Resolving Construction Disputes: Review of State DOT Processes (2024)
Chapter: I. INTRODUCTION
RESOLVING CONSTRUCTION DISPUTES: REVIEW OF STATE DOT PROCESSES
Michael C. Loulakis, Capital Project Strategies, LLC, Reston, VA
I. INTRODUCTION
Commercial disputes among owners, contractors, and subcontractors on construction projects are a fact of life, regardless of how hard parties might try to avoid them. Sometimes these disputes get resolved quickly at the project level, where project teams meet, listen to each other’s perspectives, and come to a mutual agreement, all while maintaining a professional, cordial relationship. The other end of the spectrum is resolving the dispute through litigation, which is neither simple nor fast and typically quite acrimonious. In reality, few parties go through litigation and leave with a positive feeling about their counterparts. To make matters worse, the results of litigation are often unsatisfactory to all parties, particularly when one factors in legal fees, expert fees, and the time spent by project personnel – who would much rather be part of a team building a project than part of a team building a case for a trial.
The construction industry as a whole has been searching for decades for better ways to resolve contractor disputes and avoid litigation. As a result, it is common to find alternative dispute resolution (ADR) processes in construction contracts. Some ADR processes are intended to help facilitate settlement discussions between the parties, such as requiring negotiations at the project and senior management level and the use of a third-party mediator if internal negotiations are unsuccessful. For disputes that remain unresolved, it is also common to find arbitration specified in construction contracts as the means to reach a final, binding resolution of such disputes instead of litigation.
In terms of nonbinding ADR processes, most state departments of transportation (DOTs) embrace the use of issue resolution ladders, partnering, and mediation to resolve disputes with their construction contractors. In fact, DOTs are responsible for having introduced one of the most unique and innovative ADR processes—dispute review boards (DRBs)—to the construction industry as a whole. DRBs are comprised of neutral, experienced third parties (either one or three member boards) who provide nonbinding recommendations to the leadership of DOTs and contractors for project-specific disputes. DRBs were first used in the United States in the late 1970s in response to the challenges of dealing with disputes on transportation tunneling projects. Since that time, they have come to be used throughout the transportation industry, and particularly on DOT road and bridge projects.
While DOTs widely use ADR processes to help settle construction disputes, only a few use arbitration or other ADR processes as the means for reaching a final, binding resolution of those disputes. Most DOTs require contractors who are dissatisfied with the results of their administrative and/or nonbinding ADR processes to either sue in the state’s general jurisdiction court or pursue remedies before the state’s administrative agencies. While some DOTs are required by statute or policy to use binding arbitration, these statutes or policies limit arbitration to relatively small dollar value claims, unless the parties agree otherwise. As a practical matter, this means that the contractor’s remedy is litigation.
A. Purpose and Overview of this Digest
This digest is driven by the need to better understand what DOTs are doing in terms of ADR processes. As evident by the title, the digest’s primary objective is to provide a review of the practices DOTs use for their construction disputes and to give DOT and industry feedback on these practices. While the digest will discuss the general attributes of all ADR processes used by DOTs, it will devote substantial attention to the arbitration process, including its differences with litigation, examples of arbitration awards, and cases where arbitration awards have been challenged.
The data for this digest is primarily based on a “cold eyes” review of the statutes and regulations governing each state DOT’s dispute resolution processes, as well as by the practices they incorporated into their standard specifications and other published literature.1 This review of the published literature was supplemented by feedback from many of the country’s DOTs and industry professionals through surveys and telephone calls, which feedback sought, among other things, opinions about the use and effectiveness of DOTs’ dispute resolution processes.2
The following is an overview of the remaining contents of this digest:
- Chapter II: Overview of Nonbinding Dispute Resolution Processes. This chapter provides an overview of the nonbinding ADR processes that DOTs are using to resolve construction disputes. These processes include some which occur at the project level, such as issue resolution ladders, as well as those that use independent third parties, such as DRBs and mediation.
- Chapter III: Overview of Arbitration and Other Binding Dispute Resolution Processes. This chapter focuses on the general attributes of the two major binding dispute reso-
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1 In this context, a “cold eyes review” means that the researcher based his thoughts and opinions on what the language of a statute, specification, or other document seems to say and mean, as opposed to how it may have been intended, used, or interpreted by others.
2 As will be discussed later in this digest, a total of 28 DOTs and 38 private sector individuals either responded to the surveys or provided telephone interviews.
- Chapter IV: State-By-State Review of Dispute Resolution Processes. This chapter provides a comprehensive review of the specific dispute resolution processes used by each DOT, focusing on what happens after the DOT has issued its final administrative decision on the dispute.
- Chapter V: Arbitration Processes Used by DOTs. This chapter reviews the specific arbitration authority and processes for those DOTs that use arbitration.
- Chapter VI: Overview of the AAA and Uniform Arbitration Act Arbitration Processes. This chapter generally discusses the procedural aspects of the American Arbitration Association (AAA) Construction Industry Arbitration Rules and Uniform Arbitration Act, which set forth the typical processes used by the DOTs that have arbitration authority. While some of these processes are also discussed in Chapter III, this overview explains the details of how an arbitration usually works.
- Chapter VII: Perspectives from DOTs and Industry on Dispute Resolution. This chapter explains the surveys conducted for this digest and provides the DOT and industry feedback gathered through them. While there are some general statistics about the results, the value in this chapter comes from the comments provided by survey respondents about their views on a given subject, which comments are quoted extensively. The comments help explain the reality of how DOTs and the industry view the effectiveness of various ADR processes.
- Chapter VIII: Perspectives Based on Caselaw and Arbitration Awards. This chapter provides a review of some of the published court decisions involving disputes between DOTs and contractors that involve arbitration awards as well as several published arbitration awards. It reinforces the idea that while arbitrations are expected to be “final and binding,” there are ways for a party to successfully contest awards.
- Chapter IX: Dispute Resolution on Large Design-Build and P3 Projects. Large, complex design-build and P3 projects often have contracts that vary from the normal contracting approach taken by DOTs. This chapter briefly addresses some of the dispute resolution experiences on those projects.
- Chapter X: Practical Advice and Conclusion. This chapter provides closing thoughts on the DOT dispute resolution processes, including practical advice on what DOTs might consider doing to determine if their processes are meeting the needs of the DOT and industry.
lution processes—arbitration and litigation—as well as the primary differences between them. This chapter also discusses other binding dispute resolution processes used by some of the DOTs.
As will be discussed at several points in this digest, readers should remember that the disputes process within a state DOT has many nuances and subtleties. Some DOTs have published literature that provides very clear dispute resolution processes, while others have published literature that is somewhat opaque or ambiguous. The surveys and interviews conducted as part of this digest helped explain some things that were not readily ascertainable from the “cold eyes review.” However, it is quite possible that what is being reported herein is not fully accurate. Stated differently, while the written words of a specification or manual may say or suggest a specific approach, the actual practice may be quite different.
Similarly, for a variety of reasons (but often because DOTs and their contractors are reliant upon each other and have good relationships), it is common for disputes to be resolved outside of the “normal” processes. This digest did not attempt to assess these practices—e.g., how formal/informal a meeting with the DOT’s commissioner actually is in practice and whether there is flexibility to consider claims that have not been previously raised. It is incumbent upon a contractor doing business with a DOT to understand what it takes to be successful with that DOT, which includes figuring out these nuances and subtleties.
B. Key Takeaways from the Research
This digest contains a substantial amount of material that requires careful reading to capture a full understanding of the content. That said, there are a few key takeaways that we will highlight here.
In terms of nonbinding ADR processes, the two most significant ones to consider are DRBs and mediation.
- DRBs of some sort are specified by 15 DOTs, although there are a variety of ways that DOTs are implementing the DRB process—from one-person DRBs to ad hoc DRBs only convened when there is a dispute.
- Mediation is specified by 18 DOTs, and all but three of them require that the mediation be mutually agreed upon before it can be used, as opposed to making it mandatory if requested by a party.
Regardless of what is in the DOT’s published literature, it is clear that the usage of both DRBs and mediation is far more extensive than what is portrayed earlier. The digest will cite several examples of DRBs being used on “one-off” projects by DOTs that do not mention the process in their published literature. As for mediation, it is clear that this is a typical way that construction disputes are resolved once formal arbitration or litigation has started, regardless of whether the process is specifically called out as an ADR option in the DOT’s specifications. Importantly, the survey feedback from both DOTs and industry was that mediation was by far the most effective way to resolve a construction dispute.
In terms of binding dispute processes on their construction projects, only 16 DOTs are required to, or have chosen to, use arbitration. The requirement to use arbitration is typically based on a state statute that specifically calls for construction disputes with the DOT or any state public agency to be submitted to arbitration. However, of those DOTs that are required to arbitrate, only three (California, Connecticut, and North Dakota) are required to use arbitration regardless of the monetary value of the dispute. As noted earlier, of the pool of DOTs that use arbitration, most have major restrictions on the value of the
