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Negotiation is usually the first level at which dispute resolution is attempted. The parties to the dispute retain the greatest control and incur the least expense. Moving from negotiation to mediation to arbitration or litigation results in a reduction of control along with an increase in costs at each step.

Resolution by negotiation retains the highest level of control because it is the parties themselves who determine the terms of the agreement. They decide how the matter will be resolved, not some third party. This is the most common and most cost-effective method of dispute resolution.

Exchanging letters with position statements is not negotiating. Exchanges of letters responsive to reasonable requests for information and explanation, however, can set the stage for a successful negotiation. Most disputes escalate into arbitration or litigation when the exchange of letters ceases to be a dialogue about the issues. These types of letters only complicate matters so they ignore the issues raised in the letter to which they are responding and make new accusations of wrongdoing. Even if there are new issues that need to be raised in a reply, responding to the specifics keeps things on track for resolution.

Once positions are staked out, real negotiation should begin. Although styles of negotiation vary widely and are unique to each individual, here are some general guidelines that may be useful in approaching a negotiation:

  1. Define areas of agreement. Recognize the issues where there is agreement. This sets a tone for the negotiation — the purpose is to get a resolution. It also has the benefit of limiting the issues that can be brought up as negotiations progress.
  2. Listen to the other side. Parties in a dispute always have their own agendas. There are certain things they have a burning desire to get off their chest. Similarly, there may be things you want to get off your chest. Both sides need to be afforded this opportunity. It has the effect of giving a party the feeling that they have had their “day in court.” It will also bleed off some of the emotions that are often part of a dispute. Remember, they won’t listen to you if you won’t listen to them.
  3. Negotiation is the art of compromise. Be prepared to compromise. Be prepared to back off positions that are taken only for the purpose of gaining leverage. It is hard to be viewed as negotiating in good faith if one refuses to pay money that is acknowledged as due. Holding $25,000 because of a $5,000 dispute to create leverage will come back to haunt you if you cannot resolve the problem.
  4. Fix the damages. If you can’t agree on whom should pay, try to agree on how much would be paid if anyone pays at all. This has the benefit of eliminating the claim creep. Claims such as back charges or change orders have a habit of growing larger and larger as time goes by. If there is a ceiling on the money involved, it will often reduce its importance in the overall scheme of things.
  5. Have a plan. Focus on achieving a reasonable financial goal and preserving your relationship with your opponent. Factor in the value of your time. You cannot grow a business while you are busy fighting with other people. Factor in the cost of having others, such as lawyers, resolve it for you. Have a settlement range in mind, but be prepared to react to what you learn in the negotiation. Realize that you may have heard only the favorable parts of the story.

Mediation is another form of negotiation. Here, a neutral third party is brought in to facilitate the negotiations. Florida has been a pioneer in the use of this method of dispute resolution. The process is now required in virtually all lawsuits before a court will even consider a trial. With mediation, as opposed to negotiation, costs now start to rise and control begins to fall. The mediator has to be paid and some measure of control is now in his or her hands.

The critical element in the success of a mediation is the skill of the mediator. He or she must be objective, truthful and command respect. Credibility is required because the mediator is likely to suggest that one or both parties are wrong and that one needs to pay something to the other. Knowledge of construction is a must.

Mediation usually begins with the parties agreeing on a mediator and setting a schedule for the mediation. Attorneys, accountants, claims consultants and others may participate in the process to the extent they can help clarify issues and resolve controversies. Often mediation statements are exchanged or provided directly to the mediator. These are designed to familiarize the mediator with the nature of the dispute. The mediation itself usually starts with opening statements, where the parties set out their views of the dispute. This is important because the decision maker may be hearing the unfiltered version of the other party’s claim for the first time.

Generally, everything that takes place at the mediation is confidential and privileged. The mediator cannot be compelled to testify about anything taking place. This allows the parties to be candid about their positions without fear that the information will be used against them in a subsequent arbitration or mediation.

The parties still retain significant control since the mediator cannot impose a settlement. Any settlement must be agreed to by both parties. It allows a great deal more flexibility and creativity than is available in arbitration or litigation. The parties, for example, can agree to a solution, enabling one of the parties to do the work themselves at a lower cost. By contrast, in arbitration or litigation, the only alternative is an award of money damages.

This article first appeared in the Contractor’s Advantage, March/April 1997 issue, published by Knight Images, Inc. for Scotty’s Contractors School.