A201 General Conditions make mediation a condition precedent to initiating binding arbitration. Furthermore, the AAA provides mediation services for those interested parties who have filed for arbitration without any additional costs. Parties only need to check the box at the top of the form demand for arbitration requesting mediation.
Mediation is a cost-effective way to resolve a dispute. Because mediation is not an evidentiary hearing, preparation of witnesses, exhibit notebooks and other costly preparations are not necessary. However, for an effective mediation, both sides should know their case and related law. Additionally, both parties must enter mediation with a desire to resolve the dispute, or at the very least, have an open mind that will enable them to assess the strengths and weaknesses of the opposing party's case as well as their own. In South Carolina mediation is mandated before litigation. As state above, many contracts require mediation before arbitration or litigation. In those situations, the facts surrounding the parties' respective claims may not be fully developed. This is especially true in large construction disputes or situations where both parties have legitimate claims and defenses. In these situations, the mediation may take several sessions. It is not uncommon to begin a mediation, only to realize that it is premature and that additional discovery or development of the issues or facts are necessary for the parties to be able to intelligently discuss resolution. In those situations, the parties may meet more than once during the course of litigation or in the time leading up to an arbitration hearing. Once each party has had the opportunity to understand the nature of the dispute and the facts concerning the project itself, mediation is a more effective tool for resolving the dispute.
2. Enforcing a Mediated Settlement
Mediation is not binding. But it would seem that it should be safe to assume that a settlement reached during mediation would be binding and enforceable. This may not necessarily be true. In Galloway v. Regis Corp., the parties reached a settlement agreement during mediation discussions.19 The parties together informed the clerk of court that a settlement had been reached, and a form order dismissing the case was entered.20 Thereafter, the defendant refused to remit payment because the plaintiff could not produce tax returns that would sustain the amount of damages agreed to by the parties.21 The plaintiff did not believe this was a condition precedent to payment.22 Unhappy with the unfolding events, the plaintiff sought court intervention.23 The trial found an enforceable agreement and ordered the defendant to perform the agreement.24 The Court of Appeals reversed, finding that the settlement could not be enforced because it had not been reduced to writing and entered into the record.25 Without a consent order or other written documents showing the terms of the agreement, it could not be enforced.26
The viability of Galloway may be questionable. The South Carolina Supreme Court noted that the Galloway court relied on dicta to find that no enforceable settlement agreement existed.27 Nevertheless, care should be taken during a mediation session to have any settlement reduced to writing, along with the essential terms. Taking this step is better than losing a settlement opportunity. Settlements reached in court-ordered mediation are required to be reduced to writing during the mediation to guard against one party reneging on the deal.28
D. Arbitration Under South Carolina Law
An agreement to arbitrate can be crafted to fit the parties' desires, so long as it does not violate public policy, a statute, or the Constitution.29 South Carolina has adopted the Uniform Arbitration Act ("Arbitration Act"),30...
