Alternative Dispute Resolution (“ADR”) is defined as any means of settling disputes outside of the courtroom. ADR typically includes project neutral evaluation, negotiation, mediation, and arbitration.
While the two most common forms of ADR are arbitration and mediation, negotiation is almost always attempted first to resolve a dispute. It is the traditional mode of dispute resolution. Negotiation allows the parties to meet in order to settle a dispute. The main advantage of this form of dispute settlement is that it allows the parties themselves to control the process and the solution.
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This article will focus on “Global Settlement” as a underused form of ADR that is misunderstood and usually not used properly. I have been involved in a number of global settlement negotiations and the successful ones all had one thing in common; A well thought out settlement objective and negotiation strategy, and a defined global settlement process/procedure. Below are the key ingredients of a successful global settlement negotiation.
What is a Global Settlement?
A global settlement is when all outstanding issues of a contract are settled and agreed upon in a comprehensive change. The global settlement discussion is usually escalated to a higher-level negotiation between owner senior management officials and the principal company officers of the contractor.
Why consider Global Settlement?
The global settlement opportunity may be the last alternative to litigation. The global settlement process provides both parties the opportunity to view the outstanding issues of a contract in an informal dispute resolution forum. Because of this, the strengths and weaknesses of each issue can be viewed in relation to the “big picture” of the entire contract and a settlement can hopefully be reached. There are many factors to consider when deciding if a global settlement is appropriate. The most common factors that would indicate the need for a global settlement are:
- the contract work is complete;
- an impasse has been reached in settling the major issues;
- several unsettled claims exist; and
- Owner counterclaims exist.
The path to global settlement is usually the inability of the contractor and the owner to reach agreement upon changes and interpretations of the contract. Disputes are a result of the owner’s and contractor’s inability to agree on Modifications (change orders), usually the price and/or time extension. Thus, these issues lingered until the end of the contract and remained unresolved as disputes.
When disputes exist the contractor probably has not closed the contracts out with his subcontractors. If the contract is not closed, then the subcontractors have not received their final payments and they may have disputes or pending lawsuits against the contractor. The contractor has to consider the time value of money. If a settlement could be reached now, it could far outweigh any court victory several years from now. Also, any amount the contractor might win in court would be reduced by attorney fees. The owner also must consider the time value of money. A settlement now would avoid the cost of litigating the claims/appeals over the following years. In addition, the interest charges may be substantial and should be considered in the time value of money calculations.
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All outstanding issues (claims, counterclaims, and unilateral modifications) should be included in the settlement negotiations. When proposing the list of issues to the contractor, every known issue, should be included.
Business Decision and Risk
The need to settle outstanding issues in a global settlement is primarily a “Business Decision”. For the contractor and the owner, a settlement offers the opportunity to close out the contract now. If a settlement is not reached, the potential liability of loss on certain issues must be considered when the contractor makes business decisions affecting the company’s future. On the other hand, if a settlement is reached the contractor can move on. In some cases, global settlement is the best solution because neither side has a strong position on the issues. The alternative to settlement is litigation. Again, the question of risk must be addressed. Since there is never a “sure winner” In litigation, the risk of losing must be balanced against the cost of settlement. The main point is that global settlement is an ADR option that should be considered when analyzing a dispute resolution course of action.
Once the decision to attempt a global settlement has been made, all other efforts to settle individual disputed issues should cease so that the negotiation team will have a full range of “give and take” issues on which to base their negotiation strategy. An initial letter should be sent to the contractor expressing the owner’s willingness to enter into closeout negotiations and asking the contractor to request that closeout negotiations be scheduled. A list of issues as the owner understands them should be included with the letter. This letter should be prepared by the owners contracts representative.
A list of outstanding issues should be included in the letter to the contractor. The list should include all claims, unresolved change orders, and owner counterclaims such as non-conforming work, liquidated/actual damages. A dollar value and time extension (if applicable) must be included for each issue. Care should be taken to ensure that the most recent cost data is used when assigning the dollar value. These values may have changed as the issue evolved. The contractor will be asked to verify that the list of disputed issues is complete and accurate. The contractor may add or delete issues from the list. The contractor must also verify that there is no duplication or overlap between claims. This ensures that the fair and reasonable cost of an issue will only be counted once. Further, the contractor should be asked to verify that no additional claims are to be made. This is to ensure that no surprise issues are brought into the negotiations.
Rules for Global Settlement Negotiations
Once the contractor has replied to the initial owner letter, rules should be established for conducting the negotiations. The following rules have been successfully used at several global negotiations:
- The representatives will have the authority to settle issues, but they can consult with others not in the meeting before making a final agreement.
- Attorneys will not be present at the meeting but office space can be provided for the contractor’s attorney or private telephone access to the attorney.
- The rules of evidence normally used in a hearing will not apply.
- Questions may be asked to better understand the other side’s statements.
- The parties should be prepared to back up statements with documentation if requested.
- No recordings will be made of the discussions. However, notes can be taken provided they are destroyed within 10 days after the discussion.
- Any offer or statement made as part of the settlement discussions cannot be used for any other purpose in any other proceeding.
- Any document prepared for exclusive use in the discussion cannot be used by the other party for any other purpose in any other proceeding.
These rules have been found to be fair and provide protection to both parties. The rules allow each side to make their “best offer” without fear that it could be used against them later. Depending on the contractor, rule 2 may have to be modified to permit attorneys to participate directly in the discussions. If possible, the inclusion of attorneys should be discouraged. Since the discussions should focus on technical and cost issues, as they relate to the construction work, a more productive session will occur with only engineering, construction, and contract personnel present. It should be emphasized that private phone access or nearby office space will be available. If the contractor insists that his attorney be present, it would be prudent to include an Owner attorney on the negotiation team.
Preparing for Global Settlement Negotiations
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In preparing for the global settlement negotiation meeting the success of the negotiation is directly related to the time spent reviewing the issues before the meeting. Position papers should be developed and presented in the meeting by both sides. A negotiation objective cost value should be developed for each disputed issue. The values should have a range of Low/Medium/High. The low value would be the current conservative owner position to start negotiations with. The Medium value would consider some disputed issues where strength of owner’s position is weaker. The High value would consider the cost benefit analysis of settlement now at the high value versus the risk of litigation costs and chances of winning in court.
Both parties will need to assign a chief negotiator to present and negotiate the disputed issues. Both parties should have field and contract administration personnel in attendance that understand the contract and the disputed issues and can articulate respective positions on the disputed issues and answer specific questions related to an issue.
The agenda should specify the date and location of the settlement negotiations. For planning purposes, an estimate of the time required should be provided. The agenda outline should be brief and somewhat flexible in its wording. After the introductions, approximately 1- hour should be allotted for the contractor to make his opening presentation. A 20 or 30-minute break should follow the contractor’s presentation. This break will allow the Agency team a chance to quickly review the contractor’s opening position and make any adjustments to their opening position. Next, 1- hour should be scheduled for the opening presentation by the Owner. A 1-hour lunch break will give both sides time to review the opening positions. After lunch, 3 or 4 hours should be scheduled for settlement discussions. The schedule for the second or third days should simply be “continue settlement discussions.” On the last day, 1 hour should be set aside for a wrap up.
As with any contracting action, the global settlement procedure must follow all applicable contracting regulations. The appropriate approvals must be obtained to conduct the negotiation. The requirements of the applicable Federal or State Agency and Construction Contract must be carefully reviewed and complied with.
Settlement Finalized
Once the negotiations have been finalized, the contract modification that will wrap everything up must be prepared. The wording and contents of the modification are very important and must be checked very carefully by those involved. Many of the contractors request that no issue specific dollar amounts be included in the modification wording, only the bottom line figure. This allows them some flexibility in dealing with their subcontractors.
Final settlement wording is critical and the exact wording should be verified with the appropriate counsel. If any issues were excluded from the settlement, they should be clearly listed in a separate paragraph. Correct invoice and release forms should also be included in the settlement packet. As with other modifications, the contractor must accept the modification without qualification.
Final Payment and Contractor’s Release is the desired result of this global negotiation process, which is the receipt of the contractor’s final release and processing of the final payment. The release document must be checked extremely carefully. Dates, signatures, written figures, and numbers should match and agree with the settlement. A mistake on the release has the potential to cause a lot of trouble. Attention to detail at this time could avoid embarrassment later. Once the final release is correct, the final invoice can be processed and paid.
Global Settlement Negotiation Procedures, Techniques and Strategies for Contracts in Dispute
Alternative Dispute Resolution
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