Constructing Better Outcomes: The Case for ADR Clauses in Construction Contracts

Construction projects involve significant financial commitments, complex contractual relationships, extensive project schedules and scopes, creating a breeding ground ripe for disputes. Owners, contractors, subcontractors, architects, and engineers routinely face disagreements involving payment, delays, design issues, change orders, defective work, scheduling impacts, and differing interpretations of contract documents. While litigation remains an available remedy, it can be expensive, time-consuming, an inefficient means to arrive at the desired outcome, and disruptive to ongoing projects. To mitigate some of the above-mentioned impacts, construction industry members should strongly consider including carefully drafted mediation and arbitration (also known as “alternative dispute resolution” or “ADR”) provisions in their contracts.

A well-written ADR clause can provide the parties with a calculated roadmap with checkpoints along the way for resolving conflicts before they escalate into what could become costly public courtroom battles. Mediation and arbitration offer distinct advantages and procedural gates that can preserve business relationships, reduce uncertainty, increase privacy of the dispute, and provide more efficient outcomes.

Mediation: Encouraging Early Settlement

Mediation is a voluntary process in which a neutral third party (commonly but not required to be an attorney) assists the parties in negotiating a mutually acceptable resolution. Unlike a judge or arbitrator, a mediator is not empowered to make any findings of fact, determinations of law, or ultimate decisions on the merits. Instead, the mediator helps identify the key strengths and weaknesses with both parties’ positions, evaluate potential solutions, and facilitate settlement discussions while the parties are likely in separate rooms. Mediator costs are typically shared between the participating parties.

For construction projects, mediation can be particularly valuable because disputes often arise while work is ongoing. A prolonged dispute often delays completion and/or payment, increases costs for all involved, and strains relationships between owners, contractors, subcontractors, and design professionals. Mediation can allow parties to address and resolve disputes in real-time while maintaining control over the outcome.

Mediation also provides confidentiality benefits. Discussions during mediation are generally private, allowing parties to explore settlement options without the same public exposure associated with Court proceedings. Because mediation can either be agreed to through contract or ordered by the Court if in active litigation, e.g., pursuant to MCR §§ 2.410-411, it can benefit the parties to engage in mediation prior to filing a lawsuit if there is any sense of collegiality remaining and the circumstances call for it.

Arbitration: An Alternative Route to Award

Meanwhile, arbitration is an escalated ADR process in which one or more neutral arbitrators (commonly but not required to be an attorney) see evidence, assess witness testimony, and issue an award regarding the given dispute. Depending on the contract language, arbitration can provide a faster and more specialized alternative to traditional litigation. The arbitrator’s award can be confirmed by a Court order and may only be vacated in rare instances of corruption, fraud, or other undue means.

Construction disputes frequently involve technical issues requiring specialized knowledge. Parties can select arbitrators with experience in construction law, project management or scheduling, engineering, architecture, or industry practices. Although arbitration carries its own costs through the arbitrator’s fee, expert witnesses, and potentially a court reporter, arbitration has less rigid scheduling requirements, allowing procedural issues to be agreed upon by the parties and providing more flexibility over traditional litigation. For businesses seeking more control over and predictability in the process, a properly drafted arbitration provision can establish clear procedures for resolving disputes, while avoiding some of the uncertainty and unnecessary costs associated with litigation.

Important Considerations When Drafting ADR Clauses

Mediation and arbitration clauses should only be included after careful consideration of important issues, including but not limited to:

• Whether mediation is required before arbitration or litigation;
• The governing rules of mediation/arbitration proceedings;
• The number and qualifications of the mediator(s)/arbitrator(s);
• The location of hearing and governing law;
• How costs and fees will be allocated; and
• Whether the arbitrator’s decision will be final and binding.

Conversely, a poorly drafted clause can create additional hurdles regarding the dispute resolution process itself, making clear and specific language essential.

For construction projects, dispute resolution provisions are not merely boilerplate contract language—they are valuable risk management tools. Properly drafted mediation and arbitration clauses can help owners, contractors, subcontractors, architects, and engineers resolve disputes more efficiently, protect ongoing business relationships, and reduce the financial and operational impact of construction disputes. Before signing a construction contract, parties should evaluate their dispute resolution options and work with experienced construction counsel to ensure the agreement reflects their goals and protects their interests. If you have any questions regarding a dispute, consult your attorney or anyone in Clark Hill’s Construction Practice Group.

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