Does Your Contract Help You Control Dispute Resolution Costs?
By Robert K. Cox and Jay Brudz of Williams Mullen – Guest Contributors
In the world of construction projects, disputes happen. Yet, given that reality, why do so many project contracts, subcontracts and purchase orders fail to include terms to better control the costs of dispute resolution procedures? In this short article, we will share with you a few of our ideas for controlling dispute resolution costs, whether you are a project owner, contractor, trade contractor or supplier.
Limits on the Costs of Arbitration
Arbitration is by agreement. Consequently, contracting parties can include terms in their contracts that limit the arbitration hearing and thus the costs of the process.
When drafting your contract, consider adding terms to the arbitration clause limiting the number of witnesses and hearing days. For example, for claims arising from contracts, subcontracts or purchase orders where the contract sum (exclusive of change orders) is $500,000 or less, agree to no discovery except a mandatory exchange of documents, limit the witnesses to no more than two witnesses per party and limit the number of hearing days to two consecutive days. For contracts, subcontracts and purchase orders where the contract sum is more than $500,000 and less than $1,500,000, agree to the mandatory exchange of documents, allow three witnesses per party, including experts and deposition of experts only, not to exceed 8 hours per deposition. The hearing would be agreed not to exceed three days. For contracts, subcontracts and purchase orders where the contract sum is in excess of $1,500,000, agree to mandatory exchange of documents, four witnesses per party, including experts and depositions of experts only, not to exceed 8 hours per deposition. The hearing would be limited to five days. These limits can be changed, of course, but the guiding principle should be to include terms to control the costs of the arbitration.
After your arbitration process has started, if you are under the American Arbitration Association’s Construction Industry Arbitration Rules, do not forget to invoke Rule 24. Under this Rule, the arbitrator may direct the production of documents and the identification of witnesses, but there is to be no other discovery except in exceptional circumstances.
Define Prevailing Party Recovery
How often have you read a contract that includes terms for recovery of “reasonable attorney’s fees and costs” by the “prevailing party”? Such terms can be unintentionally limiting and not achieve the cost control (in this case, recovery) anticipated.
First, why limit the prevailing party’s recovery to “reasonable attorney’s fees and costs”? A court could define “costs” to include only the costs included under a statute such as 28 U.S.C. § 1920, e.g. clerk and marshal fees, fees for transcripts obtained for use in the case, and costs for copies obtained for use in the case. Such costs could be but a small fraction of your litigation “costs”. Consider expanding the word “costs” to include expert and consultant fees and costs, deposition transcript costs and reporter fees, mediator or arbitrator fees, paralegal fees, investigative costs, document copying costs, filing fees, e-discovery costs and other such costs typically incurred in litigation or arbitration.
Second, consider defining “prevailing party” in your contract or purchase order. In most jurisdictions, “prevailing party” is not only a subjective phrase, but also one subject to the court’s or arbitrator’s determination whether there even was a “prevailing party”. Remember, there are three possible outcomes when you let the court or arbitrator deal with a “prevailing party” question: 1) you prevailed, 2) your opponent prevailed, or 3) no one prevailed.
You should consider defining “prevailing party” in your contract, perhaps tied to settlement offers. One example would be:
Prevailing party means that party, plaintiff or defendant who substantially prevails against the other party. If however, a written offer of compromise made by either party is not accepted by the other party within 21 days after receipt, and the party not accepting fails to obtain a more favorable judgment, the non-accepting party shall not recover prevailing party’s fees and costs (even if it is the prevailing party) and shall pay the costs of suit, reasonable attorneys’ fees and costs incurred by the offering party.
The point is to think about defining “prevailing party” at the outset, rather than having a court or arbitrator define the phrase after the fees and costs are incurred.
Electronic Documentation and Discovery Controls
Electronic discovery is one of the most disruptive and expensive aspects of dispute resolution. While discovery rules may or may not give one party an advantage over the other party after a dispute has arisen, at the time of contracting both parties are probably motivated to prospectively limit their electronic discovery liability, whether in litigation or arbitration. By limiting discovery up front, the parties can tame the largest category of dispute resolution expense.
Key terms to include in your contracts would include:
Specifying when the duty to preserve documents attaches;
Limiting the number of employees whose email would be required to be reviewed and produced;
Defining the number of server based systems that would be discoverable;
Limiting spoliation sanctions to only those situations involving actual knowledge and bad faith; and
Agreeing to cooperate to the extent practicable on issues of electronic discovery.
(A broader discussion of these terms including model language is available here: Jay Brudz & Jonathan M. Redgrave, Using Contract Terms to Get Ahead of Prospective eDiscovery Costs and Burdens in Commercial Litigation, XVIII RICH. J. L. &TECH. 13, http://jolt.richmond.edu/v18i4/article13.pdf)
The process of dispute resolution can be expensive. Put controls in your contracts to reduce that expense.
About the Authors
Williams Mullen is an AMLaw200 full service law firm. Bob Cox is the Chair of the Construction Practice Group, Jay Brudz co-Chairs the eDiscovery and Information Governance Section. Visit www.williamsmullen.com for more.
Articles published in The Expert Report are the opinions of the authors and do not necessarily represent or reflect the policies or opinions of The Rhodes Group. The Expert Report may not be reproduced in whole or in part without the permission of the publisher.