The Mediation Procedure in Construction Disputes saves Time, Money, and Nerves

What to do in the case of a standstill or even the termination of a construction project? – A standstill or even the termination of a construction project is a relatively surefire way to financial ruin. Besides differing opinions, the cause of such a conflict situation is often the lack of communication between the parties to the construction contract. A structured mediation procedure can break this communication barrier and lead the parties to a swift, cost-effective, and legally secure solution that leaves no one as a loser. As an alternative dispute resolution instrument, mediation offers many advantages over resorting to the courts, especially enabling the timely continuation of the construction project. Despite its numerous advantages, mediation procedures are unfortunately still not widely adopted in construction law practice.

Introduction

Typical scenarios leading to a standstill in a construction project include disputes over additional claims by the contractor or, even more frequently, disputes over defects. The owner refuses to pay either because they don’t accept the contractor’s additional claims or because they believe they have identified defects in the construction work. In response, the contractor suspends work due to the owner’s non-payment. Ultimately, this leads to the termination of the construction contract, resulting not only in project delays but also culminating in a legal dispute.

The outcome of a legal proceeding, particularly in cases involving defects, is often uncertain and heavily relies on expert opinions provided by court-appointed experts. Due to the often lengthy duration of such legal proceedings, the parties soon deplete their personal and financial resources. Key individuals depart, subcontractors become insolvent, legal costs escalate, and in the end, a weary settlement is reached, focusing solely on the distribution of the incurred damages and long forgotten about the common project success.

A mediation procedure offers the parties the opportunity to engage in a structured process, under the neutral guidance of experienced construction lawyers, aiming to return to a shared path as early as possible, potentially saving a jeopardized project. The Working Group for Construction and Real Estate Law within the German Bar Association has developed a Conciliation and Mediation Rules for Construction Disputes (SOBau) for this purpose, which was completely revised in 2020 to better meet practical needs. In addition to the mediation discussed here, SOBau also includes provisions for mediation as well as for expert and arbitration procedures (1).

The Mediation Procedure

Mediation, similar to a process of mediation, aims to lead the parties to an amicable settlement through a confidential procedure, guided by and with the assistance of the mediator. However, unlike mediation, mediation does not restrict itself to merely moderating conversations between the parties. Instead, in cases where the parties desire it and cannot reach a conclusion themselves during the mediation discussions, the mediator prepares a mediation proposal, typically accompanied by a written justification.

Mediation, therefore, can be seen as a form of “mediation plus.” The mediation proposal can be roughly likened to a judicial settlement proposal. It becomes binding on the parties only if each party accepts it in writing within two weeks. Failure to do so results in the mediation procedure being considered unsuccessful. The parties can still resort to the regular courts. In specific cases, the rejection of a mediation proposal can lead the parties to reconvene with the mediator to resolve any remaining contentious issues based on this new discussion foundation, thus potentially reaching an agreement on the “second attempt.” The mediator will adapt the procedure as flexibly as possible to facilitate a successful agreement, even at a later stage.

A mediation procedure can be agreed upon by the parties to a construction contract at any time, even after the fact, unless the construction contract already contains relevant provisions. Templates for a mediation agreement and a mediation contract can typically be provided by the selected mediator. During a mediation procedure according to SOBau, the statute of limitations for the disputed claims is suspended, and the parties are not permitted to file a claim with a regular court, except in cases of interim injunctions and independent evidence proceedings.

The Mediator

Mediators listed according to SOBau are experienced lawyers who must also be formally qualified as specialist lawyers in construction and architectural law. They have completed special SOBau training and are obligated to engage in regular professional development. Those who meet these criteria and provide evidence of them are included in the mediator list under SOBau. The necessary expertise is thus assured in all cases (2). The mediator conducts the procedure strictly neutrally and is bound by confidentiality.

The mediator will not express their own legal opinions on individual issues unless all parties involved request it, and there is a prospect that this would facilitate reaching an agreement. The objective of the mediation procedure is to achieve a consensual resolution of the dispute, not to conclusively settle legal issues. For technical clarification, the mediator may involve qualified experts in the procedure, particularly in cases related to defects. Conducting mediation negotiations at the construction site is not only possible but often advisable.

The remuneration of the mediator is based on an hourly fee to be agreed upon, typically aligned with lawyers’ hourly rates. If the parties cannot agree on a mediator, the President of the German Bar Association (DAV) can appoint one upon request.

Advantages of the Mediation Procedure

The advantages of a mediation procedure over a legal dispute in terms of time and cost are evident. Furthermore, the mediation procedure offers the advantage that there are no winners or losers at the end, as the parties have voluntarily reached a compromise. In the mediation procedure, all parties have ample opportunity to present their perspectives in detail. The conversation setting provided in the mediation procedure, governed by certain rules, has not been experienced by the parties before, often making it possible to change perspectives, which typically contributes to reaching an agreement.

The often heated and time-pressed oral hearings in regular courts cannot provide this in the same manner. Conflicts and sensitivities are often exacerbated rather than resolved, which can significantly depend on the skill, experience, and construction law expertise of the judge in each specific case. The parties cannot choose their legal judge in regular courts, but they can select their mediator.

The mediation procedure not only offers an efficient and forward-looking way to resolve conflicts but also leads to legally secure agreements between the parties. Mediation is not a waste of time or a “chatterbox,” but a genuine alternative to the legal process. If lawyers are involved on both sides of the mediation, the resulting agreement can also be structured as a “lawyer settlement,” which can then be declared enforceable by the court or a notary under the conditions of § 796a ZPO, similar to a judicial settlement.