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The Death of Mandatory Arbitration in Public Works Disputes: Does Opportunity Knock for a Better Way?

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the death oF MandatorY arBItratIon In PuBlIC WorKs dIsPutes:
The 2009 Nevada Legislature brought forth its usual tide of changes to the Nevada statutory language. While some changes came amidst a fanfare of publicity, one significant change to the way public works disputes are resolved received little attention outside of Carson City. The revision to NRS 338.150 altered the requirement that disputes must be resolved by mandatory and binding arbitration. Henceforth, such claims may be resolved through the courts, with alternative dispute resolution remaining only as a permissible alternative. This amendment appears to provide flexibility for modes of dispute resolution and encourages the seeking of other ways to resolve these often-complicated construction disputes outside of the courts. However, a review of the history of public works and private construction disputes in the state reveals that the likely result of this amendment will be a substantial increase in the number of complex construction matters that end up in our already over-taxed court system.
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a short hIstorY oF arBItratIon requIreMents In neVada PuBlIC WorKs dIsPutes
Before 2005, NRS 338.150 set forth some ambiguous language about whether or not arbitration was required when parties to a public works project became embroiled in disputes. Many public bodies interpreted the language as giving the public entities a choice when deciding whether or not to arbitrate such disputes. The choice typically made by public owners was to go to court. Contractors eventually tired of this interpretation of the law and challenged it, contending that the Legislature intended to require mandatory and binding arbitration of all public works construction disputes. These challenges
culminated in a Nevada Supreme Court decision, Harris Associates v. Clark County School District, 119 Nev. 638, 81 P .3d 532 (2003), where the court sided with the contractors and held that the intent of the ambiguous language in NRS 338.150 was to require mandatory binding arbitration of all public works disputes. The 2005 Legislature agreed with the Supreme Court’s interpretation of the statute and codified the Harris holding. Since that shift in the method of resolving public construction disputes, several high-profile cases have been decided by panels of arbitrators. The first involved the Nevada State Veterans Home in Boulder City, which was built by Addison, Inc. and overseen by the Nevada State Public Works Board. The board terminated Addison near the completion of the project, then fought Addison’s attempt to force
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the death oF MandatorY arBItratIon
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mandatory and binding arbitration. The Nevada Supreme Court eventually applied the Harris decision to require arbitration. Following a sixweek arbitration before a panel of three arbitrators, the state was dealt an adverse $10 million award that included payment of all arbitration fees and attorney fees incurred by the contractors. A few years later, the Regional Justice Center project became embroiled in a long, bitter and expensive dispute between the contractor, A.F. Construction, and Clark County. After a 10-week arbitration hearing, a panel of three arbitrators eventually awarded approximately $52 million to A.F., which included the cost of the arbitration but no attorney fees.
was particularly upset by its exorbitant arbitration costs, which were represented to exceed $2.5 million, including arbitrators’ fees, and no results were reached in the lengthy process. Contrary debate appears to be missing from the public record of A.B. 48. The bill passed without trouble and has been signed into law. All future disputes in public works projects will be resolved in a court of law, unless the contract provides for a different resolution method when it goes out to bid or unless the parties otherwise agree post-bid.
What does the Future hold?
The most compelling question arising from A.B. 48 is whether or not public bodies truly will treat it as the death of arbitration for public works construction disputes and resort to the status quo prior to the Harris decision. That status quo appeared to push all disputes in the public works arena into court. Several concerns come to mind with such a result. First, construction disputes are complicated affairs that can be difficult for juries and even general jurisdiction judges to understand. Moreover, public works disputes often involve entrenched parties who refuse to accept responsibility for any conduct that may have caused or contributed to the dispute. Also, parties and witnesses to construction disputes often carry grudges against each other due to some action, retaliation or blow-up that took place on the project. This kind of problem often requires that even seemingly clear-cut cases be decided by a fact-finder. More importantly, our current court system suffers from a seriously overcrowded docket, filled not only with personal injury and malpractice cases, but also with complex commercial disputes and construction defect cases. By contrast, one only needs to recall the Venetian litigation, which centered on a private construction project, to recognize how long (10 months), expensive and economically devastating a complex construction jury trial can be to parties in a court process. See In Re Venetian Litigation, No. A397391 (Dist.Ct.Nev. Filed Dec. 22, 1998). In order for A.B. 48 to be considered a success, several things need to happen. First, public bodies and contractors must recognize that potential remains for successfully resolving disputes through alternative dispute resolution, including binding arbitration. Success may depend upon the parties agreeing to limit the number of arbitrators, agreeing to limit the extent and nature of discovery or even to require deadlines for final resolution of the dispute.
the goVernMent deClared War on MandatorY arBItratIon, But no one Fought BaCK
To the public entities paying the enormous bills for arbitration awards, the arbitration solution no longer appeared to be the salvation envisioned by the Nevada Supreme Court and adopted by the Legislature. They perceived the process as devoid of the expected advantages. There was nothing speedy or inexpensive about the processes they were encountering. Arbitrators appeared to be allowing as much, or more, discovery as were the courts and the process was often taking much longer than the proverbial “day” in court. To make matters worse, arbitrator fees were being tacked onto the attorney fees and expert fees already being expended. The bitter taste created by this situation led public entities to seek relief at the 2009 Legislative Session. Assembly Bill 48 (A.B. 48) was proposed with a variety of arguments to remove the requirement for mandatory and binding arbitration of public works construction disputes. While some of the arguments focused on the desire for choice and flexibility, the legislative history suggests the City of Las Vegas led the charge for the change, due in large part to the city’s unhappiness over the time-consuming and expensive arbitration of a public works dispute that was ongoing at the time of the hearings before the Legislature. The city
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The courts also can help to alleviate the potential for a substantial increase in complex construction litigation. One way to address such an increase (assuming our economy allows for more construction projects to fight about) is to create a special construction claims dispute court. Such a court would handle, primarily, construction disputes that typically arise during the construction process from both the private and public sectors. The judge would need to be trained and/or experienced at handling construction disputes, much as arbitrators are typically trained and experienced in the handling of such disputes. Such a specialized court would be able to handle the complexities and anomalies in construction disputes in a more effective, efficient and timely manner.
perception caused, or contributed to, the passage of A.B. 48, which did away with mandatory arbitration in public construction disputes. The construction community, the public and the legal community must all examine the past in order to pave the way for a future which offers an orderly, efficient and fair way to resolve these complicated cases, no matter what forum is chosen.
Construction arbitration seems to have changed from a speedy, inexpensive and fair process for resolving complex disputes into a time-consuming, expensive and potentially unwieldy way to obtain final resolution to construction claims. This
PhIL DABNEy, a partner in the Las Vegas office of Holland & Hart, LLP concentrates in construction litigation and alternative , dispute resolution. He has experience with cases involving commercial construction contract and pay disputes, construction claims, construction defect disputes, real estate, administrative law, general commercial and personal injury. Dabney has trained with the American Arbitration Association and the Peter Maida mediation program. MAGALI WySoNG is an associate in the Las Vegas office of Holland & Hart, LLP She is a member of the litigation department . and focuses her practice on commercial litigation.
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