By Andrew Ness
At the most recent Construction SuperConference, I was honored to speak on a panel titled: “Insights from Arbitrators and Advocates on Providing Alternative Delay and Damages Quantum.” When asked whether the Respondent should provide its own delay and damages analyses, my answer was “pretty much always.” Then the question turned to “how do arbitrators determine delay and damages quantum?” This post focuses on the panel’s insights on this issue.
How Do Arbitrators Approach the Problem?
If one party proves it has been delayed or it has suffered damages, but there is dispute about the time or money to be awarded, how do arbitrators make an award? Some arbitrators simply choose either the Claimant’s requested amount or the Respondent’s requested amount, without injecting their own views. In the author’s experience, this is by no means the majority view in U.S. construction arbitrations. While the arbitrator’s award must be based on the record, many times arbitrators adopt elements of each side’s presentation and modify them to arrive at a different outcome than either party requested.[1]
Why Do Arbitrators Break Down the Delay and Damages Presentations?
There are three reasons for this. First, construction cases usually have lots of moving parts regarding delays and damages. Even a modest-sized delay claim can involve five or more different causes of delay that Claimant asserts are compensable delays. Frequently, the evidence supports some but not all these claims.
This is also true regarding the damages amount claimed. Almost every change order dispute involves, at a minimum, several categories of claimed costs – labor, materials, equipment, overhead and profit. But the evidence often casts substantial doubt on one or more of the cost elements presented. Labor costs may be mischarged, or excessive materials may have been purchased. Equipment hourly rates may be inflated, or excessive overhead or profit rates are claimed.
Second, these issues may be exacerbated by the fact that Claimants sometimes overstate the amount of delay or dollars being claimed, by including weaker claims along with stronger ones. The same comment holds true of the Respondent’s Counterclaims, of course, and the takeaways below apply equally to Counterclaims.
Third, counsel in construction cases frequently focus primarily on entitlement – proving the merits of the claim–while paying scant attention to the damages. Many experienced construction arbitrators have commented that advocates frequently don’t give damages sufficient attention. It is understandable that attorneys focus on liability, since without liability, damages are never reached. However, damages should be more than an afterthought, lest the attorney “win” on the merits, but receive a nominal damages award because the damages proof was not properly assembled and vetted. This is a more common outcome than many lawyers appreciate.
For these reasons it is rare that arbitrators find for the Claimant (or Counterclaimant) on entitlement and award the delay duration or the monetary damages Claimant seeks, or an alternative amount Respondent proposes. Arbitrators will and need to examine the claimed delay period and monetary damages as closely as they do the arguments on liability.
What Do Arbitrators Want to See?
What do arbitrators look for in delay and damages presentations? It largely comes down to transparency in the delay/damages analysis, particularly that presented by the delay and damages experts.
Consider a specific example: a delay expert report identifying five compensable causes of delay and concluding that they collectively caused 200 days of delay, without breaking down the contribution of each separate cause of delay. This lacks the transparency arbitrators need.
What if the arbitrators conclude that three of those delay events are appropriate compensable delays, but two are not? The arbitrators are left at sea. The expert report offers no help in deciding how much delay to attribute to the three valid delay events. Expert reports need to clearly identify each step in their delay or damages analysis, always “showing their work” as to how they arrived at the numbers claimed.
Where the expert has not been sufficiently transparent, reviewing the entire record may provide an adequate basis to assign a specific number of delay days to the three valid delay events. If not, don’t expect the award to include 200 delay days. More likely and more properly, the award may be zero delay days because Claimant failed to demonstrate the amount of delay attributable to the three valid events. This is a tough example of the adverse effect that can result from lack of transparency.
The Importance of Supporting Fact Witness Testimony
This example also highlights the importance of fact witness testimony to support the expert’s conclusions. Testimony from fact witnesses who were engaged in the events claimed as delays (or the cause of monetary damages) is often more significant to the arbitrators in evaluating what happened and its delay or cost effects on the project than the forensic delay or damages experts’ after-the-fact analysis.
Experts prefer relying on documentary evidence, such as emails, meeting minutes, schedules and daily reports. This is because the documents are not going to change; they say what they say and are available for detailed analysis. Witness testimony, by contrast, may not come out at the hearing the way the expert understood it during an earlier interview of the witness, especially after cross-examination highlights inconsistencies or hazy memory. While documentary evidence in construction cases is rarely fabricated, all forms of documentary evidence can be slanted, incomplete, unclear or, often ambiguous.
The testimony of the individuals who lived through the events in question and can speak knowledgeably about their effects on the work in terms of delays, extra work and extra costs, not only give life to the dry documents, but often provide the arbitrators with the context and details that greatly assist in the assessment of delays and damages. In fact, it is not uncommon that the fact testimony provides the most significant contribution to the ultimate ruling on a major element of damages or a delay claim, whether for good or for ill.
Takeaways
There is nothing wrong with arbitrators mixing and matching delay and damages evidence — accepting part of the delay or damages evidence Claimant offer and some that Respondent offers. In most cases, arbitrators make their own judgments as to credibility and persuasiveness of the expert and fact witnesses on delay element and damages issues.
While a judge or jury often lacks expertise to question delay or damages expert opinions, knowledgeable construction arbitrators often have that expertise. This is a key reason for preferring arbitration of construction disputes. Decisions and awards are more reasonable and reliable when the fact finder understands construction industry practices and norms.
Arbitrators cannot properly substitute their own opinions on the issues unsupported by the case record. For example, it is not appropriate for the arbitrators to conclude, based solely on their review of industry cost data such as Means (which neither party submitted), that performing an element of extra work should have cost less than was claimed.
But where arbitrators have considerable construction knowledge, it properly influences their consideration of the strength of evidence in the case. This does not mean they can conduct independent research beyond the case record or substitute their own opinions for conclusions drawn from the evidence.
Even if the Respondent cannot offer its own full delay or damages analysis, it is good strategy to poke as many holes in the Claimant’s presentation as possible. The collective “holes” may be sizable enough to reduce the delay or damages award to a small fraction of the amount claimed.
[1] I obviously do not speak for all construction arbitrators, but such statements are based on experience sitting on numerous arbitration panels, providing a representative cross-section of the arbitrators hearing larger U.S. construction disputes.
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