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Arbitration- Some Observations Arbitration- Some Observations

Arbitration- Some Observations

The construction industry has been a long term and extensive user of arbitration as a means of dispute resolution. This is the result of many things but is due in part to the extensive use of written agreements in the construction industry, unlike some other industries, and the widespread use of AIA forms, which adopted arbitration by the American Arbitration Association beginning in 1937, such that the AAA developed specific Construction Industry Arbitration Rules.

Most construction owners, contractors, designers, and other project participants or their attorneys already have opinions or views on the use of arbitration or litigation in the resolution of disputes. Some prefer the protections afforded by formal civil litigation, at the risk of incurred time and cost, while others prefer arbitration, with streamlined processes, at the risk of a "split the baby" award or an arbitrator being arbitrary with no right to appeal.

Typically, the arbitration/litigation process is preceded by a number of predecessor dispute processes. If you are operating under an AIA document, or likely under the terms of any other long form contract document, there are contractual notice of claim requirements that provide limits on the time for providing a notice of claim. In Indiana, there is precedent for strict compliance with these procedures and deadlines. See Weigand Constr. Inc. v. Stephens Fabrication, Inc. 929 N.E.2d 220 (Ind. App. 2010) where a claim presented long after the contractual 21-day notice requirement was deemed waived. These might be more strictly enforced in civil litigation than in an arbitration setting. Although arbitrators should follow the law, it is not as strictly enforced or generally appealable.

Other dispute resolution processes, informal or contractually required, may follow the claim presentation. These may include an "initial decision" by the designated Initial Decision Maker or presentation to a Project Neutral or claim review board for summary review for decision and/or an advisory opinion. The contract may call for a meeting and an attempt to resolution by the project executives and/ or owner representative, which may subsequently be required to be elevated to the CEOs. And it is typical in current contracts to require a good faith mediator prior to initiation of arbitration or litigation. All of these predecessor activities, if contractually required, need to be complied with or waived.

If all of these are unsuccessful, you are left pursuing the contractually agreed dispute resolution method. To be enforceable, there must be an agreement to arbitrate. The AIA form has the option to select arbitration. But the agreement to arbitrate can be either before or after the dispute arises. But the agreement cannot be ambiguous or conditional—don't be fooled by agreements that have an "arbitration" provision, which says the dispute "may be referred to arbitration" or one party may choose to arbitrate. Each of these provisions may result in an arbitration of the claim, but only if one or both parties subsequently agree.

The AIA version of an arbitration agreement mandates the use of the American Arbitration Association, Construction Industry Rules. See for example AIA 201 General Conditions of the Contract for Construction (2017 ed.), Article 15.4. Those rules currently offer four separate "tracks," depending on the amount at issue. When less than $25,000 is at issue, the rules mandate that Resolution by Document Submission be the method—without any face-to-face hearing. Where the claim and counterclaim are for more than $25,000, but less than $100,000, the Fast Track Procedures are utilized with a 45-day standard for completing the hearing process and the award within 14 days of the hearing. For disputes of amounts above $100,000 and up to $1,000,000, the Regular Track is utilized. For arbitration of claims of $1,000,000 or more, the AAA uses Procedure for Large, Complex Construction Disputes.

A single arbitrator is used for the Document Only, Fast Track, and the Regular Track arbitrations, with the presumption of the Large Case Track being that a panel will be used.

No discovery is assured, unless otherwise agreed to, in the Document Only or Fast Track process—only the pre-hearing exchange of exhibits to be relied upon at the hearing—and in the case of Fast Track, the pre-hearing exchange of witness lists. Documentary discovery is permitted in both the Regular Track and the Large Case Track, but all within the discretion of the arbitrator. There is wide variation in the exercise of this discretion. I have been involved in small value arbitrations where the arbitrator permitted almost unlimited discovery and depositions and in large value arbitrations where almost no discovery was permitted. The current rules establishing four separate tracks seek to address this at least in part.

Of course, your agreement may establish a different procedure for the arbitration, i.e. establish the method for arbitrator selection, for arbitrator qualifications, rules of permitted discovery, the permitted number of depositions, time for and for of rendering the award, or even for appealability in the event of an award contrary to law.

Whether to agree to, or whether to include an arbitration provision in your construction contract is ultimately based on your view of the character of likely disputes and the weight of the respective relative advantages and disadvantages of arbitration v. litigation. Of course, it is hard, maybe even impossible, to anticipate in advance the character of future disputes. As demonstrated above, if you have mutual agreement, the parties can design their own dispute resolution or arbitration process, but have little ability to affect the course of litigation beyond agreements to waive jury trial and limitations on damages or liability.

The generally recognized factors said to favor arbitration are:

  • A quicker, more streamlined procedure resulting in faster and less costly resolution. This has been repeatedly questioned by commentators and practitioners in the past, and as mentioned above, can be enhanced or exacerbated by the terms of the agreement or by conduct of the hearing by an arbitrator.
  • The arbitrator's ability to be flexible in running the process and in achieving an equitable solution, while being guided by the law, but not bound to the strict rules and procedures, e.g. the rules of evidence and witness presentation. Some say that arbitrators' tendency is to split the baby, which depending on your position, might or might not be a factor.
  •  Arbitration proceedings are private, so your dispute details, or even the fact there is a dispute, can proceed without publicity or public notice.
  • The arbitrator's experience is likely to be greater than the typical judge or jury member, as he or she is likely to be on a construction arbitration panel. The downside is  he or she may also have an implicit bias in favor of the side of the industry in which he or she works.
  • The award is final and likely conclusive, ending the dispute. The grounds for appeal are narrow.
Dispute resolution provisions are key contractual terms and attention should be paid to them. An arbitration provision should be carefully considered in the context of each contract and its attendant risks. 

For more information, contact Gary Dankert of our Construction Practice.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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