Mediation in construction disputes ©
Introduction
Due to their complexity, construction projects are prone to generating disputes between the participants. This is due to a number of factors, such as the large number of participants in the construction process, the need to resolve a multitude of technical and organizational issues, the complex state regulations, the high cost of most construction endeavors, etc.
The purpose of the present article is to point out the main features and principles of mediation as well as its advantages in resolving disputes in the construction business compared to court proceedings and other alternative means of dispute resolution. Special attention is paid to the question of why construction disputes are well suited to mediation.
GENERAL CHARACTERISTICS OF THE MEDIATION PROCEDURE
The legal framework
In Bulgaria, the mediation procedure is regulated by the Mediation Act (promulgated in the State Gazette (SG), issue 110, dated 17.12.2004, amended and supplemented in issue 86 / 24.10.2006, supplemented in issue No 9 / 28.01.2011, amended and supplemented in issue 27 01.04.2011, SG No. 77/18.09.2018, effective 1.01.2019, amended, SG No. 17/26.02.2019, amended and supplemented, SG No. 11/2.02.2023, effective 1.07.2024) and Ordinance No 2 from 15.03.2007 on the conditions and procedure for the approval of organisations that provide training of mediators, the applicable mediator training requirements, on the procedure for the registration, deregistration and deletion of mediators from the Unified Register of Mediators and on the procedural and ethical rules of mediator conduct.
In the last twenty years the need for the application of alternative dispute resolution methods, and in particular mediation, has been widely recognized and promoted at the supranational level, with four recommendations on mediation being adopted within the Council of Europe 1 and, within the European Union a Code of Ethical Conduct for the mediator and two Directives being adopted, namely Directive 2008/52/EC of the European Parliament and of the Council dated 21 May 2008 on certain aspects of mediation in civil and commercial matters and Directive 2013/11/EU of the European Parliament and of the Council from 21 May 2013 on alternative dispute resolution for consumer disputes2 as well as Regulation (EU) No 524/2013 of the European Parliament and of the Council dated 21 May 2013 on online dispute resolution for consumer disputes.3
What, indeed, is mediation and what are its major features?
Generally speaking, mediation is a flexible and informal out-of-court dispute resolution procedure in which the disputing parties (assisted by a third neutral party - a mediator) search to find a mutually acceptable solution to their dispute and to reach an agreement. According to the legal definition contained in Art. 2 of the Mediation Act " Mediation is a voluntary and confidential procedure for out-of-court resolution of disputes, whereby a third party mediator assists the disputants in reaching a settlement."
The degree of intervention and the role of the mediator vary from one type of mediation to another but it is important to underline that in all cases the mediator does not give or impose a decision on the dispute: the final decision in a mediation procedure is always the result of an agreement between the parties themselves.4
At the heart of the concept of mediation is the method of principled negotiations or negotiations based on the interests of the parties. This method takes into account the difference between the positions held and the purely legal arguments by which the parties justify and try to impose the position they hold and its underlying interests (personal, psychological, business or other interests, concerns and needs impacted by the conflict). The exploration of these deeper and usually hidden levels of the conflict helps the parties achieve more clarity about what is truly important to each of them in the particular situation and opens up the possibility of finding different alternatives to meet these needs and finding a solution that meets the needs of both parties.5
The subject matter of mediation may be any legal or non-legal dispute on any/all issues that can be negotiated by the parties. The types of disputes in which mediation can be conducted are non-exhaustively listed in Art. 3, par. 1 and 2 of the Mediation Act (MA). According to Art. 3, par. 3 of the MA, "mediation shall not be conducted if a law or another statutory instrument provides for another procedure for the conclusion of an agreement."
Main features of the procedure
The mediation is a voluntary, confidential procedure, and the parties have full control over the decisions taken in it.
Other important features of the procedure are its flexibility, economy and speed as opposed to court proceedings and other alternative dispute resolution methods. Mediation is conducted in sessions (meetings) between the mediator and the disputing parties. These meetings are held at a time and place convenient for the parties (usually neutral), and their number and duration depends on the possibilities the participants have and the specifics of the case. Mediation can also be conducted through the use of different means of communication (e.g., online, videoconferencing platforms) although in general the sessions in the physical presence of the mediator and the parties are more effective and preferable. In the mediation process issues other than the immediate subject of the specific dispute can also be discussed and resolved (for example, issues related to the future relations between the parties, such as a procedure by which they will exchange information or fulfill each other's commitments; future cooperation; resolution of an issue which is not a direct subject of the specific dispute but which has triggered its occurrence, etc.).
The parties choose the mediator themselves, and when making that choice, they are able to take into account both the personal qualities and the professional competences of the chosen mediator to be suited to the specifics of their case.6
The length of the procedure depends on the specific case, but in any case, under Bulgarian law, it cannot last longer than six months. According to Art. 15, par. 1, item 6 of the Mediation Act, the mediation shall be terminated upon the expiration of six months from its commencement. The parties themselves may set a shorter time limit after which the procedure is terminated or, even without having set such a time limit, terminate it at any time.
Mediation does not preclude the possibility of a subsequent referral to court or arbitration if the parties have failed to reach an agreement in the mediation procedure. Furthermore, it may take place both before the commencement of and during a pending court or arbitration proceeding concerning the same dispute. In the latter case, if the parties have reached an agreement on their dispute within the mediation procedure, they may request the court before which the case is pending to approve this agreement as a court settlement or, in the case of arbitration, to reproduce the settlement in an arbitral award under agreed terms.7
The parties may participate in the mediation procedure together with lawyers, experts, and other professionals, or may, if needed and by common agreement with the other party, be assisted by such professionals by requesting, for example, advice or expert assessment on a particular matter that will help them reach a decision.
Mediation principles
Mediation is conducted in conformity with the following core principles:
- Voluntariness - the parties are free to decide whether to participate in the procedure or to withdraw from it at any time. This principle also applies in the cases where the parties are directed to mediation by a court of law – even in these cases they can refuse to participate in the mediation or withdraw from it at any time.8
- Equality of the parties - the parties must have equal opportunities to participate in the procedure, and the mediator ensures this.
- Neutrality and impartiality of the mediator - the mediator cannot give assessments and legal advice 9, nor impose a decision on the dispute. The mediator must not show bias and is only obliged to undertake a mediation procedure if he can ensure his neutrality, impartiality and independence (Art. 9 of the Mediation Act). Pursuant to Article 13(2) and (3) of the Mediation Act, the mediator is obliged to disclose to the parties all circumstances which may give rise to reasonable doubts as to his/her impartiality and neutrality, and to submit a declaration of such circumstances when commencing the procedure10. In the event that such a circumstance arises in the course of the procedure, or any of the parties expresses doubt as to the neutrality and impartiality of the mediator, the mediator shall withdraw from the procedure (Article 10(3) of the Mediation Act).
- Confidentiality - according to the provisions of Art. 7, the discussions related to the dispute are confidential and the participants in the mediation are obligated to keep all circumstances, facts and documents that have become known to them in the course of the procedure in confidentiality. The mediator may not be questioned as a witness about circumstances that have been entrusted to him by the participants and are relevant for the resolution of the dispute that is the subject of the mediation, unless with the express consent of the participant who entrusted them to him. In addition to the obligation of confidentiality vis-a-vis any third parties to the mediation, the mediator is also under an internal confidentiality obligation (in respect of the parties involved in the procedure). The mediator may not disclose to the participants in the mediation procedure any circumstances that have been entrusted to him /her by one of the parties in the absence of the others, except with the explicit consent of the party disclosing the information (Art. 10, par. 4 of the MA). Exceptions to the confidential nature of mediation are allowed only in cases expressly specified by the law.
Consequences from the mediation procedure
In addition to the possibility to resolve their dispute voluntarily and improve the communication with each other, mediation provides the parties with some important advantages compared to the negotiations conducted between them outside of a mediation procedure, namely: suspension of the limitation period and the possibility of making the agreement reached in mediation enforceable.
Suspension of the limitation period
Pursuant to Article 11a of the Mediation Act, the statute of limitations on the dispute subject to mediation shall be suspended for the duration of the mediation procedure.
In order to establish the exact moment from which the limitation period stops running, Article 11(2) of the Mediation Act states that the commencement of the mediation procedure shall be deemed to be the day on which the parties have expressly agreed on its commencement, or, where there is no express agreement - the day of the first meeting of all participants with the mediator.
The limitation period shall be suspended until the termination of the procedure (by agreement or otherwise). Since a mediation procedure is terminated by virtue of the law upon the expiration of six months from its commencement, if no agreement has been reached within that period or the mediation has not been terminated on any other ground, as of the expiry of the six-month period, the running of the limitation periods shall be resumed.
Enforceability of the agreement reached as a result of the mediation
The settlement reached in the mediation procedure may be made enforceable regardless of whether the dispute resolved thereby is the subject of a pending lawsuit or not. In cases where the dispute is the subject of a pending lawsuit, the parties may, under the general procedure of the Code of Civil Procedure (CCP), request the court where the case is pending to approve their agreement as a court settlement. Where the dispute is not subject to a pending lawsuit, the parties may request approval of the agreement on the grounds and as per the order set in Art. 18 of the Mediation Act, according to which "the agreement on a legal dispute reached in the mediation procedure shall have the force of a court settlement and shall be subject to approval by the district courts in the country." Pursuant to the quoted text, the court shall approve the agreement after confirmation by the parties, if it does not contradict the law and good morals, and in case the public prosecutor is involved in the case as a party, after hearing his opinion as well. There is already practice in the application of this text, and decisions approving agreements reached in the framework of a mediation procedure have been handed down by several different district courts in the country.
MEDIATION IN CONSTRUCTION DISPUTES - SPECIFIC BENEFITS
Disputes in the sphere of construction and building are particularly well suited for mediation, as most often the prevailing issues to be resolved are more of a technical rather than of a legal nature. Typically, the participants in the construction dispute demand that it be considered by somebody having the necessary special knowledge of the matter at hand. The mediation procedure allows the parties to choose a mediator with the relevant technical competence required to resolve the dispute, e.g., a civil engineer, an architect, or a water supply & sanitation specialist. The parties may also resort to co-mediation by selecting two or more mediators with different specialties, e.g., a lawyer and an engineer. In contrast, in construction litigation, the option of selecting a judge with appropriate experience is excluded, especially in Bulgaria, where no specialized courts for resolving construction disputes exist.
In this respect, a distinction should be made between Dispute Adjudication Boards, which are provided for under the FIDIC contractual terms, and mediation. Insofar as both forms are alternatives to the judicial and arbitration proceedings some resemblance between them does exist. However, the procedure before the Dispute Adjudication Boards (DABs) does not constitute mediation, since the DABs do not assist the parties in reaching their own decision, but rather render a decision that may be unacceptable to either party. Moreover, the DAB deals with the dispute according to a certain procedure that is agreed upon in advance between the parties, whereas in mediation there is no such requirement - the agreement to participate in the mediation procedure and the rules of the procedure can be reached at any time before the mediation starts, including at the first joint meeting between the mediator and the parties.
One unquestionable advantage of mediation, which is important for the participants in the construction business, is the high level of confidentiality compared to other dispute resolution methods. In the process of resolving their construction disputes the parties would nearly always demand to see their reputation well preserved and do not want the dispute to go public. Because of the absence of a requirement to keep meeting minutes and no obligation to keep records, as well as due to the statutory guarantee to keep the procedure confidential, mediation remains the most discreet way to resolve a dispute.
Next, mediation provides an opportunity to maintain good relations between the parties - something extremely important when it comes to projects that may take years to complete. In executing such projects, especially when they are very large, the parties find themselves "doomed" to work together for a long period of time, hence, preserving the dialogue between them is key to meeting the set working schedules and deadlines. Due to the fact that in mediation the parties resolve the disputes themselves and are not bound by decisions imposed on them by any third party, this form of dispute resolution offers a much greater chance of maintaining normal communications between them. In the realization of large infrastructure projects, where multiple contracts have to be executed by numerous participants over long time periods, the so-called "project mediation" allows for working on the project with no idle time despite the appearance of disputes. This advantage of mediation was used in the preparation of the Olympic Games in London in the course of assisting the Olympic Delivery Authority in the settlement of disputes related to the construction of the Olympic Park for the 2012 Olympics. To this end, a special Independent Dispute Avoiding Panel was created to include 10 specialists in the construction sphere who were engaged in alternative dispute resolution between the participants in the construction of the Olympic Park. This attempt at project mediation is considered to have been extremely successful.
Because of the fact that construction works usually involve a multitude of participants other than the contracting authority and the contractor, construction disputes often concern, directly or indirectly, different parties performing different functions (e.g., designers, insurers, subcontractors), whose participation in the resolution of the dispute is desirable. Unlike other dispute resolution methods, where the participation of many parties is subject to strict regulations, the mediation procedure does not prevent more persons from participating as long as all of them participate voluntarily.
In addition, mediation also offers the possibility of resolving multiple disputes between the parties, even when these disputes have no formal connection to each other, but it is important for the parties to resolve them within a common agreement. Such disputes would be separated and dealt with without reference to each other in court or arbitration proceedings.
Moreover, within the mediation framework the parties may also agree on future joint projects, the conclusion of new contracts as a part of the resolution of an existing dispute, etc. As stated above, Art. 1 of the Mediation Act describes mediation as an “alternative method of resolving legal and non-legal disputes”. In other words, unlike court proceedings which deal only and singularly with legal issues, mediation can also resolve disputes that have no legal features, e.g., when damages are inflicted on the image of one of the parties or in the event of disputes that could potentially arise in the future but cannot yet be brought to court as the filing of claims at the present point in time would be considered premature. In the process of mediation, the parties can also resolve their dispute by amending the contract concluded between them.
One other advantage of mediation, particularly important in resolving construction disputes, is speed. Due to its informal nature, mediation does not require a long period of preparation; sessions are scheduled after agreeing with the parties the time and place for their conduct and can be scheduled over several consecutive days; the procedure itself can be structured according to the needs of the parties and the specifics of the dispute. All this ensures that the dispute can be resolved within weeks of the commencement of the mediation procedure, which is impossible in court or arbitration proceedings. All of this provides an opportunity to resolve the dispute within weeks of the commencement of the mediation procedure, which is impossible in any court or arbitration proceeding. The judicial resolution of construction disputes usually requires the commissioning of a number of expert assessments, which, combined with triple instance proceedings, makes it impossible to resolve the dispute even within a term of 1 to 2 years at the very least.
Last but not least, the cost-effective resolution of construction disputes is also of great importance for the participants in the construction business. In most cases, the material interest involved in such disputes is great, and their resolution in a court of law requires considerable financial resources (attorney's fees, expert fees, state fees). In mediation, the parties owe only the mediator's remuneration, which is usually set on an hourly basis and not as a percentage of the interest. No other costs, such as state fees or fees for lawyers or experts, are accrued. Should one of the parties decide to use a lawyer or an expert, they will of course incur costs for their remuneration, but in any case, these costs would be lower than for legal representation before three instances of court. In addition, the parties to the mediation may agree on the allocation of costs and may also appoint a common expert whose fees are to be shared equally between them.
In conclusion, it should be pointed out that, given the specificity of the construction disputes, mediation could, in a number of cases, be the most appropriate method for their resolution at relatively low costs and in comparatively short time periods. Insofar as the use of this procedure does not prevent the possibility of subsequent filing of the dispute at a court of law or for arbitration, mediation can only contribute to the resolution of the dispute, whether it is resolved within the framework of the procedure or mediation has led to the improved communication between the parties. It follows, therefore, that the potential benefits of mediation in resolving construction disputes should be taken into consideration both by the parties and the court of law, which may not only indicate to the parties that mediation is an option but also explain to them in detail the advantages of this procedure.
Authors: Atty. Lyubka Vasileva-KARAPANOVA
Atty.Lyubimka DYULGEROVA
The present article was published for the first time in issue 2/2016 of the "Property and Law" magazine, the "Labour and Law" publishing house.
Last update made on June 20, 2023.
NOTES:
1 Recommendation No R(98)l on family mediation, Recommendation No (99)19 on mediation in criminal matters, Recommendation (2001)9 on mediation between administrative authorities and private individuals and Recommendation R(2002)10 on mediation in civil matters.
2 The full name of the document is Directive 2013/11/EU of the European Parliament and of the Council of 21 May 2013 on alternative dispute resolution for consumer disputes and amending Regulation (EC) No 2006/2004 and Directive 2009/22/EC.
3 The full name of the document is Regulation (EU) No 524/2013 of the European Parliament and of the Council of 21.05.2013 on online dispute resolution for consumer disputes and amending Regulation (EC) No 2006/2004 and Directive 2009/22/EC. Commission Implementing Regulation (EU) 2015/1051 of 01.07.2015 on the modalities for performing the functions of the online dispute resolution platform, the conditions for the electronic complaint form and the conditions for cooperation between contact points provided for in Regulation (EU) No 524/2013 of the European Parliament and of the Council on online dispute resolution for consumer disputes has also been adopted under this regulation.
4 According to the role and intervention of the mediator, the following main types of mediation can be distinguished: 1) Facilitative mediation: The role of the mediator is to support and facilitate negotiations without giving assessments and decisions on the dispute; 2) Evaluative mediation: In this type of mediation, the parties may ask the mediator to give them their personal expert opinion on the strengths and weaknesses of their positions and the likely outcome of the dispute in court; 3) Transformative mediation: In this style of mediation, the main focus is on improving communication and relations between the parties, rather than reaching an agreement on the merits. The goal of the mediator in this type of mediation is to help the parties improve their communication so that they can resolve the dispute themselves. The most commonly applied method of mediation is the facilitating one. Evaluative mediation in legal matters is expressly prohibited by the Bulgarian Mediation Act through the prohibition of the mediator from giving legal advice (see Art. 10, par. 1 of the Mediation Act).
5 The method was developed at the Harvard University in the framework of the Negotiation Project and is aimed at seeking a substantive solution that responds to the actual needs and interests of the parties and benefits each of them, rather than focusing on the positions stated by the parties and seeking a compromise between them. The method is described in detail in the book "Getting to YES. Negotiating an agreement without giving in" by Roger Fisher and William Uri.
6 It is important to emphasize that according to the Bulgarian Law on Mediation, only an individual who has successfully passed certification training in mediation and is registered in the Unified Register of Mediators, kept by the Minister of Justice, can act as a mediator. The organizations which can provide such training are also approved by the Minister of Justice, and the minimum duration and content of training courses are specified in the above-mentioned Ordinance No 2 of 15.03.2007.
7For the consequences of initiating the mediation procedure and the possibility of enforcing the agreement reached therein, see "Consequences from the mediation procedure" further below.
8By the time of the first publication of this article (2016), the principle of voluntariness was fully and consistently advocated by Bulgarian legislation, and the non-participation of the parties in the mediation was not subject to any sanctions or adverse consequences, while in other countries (for instance, Italy), some categories of disputes were subject to mandatory attempt at mediation before the dispute is taken to court or the mandatory participation in an information meeting (for example, Romania, Germany, and Great Britain), and a number of respective incentives and sanctions existed (for example, awarding court costs to the party who has refused to participate in mediation, regardless of whether the judgment is in favor of that party or not).
In February 2023, mandatory judicial mediation was introduced in Bulgaria (with effect from July 1, 2024). However, it does not affect the parties' right to withdraw from mediation, and even when they have not participated in the mediation procedure at all, there are no sanctions for their refusal. You can read more about mandatory judicial mediation in the article "Briefly about Mandatory Judicial Mediation in Bulgaria."
9 Pursuant to Art. 10, par. 1, of the Bulgarian Mediation Act, the mediator is expressly prohibited from giving legal advice. This provision is specific to Bulgarian legislation and emphasizes the mediator's facilitative role. In the legislation of a number of other countries, there is no such restriction, still mediators practicing facilitative mediation would normally refrain from giving advice and assessments despite the lack of an explicit prohibition.
10 Article 12, para. 2 of the Mediation Act states that: "The mediator shall be obligated to indicate all circumstances as my give rise to reasonable doubt in the parties as to the impartiality and neutrality of the mediator, including the cases when the mediator is a person:1. who is a spouse or a relative in a direct line to an unlimited degree and collaterally up to and including the fourth degree, or to the third degree of affinity, of any of the parties or their representatives; 2. who lives in de facto marital cohabitation with any party to the dispute that is the subject of the mediation; 3. who has been a representative or an agent of any party to the dispute that is the subject of the mediation; 4. in respect of whom there are other circumstances that cause reasonable doubt as to the mediator's impartiality".
